2023-04-11
The International Monetary Fund (IMF) predicts slower global economic growth and increasingly prolonged high inflation for this year, compared to the previous year. According to the IMF, central banks should continue tightening monetary policy, while fiscal policy should focus on reducing fiscal deficit and debt level in order to contribute to inflation reduction. At the IMF’s Spring Meetings to be held this week, Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania, will discuss the recent economic developments and coordinated policy responses to the economic challenges. The meetings will also cover the IMF programme for Ukraine approved in March and the implementation thereof.
“Controlling high inflation remains the main task for Lithuania and many other countries to ensure sustainable economic growth in the future. Coordinated institutional response is necessary: while central banks inhibit inflation through monetary policy measures, governments could contribute to this goal by reducing the budget deficits. Countries need to follow a consistent tightening path, while, of course, closely monitoring the effect of such a stance on financial stability and the real economy,” says Šimkus.
The IMF predicts that global economic growth will slow down from 3.4% last year to 2.8% this year, and in 2024 growth will accelerate to 3.0%. The euro area economy should grow by 0.8% this year (much slower compared to 3.5% growth last year), and by 1.4% next year. The main reason of the slowing growth is the rise in inflation following the pandemic, latyer accelerated by russia’s war against Ukraine, which the central banks are seeking to control by raising key interest rates.
Inflation should fall more slowly than previously expected, partly due to tight labour markets and slow post-pandemic recovery of labour supply. Global inflation should slow down from 8.7% last year to 7.0% this year and 4.9% next year. Inflation in the euro area should decrease from 8.4% in 2022 to 5.3% in 2023 and 2.9% in 2024.
The IMF worsened the forecast for the development of the Lithuanian economy for 2023, but improved it for 2024. A slight contraction of -0.3% is predicted for this year, driven by unfavourable trends in the first half of the year, as well as a return to 2.7% GDP growth next year. The IMF predicts that inflation in Lithuania will decrease more slowly than forecasted last autumn, and this year it should slow down to 10.5% (+2.1 percentage points) and to 5.8% (+2.6 percentage points) next year.
The IMF emphasises the increased risks to global financial stability: growing interest rates brought about the collapse of two US banks based on unsustainable financing model, and the shock also spread to the European banking sector, resulting in the fall of stock indices of European banks. Under the baseline scenario, consequences of these events should be contained, but the IMF notes that there could also be a wider impact on the financial sector, which would lead to an even slower growth of global economy.
“In the context of recent disturbances in the US and European banking sectors, it is worth reiterating that the resilience of Lithuanian banks is particularly high – they have significant capital and liquidity reserves,” says Šimkus.
The Chairman of the Board of the Bank of Lithuania Gediminas Šimkus will participate in the IMF Spring Meetings in Washington, D.C. In addition to regular meetings with colleagues from the Nordic and Baltic countries, there will be a high-level meeting of the Baltic delegations with Gita Gopinath, First Deputy Managing Director of the IMF, during which the developments and challenges of the world, European and Baltic economies will be discussed.
In the bilateral meetings, special attention will be paid to Ukraine – the delegation of the Bank of Lithuania will meet with Andriy Pyshnyy, Governor of the National Bank of Ukraine, Vladyslav Rashkovan, Alternate Executive Director of the IMF Executive Board who represents Ukraine, and IMF representatives responsible for cooperation with Ukraine. During these meetings, discussions will be held on the economic situation of the country, as well as on the newly approved USD 15.6 billion IMF programme for Ukraine and its implementation. Lithuania, together with the Nordic and Baltic countries, consistently sought an active role of the IMF in providing financial and technical support for Ukraine, which is of particular importance for ensuring macroeconomic stability of the country in the face of the war caused by russia.
During his visit, Gediminas Šimkus will also meet Vitas Vasiliauskas, who holds the position of IMF Executive Director since January and is the main representative of the Nordic and Baltic countries in the organisation. Lithuania is a member of the Nordic-Baltic Constituency, the other members of which are Latvia, Estonia, Finland, Sweden, Norway, Denmark and Iceland.