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© 2004 International Monetary Fund
May 2004
IMF Country Report No. 04/125
Luxembourg: 2004 Article IV Consultation—Staff Report; Staff Supplement; and Public Information Notice on the Executive Board Discussion
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2004 Article IV consultation with Luxembourg, the following documents have been released and are included in this package:
the staff report for the 2004 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on January 26, 2004, with the officials of Luxembourg on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on April 6, 2004. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a supplement to the staff report of April 23, 2004 prepared on the basis of additional information.
a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its April 28, 2004 discussion of the staff report that concluded the Article IV consultation.
The document listed below have been or will be separately released.
Selected Issues Paper
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.
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INTERNATIONAL MONETARY FUND
LUXEMBOURG
Staff Report for the 2004 Article IV Consultation
Prepared by the Staff Representatives for the 2004 Consultation with Luxembourg
Approved by Alessandro Leipold and Carlos G. Muñiz
April 6, 2004
Discussions were held in Luxembourg during January 15-26, 2004. The mission met with the Ministers of the Treasury and Budget, of Labor and Employment, and of the Economy; the Central Bank President; the Parliamentary Commission of Finance and the Budget and the Commission of the Economy, Energy, Postal Services, and Transport; officials of the Ministries of Foreign Affairs, Economy, Finance, Labor and Employment, the Social Security Administration, STATEC, and of the supervisory commissions; and representatives of the financial sector, the social partners, and the academic community.
The team comprised Messrs. Decressin (Head), Annaert, and Nadal De Simone (all EUR). Mr. Prader (Alternate Executive Director) and Messrs. Crelo (Advisor) and Marquez (former Advisor) also participated in the meetings.
The authorities released the mission’s concluding statement and intend to publish this staff report. Luxembourg is on a two-year consultation cycle and the previous Article IV staff report was published as IMF Country Report 02/118, following the IMF Executive Board meeting on June 5, 2002.
Luxembourg is an Article VIII member (Appendix I) and maintains an exchange system free of restrictions on payments and transfers for current international transactions, except for reasons related to security.
Luxembourg does not subscribe to the SDDS. Economic statistics have improved over the past two years but further progress is needed (Appendix II).
Contents
Executive Summary
I. Background
II. Policy Discussions
A. Economic Outlook
B. Fiscal Policy Requirements
C. Pensions and Health Care Reform
D. Factor Markets
E. The Financial Sector
F. Other Issues
III. Staff Appraisal
Boxes
1. Policy Recommendations and Implementation
2. Slowing Labor Productivity
3. Strengthening the Pension System
Tables
1. Basic Data
2. Medium-Term Projections of General Government Finances, 2002-2006
3. Indicators of Retirement Income
4. Selected Financial Soundness Indicators, 1999-2003
Figures
1. Macroeconomic Performance Indicators, 1985-2003
2. Real Output Developments, 1996-2002
3. Labor Market Developments, 1985-2003
4. Prices, and Monetary Conditions, 1996-2004
5. Luxembourg, United States, and the EU: Industrial and Consumer Sentiment Indicators, 1998-2004
6. Luxembourg and the EU: Fiscal Developments, 1995-2004
7. Youth Unemployment and Minimum Wage Employees, 2002
8. Financial Sector Developments, 1996-2003
Appendices
I. Fund Relations
II. Statistical Issues
III. Debt Sustainability Analysis
Executive Summary
Background and Prospects
After two decades with average real GDP growth of some 5½ percent and budget surpluses, real GDP growth slowed to 1¼ percent during 2001-03 and the general government fiscal balance is estimated to have recorded a deficit in 2003. A recovery is at hand. However, the correction of asset prices since 2000, relatively high wage increases recently, and slowing productivity will likely hold back the growth of employment and incomes to below the pace of 1980-2000. The authorities have begun to adapt fiscal policy to the less buoyant growth outlook. General elections are scheduled for June 2004.
Key Policy Issues
Adapting fiscal policy to less rapid growth. The authorities anticipate that, owing to the exceptional depth and duration of the growth slowdown, deficits will persist through 2006, despite a major expenditure deceleration. Given the high level of public assets, the staff concurred that fiscal adjustment could be stretched over time, while pointing to the advantages of a faster pace of adjustment. At any event, expenditure growth would have to be lower than programmed to achieve the Stability Program objectives. The authorities were confident that their targets could be achieved but did not rule out additional measures if and when necessary.
Welfare reform to raise the resilience of the economy to shocks. To combat rising unemployment, the authorities are improving the targeting of support for the jobless within the existing legal framework; the staff favors a deeper adaptation of the framework to increase work incentives. Reforms of the pay-as-you-go (PAYG) pension system and health care are also needed to avoid potentially large payroll tax hikes in the future. The authorities view the PAYG system as sustainable on long-run historical real GDP growth rates and intend to reassess the system in 2006, in consultation with social partners. They also pointed to ongoing health care reforms.
Further strengthening the financial sector. Banks and insurances have weathered the recent turbulence well and thus the discussions focused on the medium-run prospects and on improvements in supervision. The EU Directive on savings taxation was seen to clear the air of uncertainty and the authorities looked forward to its rapid adoption. They did not expect a large negative impact on the financial sector, although activity was widely seen to slow relative to the boom years of the 1990s, reflecting also rising global competition. There was agreement that Luxembourg would have to sustain strong AML/CFT efforts given the large amount of crossborder business.
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INTERNATIONAL MONETARY FUND
LUXEMBOURG
Staff Report for the 2004 Article IV Consultation
Supplementary Information
Prepared by the European and Policy Development and Review Departments
Approved by Alessandro Leipold and Carlos G. Muñiz
April 23, 2004
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FOR IMMEDIATE RELEASE
May 4, 2004
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