Republic of Lithuania: IMF Executive Board Concludes 2013 Article IV Consultation
March 28, 2013
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2013 Article IV Consultation with Lithuania is also available
March 28, 2013
On March 22, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Lithuania.1
Background
Since the 2008-09 crisis, significant progress has been made in reducing macroeconomic imbalances, and the economic recovery is well underway. Growth registered 3½ percent in 2012, supported by strong exports and a bumper harvest. Private consumption was also robust, reflecting rising consumer confidence and improving labor market conditions. Unemployment fell to 13.2 percent and has been on a declining trend for both youth and the long-term unemployed. Inflation slowed to 3.2 percent in 2012 as the effects of rising global commodity prices moderated. Core inflation, meanwhile, remained fairly subdued at 2 percent. Strong export growth and an improvement in the terms of trade helped reduce the current account deficit to 0.9 percent of GDP in 2012.
The fiscal deficit narrowed from 9½ percent of GDP in 2009 to 5½ percent of GDP in 2011, and to an estimated 3 percent of GDP in 2012. The government successfully raised about €1¾ billion in international markets in 2012 and redeemed €1 billion maturing in early March.
The largely foreign-owned banking system, overall, remained well capitalized, liquid, and profitable. Credit growth remains weak and nonperforming loans, while declining, are still high. Along with falling interest rate margins, this led to a decline in bank profitability.
Four credit institutions were intervened since the last Article IV consultation—two domestically-owned banks and two credit unions—due to insolvency. This has removed an important threat to financial stability and strengthened the overall soundness of the financial system, while accesses to guaranteed deposits and financial stability have been maintained.
The government has announced its intention to seek euro adoption in 2015.
Executive Board Assessment
Executive Directors welcomed the ongoing recovery and the impressive macroeconomic rebalancing since the 2008–09 crisis. The reduction in the fiscal and current account deficits has significantly reduced vulnerabilities, and competitiveness gains have laid the foundation for an export-led recovery. Directors agreed that investment and continued structural reforms will be critical to sustain competitiveness gains, reduce unemployment, and support growth in the medium term.
Directors commended the strong fiscal adjustment undertaken to date. They noted that the 2013 budget balances the need to support the recovery with further consolidation. Looking ahead, Directors agreed that further reductions in the structural fiscal deficit will be needed to rebuild buffers. They encouraged the authorities to shift the composition of fiscal adjustment to the revenue side, and stressed the importance of high quality measures to ensure sustainability while reducing income inequality. They saw merit in expanding wealth and property taxes and broadening the tax base, noting that improvements in tax administration should accompany any new revenue measures. Directors also called for strengthening the fiscal framework and further reform of the pension system.
Directors commended the authorities for the intervention in four insolvent credit institutions which has strengthened the overall soundness of the financial system. They underscored the importance of continuing enhanced supervision, including stepped-up on-site inspections, strict stress testing, and close monitoring of banks’ loan loss provisions. Directors agreed that the financial sector has an essential role to play in supporting growth and investment, and emphasized that credit should not be unduly constrained going forward. To foster sound credit growth, they supported a review of obstacles to timely resolution of nonperforming loans and welcomed steps to improve the insolvency framework.
Directors stressed that maintaining competitiveness, addressing labor market inefficiencies, and enhancing the business and investment environment will be key to sustain growth and reduce unemployment over the medium term. They underscored that future wage growth should not outpace productivity growth. They encouraged the authorities to support job creation through training, active labor market policies, and addressing any disincentives to work in the benefits system. Efforts are also needed to reduce administrative burdens and improve energy efficiency. Directors welcomed the authorities’ goal of joining the euro area in 2015 from a strong and sustainable base.
| Republic of Lithuania: Selected Economic Indicators | ||||||
| 2009 | 2010 | 2011 | 2012 | 2013 | ||
|
|
Est. |
Proj. | ||||
|
Real Economy |
||||||
|
Real GDP growth |
-14.8 | 1.5 | 5.9 | 3.6 | 3.0 | |
|
CPI, period average (annual percentage change) |
4.2 | 1.2 | 4.1 | 3.2 | 2.1 | |
|
CPI inflation, end of period |
1.2 | 3.6 | 3.5 | 2.9 | 2.7 | |
|
Unemployment rate (year average, in percent of labor force) |
13.7 | 17.8 | 15.2 | 13.2 | 12.0 | |
|
Public Finance |
(In percent of GDP) | |||||
|
General government balance |
-9.4 | -7.2 | -5.5 | -3.0 | -2.6 | |
|
General government gross debt |
29.3 | 37.9 | 38.5 | 39.6 | 40.0 | |
|
Foreign currency-denominated public debt |
27.0 | 34.1 | 33.1 | 33.3 | 32.8 | |
|
Balance of Payments |
(In percent of GDP, unless otherwise specified) | |||||
|
Current account balance |
3.7 | 0.1 | -3.7 | -0.9 | -1.3 | |
|
Gross official reserves (in billions of euros) |
4.6 | 5.0 | 6.4 | 6.5 | 6.7 | |
|
Exchange Rates |
(Litai per U.S. dollar, unless otherwise specified) | |||||
|
Exchange rate (end of period) |
2.37 | 2.61 | 2.62 | 2.62 | … | |
|
Exchange rate (period average) |
2.48 | 2.60 | 2.48 | 2.68 | … | |
|
Real effective exchange rate (2005=100, increase=appreciation) |
118.4 | 113.2 | 114.8 | 113.1 | … | |
|
Money and Credit |
(Year-on-year percent change) | |||||
|
Reserve money |
-17.2 | 19.4 | 37.5 | -6.4 | 5.5 | |
|
Broad money |
0.3 | 8.9 | 4.9 | 7.2 | 8.8 | |
|
Private sector credit |
-6.9 | -7.6 | -5.7 | 0.3 | 3.4 | |
|
Sources: Lithuanian authorities; and IMF staff estimates. | ||||||
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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