Minister of Finance Pierre Gramegna was very satisfied with the IMF report, describing it as "high praise from Washington", which the country can be "pleased about". In Gramegna's eyes, this confirms the soundness of the government's pandemic response.
In fact, Luxembourg handled the situation much better than initially expected, the experts said in their report after consultations with interlocutors from the government, the private sector, and social partners in March. The "rapid, targeted, and appropriate response" to the crisis has prevented the worst. Luxembourg put 18.6% of its gross domestic product into fighting the pandemic on many levels, which helped cushion the social, economic, and human consequences, the report states. The IMF also points out that the rapid transition to teleworking has enabled the country to weather the crisis relatively well. Overall, the IMF experts give a positive assessment for Luxembourg.
In 2020, the Luxembourg government had put in place a comprehensive package to stimulate economic growth and maintain the purchasing power of employees, which was followed by further targeted measures in 2021. "As a result, the economic contraction in 2020 was mild, at -1.3%," the IMF experts stated. They expect the economy to grow by 4% in 2021.
Although the IMF estimates that economic activity will initially remain below pre-crisis levels, 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 infrastructure gaps, the experts go on to say.
Given the outlook for international corporate taxation and in view of the government's ambitious CO2 emission targets, the experts recommend that Luxembourg retain fiscal room for manoeuvre. 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 capital ratio and liquidity reserves. The IMF expressly welcomes the increased supervision of the investment fund sector. It encourages Luxembourg to continue in this direction and to further regulate.
In addition, the IMF experts advise Luxembourg to continue to support the labour market, especially those with lower incomes. Regarding recovery, the focus should be on job creation and orientation towards dynamic sectors rather than on job retention alone. Finally, the IMF, while highlighting the government's efforts in the housing market, encouraged the government to further strengthen the creation of new housing units and to allow more people access to housing.
