IMF: Lithuania's economic recovery this year is faster than projected
Against the background of geopolitical tensions and fragmentation of the world economy, Lithuania withstood the price shock and remained competitive in foreign markets, and this year the economy is expected to grow faster than previously forecast. The favourable economic development paves the way for decisive structural reforms needed to address long-term challenges. These decisions are necessary in order for Lithuania to continue to move closer to the standard of living in Western Europe. This is underlined by the mission of the International Monetary Fund (IMF), which has completed its work in Lithuania today.
“Lithuania’s economic recovery is gaining momentum, the peak of inflation is behind us, and personal income continues to rise. In the face of recent shocks, it is essential to invest in the competitiveness and resilience of the economy. The ongoing russia’s war against Ukraine continues to affect the entire region – in this context, we need to strengthen Lithuania’s defence capabilities by providing sustainable additional funding,” Minister of Finance Gintarė Skaistė says.
"Geopolitical environment remains complex and risks have not disappeared, but long-term economic challenges require decisions to be found without delay. First of all, I am talking about the ageing of the population and the associated consequences. Without decisive structural reforms, productivity growth will slow down over time, which will reduce the economic potential,” Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania, states.
According to him, it is important to improve the qualification of employees, develop skills and the ability to adapt to the changing requirements of the labour market in the course of life.
According to the IMF's assessment, the recent price shock caused by the pandemic and russia's war against Ukraine has not derailed Lithuania's economic convergence, i.e. the convergence of the economy towards the European average. Lithuanian exporters remain price-competitive and have recently increased their exports in the high value-added services sector. The recovery in external demand should also support exports of manufacturing goods in the second half of the year.
The IMF forecasts GDP growth of 2.4% for Lithuania this year, compared to the 2.2 % forecast in April, and in the medium term, economic development is expected to stabilise slightly above 2 %. Strong real wage growth and employment growth will support private consumption, EU funds will stimulate public investment, and external demand is expected to strengthen gradually over the remainder of the year. The average annual inflation rate this year will be 1.2 %, and it will be below the euro area average.
According to the IMF, the fiscal stance contributed to a significant slowdown in inflation. In line with the economic cycle, the structural public sector balance improved last year compared to 2022, which contributed to a further decline in debt levels (the level of public debt decreased by 10 percentage points compared to the pandemic period). The IMF estimates that fiscal policy will be mildly expansionary this year, given economic growth and the narrowing of the output gap. The general government deficit is forecast to be lower than foreseen in the budget law. According to the IMF, if budgetary revenue is higher than planned, it should be used, together with expenditure savings, to reduce the fiscal deficit.
The IMF also assessed the growing needs to increase national defence financing, as well as the rising cost of debt payments. This contributes to structural long-term challenges to public finances stemming from an ageing population and falling birth rates. For this reason, IMF experts recommend implementing a public finance policy plan that includes decisions on additional sustainable sources of revenue.
According to the IMF, Lithuania could increase its tax revenue while preserving a competitive tax environment. Lithuania’s tax revenue-to-GDP ratio is significantly lower than the EU average, with a difference of around 9 % of GDP. The tax system proposes to move towards a more balanced model in which property, capital and environmental taxes play a greater role.
The IMF recommends that Lithuania's decision-makers take decisive action to boost the potential of the economy. It is stressed that the reform of the pension system should focus on the sustainability of the system and create incentives for participation in the second and third pillars, while limiting early exit from the second pillar. Ongoing education and health reforms have allowed a step forward, but further ambitious measures are needed, for example through the development of vocational education and training.
The IMF estimates that 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. At the same time, it is stressed that the solidarity contribution of banks did not have a negative impact on banks’ performance and did not create negative incentives. However, the IMF points out that the solidarity contribution should be temporary and not turn into a new permanent taxation instrument.
The IMF experts noted Lithuania's progress in strengthening its anti-money laundering and terrorist financing (AML/CFT) prevention framework, including strengthened market access requirements for virtual currency service providers. The IMF also welcomes the enhanced prevention of the AML/CFT of institutions that have joined or wish to join the payment system CENTROlink of the Bank of Lithuania.
During the two-week consultations, IMF experts met with the management of the Bank of Lithuania and the Ministry of Finance as well as had meetings with representatives of the Office of the President, the Seimas, the Government, other state institutions and the private sector.
Lithuania has been a member of the IMF since 1992.Currently, the IMF is an organisation of 190 countries. Annual consultations of the country with the IMF take place following Article IV of the IMF’s Articles of Agreement, which obliges the member countries of the IMF to strive to implement economic and financial policies that ensure national and global financial and economic stability.
