IMF Staff Country Reports

The 2023 Article IV Consultation discusses that 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. With monetary conditions that are too loose for Lithuania, the onus to fight inflation and maintain competitiveness is on fiscal policy and structural reforms. Short-term policies should aim at reducing inflationary pressures and preserving financial stability. Long-term policies should focus on implementing long-overdue structural reforms that remain key to raising further the economy’s growth potential supporting faster income convergence with Western Europe. Fiscal policy needs to take a disinflationary stance. This will require a lower-than budgeted deficit this year, notwithstanding a weakening economy and a contractionary stance going forward in line with the domestic fiscal rule. The report recommends implementing long-overdue structural reforms to strengthen education and healthcare and to address risks associated with climate change. Utilize EU funds efficiently to enhance private sector productivity.