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In the Face of Global Challenges and Great Uncertainties, Lithuania Remains on the Path of Growth

Date

2022 07 28

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Despite the challenges caused by Russia's war against Ukraine, the Lithuanian economy is showing resilience – according to the International Monetary Fund (IMF), economic growth will remain positive this year and should reach 1.8 %.  Significant inflationary pressure felt in 2022 should weaken next year, as energy and raw material prices stabilize. The IMF emphasizes that in the near term it is important to focus on targeted support for the most vulnerable groups of the society, and in the longer term to continue the implementation of structural reforms, strengthening the economic growth potential and resistance to shocks.

"Lithuania, like other EU countries, is facing economic challenges due to Russia's war in Ukraine – from increased energy prices to broken supply chains. Nevertheless, the Lithuanian economy shows resilience – this year the country's economy should grow, albeit at a slower pace than projected before the war, and the labour market remains resilient. The IMF positively assesses the decisions taken by the Government, which aim to amortize the negative effects of the war. I agree with the assessment of the Fund's experts that possible additional support measures should be targeted, clearly defined, short-term and, most importantly, should not increase inflationary pressure. Against the background of near-term challenges, we cannot forget the long-standing problems – we must continue the implementation of reforms, strengthening the economic growth potential and resilience. In this regard, the reforms and investments planned in the "New Generation Lithuania" Plan in areas such as green or digital transformation are extremely important," said G. Skaistė.

The Lithuanian economy has withstood the pandemic shock well and in 2021 showed rapid growth rates. The IMF experts warn that high uncertainty and geopolitical risks can negatively affect economic growth trends and lead to prolonged high inflation, which is largely determined by external factors, such as significantly increased prices of energy, raw materials and food on international markets in the context of Russia's war against Ukraine.

The IMF positively assesses the policy direction chosen by the Government and a 2.26 billion package prepared in April of this year designed to amortize the impact of the energy price shock on the country's economy, business and society. However, the IMF points out that in order to avoid possible additional inflationary pressure, further support measures in the face of a shock must be targeted, temporary and targeted at the most vulnerable groups.


After assessing the growing expenditure needs, the IMF encourages the search for additional sustainable sources of budget revenue, for example, by implementing changes in real estate and environmental taxes and thus expanding the tax base on the basis of taxes that are less harmful to economic growth. In this regard, the IMF considers the proposal submitted by the Ministry of Finance to change the real estate tax model as a step in the right direction.

The IMF report states that Lithuania's trade relations and energy dependence on Russia have consistently decreased since Lithuania's accession to the EU, and this process accelerated even more after the annexation of Crimea in 2014. In 2021, the share of Lithuanian exports to Russia, Ukraine and Belarus made up only 16%, and 90% of exports to Russia consisted of re-exported goods (of non-Lithuanian origin), thus the Lithuanian economy met the Russian war against Ukraine being in a strong position.

"Lithuania's economic relations with Russia have been steadily declining already for several years. The Lithuanian economy met the Russian war in Ukraine in a strong position with sufficient fiscal reserves, a well-capitalized and shock-resistant financial sector and a strong external position. Accordingly, the effects of the war on the Lithuanian economy are limited, at least for now, and the economy will continue to grow, although at a slower pace. Despite the unfavourable geopolitical environment, we must strive for progress in the implementation of productivity-increasing reforms, which are necessary to ensure further income convergence with Western countries," said Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.

According to the IMF, the banking system in Lithuania is well capitalized and liquid, ready to withstand larger-scale economic shocks and adapt to the changing situation. It is emphasized that the financial situation of companies and households is sufficiently strong, but the rapid growth of real estate prices remains a source of risk. The IMF has positively assessed the steps taken by the Bank of Lithuania in the field of macroprudential policy, including a higher down payment requirement for the purchase of a non-first home.

The IMF emphasizes that although the current situation due to the war in Ukraine is less favourable for the implementation of structural reforms, long-term challenges for the Lithuanian economy remain relevant, therefore it is important to speed up education and health care reforms, eliminate gaps in transport infrastructure, in order to ensure sustainable productivity growth and further rapid convergence of income with the West Europe. It is expected that EU investments, including the "New Generation Lithuania" Plan, will provide the necessary impetus to implement the necessary transformations and reforms. It is also necessary to further address climate change issues and strengthen energy security. According to the IMF, the inclusion of the CO2 component in the environmental tax system would not only create the necessary incentives to reduce energy consumption and environmentally harmful emissions, but would also supplement the State budget.

This year, the IMF mission paid special attention to the Fintech sector and the evaluation of the Lithuanian money laundering and terrorist financing prevention system. According to the IMF experts, taking into account the rapid development of the Fintech sector, the aim should be further strengthening of the regulation of the sector, including the prevention of money laundering and terrorist financing, market entry and supervision mechanisms, allocating the necessary resources at the level of responsible institutions.

IMF and Lithuania

Lithuania became a member of the IMF in 1992. In the IMF Board of Governors, which makes the most important decisions, Lithuania is represented by the Chairman of the Board of the Bank of Lithuania, and the alternate representative is the Minister of Finance.

The basis of the cooperation between Lithuania and the IMF is economic consultations under Article IV of the IMF’s Articles of Agreement. This article of the agreement obliges the member countries to implement economic and financial policies that ensure national and global financial and economic stability.

Each year, representatives of the IMF meet live or remotely with representatives of the Government, the Bank of Lithuania, the private sector and non-governmental organizations, politicians, economic experts, with whom they assess the country's economic situation and development trends, and submit statements and recommendations of consultations under Article IV of the IMF’s Articles of Agreement.

The last such mission took place from May 26 to June 7, after which the prepared statement was approved by the IMF Board on July 26.