IMF Mission: skilful management of economic policies by the Government, Parliament, and the Bank of Lithuania has been crucial to maintaining stability


2009 06 22


Prime Minister Andrius Kubilius met with members and Head of the International Monetary Fund (IMF) Consultation Mission Catriona Purfield following their routine mission to Lithuania. IMF annually conducts consultations with each member country according to the IMF Agreement, assess the performance of the economy and submit macroeconomic policy recommendations to the respective governments.
The IMF Mission announced that skilful management of economic policies by the Government, Parliament, and the Bank of Lithuania since the onset of the downturn has been crucial to maintaining financial stability. The IMF representatives have pointed out that the Lithuanian economy is undergoing a sharp adjustment and that there is a considerable range of uncertainty around the forecasts of economic recovery, therefore the road ahead requires continued steps by the Government to safeguard fiscal and financial sustainability of the country.
Head of the IMF Mission Catriona Purfield has welcomed the fact that sizeable fiscal adjustment has been undertaken and that the authorities have successfully tapped international markets through a recent Eurobond issue. These decisions have been crucial to maintaining stability. Nevertheless, according to the Head of the Mission, the road ahead will be challenging requiring continued steps to safeguard fiscal and financial sustainability. Despite the rapid adjustment in the current account, buffers to deal with risks are low, and ensuring a sustainable path within the currency board arrangement to Euro adoption will require a continued effort.
The IMF has provided three major guidelines for the Lithuanian Government with a view to preserving financial stability. Firstly, a sizeable further consolidation in the fiscal sector is required, for otherwise, Lithuania will see a sustained increase in its borrowing needs and costs, and a rising debt burden. Secondly, it is necessary to build additional buffers in the financial system. Even though the banking system has shown a good level of capitalization, non-performing loans are on the rise; therefore the current pace of building provisioning cushions would need to be accelerated. The Head of the Mission was positive about the draft Law on Financial Stability currently pending before the Seimas. Thirdly, the IMF recommends that the Government should continue wage rate adjustments and structural reforms. Recent declines in private sector wages are an important step for improving cost competitiveness, and the reduction of public sector wages could complement this adjustment. Efforts to improve the business environment, labour market flexibility and administrative bottlenecks are also key.

Prime Minister Andrius Kubilius expressed his appreciation to the IMF Mission and its Management for the effective work while analysing current developments in Lithuania as well as carried out and projected actions. “We highly appreciate IMF’s insights as regards the complexity of the current macroeconomic situation. The recommendations offered by the IMF Mission correspond to the course that our Government has been pursuing with a view to achieving our priority goal: the financial stability of the state“, said the Prime Minister.

According to the Prime Minister, the financial target of 7% of GDP consolidation of public finances in the immediate couple of years poses a sizable but manageable challenge. The Government is open to all public proposals; however a common consensus is required in terms of further budget consolidation, particularly through the reduction of public sector outlay and subsequent additional revenue, as well as through substantial structural reforms in sectors largely dependant on public finances. Furthermore, in the near future an action plan in the lead to the adoption of the euro should be worked out, and it should ensure that the deficit is brought down and maintained at 3% of GDP for three years period.

Catriona Purfield noted the open and cooperative nature of the Lithuanian Government led by Prime Minister Andrius Kubilius, pointing out that it was not so usual in the practice of the IMF.

The official text of the IMF Statement is available on the IMF website.