On July 30, 2019, the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation
with the Republic of Lithuania and considered and
endorsed the staff appraisal without a meeting.
The economy exceeded expectations in 2018. Real GDP expanded by 3.5
percent with external demand more resilient than expected and without
pre-crisis imbalances reemerging. A strong contribution in net exports
helped the current account reach its highest surplus in four years.
Private consumption growth accelerated with better-than-expected
employment growth and a rebound in real wage growth. The labor market
remains tight with labor costs among the fastest growing in the EU, but
without inflationary pressures. With a positive macroeconomic
environment, the government has achieved a higher fiscal surplus for
the third year in a row. Data for the first quarter of 2019 suggest
that the economy’s growth momentum has carried over into this year.
With Lithuania’s economy expanding above potential, growth is expected
to moderate in the next few years to a more sustainable pace. Growth in
2019 is projected at 3.2 percent, mainly because a moderating labor
market will slow down consumption and exports will decelerate after a
strong start early this year. Investment will depend on policy
predictability, reform efforts and the business environment.
As a small open economy, Lithuania is vulnerable to a weakening
external environment characterized by slower growth in Europe,
continued trade tensions, uncertainty around Brexit conditions, and
geopolitical risks. Domestically, emigration, population aging, and
slow progress in implementing key aspects of the government’s reform
agenda are the main risks to the economic outlook.
Executive Board Assessment
In concluding the Article IV consultation with the Republic of
Lithuania, Executive Directors endorsed the staff’s appraisal as
The Lithuanian economy has continued to enjoy a strong
macroeconomic and fiscal performance, but long-term challenges
remain largely unaddressed. Prudent fiscal policy, a flexible labor market, and proactive
macroprudential policies have been critical to preserve stability and
should be maintained. The recovery has avoided the emergence of the
large imbalances of the past and better positioned Lithuania to face
external shocks and future economic downturns. However, Lithuania still
confronts severe demographic pressures, large social disparities, and
external uncertainty that can only be addressed with structural
reforms. This is the only way to ensure sustained high wage growth and
improved living standards.
The continued strong economic performance suggests that a neutral
fiscal stance would have been preferable this year.
Going forward there are heightened risks to revenues and increased
spending pressures from social needs that are partly countered by
conservative economic projections. Gains from combating informality are
difficult to predict while the revenue impact of recent reforms is
uncertain. Thus, revenue buoyancy may largely reflect cyclical factors.
Without commensurate increases in revenues, spending pressures are
increasing budget rigidities.
Macroprudential policy is being used proactively to prevent
Signs that moderate cyclical systemic risks are emerging led the Bank
of Lithuania to raise the countercyclical buffer to one percent in
mid-2018. The financial system remains sound, liquid, and profitable.
The external position is stronger than implied by fundamentals and
However, under unchanged policies, Lithuania’s current account should
gradually converge towards its medium-term norm.
Despite growing urgency, education and healthcare reforms have
failed to deliver.
Maintaining large and inefficient networks comes at the cost of quality
and opportunities. Only comprehensive reform will allow Lithuania to
produce the competitive and well-paid workforce needed to tackle income
and social disparities. Thus, planned wage increases in these sectors
should be made conditional on progress in network optimization.
Pension and tax reforms go in the right direction, but remaining
challenges will require future compromises.
Tax reform could have been more ambitious in shifting taxes away from
labor. The reduction of tax exemptions and privileged regimes is also
needed. On pensions, reform has ensured the financial, but not social,
sustainability of the system. Low and declining pensions will increase
pressures to boost basic pensions, which have been transferred to the
budget this year. This represents a fiscal risk over the medium-term.
ALMP should be strengthened to effectively address skill mismatches
and increase labor force participation. Current funding is low and relies excessively on EU funds and its
composition inadequately reflects cyclical conditions or the needs of
the labor market. Thus, reliance on employment subsidies should
decrease and focus on the most disadvantaged groups only. The emphasis
should shift to well-designed training curricula to upskill the labor
Lithuania faces a difficult tradeoff between maintaining a low and
competitive tax system and strengthening the social safety net. With discretionary spending already low, further increases in social
spending will likely require higher revenues. To ensure the most
efficient use of limited resources, targeted social spending should be
the main tool used. In this connection, the design and generosity of
child benefits should balance their positive impact on reducing child
poverty against the potential disincentives to work, particularly for
Fintech provides big opportunities to improve financial services
and produce high-skill jobs, but it also brings challenges,
particularly related to anti-money laundering. The authorities’ efforts to promote fintech are already delivering
results. Fintech companies will introduce some healthy competition,
initially in the payment services segment. The larger focus on
cross-border transactions represents a shift in the business model of
the financial system that will bring new challenges for supervision,
particularly regarding AML/CFT. The authorities’ efforts to implement
the 2018 MONEYVAL recommendations and enhance inter-agency coordination
should be complemented by adequate resources across all agencies