Republic of Lithuania: Staff Concluding Statement of an IMF Staff Visit

IMF News, February 1, 2021

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Canonical URL: Republic of Lithuania: Staff Concluding Statement of an IMF Staff Visit

IMF mission met virtually with the Lithuanian authorities from January 25 – 29 to discuss recent economic developments and policy priorities.
Statement date: February 1, 2021.
The views expressed are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
Footnote: The earlier version incorrectly assumed this was an article IV end-of-mission staff agreement.

Lithuania entered the COVID-19 crisis on a strong footing and suffered one of the mildest economic contractions in Europe in 2020.
Pre-pandemic strengths highlighted:
- Euro area membership.
- Fiscal space.
- A surplus in the current account.
- Stronger corporate and household balance sheets.
- A well-capitalized and profitable banking system that is not dependent on external funding.
- Years of prudent policies that helped eliminate macroeconomic and financial imbalances built up before the Global Financial Crisis.
- Hard-fought competitiveness gains that reduced vulnerability to shocks.

The government’s policy response has been timely and appropriately focused on:
- Providing liquidity to firms.
- Support to workers in sectors affected by restrictions in activity.
- Support to the healthcare sector.
Bank of Lithuania actions:
- Eased countercyclical capital requirements within its macroprudential framework, supporting credit supply during the crisis.
- Supported private sector-led moratoria on loan repayments, helping improve liquidity positions of households and businesses.
Banking sector characteristics that supported stability:
- High capital and liquidity ratios.
- High profitability.
- Prudent lending standards.

Lithuania’s economic recovery is expected to accelerate later in 2021.
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 in 2021, partly due to higher labor force participation and policies that support unemployed workers.
- The use of the Recovery and Resilience Funds later in 2021 will begin adding momentum to domestic demand by supporting higher public and private investment and should provide an opportunity to accelerate needed structural reforms.
Risks:
- 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, particularly while restrictions to economic activity are in place.
Transition in recovery phase:
- From rapid and broad support to firms and households.
- To targeted support for sectors and workers particularly affected by the crisis.
Fiscal policy should:
- Support a robust recovery.
- Set a medium-term path to rebuild buffers once the recovery is firmly entrenched.
- Be anchored by a comprehensive and growth-friendly medium-term fiscal strategy that reflects the new government priorities to help anchor expectations, reduce uncertainty and address long-standing challenges.

In the absence of systemic risks to financial stability, emphasis should be on ensuring that the well-capitalized and liquid banking system stands ready to extend new credit and support the recovery.

The new government’s priorities focus on:
- Reducing economic disparities.
- Increasing productivity.
- Improving health and education systems.
Challenges and recommended reform areas:
- Addressing the tradeoff between maintaining a low and competitive tax system and meeting increasing demands for better public services.
- Addressing disproportionate crisis effects on lower-skilled workers and poorer regions to avoid exacerbating inequality.
- 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 to support productivity and competitiveness.

International Monetary Fund — Staff Concluding Statement (February 1, 2021)