IMF Staff Concludes Visit to LithuaniaPress Release No. 14/460
October 7, 2014
An International Monetary Fund (IMF) mission visited Vilnius during September 30 – October 6, 2014, 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 performance has held up well in a difficult external environment. Despite some softening in the second half of 2014, momentum in domestic demand and favorable external competitiveness should ensure growth of 2.9 percent this year. A moderate pickup to 3.1 percent is expected for 2015 as external and credit conditions improve and as the reform efforts of the past few years bear fruit. But better external conditions are far from assured, putting a premium on policies that emphasize preserving and building buffers.
“Euro adoption in 2015 is testimony to Lithuania’s economic success and a welcome boon to the economy that will further cement Lithuania’s firm place in Europe. Policy frameworks critical for long-term success in the currency union are being established: a broad macroprudential mandate for the Bank of Lithuania is now in place; and legislation for prudent fiscal policy over the business cycle is well advanced. In practice, a strong fiscal council will be needed to guard against pro-cyclical fiscal policy in upswings. Successful euro area membership also requires close alignment of wage and productivity developments, together with continued economic flexibility.
“The repair of public finances is much advanced but has not yet reached the point where the large increase of the public debt ratio since 2009 is being reversed. New demands on public finances, including for national security and compensation payments for crisis-induced pension and wage cuts, are complicating the task. For 2014, careful budget execution for the rest of the year could secure a deficit slightly better than the budgeted 1.9 percent of GDP,1 thus broadly achieving consolidation of ½ percent of GDP in structural terms. For 2015, the government’s goal of further structural adjustment of ½ percent of GDP appropriately balances consolidation needs with the considerable uncertainty in the economic outlook. Based on the mission’s more cautious macroeconomic assumptions, the 2015 draft budget would require additional efforts to achieve this objective. Furthermore, with the additional allocation for national security, growth in other spending becomes narrowly circumscribed. The finalization of the budget should therefore focus on broadening the revenue base and targeting savings in non-priority areas.
“Lithuania’s financial sector is well capitalized and highly liquid. Recent further improvements have added to the system’s resilience to shocks. Together with a lengthening track record of profitability and declining non-performing loan ratios it should help lay the base for a pickup in credit, which is currently moving sideways. Supervisors are rightly keeping close tabs on smaller financial institutions with higher risk profiles, including credit unions until the sector is more fundamentally reformed.
“Lithuania’s future economic prospects will increasingly depend on its strength in the structural area. Efficiency of public spending and EU structural funds will take on high significance. Tangible progress in energy sector reform is commendable: diversification of energy supplies will allow competition to flourish, especially if the state-owned enterprises are run along commercial lines and appropriate private-sector participation is secured. The labor market would benefit from an overhaul of the Labor Code, although tackling still high unemployment is a broader task, also encompassing education reform and a reduction of the high labor tax wedge, which should be carefully considered.”
1 General government in ESA95 definition, but excluding expenditure for pension compensation of 0.7 percent of GDP accrued in 2014 but to be paid mostly in subsequent years.