Press Release No. 18/397

IMF Staff Concludes Visit to the Republic of Lithuania

October 29, 2018

An International Monetary Fund (IMF) mission visited Vilnius during October 23–29, 2018, to discuss recent economic developments and policy priorities with the Lithuanian authorities. At the conclusion of the visit, Mr. Borja Gracia, IMF mission chief for the Republic of Lithuania, made the following statement:

“Lithuania’s economy remains strong. Consumption continues to be the main engine of growth buoyed by strong wage growth, low unemployment, and moderating inflation. Investment is firming up, despite continued low utilization of EU funds, supported by strong credit growth and high capacity utilization. However, export growth is moderating following a sizable build-up of capacity in 2017 and the weakening of the external environment. Risks to the outlook are on the rise and include a retreat from global cross-border integration, renewed euro area strains, and geopolitical tensions.

“With positive macroeconomic conditions, the labor market is tightening with unemployment at pre-crisis levels and high employment and labor force participation. Notwithstanding the recent recovery in productivity growth, particularly last year, real wages are expected to outpace labor productivity in 2018. If this trend continues the economy’s competitiveness could suffer. The only way to achieve a sustainable increase in real wages is to improve productivity growth by implementing structural reforms. Moderating the pace of minimum wage hikes would help limit wage pressures amid a tightening labor market. Wage moderation is also needed to contain inflation expectations in the context of rising energy prices.

“Fiscal policy has an important role to play in safeguarding macroeconomic stability. The general government is expected to achieve a fiscal surplus in 2018 for the third year in a row. This is a remarkable achievement. Nevertheless, the 2019 budget, planned around the government’s reform package, targets a smaller fiscal surplus. Given continued strong economic growth and low unemployment, a constant or moderately increasing surplus would avoid the risk of a pro-cyclical fiscal stance. In light of weaker external demand and heightened risks to the economic outlook, the authorities should intensify efforts to rebuild fiscal buffers to tackle future shocks. The budget is based on realistic macroeconomic projections. However, the reliance of revenue projections on improvements in revenue administration, although supported by measures to reduce informality, represents a risk.

“Lithuania’s banking system is well capitalized, liquid, and profitable. Credit has been expanding rapidly in the first half of 2018 accompanied by rising housing prices. However, there is little evidence of reemergence of sizable imbalances. That said, the Bank of Lithuania should continue using macroprudential policy proactively to tackle systemic risks.

“Structural reforms are needed to boost productivity growth amid adverse demographics. The reform package approved by the government, covering tax, pensions, education, healthcare, innovation, and informality, is a step in the right direction. The reduction of the tax burden on labor is welcome but additional efforts are needed to generate a broader revenue base and a more efficient tax system. In this connection, the failure to introduce environmentally-related taxes and expand the base of the real estate tax as previously announced is unfortunate. Tax policy should strike the right balance between maintaining a competitive, low tax-to-GDP ratio and addressing social needs. Education and healthcare reforms are critical in Lithuania. Reform plans in these areas are a promising first step that need to be followed by decisive implementation to ensure their long-term sustainability. Upfront wage increases, while needed given current low wages, could put at risk the implementation of other politically sensitive, but critical reform elements such as the rationalization and consolidation of their networks. Only a comprehensive reform of these sectors will allow Lithuania to produce a competitive workforce necessary to tackle strong demographic headwinds.”