IMF Staff Concludes Visit to Lithuania

IMF News, November 21, 2022

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The Lithuanian economy "has shown remarkable resilience and strong growth momentum this year, but significant headwinds are forcing a slowdown."
Growth is "expected to slow down significantly in 2023 driven by declining real incomes and low external demand."
Prior to Russia’s invasion of Ukraine, the economy "was showing signs of overheating that fueled inflationary pressures in addition to the increase in global energy and food prices."
With unemployment "below pre-pandemic levels," robust wage growth is "pushing core inflation higher and risks creating a persistent wage-inflation spiral" that could "undermine the country’s competitiveness" if it materializes.
Policy challenge: "balance the need to fight inflationary pressures and provide support to a weakening economy in order to preserve macroeconomic and financial stability."

"The fiscal position remains strong supported by the revenue windfall in part generated by high inflation, but spending pressures, including for energy subsidies, continue to build."
The fiscal stance "this year is projected to be moderately counter-cyclical."
Significant energy subsidies and other long-term spending pressures "are expected to weaken the fiscal position in 2023."
If inflationary pressures remain high, "the fiscal position will have to be tightened despite the expected slowdown in growth to support monetary policy’s efforts to lower inflation."
To address long-standing spending pressures and social demands, "further increases in social spending will require an improvement in the quality of public spending and increased revenues."
Revenue-raising options identified: "scope to broaden the tax base, particularly by eliminating distortionary tax exemptions and through property and environmental taxes."

Assessment: "The response to the energy crisis has appropriately limited economic disruptions and provided support to the most vulnerable while allowing for market price signals to operate—but fiscal costs are mounting."
Criticism: "The untargeted energy price subsidy to households is particularly costly."
Recommendation: Make subsidies "more targeted at the most vulnerable and more efficient, reducing their fiscal burden."
Specific option suggested: "consideration could be given to replace the existing energy tariff subsidies with a bonus linked to past energy consumption, other household characteristics, and a component related to the difference between the market and subsidized tariff."

The banking sector has "high capital, liquidity, and healthy profitability" and "is prepared to face a weakening economic environment."
The non-performing loan ratio is "well below the historical average," and banks’ profitability "is being boosted by higher interest incomes."
As the Fintech sector matures and becomes larger, the focus should shift "from growth to consolidation with a view toward mitigating money laundering risks by strengthening the AML/CFT supervisory capacity of the Bank of Lithuania and the Financial Intelligence Unit."

Lithuania faces opportunities and challenges beyond the immediate crisis that "will require ambitious reforms to increase productivity and support higher wages."
Structural reform priorities: "implementing education and healthcare reform programs, improving the skills of Lithuanian workers, and investing in green and digital infrastructure" to "support productivity, competitiveness, and growth in the longer term."
Policy guidance: "The authorities should maintain prudent policies and accelerate the implementation of much-needed structural reforms, including in the areas of healthcare and education and improving the tax system."

Mission dates: IMF mission "met with the Lithuanian authorities from November 15–21" to discuss recent economic developments and policy priorities.
Press release date: November 21, 2022.
Press Release No.: 22/393.
Statement attribution: "End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion."

IMF press release — Press Release No. 22/393, November 21, 2022