IMF Executive Board Concludes Article IV Consultation with the Republic of Lithuania

IMF News, July 31, 2019

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IMF Executive Board Concludes Article IV Consultation with the Republic of Lithuania

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Bibliographic details

• Published: July 31, 2019

Economic performance and near-term outlook

• 2018: Real GDP expanded by 3.5 percent; current account reached its highest surplus in four years.
• Private consumption growth accelerated in 2018 with better-than-expected employment growth and a rebound in real wage growth.
• Labor market: tight, with labor costs among the fastest growing in the EU, but without inflationary pressures.
• Fiscal outcome: government achieved a higher fiscal surplus for the third year in a row.
• 2019 projection: Real GDP growth projected at 3.2 percent.
• Medium-term projection: Growth expected to moderate to a more sustainable pace as the economy expands above potential.

Key risks and vulnerabilities

• External risks:
  • Vulnerability to slower growth in Europe, continued trade tensions, uncertainty around Brexit conditions, and geopolitical risks.
• Domestic risks:
  • Emigration, population aging, and slow progress in implementing key aspects of the government’s reform agenda.
• Fiscal risks:
  • Heightened risks to revenues and increased spending pressures from social needs.
  • Revenue buoyancy may largely reflect cyclical factors; gains from combating informality are difficult to predict and revenue impact of recent reforms is uncertain.
  • Without commensurate increases in revenues, spending pressures increase budget rigidities.
• Social risks:
  • Large social disparities and low/declining pensions increase pressures to boost basic pensions; basic pensions have been transferred to the budget this year, representing a fiscal risk over the medium-term.

Executive Board assessment and policy guidance

• Overall assessment:
  • The Lithuanian economy has continued to enjoy a strong macroeconomic and fiscal performance, but long-term challenges remain largely unaddressed.
  • Prudent fiscal policy, a flexible labor market, and proactive macroprudential policies have been critical to preserve stability and should be maintained.
  • Structural reforms are necessary to address demographic pressures, social disparities, and to ensure sustained high wage growth and improved living standards.
• Fiscal policy:
  • The continued strong performance suggests that a neutral fiscal stance would have been preferable this year.
  • Planned increases in social spending will likely require higher revenues given discretionary spending is already low.
  • Targeted social spending should be the main tool to ensure efficient use of limited resources.
  • Design and generosity of child benefits should balance reducing child poverty against potential disincentives to work, particularly for women.
• Labor market and active labor market policies (ALMPs):
  • ALMP should be strengthened to address skill mismatches and increase labor force participation.
  • Current funding is low and relies excessively on EU funds; composition inadequately reflects cyclical conditions or labor market needs.
  • Reliance on employment subsidies should decrease and focus on the most disadvantaged groups only.
  • Emphasis should shift to well-designed training curricula to upskill the labor force.
• Education and healthcare:
  • Despite growing urgency, education and healthcare reforms have failed to deliver.
  • Maintaining large and inefficient networks comes at the cost of quality and opportunities; planned wage increases in these sectors should be made conditional on progress in network optimization.
• Pensions and taxes:
  • Pension and tax reforms go in the right direction, but remaining challenges will require future compromises.
  • Tax reform could have been more ambitious in shifting taxes away from labor; reduction of tax exemptions and privileged regimes is needed.
  • Pension reform has ensured financial, but not social, sustainability.
• Macroprudential and financial stability:
  • Macroprudential policy is being used proactively to prevent systemic risks.
  • The Bank of Lithuania raised the countercyclical buffer to one percent in mid-2018 in response to moderate cyclical systemic risks.
  • Financial system remains sound, liquid, and profitable.
• Fintech and AML/CFT:
  • Fintech offers opportunities to improve financial services and produce high-skill jobs, initially in payment services and cross-border transactions.
  • Shift toward cross-border transactions brings new supervisory challenges, particularly related to AML/CFT.
  • Authorities’ efforts to implement the 2018 MONEYVAL recommendations and enhance inter-agency coordination should be complemented by adequate resources across all agencies involved.

Selected economic indicators and projections (exact values from source)

• Quota (current, % of total): SDR 441.6 million, 0.09 percent
• Per capita GDP (2018): € 16,100
• Literacy rate (2015): 99.8 %
• At-risk-of-poverty (after transfers), share of population (2017): 29.6%
• Key export markets: Russia, Latvia, Estonia, Poland, Germany

Output and demand

• Real GDP growth (annual percentage change): 2018: 3.5; 2019: 3.2; 2020: 2.6; 2021: 2.5; 2022: 2.4; 2023: 2.3; 2024: (not listed in table but projections continue)
• Domestic demand growth (year-on-year, in percent): 2019: 3.8
• Private consumption growth (year-on-year, in percent): 2019: 3.7; 2020: 3.0
• Domestic fixed investment growth (year-on-year, in percent): 2019: 6.0; 2020: 5.5; 2021: 4.3; 2022: 3.6
• Inventories (contribution to growth): 2018: -1.1; 2019: -0.1; 2020: 0.0
• Net external demand (contribution to growth): 2018: 0.6; 2019: -0.5; 2020: -0.9; 2021: -0.8
• Nominal GDP (in billions of euro): 2018: 45.1; 2019: 47.7; 2020: 50.2; 2021: 52.6; 2022: 55.1; 2023: 57.6; 2024: 60.2
• Output gap (percent of potential GDP): 2018: 0.5; 2019: 0.7; 2020: 0.4; 2021: 0.2; 2022: 0.1

Labor and prices

• Employment (annual percentage change): 2018: 1.5
• Unemployment rate (year average, in percent of labor force): 2018: 6.1; 2019: 5.9; 2020: 5.8; 2021: 5.7; 2022: 5.6
• Average monthly gross earnings (annual percentage change): 2018: 9.9; 2019: 8.0; 2020: 5.4; 2021: 4.9; 2022: 4.7; 2023: 4.6
• Average monthly gross earnings, real (CPI-deflated, annual percentage change): 2018: 7.2; 2019: 2.7
• Labor productivity (annual percentage change): 2018: 2.0
• HICP, end of period (year-on-year percentage change): 2018: 1.8; 2019: 2.2
• HICP core, period average (annual percentage change): 2018: 1.9; 2019: 2.1

General government finances

• Revenue (percent of GDP): 2018: 34.7; 2019: 35.7; 2020: 35.8
• Of which EU grants: 2018: 0.8; 2019: 1.3; 2020: 1.2; 2021: 1.1; 2022: 1.0
• Expenditure (percent of GDP): 2018: 34.0; 2019: 35.4; 2020: 35.5; 2021: 35.6
• Of which: Non-interest: 2018: 33.1; 2019: 34.5; 2020: 34.8; 2021: 35.2; 2022: 35.3
• Fiscal balance (percent of GDP): 2018: 0.3
• General government gross debt (percent of GDP): 2018: 34.2; 2019: 32.0; 2020: 30.2; 2021: 28.7; 2022: 27.3; 2023: 26.0; 2024: 24.7
• Of which: Foreign currency-denominated: 2018: 9.6; 2019: 9.0; 2020: 8.5; 2021: 8.1; 2022: 7.7; 2023: 7.3; 2024: 7.0

Balance of payments and external

• Current account balance (percent of GDP): 2018: 1.6; 2019: -0.4
• Current account balance (billions of euros): 2018: -0.2
• Exports of goods and services (volume change, in percent): 2018: 5.1; 2019: 4.0
• Imports of goods and services (volume change, in percent): 2018: 4.5
• Short-term debt at original maturity (percent of GDP): 36.7; 32.2; 30.8; 29.8; 29.0 (series presented)
• Gross external debt (percent of GDP): 2018: 78.5; 2019: 73.2; 2020: 69.6; 2021: 66.8; 2022: 63.7; 2023: 61.0; 2024: 58.5

Exchange rates and saving-investment

• Exchange rate (euro per U.S. dollar, end of period): 0.88
• Exchange rate (euro per U.S. dollar, period average): 0.85
• Gross national saving (percent of GDP): 2018: 19.8; 2019: 20.0; 2020: 20.4; 2021: 20.1; 2022: 19.4; 2023: 19.1
• Gross national investment (percent of GDP): 2018: 18.2; 2019: 18.8; 2020: 19.3; 2021: 19.5; 2022: 19.7; 2023: 19.9
• Foreign net savings: 2018: -1.6; 2019: -1.2; 2020: -0.6

Sources noted in original release: Lithuanian authorities; World Bank; Eurostat; and IMF staff estimates and projections.

Source: Press Release No. 19/308, IMF Executive Board concluding the Article IV consultation with the Republic of Lithuania, July 31, 2019.

References

• https://www.imf.org/-/media/images/imf/bios/imfboard.jpg
• The Executive Board
• Republic of Lithuania and the IMF
• IMF Policy Advice -- A Factsheet
• Press Releases
• PRESS CENTER
• https://www.imf.org/en/home