## Republic of Lithuania: Staff Concluding Statement of the 2019 Article IV Mission _IMF News, June 25, 2019_ ## Source details **Canonical URL:** [Republic of Lithuania: Staff Concluding Statement of the 2019 Article IV Mission](https://www.imf.org/en/news/articles/2019/06/25/lithuania-staff-concluding-statement-of-the-2019-article-iv-mission) ## Other formats - [Markdown version](/en/news/articles/2019/06/25/lithuania-staff-concluding-statement-of-the-2019-article-iv-mission/index.md) - [Structured JSON version](/en/news/articles/2019/06/25/lithuania-staff-concluding-statement-of-the-2019-article-iv-mission/index.json) - [Bundle manifest](/en/news/articles/2019/06/25/lithuania-staff-concluding-statement-of-the-2019-article-iv-mission/bundle-manifest.json) ## Bibliographic details - Published: June 25, 2019 --- ### Macroeconomic and fiscal performance - The Lithuanian economy has continued to enjoy a strong macroeconomic and fiscal performance. - The recovery has avoided the large imbalances of the past and places Lithuania in a better position to face future economic downturns. - Prudent fiscal policy, a flexible labor market, and proactive macroprudential policies have been critical to preserve stability and should be maintained. - Lithuania still confronts severe demographic pressures, high social disparities, and external uncertainty. - Effective implementation of the authorities’ comprehensive reform agenda, particularly in education and healthcare, along with a continued strong fiscal position, is key to increase productivity and support higher wages. ### Boost productivity to sustain high wage growth and reduce social disparities - Education and healthcare reforms have so far failed to deliver in key areas; maintaining large and inefficient networks comes at the cost of lower quality and opportunities. - Only comprehensive reform in education and healthcare will allow Lithuania to produce the competitive and well-paid workforce needed to tackle income and social disparities. - Lack of buy-in from municipalities has hindered implementation of the reform agenda. - Recommendation: Make planned wage increases in education and healthcare conditional on progress in network optimization. - Active labor market policies should be strengthened to effectively address skill mismatches and increase labor force participation. - Current funding is low and relies excessively on EU funds and its composition inadequately reflects the needs of the labor market. - Recommendation: Decrease reliance on employment subsidies (focus them on the most disadvantaged groups) and shift emphasis to well-designed training curricula to upskill the labor force. - Tradeoff: Maintaining a low and competitive tax system versus strengthening the social safety net. - Discretionary spending is already low; further increases in social spending will likely require increases in revenues. - Recommendation: Use targeted social spending as the main tool to reduce poverty and inequality to ensure efficient use of limited resources. - Child benefits design and generosity should balance their positive impact on reducing child poverty against potential disincentives to work, particularly for women. ### Fintech: opportunities and challenges - Fintech provides big opportunities to improve financial services and produce high-skill jobs, but it also brings challenges, particularly related to anti-money laundering. - Lithuania is positioning itself as an attractive host of fintech platforms and a gateway to Europe for non-European financial companies; authorities’ efforts are already delivering results. - In a highly concentrated banking sector, strong profitability largely reflects high operational efficiency. - The exit of one bank and ongoing restructuring of another has lowered the intensity of competition, at least temporarily. - Fintech companies will introduce competition, initially in the payment services segment. - A larger focus on cross-border transactions could represent a shift in the business model of Lithuania’s financial system and bring new challenges for supervision, including on AML/CFT. - Authorities are stepping up inter-agency coordination and efforts to implement the 2018 MONEYVAL recommendations. - Success will require adequate resources across all agencies involved. ### Preserve macroeconomic and financial stability - Fiscal stance and outlook - The fiscal surplus in 2019 will fall to 0.3 percent of GDP reflecting a moderate loosening of fiscal policy. - Continued strong economic performance suggests that a neutral stance along the lines of the last few years would have been preferable. - Heightened risks to fiscal revenues and increased spending pressures are expected going forward. - The budget relies on uncertain gains from combating informality. - Recent revenue gains have a significant cyclical component reflecting low unemployment and high wage growth. - The negative revenue impact of recent tax and pension reforms is uncertain. - Projected fiscal revenues over the next few years are subject to increased uncertainty. - Spending pressures are intensifying: the large increase in social spending and public sector wages in 2018 are expected to continue this year and next. - Since revenues are not increasing at the same rate, these spending pressures are being accommodated at the expense of other more flexible components of public spending. - Recommendation: Any additional spending will require an increase in revenues. - Tax and pension reform assessment - Tax reform could have been more ambitious in shifting taxes away from labor into capital, wealth, real estate, and environmental taxes. - Reduction of tax exemptions and privileged regimes is needed. - Pension reform has ensured financial, but not social, sustainability of the system. - Complementing pay-as-you-go SODRA pensions with a capitalized pillar is necessary given Lithuania’s negative demographic dynamics, projected as among the most severe in Europe. - Low and declining pensions will increase pressures to boost basic pensions, which have been transferred to the budget this year; this represents a fiscal risk over the medium-term. - Macroprudential policy and banking sector - Macroprudential policy is being used proactively to prevent systemic risks. - Lithuania’s cyclical position is more advanced than the euro area, making the ECB’s monetary policy stance looser than would be warranted for Lithuania alone. - The banking system remains sound, with strong capitalization and high asset quality, liquidity, and profitability. - Signs that moderate cyclical systemic risks are emerging: the pace of growth in credit and house prices remained relatively high. - The Bank of Lithuania raised the countercyclical buffer to one percent in mid-2018. - Most banks were already above the new capital requirement and have large and rising liquidity buffers given faster deposit growth than credit growth. - Though the pace of corporate loans moderated, the growth of mortgages remains relatively high. ### Economic developments and risks - Recent performance - Strong real growth in 2018, at 3.5 percent, continued into the first quarter of 2019, reaching 4 percent. - Supported by resilient export growth, the current account surplus reached its highest level in four years. - Strong domestic demand has been supported by high wage and better-than-expected employment growth. - Inflation stood at 2.5 percent in 2018. - Medium-term outlook and risks - Growth is expected to moderate to a more sustainable path in the next few years. - Over the medium-term, potential growth is projected to come down to 2-2.5 percent reflecting negative demographics. - Domestic demand will continue to be the main engine of growth, but a moderating labor market will ease consumption growth. - Investment in the short-term will be affected by increased external uncertainty and over the medium-term will depend on the effectiveness of reforms to translate into increased productivity. - Low productivity growth is the key risk going forward. - Short-term risks relate to a weakening external environment reflecting increased uncertainty. - As a small open economy, Lithuania is particularly sensitive to external shocks. - The current environment of low debt, high liquidity, and strong fiscal and current account positions will mitigate the impact of any negative shocks. - In the longer-term, without progress on the reform agenda—notably in education, healthcare, and innovation—productivity growth may remain insufficient to support competitiveness and to compensate for a declining population due to ageing and emigration. *IMF Communications Department — June 25, 2019* --- ## References - [Republic of Lithuania and the IMF](http://www.imf.org/external/country/LTU/index.htm) - [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance) - [Mission Concluding Statements](https://www.imf.org/en/news/searchnews) - [PRESS CENTER](http://presscenter.imf.org/) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2019/06/25/lithuania-staff-concluding-statement-of-the-2019-article-iv-mission_