The IMF urges to take advantage of an economic upturn in preparing for potential challenges and supports the Bank of Lithuania’s decisions
Following the report prepared by the International Monetary Fund (IMF) staff mission in Lithuania and approved by the IMF Executive Board, the IMF supports the Bank of Lithuania’s efforts in strengthening the financial system. The IMF warned about the economic developments in Lithuania, yet indicated that the country is better prepared to deal with possible shocks compared to the pre-crisis period.
“Lithuania has to strengthen its economic resilience to future challenges and the current economic upswing provides a solid basis to implement that. The Bank of Lithuania has taken steps to strengthen financial stability by ensuring that financial institutions have higher capital reserves to better withstand potential shocks,” said Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.
The IMF emphasised that Lithuania’s economic growth is above its potential. Therefore, according to its forecasts, the economic expansion is set to slow down in the upcoming years. The growth outlook is also dampened by unfavourable external conditions: tensions in international trade, uncertainty over Brexit and the potential turmoil in global financial markets. For this reason, Lithuania should pursue a neutral macroeconomic policy, maintain proactive prudential approach and secure reserves for the future rather than further stimulate economic growth through fiscal measures.
The IMF takes a supportive approach to the Bank of Lithuania’s efforts in strengthening the stability of the financial system. From 30 June 2019, domestic banks and central credit unions are subject to a 1% countercyclical capital buffer rate, which was raised twice over the last two years. The Bank of Lithuania has taken such decisions considering the fact that now is the right time to increase resilience of the financial sector in the face of potential future challenges.
The IMF also noted that Lithuania’s economic development, which is currently above potential, leads to tensions in the labour market and rapid wage growth (10% in 2018) – in the long run, this may reduce the country’s competitiveness in foreign markets. The IMF experts emphasised that, in terms of the living standards, Lithuania will only be able to sustainably approach the “old” EU member states if labour productivity growth increases along with wages. Productivity could be boosted by labour market related reforms – currently, there is a mismatch between the supply and demand of the skilled labour, particularly in the IT and financial sectors. According to the IMF, this gap can be explained by the surplus of the low-skilled labour and shortcomings in the Lithuanian education system.
Nevertheless, despite all the challenges facing the country’s economy, the IMF stated that Lithuania is now better prepared to withstand possible shocks than it was a decade ago. The financial system’s liquidity and profitability levels are high, the banking sector is better capitalised, while household and corporate indebtedness (as a share of GDP) has fallen after the crisis.