Mission Concluding Statement 

Republic of Lithuania: Staff Concluding Statement of an IMF Staff Visit

February 1, 2021

Washington, DC: An International Monetary Fund (IMF) mission met virtually with the Lithuanian authorities from January 25 – 29 to discuss recent economic developments and policy priorities. At the conclusion of the visit, Mr. Borja Gracia, IMF mission chief for the Republic of Lithuania, made the following statement:

The Lithuanian economy entered the COVID-19 crisis on a strong footing and suffered one of the mildest economic contractions in Europe in 2020. Years of prudent policies helped Lithuania eliminate the macroeconomic and financial imbalances built up before the Global Financial Crisis. In addition, Lithuania entered the COVID-19 pandemic with euro area membership, fiscal space, a surplus in the current account, stronger corporate and household balance sheets, and a well-capitalized and profitable banking system that is not dependent on external funding. Combined with hard-fought competitiveness gains, this has helped the Lithuanian economy become less vulnerable and more resilient to shocks.

For the first time, the economic policy response implemented in the face of a big shock has been decisively supportive. The government’s policy response to the pandemic has been timely and appropriately focused on providing liquidity to firms and support to workers in sectors affected by the restrictions in activity, as well as the healthcare sector. The Bank of Lithuania eased countercyclical capital requirements within its macroprudential framework, which supported credit supply during the crisis. At the same time, private sector-led moratoria on loan repayments, supported by the Bank of Lithuania, have helped improve the liquidity positions of households and businesses. High capital and liquidity ratios in the banking system, together with high profitability and prudent lending standards, provided an additional source of stability.

Lithuania’s economic recovery is expected to accelerate later this year. As vaccinations progress and pandemic-related restrictions ease, domestic demand, supported by moderate employment losses and high wage growth in 2020, should drive a rebound in growth. The unemployment rate is expected to gradually improve but to remain higher than pre-pandemic levels this year, partly due to higher labor force participation and policies that support unemployed workers. The use of the Recovery and Resilience Funds later this year will begin adding momentum to domestic demand by supporting higher public and private investment and should provide an opportunity to accelerate needed structural reforms. However, as a small open economy and with an uncertain external environment, risks remain significant and government policies must continue to be proactive.

Policies should continue to provide support until the recovery is on a solid footing. This is particularly important while restrictions to economic activity are in place. Policies in the recovery phase will need to transition from providing rapid and broad support to firms and households to providing targeted support to those sectors and workers particularly affected by the crisis. Fiscal policy should support a robust recovery but also set a medium-term path to rebuild buffers once the recovery is firmly entrenched. In this regard, a comprehensive and growth-friendly medium-term fiscal strategy that reflects the new government priorities will help anchor expectations, reduce uncertainty and help address long-standing challenges. In the financial sector, and in the absence of systemic risks to financial stability, the emphasis should be to make sure that the well-capitalized and liquid banking system stands ready to extend new credit and support the recovery.

The new government’s priorities rightly focus on reducing economic disparities, increasing productivity and improving the health and education systems. Lithuania’s opportunities and challenges include, and extend beyond, the immediate crisis and will have to be addressed with ambitious reforms to increase productivity and support higher wages. The new government will face a difficult tradeoff between maintaining a low and competitive tax system that attracts investment and meeting increasing demands for better public services. The disproportionally stronger effect of the crisis on lower-skilled workers and poorer regions could further exacerbate inequality. Thus, addressing social disparities and poverty, including via the tax-benefit system, implementing education and healthcare reform programs, investing in the skills of Lithuanian workers and in both clean and digital infrastructure could help support the productivity and competitiveness of the Lithuanian economy.

Footnote: The earlier version incorrectly assumed this was an article IV end-of-mission staff agreement.