IMF Staff Concludes Visit to the Republic of Lithuania

September 13, 2016

An International Monetary Fund (IMF) mission visited Vilnius during September 6-12, 2016, to discuss economic developments and government policies with the Lithuanian authorities. At the conclusion of the visit, Mr. Christoph Klingen, IMF mission chief for Lithuania, made the following statement:

 “Economic activity is expanding at a satisfactory pace and is likely to accelerate moderately into next year. Private consumption is the main driver, supported by strong wage growth. Exports are also doing reasonably well considering the weak external environment, as efforts to diversify markets are beginning to bear fruit. Investment has been a drag on growth so far this year, mainly reflecting a hiatus in EU funds drawings during the transition to the EU’s Multiannual Financial Framework 2014-20, but is set to pick up. GDP growth should reach some 2.5 percent this year and around 3 percent in 2017.

 “Wage growth has been high relative to productivity gains, a situation that requires monitoring if competitiveness is to be maintained. The current trajectory is unsustainable, although adverse effects on export performance have not visibly materialized so far. The source of the recent stagnation of labor productivity needs further analysis, especially whether it partly reflects firms employing extra workers in anticipation of expanding activity or dwindling labor supply. Policies that promote labor supply would be prudent, whereas minimum wage hikes should be paused.

 “Public finances are headed for sizable overperformance this year, providing some room for new initiatives in 2017 without unduly undermining the hard-won fiscal gains of the past, which need to be preserved. Unexpectedly strong wage and retail sales developments are buoying revenue collections and could bring the general government budget deficit to 0.25 percent of GDP, compared to a budgeted 1.2 percent of GDP. This overperformance, together with some likely further revenue buoyancy, as well as possible gains from improvements in tax administration, could accommodate announced new initiatives for next year—notably higher defense spending, pension indexation, cuts in social contributions, and higher allowances under the personal income tax. Even with these initiatives, the budget deficit would remain contained, at less than 1 percent of GDP. In structural terms the deficit would be even smaller, thus ensuring that public debt relative to GDP gradually declines over time. That said, it remains important that prudent fiscal policy is maintained.

 “Policies under the “New Social Model” would benefit from adjustments. Abandoning the passed labor code following the presidential veto would be a missed opportunity to achieve needed reforms. Given the procedural constraints, adopting a new code and expeditiously addressing remaining legitimate concerns of social partners through amendments appears preferable. While the new pension system delivers sizable benefit improvements in the near term, it likely implies large benefit reductions in the long run, requiring further action to ensure social sustainability. Moreover, plans to compensate for the envisaged successive cuts in social security contributions are yet to be articulated.

 “There are no apparent immediate risks to financial stability. Soundness indicators are favorable, although smaller domestic banks would benefit from further bolstering their capitalization. The gradually strengthening revival of credit growth and the re-emerging interest in SME lending are positive developments that will support investment and growth. The new Law on Credit Unions is welcome and could transform the underperforming sector after necessary adjustment, allowing it to occupy an important niche in Lithuania’s financial system.

 “The upcoming new legislative period provides an opportunity to clearly articulate a strategic economic program, harnessing the broad societal consensus for inclusive convergence with living standards in Western Europe, based on solid productivity growth and sound public finances.

  • Regarding public finances, following the period of successful consolidation, the focus can now shift to fiscal structural reforms. A tax system that lightens the burden on low-wage earners and relies more on higher incomes, capital income, and wealth would serve the dual purpose of alleviating income inequality and expanding formal employment. On the expenditure side, reviewing spending programs and enhancing their effectiveness are important tasks. Efforts to improve tax administration should continue.
  • Top-notch education is essential for shifting the economy toward the production of higher value goods and services. There is room to improve educational outcomes and reduce mismatches between qualifications and labor market needs. This requires streamlining the oversized educational infrastructure, increasing standards, improving information about job market needs, and raising the profile of vocational training. The new Law on Higher Education provides important tools to make headway.
  • Innovation is key to narrowing the income gap with Western Europe. EU funds provide substantial resources to promote it, but better outcomes could be achieved with a less fragmented innovation infrastructure and more emphasis on marketable applications.”
IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Wiktor Krzyzanowski

Phone: +1 202 623-7100Email: MEDIA@IMF.org