Press Release No. 08/325

Press Release No. 08/325

A staff mission of the International Monetary Fund (IMF) visited Vilnius during December 8-16 to discuss recent economic developments with the authorities. The mission issued the following statement today at the conclusion if its visit:

"The Lithuanian economy faces challenges. The rapid deterioration in the global economy, particularly in regional trading partners, and the continued process of financial deleveraging constitute a serious external shock. The recent period of strong growth in domestic demand has also resulted in high inflation and a larger current account imbalance. In this environment, further changes in market sentiment or sharply slowing capital inflows could amplify the impact of the global shock.

"Bold upfront policy actions and contingency planning will help Lithuania to address these challenges. The currency board arrangement remains central to the policy mix, contributing to macroeconomic stability and providing a bridge to eventual euro adoption. The currency board arrangement requires strong supporting policies. This places the onus on fiscal policy to contribute to the reduction in domestic demand needed to safeguard external sustainability and future competitiveness. Despite currently adequate banking sector indicators, preemptive measures will help enhance banks' capacity to withstand the economic slowdown. Quick and strong action on all these fronts should bolster confidence and create the preconditions for eventual recovery.

"The authorities are taking strong policy actions. The government plans a significant upfront fiscal adjustment, supported by a strong package of revenue and expenditure measures. This is appropriate in this environment given the current constraints on the public sector's ability to borrow. The authorities have also taken preemptive steps to address the needs of the banking system. The prompt increase in deposit insurance coverage and reduction in reserve requirements have eased liquidity pressures. The Bank of Lithuania has also requested that banks further increase their capital buffers, which together with banks' efforts to increase loan-loss provisioning should create room to absorb prospective losses from deteriorating asset quality. The mission welcomes these prudent measures."