The International Monetary Fund’s (IMF) executive board has endorsed Luxembourg’s economic policies – including its efforts on tax transparency – while providing a few recommendations for further improvement.

As part of annual bilateral discussions with members, the IMF visited Luxembourg and prepared a report serving as a basis for discussions by the executive board.

In its assessment, sent to Luxembourg’s authorities, the executive board says “buoyant” tax revenues resulting from ”higher-than-expected economic activity” in 2016 led to a fiscal surplus of 1.6% of GDP.

It said it expected recent tax reforms to have an impact in 2017, resulting in a drop in the fiscal surplus and a “broadly balanced budget over the medium term”.

International risks

While the IMF sees overall growth prospects as good, it warns of risks for Luxembourg originating from the international environment.

The IMF recently projected a growth slowdown for Luxembourg in line with the general development of the eurozone.

The country’s financial system could be affected by volatility caused by a ”retreat from cross-border integration, policy uncertainty in the US and related to upcoming elections in Europe and Brexit”, it says.

The IMF also warns of “lower-than-expected growth in Europe and challenges to the euro area architecture”.

It praised Luxembourg for embracing recent initiatives promoting the “international tax transparency and anti-tax avoidance agenda” but said it efforts could also “weigh on economic activity and tax revenue”.

At the same time, the creation of a level playing field in this regard could “accentuate its other competitive advantages”, it said.

Due to Luxembourg’s ”proactive engagement” in this field, it should consider putting in place contingency measures ”to address revenue risks that may arise from implementation of this agenda, and from volatile financial flows”.

To protect against risks stemming from the international environment, the IMF calls on Luxembourg to ”further improve the oversight of the financial system, adapt the tax regime to the changing international environment and implement structural reforms to diversify the economy and further reduce unemployment”.

The IMF also encourages the Grand Duchy to ”continue to move towards risk-based supervision and to increase resources for entities safeguarding the stability of the large and interconnected financial system”, as well as to continue the ”close monitoring of risks in the real estate market” to be able to adjust policies if necessary.

The capital of the central bank should also be increased to ”bolster its financial buffer”.

Robust performance

The IMF’s executive directors credit Luxembourg with a ”robust macroeconomic performance” founded on ”prudent policies and strong institutions”.

They welcome the country’s ”commitment to reinforce the oversight of non-bank holding companies that include banks and to improve risk monitoring”.

Turning to the Grand Duchy’s ”prudent fiscal policies”, it calls for further widening of the corporate tax base and “maintaining fiscal buffers, including low public debt over the medium term”.

The IMF also praises structural reform efforts to expand activity “beyond the financial sector to enhance the resilience of the economy”.