The IMF expects Luxembourg's growth to increase provided the real estate sector does not get out of hand. (Photo: Shutterstock)

The IMF expects Luxembourg's growth to increase provided the real estate sector does not get out of hand. (Photo: Shutterstock)

At the end of its annual assessment visit, the International Monetary Fund urges Luxembourg to monitor developments in its real estate sector and diversify its tax revenues.

Anna Shabunina, IMF mission chief for Luxembourg, was "cautiously optimistic" about the economic outlook for the coming months. After a year of slower and more uneven growth than expected at 0.5% "due to private consumption falling short of expectations", the IMF is expecting growth of 2% in 2025 "supported by a rebound in domestic demand and a return of confidence". Growth that will accelerate to around 2.5% to 2.7% in 2027, "supported by domestic demand, lower interest rates and market confidence".

Strong rise in non-performing loans

Figures that remain conditional on external factors mainly linked to geopolitical developments and an internal factor: the ongoing adjustment in the property and construction sectors. Anna Shabunina expressed her concern at the "widespread increase in non-performing loans in banks' portfolios". In just a few years, this proportion has risen from a historical average of 2% to 3.4%. For 2023, the Luxembourg Central Bank estimated these non-performing rates at 1.8%, a rate 0.3 percentage points higher than the European average.

"Although starting from low levels, this remains manageable and most banks are capable of absorbing significant losses. However, their resilience must be preserved and vulnerabilities must continue to be closely monitored, particularly in the property construction sector where confidence issues persist," continues the expert.

Diversifying tax revenues

This problem aside, Luxembourg remains a good performer in terms of the IMF's criteria.

The IMF praises the government for its "balanced fiscal policy" and "welcomes the efforts to reduce expenditure". At the same time, it stresses the need for "neutral" tax reforms. In other words, "tax reforms that should aim to maintain revenues or, failing that, offset a surplus in foreseeable expenditure due in particular to the ageing of the population by diversifying budget revenues via property tax, environmental taxation and VAT".

Satisfaction also with the desire to reform the pensions system "to avoid greater adjustments in the future that would disproportionately affect future generations".

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