Republic of Lithuania: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Lithuania

IMF Staff Country Reports, September 5, 2023

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Republic of Lithuania: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Lithuania

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Bibliographic details

• Published: September 5, 2023
• Series: IMF Staff Country Reports
• DOI: https://doi.org/10.5089/9798400254048.002

Key findings and macroeconomic assessment

• Lithuania weathered a series of unprecedented external shocks owing to resilient macroeconomic fundamentals and a decisive policy response.
• The strong post-pandemic recovery led to demand driven inflationary pressures.
• Supply side bottlenecks and large increases in commodity prices after Russia’s invasion of Ukraine compounded these pressures and resulted in high and persistent inflation.
• Monetary conditions are assessed as too loose for Lithuania, placing the onus to fight inflation and maintain competitiveness on fiscal policy and structural reforms.
• Short-term objectives include reducing inflationary pressures and preserving financial stability.
• Long-term objectives include implementing long-overdue structural reforms to raise the economy’s growth potential and support faster income convergence with Western Europe.

Inflation, monetary, and fiscal stance

• Inflation drivers identified: demand-driven pressures, supply bottlenecks, and large commodity price increases after Russia’s invasion of Ukraine.
• Monetary policy: monetary conditions described as too loose for Lithuania.
• Fiscal policy guidance:
  • Fiscal policy needs to take a disinflationary stance.
  • This requires a lower-than budgeted deficit this year, notwithstanding a weakening economy.
  • A contractionary stance going forward is recommended in line with the domestic fiscal rule.

Policy recommendations — short term

• Reduce inflationary pressures.
• Preserve financial stability.
• Use fiscal policy to tighten conditions where monetary policy is insufficient.

Policy recommendations — medium and long term (structural)

• Implement long-overdue structural reforms, including to:
  • Strengthen education.
  • Strengthen healthcare.
  • Address risks associated with climate change.
• Utilize EU funds efficiently to enhance private sector productivity.

Subjects and keywords (as provided)

• Subjects: Financial institutions, Fiscal policy, Fiscal stance, Inflation, International organization, Labor, Labor markets, Loans, Monetary policy, Prices, Real estate prices
• Keywords: Baltics, BoL website, energy price shock, Fiscal stance, Global, Inflation, inflation dynamics, inflation risk, Labor markets, Loans, price competitiveness, price pressure, Real estate prices, safeguards assessment policy, weakening economy, Western Europe

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