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© 2009 International Monetary Fund

December 2009

IMF Country Report No. 09/322

January 8, 2009 January 28, 2009 January 29, 2001

January 29, 2001 January 28, 2009

Republic of Lithuania: Staff Report for the 2009 Article IV Consultation

The following documents have been released and are included in this package:

  • The staff report, prepared by a staff team of the IMF, following discussions that ended on June 23, 2009 with the officials of the Republic of Lithuania on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 23, 2009. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • A staff statement

  • A Public Information Notice (PIN).

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

Copies of this report are available to the public from

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Telephone: (202) 623-7430 • Telefax: (202) 623-7201

E-mail: publications@imf.org Internet: http://www.imf.org

International Monetary Fund

Washington, D.C.

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INTERNATIONAL MONETARY FUND

REPUBLIC OF LITHUANIA

Staff Report for the 2009 Article IV Consultation

Prepared by the Staff Representatives for the 2009 Consultation with The Republic of Lithuania

Approved by Anne-Marie Gulde and Tessa van der Willigen

July 23, 2009

Discussions: Vilnius, June 11–23, 2009. The mission (C. Purfield (Head), J. Vacher, J. Miniane, A. Kangur (all EUR), E. Cerutti (SPR), L. Cortavarria-Checkley, D. Parker (MCM), and N. Budina (FAD)) met Prime Minister Kubilius; Finance Minister Šemeta; Bank of Lithuania Governor Šarkinas; Minister of Economy Kreivys; other high level officials, parliamentarians, and representatives of the private sector. Mr. Abazorius (OED) also joined the discussions. The mission concluded with a press conference.

Previous consultations: The risks associated with large external imbalances and reliance on capital inflows under the Currency Board Arrangement (CBA) were highlighted by earlier Article IV Consultations. The expansionary stance of fiscal policy in 2008 was in contrast to the tightening planned and additional consolidation recommended by Directors to build a fiscal cushion. Now that the hard-landing has materialized, this expansionary stance largely precludes the scope for the counter-cyclical fiscal policy advocated in the previous Consultation. More recent steps to remove VAT exemptions and cut current spending were in line with Fund recommendations. Consistent with the 2008 FSAP Update, the Bank of Lithuania (BOL) updated its lender of last resort procedures and strengthened its contingency planning framework. It also required banks’ to retain 2008 profits to bolster capital.

2009 policy advice: The discussions focused on the immediate impact of the global crisis on Lithuania and policies needed to ensure financial, fiscal, and external sustainability, address risks, pave the way for a healthy recovery and secure speedy euro adoption. Staff advocated a sizeable fiscal consolidation to ensure that public debt is sustainable, augmentation of banks’ capital buffers to address prospective losses with complementary efforts to enhance crisis prevention and contingency frameworks, and further wage adjustment and structural reforms to support the currency board and raise growth potential.

The authorities’ position: Keenly aware of the challenges ahead and adjustment required to support the currency board, the new government in place since late-2008 emphasized its ongoing efforts aimed at a substantial fiscal adjustment—which carries the support of Parliament and social partners at large—a strengthening of the financial system, and an overhaul of business and labor regulations to improve the investment climate, as key elements of its strategy to ensure the euro is adopted from a position of strength.

Contents

  • I. Staff Appraisal and Executive Summary

  • II. Outlook and Key challenges

  • III. Policy Discussions

    • A. Securing Fiscal Sustainability

    • B. Safeguarding Banking System Soundness

    • C. Enhancing Longer-Term Growth Potential

  • Tables

  • 1. Selected Economic and Social Indicators, 2005–10

  • 2. Medium Term Framework, 2004–14

  • 3. Summary of Monetary Accounts, 2007–10

  • 4. Balance of Payments, Baseline 2007–14

  • 5. Financial Soundness Indicators, 2005–09

  • 6. General Government Operations, 2005–11

  • 7. Fiscal Impulse and Cyclically Adjusted Balance, 2004–10

  • Figures

  • 1. The Upswing: Real Sector Indicators

  • 2. The Upswing: Financial and Balance Sheet Indicators

  • 3. The Upswing: FiscalIndicators

  • 4. The Bust: Macroeconomic Indicators in the Recession

  • 5. Financial Indicators, 2004–09

  • 6. Lithuania’s Recession in a Regional Context

  • Boxes

  • 1. Balance Sheet Exposures in a Comparative and Historical Perspective

  • 2. Exchange Rate Assessment

  • 3. Revenue Performance Post Boom

  • 4. The Social Security System (SoDra).

  • Annex Tables

  • 1. External Debt Sustainability Framework, 2004–14

  • 2. Public Debt Sector Sustainability Framework, 2004–14

  • Annex Figures

  • 1. External Debt Sustainability: Bound Tests

  • 2. Public Debt Sustainability: Bound Tests

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INTERNATIONAL MONETARY FUND

REPUBLIC OF LITHUANIA

Staff Report for the 2009 Article IV Consultation—Informational Annex

Prepared by the European Department

July 23, 2009

Contents

  • Appendices

  • I. Fund Relations

  • II. World Bank Relations

  • II. Statistical Issues

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Public Information Notice (PIN) No. 09/104

FOR IMMEDIATE RELEASE

August 11, 2009

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

IMF Executive Board Concludes 2009 Article IV Consultation with the Republic of Lithuania