IMF Staff Concludes Virtual Visit to Lithuania

IMF News, January 25, 2022

Source details

Press Release No. 22/10.
Mission led by Borja Gracia met virtually with Lithuanian authorities from January 11–24.
End-of-Mission press release dated January 25, 2022; views are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion.

The Lithuanian economy rebounded strongly in 2021 and entered 2022 on a solid footing.
Thanks to strong pre-pandemic fundamentals, available policy buffers, and a forceful policy response, the economy:
- avoided a recession in 2020;
- grew vigorously in 2021.
Domestic demand was the main driver of growth, supported by:
- continued wage growth;
- a recovery of investment.
Unemployment is returning to pre-pandemic levels, with rising job vacancies and robust wage growth indicating strong labor market conditions.
The external position is set to remain strong, driven by a significant but declining trade surplus; risks include weaker than expected external demand and geopolitical tensions.

Inflation is likely to be high for longer than previously expected, with:
- rising energy and food prices in global markets fueling higher inflation in 2021 and potentially keeping inflation elevated in the first half of 2022;
- core inflation (excluding energy and food) also rising alongside strong wage growth, suggesting broader-based price increases amid above-potential growth.
While inflation is expected to decelerate in the second half of the year, there is considerable uncertainty regarding its future path and degree of persistence, with risks skewed to the upside.

Pandemic-related policy support has been largely phased out and government revenues have rebounded strongly.
Fiscal developments:
- the fiscal deficit declined substantially in 2021 and is expected to narrow further in 2022.
Policy priorities to address long-standing pre-pandemic challenges (particularly in health and education) and pandemic legacies:
- reduce social disparities and poverty;
- improve health and education systems to facilitate green and digital transformations.
Public finance recommendations:
- improve composition and quality of public spending;
- increase mobilization of revenues, with scope to broaden the tax base, particularly through real estate and environmental taxes (which Lithuania collects significantly less than peers and are less detrimental to growth).
- leverage the EU Recovery and Resilience Facility to build consensus around politically challenging reforms to improve human and physical capital.

Fiscal strategy:
- rebuild fiscal buffers to secure capacity to respond to future shocks, given little-to-no permanent loss of output from the pandemic;
- allow automatic stabilizers to fully operate, with narrowly targeted and temporary support measures only if necessary;
- the stronger the economic recovery, the faster buffers should be rebuilt, helping fiscal policy reduce risks of overheating.
Financial sector:
- continue proactive policies to address emerging risks in the financial system.
- current environment of very high liquidity and well capitalized and profitable banks could limit the effectiveness of capital-based macroprudential measures recently adopted to address risks in the residential real estate market.
- as the Fintech sector matures and becomes larger and more sophisticated, continue efforts to enhance supervisory capacity and the AML/CFT framework.

“We would like to thank our counterparts for excellent virtual discussions and hope to soon be able to meet in person.”

Source: "IMF Staff Concludes Virtual Visit to Lithuania", Press Release No. 22/10, January 25, 2022.