IMF Executive Board Concludes 2023 Article IV Consultation with the Republic of Lithuania
IMF News, September 5, 2023
Source details
- Canonical URL
- IMF Executive Board Concludes 2023 Article IV Consultation with the Republic of Lithuania
Other formats
Bibliographic details
- Published: September 5, 2023
Overview and recent developments
- The Executive Board concluded the Article IV consultation on August 28, 2023.
- Lithuania experienced a series of unprecedented external shocks but benefited from resilient macroeconomic fundamentals and a decisive policy response.
- High inflation and rising interest rates affected disposable incomes and, combined with weak external demand, resulted in an economic contraction in the last quarter of 2022 and early 2023.
- The labor market remained broadly resilient with high wage growth (negative in real terms) and supported domestic demand for a year until July.
Inflation, labor market, and prices
- Headline inflation increased at an annual average of 19 percent in 2022.
- Inflation fell to around 10 percent in May from a peak of 23 percent in September 2022, but remains significantly above the eurozone average.
- Core inflation, excluding energy and unprocessed food, remains very high, reflecting supply bottlenecks, higher commodity prices, and robust recovery of demand after the pandemic.
- Average monthly gross earnings (annual percentage change): 9.9 (2018), 8.8 (2019), 10.5 (2020), 11.3 (2021).
- Average monthly gross earnings, real (annual percentage change): 7.2 (2018), 6.4 (2019), 9.0 (2020), 5.6 (2021), -6.4 (2022), 4.5 (2023).
Outlook and risks
- The economy is expected to recover later in 2023 and in 2024 supported by domestic and external demand.
- On balance, risks are tilted to the downside with persistently higher inflation than the Euro Area identified as the biggest risk.
- Domestic risk: If inflation remains high for longer, inflation expectations might adjust upwards, perpetuating high price and wage growth and eroding competitiveness.
- External risk: An escalation of Russia’s war in Ukraine could trigger higher energy and food prices, increasing inflation. In that scenario, the authorities’ response should avoid interfering with price signals and provide targeted support to the most vulnerable.
- Upside scenario: The economy could prove more resilient than projected given strong private sector balance sheets, strong underlying fundamentals, and an external demand that could recover quicker than projected.
Executive Board assessment and policy recommendations
- Directors welcomed the authorities’ policies that contributed to the economy’s resilience but noted high inflation and rising interest rates weakened disposable income, contributing to a temporary contraction.
- Fiscal policy:
- Directors encouraged tightening the fiscal stance while preserving public investment to mitigate the risk of high and persistent inflation.
- Reactivation of the domestic fiscal rule was recommended to help contain inflation risks and gradually rebuild fiscal buffers.
- Accommodating new and pre-existing spending pressures will likely require new revenues under the existing fiscal rule; the rule can be simplified and adjusted to accommodate permanently higher defense spending.
- Financial sector and macroprudential policy:
- Directors noted risks to the financial sector from a weakening economy and higher interest rates but judged banks are in a position to manage these risks given high liquidity, capitalization, and profitability.
- Macroprudential measures could be eased in the event of a sharp downturn, but several Directors stressed the importance of further building buffers.
- Directors encouraged keeping the levy on banks temporary to avoid being perceived as a levy on foreign investment and to minimize negative impacts on efficiency.
- With a maturing Fintech sector, Directors emphasized enhancing supervisory capacity and the AML/CFT framework.
- Structural reforms and climate policy:
- Directors highlighted preserving economic flexibility and advancing long-overdue structural reforms, including full and timely implementation of the Recovery and Resilience Plan.
- They welcomed recent civil service reform and emphasized accelerating reforms in healthcare and education to support productivity gains and higher living standards.
- Directors agreed on the need to develop renewable energy sources and improve energy efficiency for climate change mitigation and energy security.
- Directors encouraged the application of a carbon tax in sectors not covered by the EU’s Emission Trading System (ETS).
Key statistics (selected indicators from Table 1)
- Real GDP growth (annual percentage change):
- 2018: 4.0
- 2019: 4.6
- 2020: 0.0
- 2021: 6.0
- 2022: 1.9
- 2023: -1.4
- 2024: 2.9
- 2025: 2.7
- 2026: 2.5
- 2027: 2.2
- 2028: 2.1
- Domestic demand (contribution to growth):
- 2018: 3.3
- 2019: 1.3
- 2020: -3.8
- 2021: 6.7
- 2022: -1.1
- 2023: 2.6
- Private consumption growth (y/y, in percent):
- 2018: 3.6
- 2019: -2.5
- 2020: 8.0
- 2021: 0.5
- 2022: -0.4
- 2023: 2.0
- Domestic fixed investment growth (y/y, in percent):
- 2018: 10.0
- 2019: 6.6
- 2020: -0.2
- 2021: 7.8
- 2022: 3.0
- 2023: 3.7
- 2024: 3.5
- 2025: 3.2
- Export growth (y/y, in percent):
- 2018: 6.8
- 2019: 10.1
- 2020: 0.4
- 2021: 17.0
- 2022: 11.9
- 2023: -1.7
- 2024: 4.8
- 2025: 5.0
- 2026: 5.1
- Import growth (y/y, in percent): -4.5 (2018), 19.9 (2019), 12.3 (2020), 4.7 (2021), 5.3 (2022)
- Nominal GDP (in billions of euro):
- 2018: 45.5
- 2019: 48.9
- 2020: 49.8
- 2021: 56.2
- 2022: 66.8
- 2023: 72.1
- 2024: 77.9
- 2025: 83.0
- 2026: 87.6
- 2027: 91.8
- 2028: 96.0
- Employment (annual percentage change): 0.3 (2018), -1.5 (2019), 0.8 (2020), -2.8 (2021), 0.1 (2022), -0.1 (2023)
- Unemployment rate (year average, in percent of labor force):
- 2018: 6.1
- 2019: 6.3
- 2020: 8.5
- 2021: 7.1
- 2022: 5.9
- 2023: 6.2
- Labor productivity (annual percentage change): 4.3 (2018), 5.2 (2019)
- HICP, period average (annual percentage change): 1.1 (2018), 18.9 (2022), 9.6 (2023)
- HICP core, period average (annual percentage change): 13.6 (2022), 10.8 (2023)
- HICP, end of period (y/y percentage change): 1.8 (2018), 10.7 (2022), 20.0 (2023), 4.1 (2024)
- GDP deflator (y/y percentage change): 16.7 (2022), 9.4 (2023)
- General Government Finances:
- Revenue (percent of GDP): 34.5 (2018), 35.2 (2019), 36.1 (2020), 36.4 (2021), 35.8 (2022), 38.1 (2023), 36.7 (2024), 35.5 (2025), 35.6 (2026)
- Expenditure (percent of GDP): 34.0 (2018), 34.7 (2019), 42.6 (2020), 37.5 (2021), 36.5 (2022), 40.1 (2023), 38.2 (2024), 37.3 (2025), 36.6 (2026)
- Fiscal balance (percent of GDP): -6.5 (2018), -0.6 (2019), -2.0 (2020), -1.0 (2021)
- Fiscal balance excl. one-offs (percent of GDP): -6.6 (2018)
- Structural fiscal balance (percent of potential GDP): -6.1 (2018), -1.3 (2019)
- General government gross debt (percent of GDP): 33.7 (2018), 46.3 (2019), 43.7 (2020), 35.0 (2021), 33.5 (2022), 32.4 (2023), 31.5 (2024), 30.8 (2025)
- Balance of Payments (in percent of GDP, unless otherwise specified):
- Current account balance: 7.3 (2018), -5.1 (2019), -2.2 (2020)
- Current account balance (billions of euros): 1.7 (2018), -3.4 (2019), -0.9 (2020), -0.5 (2021)
- Saving-Investment Balance (in percent of GDP):
- Gross national saving: 20.6 (2018), 21.3 (2019), 20.8 (2020), 21.7 (2021), 21.6 (2022), 22.7 (2023), 23.7 (2024), 24.7 (2025), 25.3 (2026), 26.0 (2027)
- Gross national investment: 20.4 (2018), 17.7 (2019), 14.0 (2020), 19.6 (2021), 26.7 (2022), 24.2 (2023), 24.8 (2024), 25.2 (2025), 25.5 (2026)
- Foreign net savings: -3.5 (2018), -7.3 (2019), -0.8 (2020)
Source: IMF Executive Board Concludes 2023 Article IV Consultation with the Republic of Lithuania (Press Release No. 23/301).