IMF: Lithuania’s economic recovery is stronger than forecast, structural reforms important for continued strong growth
Despite geopolitical tensions and global economic fragmentation, Lithuania's economy demonstrates resilience. The economy will grow faster this year than planned at the beginning of the year, the inflation shock has been overcome and has not significantly affected the country’s competitiveness in foreign markets. To ensure further strong economic growth and convergence with Western Europe, it is vital to continue the implementation of structural reforms that strengthen productivity, competitiveness and growth potential. This is highlighted in the latest report of the International Monetary Fund (IMF) for Lithuania.
“Lithuania’s economic recovery is gaining momentum, and the purchasing power of population, as inflationary pressures subside, is growing and exceeds pre-war levels. As external demand recovers and investment expands, economic expansion should strengthen further in the coming years. These are positive trends, but looking at the longer term, it is necessary to continue structural reforms that would increase the competitiveness and productivity of the economy and allow Lithuania to further remain among the most advanced Western European countries”, says Minister of Finance Gintarė Skaistė.
“In the financial sector, we have made significant progress in preventing money laundering and terrorist financing risks in Lithuania. Over several years, we have implemented important IMF recommendations related to strengthening the supervision of financial market participants”, says Chairman of the Board of the Bank of Lithuania Gediminas Šimkus.
According to him, the Bank of Lithuania has expanded the monitoring and understanding of risks, which provides opportunities to more quickly track unusual cash flows of financial market participants from higher-risk foreign countries. The Bank of Lithuania strengthened the resources of experts working in this field and cooperated even more closely with state institutions and financial market participants. All this ensures a safer financial sector and its more sustainable development in Lithuania.
According to the IMF, the geopolitical situation and the price shock caused by the pandemic and russia's war against Ukraine have not shaken Lithuania's economy. Faced with a mild recession last year, the Lithuanian economy, according to the IMF, is expected to grow by 2.4 % this year, while GDP growth is expected to reach 2.2 % in the medium term. According to the IMF, Lithuania's export sector refocused relatively quickly, taking into account sanctions imposed on russia and Belarus due to the war against Ukraine, and remained competitive in foreign markets.
According to the experts of the Fund, strong real wage growth and employment growth will support private consumption growth, the EU funds will stimulate public sector investments, and external demand should gradually strengthen. According to the IMF, average annual inflation will reach 1.2% this year, and will be well below the euro area average (2.4%).
The IMF also notes the prudent formulation of the country's fiscal policy. This year, the general government deficit is expected to be lower than foreseen in the budget law. According to the IMF, if revenue generated to the budget is higher than planned, it together with expenditure savings should be used primarily to reduce the budget deficit.
The IMF notes that the country faces growing spending needs to increase national defence financing as well as rising debt service costs, which, in view of population ageing trends, may turn into a long-term challenge for public finance. Experts recommend making decisions on additional sustainable sources of income and implementing structural reforms in the areas of social protection and health.
According to the IMF, the banking system remains liquid and well capitalised, and is therefore well equipped to withstand unexpected shocks. Bank profitability levels, although declining, will remain elevated and well above the euro area average. It is stressed that the solidarity contribution of banks did not have a negative impact on banks' performance and did not create significant negative incentives. The IMF stresses that the solidarity contribution should be temporary and not turn into a new permanent taxation tool.
The experts of the Fund note Lithuania's progress in strengthening its anti-money laundering and terrorist financing framework, including strengthened regulation of crypto-assets, and recommend continuing the work started to further strengthen the risk management in the sector.
Lithuania has been a member of the IMF since 1992. Currently, 190 countries are members of the IMF. The country's annual consultations with the IMF are conducted in accordance with Article IV of the IMF Agreement, which obliges IMF member countries to pursue economic and financial policies that ensure financial and economic stability in the country and in the world.
Last updated: 13-08-2024
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