Republic of Lithuania: IMF Executive Board Concludes Article IV Consultation
IMF News, June 25, 2018
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- Published: June 25, 2018
Recent economic performance and near-term outlook
- Real GDP expanded by 3.9 percent in 2017, following two years of sluggish growth.
- Growth in 2018 is projected at 3.2 percent, driven mainly by weaker exports and negative employment growth; investment spending expected to pick up due to faster EU funds absorption.
- Data for Q1 2018 point to a modest deceleration of the economy and inflation.
- Inflation spiked to 3.7 percent in 2017 due to rising wages and tax hikes; inflation is projected to moderate because of the waning effects of the 2017 tax hikes, lower wage increases, and a slowing economy.
- External current account swung to a modest surplus in 2017 as exports benefited from past investments in export capacity and improved external demand.
- With the economy expanding above potential, growth is expected to moderate over time to a more sustainable pace.
Risks to the outlook
- External risks: retreat from global trade, renewed euro area strains, geopolitics and global growth.
- Domestic risks: emigration and population aging, and lack of reforms.
Executive Board assessment — key messages
- Directors welcomed Lithuania’s strong economic performance and impressive macroeconomic management.
- Internal and external imbalances have been corrected, but ambitious reforms are needed to address significant medium‑term structural challenges, including adverse demographics, high poverty and income inequality, and ensuring continued convergence to euro area income levels.
- Directors commended countercyclical fiscal policy in recent years and stressed the need for adequate fiscal buffers given Lithuania’s small open economy and lack of independent monetary policy.
- A broadly neutral fiscal stance over the medium‑term was seen as striking the right balance between rebuilding buffers and addressing pressing social needs.
- Authorities could use some available fiscal space to finance productivity‑enhancing reforms while maintaining moderate structural surpluses and a declining debt path.
- There is scope to simplify the existing fiscal framework; Directors highlighted the need to safeguard its counter‑cyclical nature.
Policy recommendations (summarized from Directors)
- Fiscal policy
- Rebuild fiscal buffers while addressing social needs via a broadly neutral medium‑term fiscal stance.
- Use some fiscal space to finance productivity‑enhancing reforms while maintaining moderate structural surpluses and a declining debt path.
- Simplify the fiscal framework while safeguarding its counter‑cyclical nature.
- Pension reform and social policy
- Advance pension reform to reduce old‑age poverty while safeguarding fiscal sustainability.
- Recent increases in minimum pensions and the transfer of the social assistance element to the state budget were welcomed.
- Increase labor force participation; build broad political and social consensus for stability and long‑term success of the pension system.
- Consider greater reliance on capital and wealth taxes instead of labor to mobilize revenues; undertake more ambitious revenue mobilization reforms given Lithuania’s low tax ratio.
- Additional resources may be needed to reduce social disparities and address aging‑related pressures; allow greater use of targeted social programs.
- Financial sector and macroprudential policy
- Financial system is sound; recent credit and housing market developments do not currently pose risks to financial stability.
- Given rapid growth in housing prices and credit and potential spillovers from Nordic parent banks, continue proactive macroprudential policies and close cooperation with banks’ home‑country authorities.
- Structural reforms to boost productivity and labor supply
- Prioritize reforms that boost productivity growth to ensure sustainable improvement in wages and living standards.
- Top priorities: education and healthcare reform, including rationalizing and consolidating bloated networks.
- Boost labor supply through reducing the labor tax wedge, linking retirement to life expectancy, tightening early retirement schemes, retraining programs, and immigration.
Selected economic indicators (highlights from 2014–23 table)
- Quota (current, % of total): SDR 441.6 million, 0.09 percent
- Per capita GDP (2016): € 13,500
- Literacy rate (2015): 99.8 %
- At-risk-of-poverty (after transfers), share of population (2016): 30.1%
- Key export markets: Russia, Latvia, Estonia, Poland, Germany
- Real GDP growth (annual percentage change):
- 2014: 3.5
- 2015: 2.0
- 2016: 2.3
- 2017: 3.9
- 2018 (projection): 3.2
- 2019 (projection): 2.9
- 2020 (projection): 2.7
- 2021 (projection): 2.4
- 2022 (projection): 2.2
- 2023 (projection): [blank in table]
- Domestic fixed investment growth (year-on-year, in percent):
- 2014: 5.7
- 2015: 4.8
- 2016: -0.5
- 2017: 7.3
- 2018 (projection): 7.8
- 2019 (projection): 6.7
- 2020 (projection): 5.6
- 2021 (projection): 4.3
- Nominal GDP (in billions of euro):
- 2014: 36.6
- 2015: 37.4
- 2016: 38.7
- 2017: 41.9
- 2018 (projection): 44.1
- 2019 (projection): 46.5
- 2020 (projection): 49.0
- 2021 (projection): 51.4
- 2022 (projection): 53.9
- 2023 (projection): 56.3
- Output gap (percent of potential GDP):
- 2014: -0.6
- 2015: 0.1
- 2016: 0.5
- 2017: 0.6
- 2018 (projection): [blank in table]
- Unemployment rate (year average, in percent of labor force):
- 2014: 10.7
- 2015: 9.1
- 2016: 7.9
- 2017: 7.1
- 2018 (projection): 6.8
- 2019 (projection): 6.6
- 2020 (projection): 6.5
- Average monthly gross earnings (annual percentage change):
- 2015: 4.5
- 2016: 5.1
- 2017: 8.2
- 2018 (projection): 6.2
- 2019 (projection): 5.2
- 2020 (projection): 4.4
- HICP, end of period (year-on-year percentage change):
- 2014: 1.0
- 2015: 0.3
- 2016: 4.2
- General government gross debt (percent of GDP):
- 2014: 40.5
- 2015: 42.6
- 2016: 40.1
- 2017: 39.7
- 2018 (projection): 37.1
- 2019 (projection): 34.4
- 2020 (projection): 31.9
- 2021 (projection): 29.6
- 2022 (projection): 27.6
- 2023 (projection): 25.7
- Current account balance (percent of GDP):
- 2014: -2.8
- 2015: -1.5
- 2016: -2.1
- 2017: -2.6
- Exports of goods and services (volume change, in percent):
- 2014: 13.6
- Imports of goods and services (volume change, in percent):
- 2014: 12.8
- 2015: 5.0
- 2016: 4.6
- Foreign direct investment, net (percent of GDP):
- 2014: -1.9
- 2015: -1.3
- 2016: -1.4
- 2017: -1.6
- Gross external debt (percent of GDP):
- 2014: 69.9
- 2015: 75.7
- 2016: 85.5
- 2017: 83.3
- 2018 (projection): 78.6
- 2019 (projection): 74.0
- 2020 (projection): 70.3
- 2021 (projection): 67.4
- 2022 (projection): 64.4
- 2023 (projection): 61.9
- Real effective exchange rate (2005=100, +=appreciation):
- 2014: 120.7
- 2015: 118.9
- 2016: 121.0
- 2017: 123.0
- Saving-investment balance (in percent of GDP):
- Gross national saving: 2014: 22.2; 2015: 17.8; 2016: 16.2; 2017: 18.0; 2018 (projection): 18.6; 2019 (projection): 18.4; 2020 (projection): 18.1; 2021 (projection): 17.6; 2022 (projection): 17.1; 2023 (projection): 16.7
- Gross national investment: 2014: 19.0; 2015: 20.6; 2016: 17.3; 2017: 17.2; 2018 (projection): 18.3; 2019 (projection): 18.5; 2020 (projection): 18.9; 2021 (projection): 19.1; 2022 (projection): 19.2; 2023 (projection): 19.3
Administrative note
- It is expected that the next Article IV consultation with the Republic of Lithuania will be held on the standard 12‑month cycle.
IMF Communications Department. Press Release No. 18/253. June 25, 2018.
