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.”
