IMF Finalizes 2024 Article IV Luxembourg Consultation

WASHINGTON, DC: On May 29, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Luxembourg.^[1]

Luxembourg' economy contracted in 2023 despite buoyant consumption, mainly due to weak external demand and residential investment. Inflation is subsiding but underlying measures remain high. Credit growth turned negative as demand dropped and real estate prices declined. Accordingly, the newly elected government has approved a mix of temporary and permanent measures to reinvigorate growth and boost competitiveness. The moderately expansionary fiscal stance is broadly appropriate to support growth, but more targeted and temporary measures would have been more efficient. The 2024 Financial Sector Assessment Program (FSAP) found the financial sector to be largely resilient against severe shocks.

Growth is expected to rebound moderately in 2024 and strengthen further in 2025, converging to its potential in the medium term. Headline inflation will decline below 3 percent this year, before temporarily increasing in 2025 once administrative energy price measures expire. Risks are tilted to the downside, stemming mainly from external demand and supply shocks, and a disorderly correction of asset prices, including domestic real estate valuations.

Executive Board Assessment^[2]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Luxembourg's economic resilience, strong buffers and the envisaged economic recovery this year and beyond. Noting the uncertain environment from geopolitics and housing vulnerabilities, Directors emphasized the need for continued policy prudence to manage short‑term vulnerabilities and reinvigorate long‑term growth and productivity.

Noting the ample fiscal space and AAA credit risk rating, Directors commended the authorities' commitment to fiscal discipline and broadly agreed that a moderately expansionary fiscal stance in 2024 is appropriate, noting that more targeted and temporary measures could have facilitated a smoother transition of fiscal policy into contractionary territory. Over the medium‑term, Directors emphasized the need for fiscal consolidation, to address rising spending pressures, notably from aging and climate transition, and to stabilize public debt. Improving spending efficiency and targeting, containing the wage bill, and expediting pension reform would be important, while tax reforms should be carefully calibrated to avoid revenue losses. In that context, Directors welcomed the authorities' intention to complement the EU rules with a medium‑term objective and suggested complementing it with an operational expenditure rule and an enhanced role for the fiscal council.

Directors welcomed the authorities' measures to restore confidence in the housing sector and emphasized that orderly rebalancing of the housing market and steps to strengthen housing affordability, particularly by expediting measures to raise housing supply, should remain a priority.

Directors positively noted that the financial sector is resilient and well‑capitalized. They commended the authorities for the progress with the implementation of the FSAP 2017 recommendations and encouraged them to sustain their commitment in that regard. They saw merit in further bolstering resilience through sectoral systemic risk buffers on real estate exposures. Directors supported activating income‑based measures early in the recovery cycle to tackle structural households' indebtedness and considering gradually reducing the maximum LTV limit of 100 percent. Enhancing the macroprudential policy framework, including by reducing potential inaction bias, would also be important. Directors also noted the need for continued progress in strengthening the supervisory, regulatory and oversight frameworks and in mitigating AML/CFT risks.

Directors emphasized the need for sustained efforts to enhance productivity and growth. They welcomed the authorities' policy priorities, including on research and development, innovation, reskilling the labor force, streamlining regulations, and facilitating market entry and exit. They agreed that enhancing wage flexibility would boost competitiveness and labor mobility.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] 2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.