The International Monetary Fund (IMF) praises the Grand Duchy for its handling of the COVID crisis. Luxembourg handled the situation far better than initially expected, the experts said in their report after online consultations with local experts of the Grand Duchy government, the private sector and social partners in March. The "rapid, targeted and appropriate response" to the crisis had prevented the worst. After all, Luxembourg put 18.6% of its gross domestic product into fighting the pandemic on many levels and cushioning the social, economic and human consequences. The IMF also points out that the rapid transition to teleworking has enabled the country to weather the crisis relatively well. It thus gives Luxembourg a good report card.
In 2020, the Luxembourg government had 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%," the IMF experts said. They expect the economy to grow by four percent in 2021.
Support green and digital developments
Although the IMF estimates 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, the experts write. Once the recovery has gained momentum, fiscal policy should support the green and digital transition and fill the infrastructure gap, the paper says.
Given the outlook for international corporate taxation and in view of the government's ambitious CO2 emission targets, the experts recommend that Luxembourg retains some fiscal room for maneuver. The Grand Duchy should continue to diversify its economy, they say. The IMF advises it to strengthen its management of public investment, which remains at remarkably high levels. The IMF considers Luxembourg's banking sector to be robust thanks to its high equity ratio and liquidity reserves. The IMF expressly welcomes the strengthening of supervision of the investment fund sector. It encourages Luxembourg to continue in this direction and to regulate further. "Expanding the market for sustainable financial products can help diversify the financial sector," the institution in Washington added.
In addition, the IMF experts advised Luxembourg to continue to support the labour market, especially the fragile profiles. With the recovery, the focus should be on job creation and orientation towards dynamic sectors rather than on job retention. Finally, the IMF, while highlighting the government's efforts in the housing market, encouraged the government to further strengthen housing creation and provide access to housing for more people.
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. The experts had an online exchange of views with various interlocutors in the Grand Duchy for the preparation of this report.
The Minister of Finance, Pierre Gramegna, was very satisfied with the IMF report. His conclusion: "This is a great praise from Washington, which is to be welcomed. It confirms the political course of action pursued during the pandemic."
Press release by the Ministry of Finance