Lithuania’s economy demonstrates resilience in the face of global shocks
The International Monetary Fund (IMF) mission led by Borja Gracia, which finished its work in Lithuania today, notes that Lithuania’s economy remains remarkably resilient: even in the background of new challenges and uncertainties posed by Russia’s war against Ukraine, a positive economic growth is expected, which should reach nearly 2% of the GDP this year. Inflation will remain higher this year but is expected to decline significantly in 2023 as the impact of the energy price shock fades. According to the IMF, the main challenge in the short term is to contain inflation, and looking ahead it is important to boost productivity through structural reforms in education and health care.
“The IMF welcomes the Government’s actions to mitigate the impact of increased prices, especially energy prices, on the country’s economy, business and society, particularly on most socially vulnerable groups. The decisions taken are helping the Lithuanian economy to continue showing upward trends even in the face of a major shock, while the cessation of energy imports from Russia – gas, oil, and electricity – is increasing our resilience to future shocks,” said Gintarė Skaistė, Minister of Finance.
Following a rapid recovery from the COVID-19 pandemic, the Lithuanian economy faced Russia’s war against Ukraine in a strong position. The trade ties and energy dependence on Russia have been steadily declining since Lithuania’s accession to the EU, a trend that accelerated after the annexation of Crimea in 2014. In 2021, Lithuania’s share of exports to Ukraine, Russia, and Belarus combined made up only 16%, while 90% of its exports to Russia consisted of re-exported goods, and therefore, the impact of the war on the Lithuanian economy due to trade disruptions is not particularly significant.
Global energy and food price hikes and supply bottlenecks have accelerated inflation which reached the annual rate of 18.5% in May 2022. However, the IMF experts point out that the inflation is driven not only by external factors but also by strong domestic demand, while the labour market remains tight. In this context, the IMF welcomes the Government’s response in the form of a €2.26 billion package to mitigate the impact of the energy price shock on the country’s economy, business and society. It is underlined that further fiscal policy measures in the face of shocks should be targeted and aimed at the most vulnerable groups.
As for medium to longer-term horizons, the IMF stresses the need to look for additional sustainable sources of the budget revenue, for example, by implementing changes to immovable property and environmental taxes, thereby broadening the tax base on the grounds of taxes that are less harmful to economic growth. In this respect, the proposal made by the Ministry of Finance of the Republic of Lithuania to change the real estate tax model is evaluated positively.
According to Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania, despite the shock caused by external threats, the Lithuanian economy will grow quite rapidly this year and the output gap will be positive. Looking ahead, additional fiscal stimulus is therefore unnecessary and additional public spending should only be targeted and directed at the most vulnerable groups.
In the assessment of the IMF, the banking sector in Lithuania is well capitalised and liquid, and ready to withstand even large-scale economic shocks. The financial situation of firms and households is sufficiently sound, but the rapid increase in property prices remains a source of risk. Accordingly, the steps taken by the Bank of Lithuania in the area of macroprudential policy, including a higher down payment requirement to buy a non-first housing, were welcomed.
This year, the IMF mission focused on the analysis of the fintech sector and the assessment of the anti-money laundering (AML) and counter-terrorist financing (CTF) framework. It should be noted that this analysis will be part of the regional ML/TF risk assessment exercise, which is being carried out this year by the IMF experts in all Nordic-Baltic countries.
“One of the new strategic objectives of the Bank of Lithuania is to increase the maturity of market participants and compliance processes. The IMF experts’ views on this issue are broadly in line, and the supervisory actions by the Bank of Lithuania have been assessed positively,” said Šimkus.
The IMF stresses that despite the war, the structural challenges are still relevant to Lithuania’s economy, therefore it is important to accelerate education and health reforms, as well as to take further action on climate change and energy security. In the IMF’s view, the inclusion of a CO2 component in the assessment of environmental taxes would not only create the necessary incentives to reduce energy consumption and environmentally damaging emissions but would also contribute to the State budget.
During the two-week consultations, the IMF experts met with the members of the Board and department representatives of the Bank of Lithuania, the management and experts of the Ministry of Finance, as well as with representatives of the President’s Office, the Seimas, the Government, other state institutions and the private sector.
Lithuania has been a member of the IMF since 1992. Currently, the membership of the IMF includes 190 countries. The annual country consultations with the IMF are organised in accordance with Article IV of the IMF’s Articles of Agreement, which obligates the IMF member states to pursue the economic and financial policy that ensures domestic and global financial and economic stability.
Republic of Lithuania: Staff Concluding Statement of the 2022 Article IV Mission