November 21, 2022
- The Lithuanian economy has shown remarkable resilience in the face of multiple shocks and continued growing at a robust pace this year. But it is now facing significant headwinds caused by a terms-of-trade shock and high inflation.
- Notwithstanding available fiscal and financial buffers, the policy stance needs to balance the need to fight inflationary pressures and provide support to a weakening economy in order to preserve macroeconomic and financial stability.
- The authorities should maintain prudent policies and accelerate the implementation of much-needed structural reforms, including in the areas of healthcare and education and improving the tax system.
Washington, DC: An International Monetary Fund (IMF) mission, led by Borja Gracia, met with the Lithuanian authorities from November 15–21 to discuss recent economic developments and policy priorities. At the conclusion of the visit, Mr. Gracia issued the following statement:
“ The Lithuanian economy has shown remarkable resilience and strong growth momentum this year, but significant headwinds are forcing a slowdown . Strong macroeconomic fundamentals, large policy buffers, and a flexible labor market are key factors in explaining the resilience of the economy. However, growth is expected to slow down significantly in 2023 driven by declining real incomes and low external demand. Prior to Russia’s invasion of Ukraine, the economy was showing signs of overheating that fueled inflationary pressures in addition to the increase in global energy and food prices. With unemployment below pre-pandemic levels, robust wage growth continues to push core inflation higher and risks creating a persistent wage-inflation spiral that could, if it materializes, undermine the country’s competitiveness.
“ The fiscal position remains strong supported by the revenue windfall in part generated by high inflation, but spending pressures, including for energy subsidies, continue to build . The fiscal position this year is projected to be moderately counter-cyclical. However, significant energy subsidies and other long-term spending pressures are expected to weaken the fiscal position in 2023. If inflationary pressures remain high, the fiscal position will have to be tightened despite the expected slowdown in growth to support monetary policy’s efforts to lower inflation. Furthermore, to address long-standing spending pressures given ample social demands, further increases in social spending will require an improvement in the quality of public spending and increased revenues. To raise revenues, there is scope to broaden the tax base, particularly by eliminating distortionary tax exemptions and through property and environmental taxes.
“ The response to the energy crisis has appropriately limited economic disruptions and provided support to the most vulnerable while allowing for market price signals to operate—but fiscal costs are mounting . The untargeted energy price subsidy to households is particularly costly. While these subsidies are temporary, there is scope to make them more targeted at the most vulnerable and more efficient, reducing their fiscal burden. For example, consideration could be given to replace the existing energy tariff subsidies with a bonus linked to past energy consumption, other household characteristics, and a component related to the difference between the market and subsidized tariff.
“ With high capital, liquidity, and healthy profitability, the banking sector is prepared to face a weakening economic environment . The non-performing loan ratio is well below the historical average, and banks’ profitability is being boosted by higher interest incomes. At the same time, as the Fintech sector matures and becomes larger, the focus is appropriately shifting from growth to consolidation with a view toward mitigating money laundering risks by strengthening the AML/CFT supervisory capacity of the Bank of Lithuania and the Financial Intelligence Unit.
“ Lithuania’s opportunities and challenges extend beyond the immediate crisis and will require ambitious reforms to increase productivity and support higher wages . Implementing education and healthcare reform programs, improving the skills of Lithuanian workers, and investing in green and digital infrastructure will help support productivity, competitiveness, and growth in the longer term.
“We would like to thank our counterparts for excellent discussions.”
Soure – IMF