Press Release No. 22/10

IMF Staff Concludes Virtual Visit to Lithuania

January 25, 2022

• Despite the large human costs of the pandemic, the Lithuanian economy has weathered the crisis remarkably well and is experiencing a strong recovery.
• In the short-term, policies should aim at mitigating emerging risks to price and financial stability and maintaining the economy’s resilience to future shocks.
• The long-standing challenges that preceded the pandemic, particularly in health and education, have taken on renewed prominence and should also be addressed.

Washington, DC: An International Monetary Fund (IMF) mission, led by Borja Gracia, met virtually with the Lithuanian authorities from January 11–24 to discuss recent economic developments and policy priorities. At the conclusion of the visit, Mr. Gracia issued the following statement:

“The Lithuanian economy rebounded strongly in 2021 and entered the year on a solid footing. Thanks to strong pre-pandemic fundamentals, available policy buffers, and a forceful policy response, the economy avoided a recession in 2020 and grew vigorously last year. Domestic demand was the main driver of growth, supported by continued wage growth and a recovery of investment. The economy is expected to expand further in 2022, albeit at a somewhat slower pace. Unemployment is returning to pre-pandemic levels, with rising job vacancies and robust wage growth pointing to strong labor market conditions. The external position is set to remain strong, driven by a significant but declining trade surplus given strong consumption and investment, but weaker than expected external demand and geopolitical tensions constitute risks.

“As in other countries, inflation is likely to be high for longer than previously expected. Rising energy and food prices in global markets fueled higher inflation in 2021 and may continue to keep inflation elevated in the first half of 2022. Core inflation, which excludes energy and food components, has also risen alongside strong wage growth, suggesting that the increase in prices is becoming more broad-based, against the backdrop of above-potential growth. While inflation is expected to decelerate in the second half of the year, there is considerable uncertainty regarding its future path and degree of persistence, with risks skewed to the upside.

“The robust recovery allows Lithuania to refocus attention on the social and economic challenges that preceded the pandemic. Pandemic related policy support has been largely phased out and government revenues have rebounded strongly. As a result, the fiscal deficit declined substantially last year and is expected to narrow further in 2022. Nevertheless, reducing social disparities and poverty as well as improving the health and education systems remain important priorities, both to address the legacies of the pandemic and to facilitate the green and digital transformations. Better composition and quality of public spending and increased mobilization of revenues are critical to accommodate spending pressures. To this end, there is scope to broaden the tax base, particularly through real estate and environmental taxes, which Lithuania collects significantly less than peers and are less detrimental to growth. The EU Recovery and Resilience Facility also provides a unique opportunity to build consensus around politically challenging reforms needed to improve Lithuania’s human and physical capital.

“Maintaining a proactive policy framework can mitigate risks and preserve credibility. With little-to-no permanent loss of output from the pandemic, fiscal buffers should be rebuilt to secure Lithuania’s capacity to respond to future shocks. Automatic stabilizers should be allowed to fully operate, with narrowly targeted and temporary support measures provided only if necessary. The stronger the economic recovery, the faster buffers should be rebuilt. This would also help support fiscal policy––the main macroeconomic stabilization tool available––in reducing risks of overheating of the economy. Financial sector polices should continue to proactively address emerging risks in the financial system. The current environment of very high liquidity and well capitalized and profitable banks could limit the effectiveness of capital-based macroprudential measures recently adopted to address risks in the residential real estate market. As the Fintech sector matures and becomes larger and more sophisticated, continuing efforts to enhance supervisory capacity and the AML/CFT framework remain a priority.

“We would like to thank our counterparts for excellent virtual discussions and hope to soon be able to meet in person.”