IMF Praises Luxembourg's Response to COVID-19 Crisis

In its latest report, the International Monetary Fund (IMF) has praised Luxembourg for its handling of the COVID-19 crisis.

On 14 May 2021, the Executive Board of the IMF concluded the Article IV consultation with Luxembourg; the IMF regularly presents analyses of the economic and financial policies of individual countries and writes assessments for its member countries under the so-called Article IV consultations. 

In its subsequent report, published on 25 May 2021 after online consultations with local experts from the Luxembourg government, the private sector and social partners, the IMF concluded that Luxembourg managed the situation far better than initially expected. The "rapid, targeted and appropriate response" to the crisis had prevented the worst. For instance, Luxembourg put 18.6% of its gross domestic product (GDP) into fighting the pandemic on many levels and cushioning the social, economic and human consequences. The IMF also pointed out that the rapid transition to teleworking has enabled the country to weather the crisis relatively well. It thus gave Luxembourg a good report card.

In 2020, the Luxembourg government put in place a comprehensive package to stimulate economic growth and to maintain the purchasing power of employees, which was followed by further targeted measures this year. "As a result, the economic contraction in 2020 was mild, at -1.3%", said the IMF experts, who expect the economy to grow by 4% in 2021.

Although the IMF has estimated that the outlook will remain below pre-crisis levels for the time being, a rapid containment of the crisis could lead to much faster growth. Due to global uncertainties, targeted policy support is crucial for the economy until a secure recovery is achieved, according to the experts. The report added that once the recovery has gained momentum, fiscal policy should support the green and digital transition and fill the infrastructure gap.

Given the outlook for international corporate taxation and in view of the government's CO2 emission targets, IMF experts recommended that Luxembourg retain some fiscal room for manoeuvre; the Grand Duchy should continue to diversify its economy. The IMF also advised that Luxembourg strengthen its management of public investment, which remains at particularly high levels. The report considered Luxembourg's banking sector to be robust due to its high equity ratio and liquidity reserves. The IMF expressly welcomed the strengthening of supervision of the investment fund sector, encouraging Luxembourg to continue in this direction and to regulate further. "Expanding the market for sustainable financial products can help diversify the financial sector," the Washington, DC-based institution added.

In addition, IMF experts advised Luxembourg to continue to support the labour market, especially fragile profiles. With the recovery, the focus should be on job creation and orientation towards dynamic sectors rather than on job retention. While highlighting the government's efforts in the housing market, the IMF also encouraged the government to further strengthen housing creation and provide access to housing for more people.

Luxembourg's Minister of Finance, Pierre Gramegna, expressed satisfaction with the recent IMF report. He concluded: "This is a great praise from Washington, which is to be welcomed. It confirms the political course of action pursued during the pandemic".

The IMF's 79-page Luxembourg report is available at www.imf.org/en/Publications/CR/Issues/2021/05/25/Luxembourg-2021-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-50188.