06-02-2024

The International Monetary Fund: after a mild contraction in 2023, recovery of the Lithuanian economy is expected this year

The inflationary effects caused by russia's war against Ukraine combined with weakened external demand resulted in a mild contraction of the Lithuanian economy in 2023. According to the International Monetary Fund (IMF), this year, while external demand recovers and the labour market remains strong, the economy will return to the growth path.

"Having withstood the challenges in 2023, the Lithuanian economy will recover this year. With the peak of inflation behind us, the labour market remaining resilient, and wage growth continuing, we project that the households’ purchasing power in 2024 will get stronger. At the Government level, we must continue to implement a prudent fiscal policy that ensures the sustainability of public finances in the long term and look for sustainable sources of financing for growing expenditure needs, especially in such important areas as national defence," said Minister of Finance Gintarė Skaistė.

"As prices in Lithuania have stopped growing recently, thehouseholds’ purchasing power is rapidly recovering. This, together with the support of the European Union, will contribute to economic growth this year. In order to ensure long-term sustainable economic growth, it is important to address structural issues in a purposeful way: to ensure sustainable public finances and to improve education by providing in-demand skills", says Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.

IMF experts note that the ECB's successively increased interest rates and the drop in energy and food prices led to a rapid decrease in inflation. Households' purchasing power and domestic demand are expected to recover this year after the inflationary shock subsides. IMF experts emphasize that the Lithuanian labour market remains resilient, and wages are growing faster than inflation.

In order to increase spending on defence and other areas such as social security, and without risking the country's fiscal sustainability, the IMF emphasizes the need for additional sustainable revenue. Although Lithuania has a relatively low level of public debt, with one of the lowest tax-to-GDP ratio in the European Union, it is necessary to implement additional revenue-generating tax solutions.

The IMF notes that the Lithuanian banking sector is stable, particularly profitable and one of the most cost-efficient in Europe. The real estate sector is witnessing a mild downturn, while the built-up capital reserves and high liquidity ensure the resilience of the banking sector.

Full IMF statement is available here.