Lithuania—Concluding Statement of the Staff Visit
IMF News, May 19, 2011
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- Published: May 19, 2011
Context and timing
- Vilnius, May 19, 2011
- Describes preliminary findings of IMF staff at the conclusion of the mission.
Economic outlook and growth projections
- Real GDP is projected to grow by 6 percent in 2011 and 4¾ percent in 2012.
- Booming exports and strengthening domestic demand are expected to support rapid economic growth in 2011-12.
- Private consumption is being boosted by increasing confidence that the recovery is robust.
- Strong private fixed investment reflects rising corporate profitability and capacity utilization.
- Solid employment growth is reducing the unemployment rate and contributing to increasing wage growth.
- Core CPI inflation turned positive in April; headline CPI inflation is being boosted temporarily by high food and energy prices.
- Risks to the growth forecast are balanced: domestic demand could surprise on the upside, but sovereign financing concerns elsewhere in Europe could spill over to funding pressures for Lithuania.
Fiscal developments, targets, and required adjustment
- Under its latest Convergence Program, the government aims to cut the general government deficit to 5.3 percent of GDP in 2011 and 2.8 percent of GDP in 2012.
- With strong economic growth boosting government revenue, the target for 2011 is likely to be achieved.
- Assuming that the wage bill is kept unchanged in nominal terms, IMF staff project a fiscal deficit of 4 percent of GDP in 2012.
- Therefore, additional fiscal measures of 1¼ percent of GDP are needed to achieve the 2012 target of 2.8 percent of GDP.
- With the recovery firmly entrenched, additional fiscal consolidation should start as soon as possible.
Composition of additional fiscal adjustment (policy recommendations)
- Expand wealth taxation:
- Introduce taxes on residential real estate and motor vehicles.
- Rationale: these taxes are less distortive than other taxes, are progressive, and could increase revenue substantially and quickly.
- Eliminate exemptions from corporate and personal income tax.
Medium-term fiscal objective and structural reforms
- Medium-term objective: fiscal surplus of ½ percent of GDP.
- Structural fiscal issues requiring further progress:
- Pension reform:
- Support an increase in the retirement age.
- Support the separation of the basic social pension and the introduction of means testing.
- Support limited government matching of individual contributions to the second pillar.
- Tax compliance:
- Welcome actions taken to strengthen revenue administration, including improved targeting of different taxpayer segments, enhancement of border monitoring, and more extensive use of cash registers.
- Support further efforts to strengthen tax compliance.
- State-owned enterprise reform:
- Welcome strengthening of transparency regarding state-owned assets.
- Support analysis of the social functions of state-owned enterprises and the development of governance reforms.
Banking system assessment and supervisory recommendations
- The banking system as a whole is on the mend, but challenges remain.
- The average non-performing loan ratio has stabilized.
- Lower loan-loss provisioning and wider interest margins helped banks post small profits for the first time since 2008.
- Capital adequacy and liquidity ratios remain well above regulatory minima.
- Supervisory actions recommended:
- Continue to closely monitor the sufficiency of all banks’ loan loss provisions.
- Ask banks to raise capital where needed under a strict timeframe.
- With improved conditions, banks’ lending standards have eased, suggesting that credit is available for sound borrowers.
Lithuania—Concluding Statement of the Staff Visit (Vilnius, May 19, 2011).