Washington, DC:
An International Monetary Fund (IMF) mission met virtually with the
Lithuanian authorities from January 25 – 29 to discuss recent economic
developments and policy priorities. At the conclusion of the visit, Mr.
Borja Gracia, IMF mission chief for the Republic of Lithuania, made the
following statement:
The Lithuanian economy entered the COVID-19 crisis on a strong footing
and suffered one of the mildest economic contractions in Europe in
2020.
Years of prudent policies helped Lithuania eliminate the macroeconomic and
financial imbalances built up before the Global Financial Crisis. In
addition, Lithuania entered the COVID-19 pandemic with euro area
membership, fiscal space, a surplus in the current account, stronger
corporate and household balance sheets, and a well-capitalized and
profitable banking system that is not dependent on external funding.
Combined with hard-fought competitiveness gains, this has helped the
Lithuanian economy become less vulnerable and more resilient to shocks.
For the first time, the economic policy response implemented in the
face of a big shock has been decisively supportive.
The government’s policy response to the pandemic has been timely and
appropriately focused on providing liquidity to firms and support to
workers in sectors affected by the restrictions in activity, as well as the
healthcare sector. The Bank of Lithuania eased countercyclical capital
requirements within its macroprudential framework, which supported credit
supply during the crisis. At the same time, private sector-led moratoria on
loan repayments, supported by the Bank of Lithuania, have helped improve
the liquidity positions of households and businesses. High capital and
liquidity ratios in the banking system, together with high profitability
and prudent lending standards, provided an additional source of stability.
Lithuania’s economic recovery is expected to accelerate later this
year.
As vaccinations progress and pandemic-related restrictions ease, domestic
demand, supported by moderate employment losses and high wage growth in
2020, should drive a rebound in growth. The unemployment rate is expected
to gradually improve but to remain higher than pre-pandemic levels this
year, partly due to higher labor force participation and policies that
support unemployed workers. The use of the Recovery and Resilience Funds
later this year will begin adding momentum to domestic demand by supporting
higher public and private investment and should provide an opportunity to
accelerate needed structural reforms. However, as a small open economy and
with an uncertain external environment, risks remain significant and
government policies must continue to be proactive.
Policies should continue to provide support until the recovery is on a
solid footing.
This is particularly important while restrictions to economic activity are
in place. Policies in the recovery phase will need to transition from
providing rapid and broad support to firms and households to providing
targeted support to those sectors and workers particularly affected by the
crisis. Fiscal policy should support a robust recovery but also set a
medium-term path to rebuild buffers once the recovery is firmly entrenched.
In this regard, a comprehensive and growth-friendly medium-term fiscal
strategy that reflects the new government priorities will help anchor
expectations, reduce uncertainty and help address long-standing challenges.
In the financial sector, and in the absence of systemic risks to financial
stability, the emphasis should be to make sure that the well-capitalized
and liquid banking system stands ready to extend new credit and support the
recovery.
The new government’s priorities rightly focus on reducing economic
disparities, increasing productivity and improving the health and
education systems.
Lithuania’s opportunities and challenges include, and extend beyond, the
immediate crisis and will have to be addressed with ambitious reforms to
increase productivity and support higher wages. The new government will
face a difficult tradeoff between maintaining a low and competitive tax
system that attracts investment and meeting increasing demands for better
public services. The disproportionally stronger effect of the crisis on
lower-skilled workers and poorer regions could further exacerbate
inequality. Thus, addressing social disparities and poverty, including via
the tax-benefit system, implementing education and healthcare reform
programs, investing in the skills of Lithuanian workers and in both clean
and digital infrastructure could help support the productivity and
competitiveness of the Lithuanian economy.
Footnote: The earlier version incorrectly assumed this was an article IV end-of-mission staff agreement.
