Bank of Lithuania
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Against the background of geopolitical tensions and the fragmentation of the global economy, Lithuania has weathered the price shock and has remained competitive in foreign markets, and the economy is set to grow faster than projected earlier. Favourable economic developments enable bold decisions on the structural reforms needed to address the long-term challenges. These solutions are necessary to ensure that Lithuania continues to move towards the Western Europe’s standard of living. This was underlined by the International Monetary Fund (IMF) Mission team who have completed their work in Lithuania today.

“The geopolitical environment remains complex, and the risks are still there, but the long-term economic challenges call for an urgent solution. In particular, I am referring to the population ageing and the consequences thereof. Without any decisive structural reforms, productivity growth will over time slowdown, which will reduce the potential of the economy,“ says Gediminas Šimkus, Chair of the Board of the Bank of Lithuania.

According to him, it is important to update the training of workers, to develop their skills and the ability to adapt to the changing requirements of the labour market.

“Lithuania’s economic recovery is gaining momentum, inflation is starting to bounce back, and people’s incomes continue rising. In the face of recent shocks, it is necessary to invest in the competitiveness and resilience of the economy. The ongoing Russia’s war against Ukraine continues to affect the entire region; in that context, we need to strengthen Lithuania’s defence capabilities by securing sustainable additional funding for that purpose,“ says Gintare Skaistė, Minister for Finance.

According to the IMF, the recent price shock, caused by the pandemic and by Russia’s war against Ukraine, did not knock Lithuania’s economic convergence towards the European average off its stride. Lithuanian exporters have remained competitive in terms of prices, and they have also recently increased their exports in the high value-added services sector. The recovering external demand is also expected to support the exports of capital goods in the second half of the year.

The IMF forecasts that Lithuania’s GDP will grow 2.4% this year, compared to the 2.2% forecast in April, and in the medium term, the economic development is expected to stabilise at just over 2%. Rapid increase in real wages and a rise in employment will support private consumption; EU funds will stimulate public investments, and the external demand is expected gradually increase during the rest of the year. The average annual inflation rate will reach 1.2% this year, i.e. below the euro area average.

According to the IMF, the fiscal stance has contributed to the significant slowdown in inflation. In view of the economic cycle, last year, the structural balance of the public sector improved, as compared to 2022, adding to a further decline in debt levels (the level of public debt decreased by 10 percentage points, as compared to the pandemic period). The IMF estimates that, in view of the economic growth and the narrowing of the output gap, fiscal policy will be mildly expansionary this year. The deficit is projected to be lower than foreseen in the budget law. According to the IMF, if fiscal revenues are to be higher than planned, together with expenditure savings, they should be used to reduce the fiscal deficit.

The IMF also took into consideration the growing demand to increase the funding for the national defence, as well as the rising cost of debt payments. This has added to the structural long-term challenges regarding public finances, resulting from the ageing of population and the declining birth rates. To this end, IMF experts recommend implementing a plan on public finance policies including, inter alia, decisions on additional sustainable sources of revenue.

According to the IMF, Lithuania could increase tax revenues while preserving a competitive fiscal environment. Lithuania’s tax revenue-to-GDP ratio is significantly, i.e. around 9% of GDP, lower than the EU average. The IMF recommends shifting towards a more balanced model of the tax system, with property, capital and environmental taxes playing a more significant role.

The IMF recommends that Lithuania’s decision-makers take decisive steps to enhance the economic potential of the country. The Fund underlines that the reform of the pension system should focus on the sustainability of the system and should create incentives to participate in the second and third pillars, while limiting possibilities to exit early. The on-going reforms in education and health have allowed to take a step forward, but further ambitious measures are needed, for example, in developing vocational training.

According to the IMF, the banking system remains liquid and well capitalised and, thus, well equipped to withstand unexpected shocks. The level of bank profitability, although it will decline, will remain elevated and well above the euro area average. At the same time, the IMF underlines that the bank solidarity contribution has not affected the performance of the banks and has not created any negative incentives. However, the Fund points out that the solidarity contribution should be applied on a temporary basis and not become a new permanent taxation instrument.

The experts of the Fund noted Lithuania’s progress in strengthening the framework for preventing money laundering and terrorist financing (MLTF), including tightened market access requirements for providers of virtual currency services. The IMF also welcomes the enhanced prevention of MLTF among institutions that joined or wish to join the Bank of Lithuania’s payment system CENTROlink.

During the two-week consultation, IMF experts met with the heads of the Bank of Lithuania and the Ministry of Finance, also held meetings with representatives of the President’s Office, the Seimas, the Government, other public institutions and the private sector.

Lithuania has been a member of the IMF since 1992. At the moment, a total of 190 countries are members of the IMF. Lithuania’s annual consultation with the IMF takes place in accordance with Article IV of the IMF Agreement, which requires that IMF member countries pursue economic and financial policies that ensure national and global financial and economic stability.

The IMF's conclusions can be found in more detail here.