IMF Executive Board Concludes 2017 Article IV Consultation with Luxembourg

IMF News, May 10, 2017

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Canonical URL: IMF Executive Board Concludes 2017 Article IV Consultation with Luxembourg

Date of press release: May 10, 2017
Press office: IMF Communications Department; PRESS OFFICER: Bruno Silvestre; Phone: +1 202 623-7100; Email: MEDIA@IMF.org
On May 5, 2017, the Executive Board concluded the Article IV consultation with Luxembourg.
Luxembourg’s economy benefits from a major role in intermediating international capital flows and competitive advantages including fiscal stability, a qualified workforce, and business-friendly regulations and oversight.

Economic growth reached 4.2 percent in 2016, driven by net exports of financial services.
Growth projection for 2017: 3.8 percent.
Continued strong job creation and a pick-up in inflation are expected.
Selected labor and price indicators:
- Unemployment (percent of the labor force): 2016 = 6.4; 2017 (Est./Proj.) = 5.9
- Resident employment (thousands): 2016 = 249.9; 2017 = 255.8
- Total employment (thousands): 2016 = 418.5; 2017 = 429.1
- CPI (harmonized), p.a.: 2016 = 0.0; 2017 = 1.2

In 2016, buoyant tax revenues from higher-than-expected economic activity contributed to a fiscal surplus of 1.6 percent of GDP.
The 2017 tax reform is expected to result in a drop in the fiscal surplus and a broadly balanced budget over the medium term.
Key public finance figures (Percent of GDP):
- General government revenues: 2016 = 41.4
- General government expenditures: 2016 = 41.1; 2017 = 41.2
- General government balance: 2016 = 1.6; 2017 = 0.2
- General government gross debt: 2016 = 20.0; 2017 = 20.8
Directors endorsed further widening the corporate tax base and maintaining fiscal buffers, including low public debt over the medium term.
Directors considered contingency measures should be put in place to address revenue risks from implementation of tax transparency and anti-tax avoidance initiatives, and from volatile financial flows.

Luxembourg remains vulnerable to lower-than-expected growth in Europe and challenges to the euro area architecture.
Downsides to growth include:
- A retreat from cross-border integration.
- Policy uncertainty in the U.S. and related to upcoming elections in Europe and Brexit causing potential financial market volatility.
- Ongoing implementation of international tax transparency and anti-tax avoidance agenda, which could weigh on economic activity and tax revenue (but could also accentuate other competitive advantages by creating a level playing field).
Balance of payments indicators:
- Current account balance: 2016 = 4.6
- Balance of trade in goods and services: 2016 = 33.9; 2017 = 32.0
- Factor income balance: 2016 = -30.5; 2017 = -28.5
- Transfer balance: 2016 = 1.1; 2017 = 1.5

Directors praised prudent policies and strong institutions underpinning robust macroeconomic performance.
Key supervisory and financial sector recommendations:
- Continue to move toward risk-based supervision.
- Increase resources for entities safeguarding stability of the large and interconnected financial system.
- Strengthen oversight of investment funds, including on-site and comprehensive inspections, system-wide stress testing, and engagement with foreign regulators where delegated activities are undertaken.
- Implement more active supervision of waivers of the large exposure limit of foreign oriented banks.
- Reinforce oversight of nonbank holding companies that include banks and improve risk monitoring.
- Continue close monitoring of risks in the real estate market and stand ready to adjust policies if necessary.
- Increase the capital of the central bank to bolster its financial buffer.

Directors welcomed authorities’ structural reform efforts to expand activity beyond the financial sector to enhance resilience.
Recommended policy areas for further action:
- Additional product market reforms.
- Active labor market policies.
- Education reform to reduce skills mismatches and inactivity traps.
- Measures to ease supply side constraints in the real estate market.
- Continued reform of the pension system to ensure long‑term viability.

Real GDP (Change in percent):
- 2012 = -0.4; 2013 = 4.0; 2014 = 5.6; 2015 = 4.2; 2016 = 3.8
Gross investment (Change in percent):
- 2012 = 0.9; 2013 = -2.4; 2014 = 8.3; 2015 = 3.4; 2016 = -0.8; 2017 = 2.6
Public finance ratios (Percent of GDP):
- General government revenues: 2012 = 44.4; 2013 = 44.3; 2014 = 43.2; 2015 = 42.7; 2016 = 41.4
- General government expenditures: 2012 = 44.1; 2013 = 43.3; 2014 = 41.8; 2015 = 41.3; 2016 = 41.1
Public debt (Percent of GDP):
- General government gross debt: 2012 = 21.7; 2013 = 23.4; 2014 = 22.4; 2015 = 21.6; 2016 = 20.0; 2017 = 20.8
Exchange rates:
- Member of the euro area
- U.S. dollar per euro: 2012 = 1.3
- Nominal effective rate (2010=100): 2012 = 98.1; 2013 = 100.2; 2014 = 100.5; 2015 = 97.0; 2016 = 98.9

Source: IMF Executive Board press release — "IMF Executive Board Concludes 2017 Article IV Consultation with Luxembourg", May 10, 2017.