Republic of Lithuania
2010 Article IV Consultation: Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Lithuania
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Lithuania experienced a severe output decline. A large consolidation contained the deterioration in the fiscal deficit and safeguarded market financing. Further fiscal consolidation is needed to place deficits and debt on a sustainable path. Tackling the deficit in the social security system and expanding the revenue base will achieve adjustment in a sustainable, pro-growth, and equitable manner. A sustained recovery also hinges on the ability of the economy to rebalance toward tradables. The rising level of unemployment makes it imperative to advance with structural reforms.

Abstract

Lithuania experienced a severe output decline. A large consolidation contained the deterioration in the fiscal deficit and safeguarded market financing. Further fiscal consolidation is needed to place deficits and debt on a sustainable path. Tackling the deficit in the social security system and expanding the revenue base will achieve adjustment in a sustainable, pro-growth, and equitable manner. A sustained recovery also hinges on the ability of the economy to rebalance toward tradables. The rising level of unemployment makes it imperative to advance with structural reforms.

I. Context: Lithuania’S Ongoing Response to the Global Crisis

A. Recent Economic and Policy Developments

1. Lithuania experienced a severe output decline in 2009. The economy started contracting in the third quarter of 2008 as a reversal in capital flows led to a collapse of domestic demand and the global recession caused exports to fall. Output dropped by 14.8 percent in 2009 and by 20 percent from peak to trough.

uA01fig01

The 10 Largest Output Declines in the World, 2008–09

(2008-09 cumulative percent changes)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: April 2010 WEO.

2 The economy is beginning to recover aided by exports and now inventories as well (Figure 1) Exports—led by capital and transport goods, pharmaceuticals, and oil derived products—rebounded strongly and real GDP showed signs of stabilizing during the second half of 2009. In the first quarter of 2010, real GDP contracted by a smaller than expected -2¾ percent y/y. Two factors explain the better than expected outcome: (i) the closure in January 2010 of the Ignalina nuclear power plant that generated about 70 percent of Lithuani’s power was a less severe shock than anticipated, and (ii) a rebuilding of inventories that contributed 11.7 percentage points to growth, as stocks had fallen sharply in 2009. The export led recovery is filtering to business and consumer confidence, with retail sales growing modestly from early 2010. Housing prices are also showing tentative signs of bottoming out, while the stock market is up 100 percent from its March 2009 trough.

Figure 1.
Figure 1.

Lithuania: Real Sector Developments

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Haver; Eurostat; and IMF staff calculations.1/ Unemployment rate is estimated as a percentage of the working age population.2/ Percent balance equals percent of respondents reporting an increase minus the percent of respondents reporting a decrease.
uA01fig02

Contributions to GDP Growth by Components

(YoY, percent)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Haver.

3. A rapid internal adjustment played a crucial role in stabilizing the economy, but unemployment has risen sharply (Tables 13):

  • The current account adjusted rapidly. It moved by around 19 percentage points of GDP to a surplus of nearly 4 percent of GDP end-2009 as the collapse in domestic demand caused imports to contract more than exports. This alleviated external financing needs and helped maintain reserves amid net capital outflows that amounted to 7.2 percent of GDP (Figure 2). Despite deleveraging in the private sector, the external debt-to-GDP ratio rose to 87 percent of GDP. Strong export trends continued in the first months of 2010, with imports showing signs of recovery (partly due to energy imports after the closure of Ignalina). Government debt issuance has partly compensated the continuing repayment of banks’ foreign liabilities

  • Inflation quickly ebbed and core inflation is now negative. Headline inflation has fallen to 0.2 percent in April 2010 despite a 33 percent increase in electricity prices after Ignalina’s closure and a VAT rate increase in fall 2009. Core prices have been falling for over a year.

  • Wages have fallen fast. Average gross earnings have fallen by 12.4 percent from pre-crisis peaks, but in sectors such as construction and real estate services, labor costs are down 20–25 percent. Unemployment had reached 18.1 percent by end Q1 2010, with high levels of youth and long-term unemployment an increasing concern.

Table 1.

Lithuania: Selected Economic and Social Indicators, 2007–15

Population (2009): 3.32 million

GDP per capita, at purchasing power parity (2009): USD 15,803

Life expectancy at birth (2008): 77.6 years (women), 66.3 years (men)

At-risk-of-poverty, share of population (2008): 20 percent

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Sources: Lithuanian authorities; World Bank; Eurostat; and IMF staff estimates and projections.

More than half of the decline in the investment/GDP ratio in 2009 is accounted for by the large (in absolute terms) decline in inventories. As such, the decline in the ratio overstates the decline in gross fixed capital formation.

Including unidentified measures quantified below.

The decline post-2012 is due to the growth in nominal GDP.

Excluding guarantees.

FDI in 2009–11 includes funds for recapitalization of foreign banks’ subsidiaries.

Includes loans guaranteed by the government.

CPI-based, 2000 trade-weighted real effective exchange rate against 17 major trading partners. For 2010, average January-April.

Table 2.

Lithuania: Balance of Payments, 2007–15

(In billions of euros, unless otherwise indicated)

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Sources: Data provided by the Lithuanian authorities; IMF International Financial and Trade Statistics; and Fund staff estimates and projections.

The 2010 projections assume average rollover rates of 90 percent for foreign banks, 74 percent for domestic banks, and 80 percent for corporates; 5 percent deposit outflows for nonresidents; and FDI (excluding bank recapitalizations) declining 50 percent. The overall FDI figures includes some further recapitalization of subsidiaries by parent banks in 2010.

Short-term debt at remaining maturity.

Table 3.

Lithuania: Summary of Monetary Accounts, 2007–11

(In billions of litai; unless otherwise specified)

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Sources: Bank of Lithuania; and Fund staff estimates and projections.

Excludes local government deposits; includes counterpart funds.

BOP basis. Differs from gross foreign assets as shown in the monetary authority’s balance sheet because of valuation effects (BOP-basis official reserves include accrued interest on deposits and securities but exclude investments in shares and other equity).

Bank of Lithuania’s gross foreign assets less reserve money, in percent of banking system deposits. Excess reserves for lending to commercial banks are determined based on net foreign reserves, and represent the equivalent of 4 percent of bank deposits.

Figure 2.
Figure 2.

Lithuania: External Sector Developments

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Bank of Lithuania and staff calculations.1/ Reserves minus base money to deposits.
uA01fig03

Inflation By Components, YoY

(Percent)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Haver.
uA01fig04

Hourly Labor Cost

(Peak=100) 1/

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Eurostat.1/ EU27 has not peaked, so we use the same peak as Lithuania.
uA01fig05

Unemployment Rates, Under 25 Years Old

(Percent)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Haver.

4. A large consolidation contained the deterioration in the fiscal deficit and safeguarded market financing (Tables 4 and 5). The authorities implemented measures worth about 10 percent of GDP (staff’s estimates of meaures’ yields) in the 2009–10 budgets that were appropriately expenditure-led given the legacy of spending increases in the boom.1 The initial focus on broad-based cuts gave way to more targeted and progressive reductions in wage, pension and benefit levels that were agreed with social partners. About 40 percent of the consolidation in the 2009 and 2010 budgets is temporary (wage cuts are set to expire at the end of 2010 and pension cuts in 2011), and the April 2010 constitutional court decision on pensions could unwind 0.6 percent of GDP in the adjustment.2 Steps to increase VAT and excise rates and broaden their base played a complementary role in the adjustment. Overall, by end-2009, the fiscal deficit was contained to 8.9 percent of GDP (ESA 95 basis) with the early adjustment rewarded with access to international bond markets at declining cost. While still low by emerging market standards, the public debt burden—at 33 percent of GDP end-March 2010—is more than double its 2008 level. The improvement in the deficit continued in the first months of 2010, amid better revenues and containment of expenditure (Figure 3).

Table 4:

Lithuania: General Government Operations, 2007-15

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Sources: Ministry of Finance, Ministry of Social Security and Fund staff estimates.

Including payments not transfered by SODRA to private pension accounts.

Table 5.

Lithuania: Fiscal Impulse and Cyclically-Adjusted Balance, 2007–15

(in percent of GDP)

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Sources: Statistics Lithuania; Ministry of Finance; and Fund staff estimates.

Based on disaggregated elasticities for different revenue and expenditure components.

Including social contributions retransferred from private pension accounts to PAYG pillar in 2009 and 2010.

Based on the European Commission’s aggregated approach and a budget sensitivity parameter of 0.27, estimated by the EC (2009).

Based on the European Commission’s aggregated approach and a budget sensitivity parameter of 0.33, estimated by the Bank of Lithuania (2009).

Figure 3.
Figure 3.

Lithuania: Fiscal Developments

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Haver; Eurostat; Sodra and IMF staff calculations.
uA01fig06

Large Scale Fiscal Adjustments

(Change in the Primary Banance, percent of GDP) 1/

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Sources: Fiscal Adjustment Database, Fiscal Affairs Department, IMF.1/ For the Baltics in 2009, adjustment is measured relative to un changed policies and, net of the impact of rate reductions in PIT and CIT or of spending increases.
uA01fig07

Fiscal Adjustment in the Baltics, 2009–10

(Percent of GDP) 1/

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: IMF staff estimates.1/ Measures implemented net of the impact of rate reductions in PIT and CIT or of spending increases. Gross adjustment was larger. For Estonia and Latvia, measured on a cash-basis; for Lithuania, on a ESA 95 basis.

5. The financial sector weathered the crisis but faces sizeable non-performing loans (NPLs). To preserve financial stability, reserve requirements were lowered, the deposit insurance coverage raised, liquidity support procedures streamlined, and the 2009 Financial Stability Law was adopted. Banks improved their liquidity positions, with subsidiaries of international banks benefiting from parent support at the height of the global turmoil. Asset quality has suffered, with the level of non-performing loans (defined as past due more than 60 days plus impaired loans) rising almost four-fold from end-2008 to March 2010 and banks making large losses in 2009 (Figure 4). However, capital and liquidity indicators improved to 15 percent and 45 percent, respectively by end-March 2010 (Table 6). Provisions increased to cover 7½ percent of gross loans but the ratio of provisions to NPLs at almost 40 percent of NPLs, is still lower than most international comparators. Credit to the private sector is down 9.7 percent from its peak while parent bank funding (net of capital injections) fell by an estimated 8.5 percent in 2009, reflecting in part lower loan demand (Box 1). The loan-to-deposit ratio has fallen to below 150 percent while interbank rates have returned to pre-crisis levels, although as before, transactions at longer maturities are limited.

Figure 4.
Figure 4.

Lithuania: Financial Sector Developments

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Bank of Lithuania and Global Financial Stability Report, 2010.
Table 6:

Financial Soundness Indicators, 2004–10, Banking System Data

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Source: Bank of Lithuania.

Without foreign bank branches.

Total profits (losses) after tax. Interim quarterly results are annualised.

From end-2005 to Q1-2008, NPLs are loans with payments on which are overdue more than 60 days. Until 2004 NPLs are loans in Substandard, Doubtful and Loss loans categories.

Non-performing loans are defined as the sum of the impaired loans and those non-impaired loans that are overdue more than 60 days. New series not comparable to the previous ones.

Data as of the end of period.

Information is based on interbank deals of all maturities (mostly overnights) made between resident banks in Litai within the last quarter of the period.

Specific provisions include provisions against general portfolio risk until end-2004. From end-2005, due to the change in definition of NPLs, specific provisions are not directly attributable to the NPLs. Therefore, the ratio may turn negative.

Specific provisions include allowances for both individually and collectively assessed loans.

Credit Contraction and Deleveraging1/

Post-crisis deleveraging can be protracted, delaying the recovery in credit. Recent studies indicate that countries with (i) high bank credit growth prior to the crisis, (ii) suffering from a stronger demand contraction after the Lehman brothers shock, (iii) with high financial integration with respect to the rest of the world, and (iv) with weaker countercyclical monetary policy response experienced on average lower growth rates of bank credit post crisis.2/ Because the contraction in nominal GDP was large in Lithuania in 2009, the ratio of credit-to-GDP will only decrease in 2010.

The contraction in credit in Lithuania started in December 2008 reflecting the legacy of a strong credit boom and lack of demand. By end-2009, the nominal stock of credit to the private sector declined by 8 percent from its November 2008 peak, the fastest pace in Emerging Europe. As a proportion of GDP, the stock of credit grew particularly rapidly and late in the international cycle—with implications for the subsequent deterioration in asset quality. Audited data suggest banks have adjusted their lending patterns but some banks have maintained or even increased their gross loan exposure to sectors such as construction, real estate, or transportation. Overall, quantifying the contributions of demand and supply factors is challenging. Lending surveys suggest lower demand played an important role in explaining the decline in credit, with evidence of potential supply effects more mixed.

Short term risks for the outlook are tilted to the downside. Banks are more liquid (the deposit base has stabilized and broad money is increasing), while investment might pick up in 2010, supported by exports. However, new loans to households and corporates remain at very low levels, with few signs of improvement. Downside risks include: high real interest rates, a further deterioration in asset quality, low consumer demand if unemployment and wages deteriorate further, delays in recapitalization, and a feeble recovery in asset and collateral prices.

uA01fig08

Selected European Countries: Credit Growth

(in percent, y/y)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

uA01fig09

New Loans to Households

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Bank of Lithuania and IMF Staff estimates
uA01fig10

Credit to Private Sector and Loan to Deposit ratio

(1995–2011)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

uA01fig11

Real Interest Rates on New Lending to Households

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

1/ See Selected Issues paper. 2/ Aisen A. and Franken M. (2009): “Bank Credit and the 2008 Financial Crisis: A Cross-Country Comparison”, Central Bank of Chile, Working Paper 532, December 2009.

B. Near-Term Outlook

6. Exports and inventories are expected to lead the recovery in 2010 (Text Table). Staff projects that real GDP will grow by 2 percent in 2010, with the recovery dependent on exports that are forecast to grow by about 9 percent in real terms. Stronger external demand and the higher absorption of EU funds will help private consumption and gross fixed capital formation expand during 2010 on a quarter-on-quarter basis—though not on a year-on-year basis due to strong base effects. Moreover, the large decline in inventories in 2009 creates the potential for a large contribution in the 2010 forecast, were inventories to stabilize. Growth in domestic demand will however be modest, hampered by high unemployment, falling incomes, and weak credit prospects. This in turn will constrain import growth, although higher than forecast energy imports in the wake of the closure of Ignalina or a swifter recomposition of inventories would risk imports rising faster than expected. The output gap of about -5 percent implies that deflation in core CPI is expected to persist through 2010, although higher energy and food prices will leave headline inflation close to zero.

Contributions to GDP Growth: 2006–11

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Source: Statistics Lithuania; and IMF staff calculations.

7. External surpluses are expected to moderate as domestic demand recovers, but deleveraging by the banking sector will weigh on capital flows. Strong export and current transfers are expected to keep the current account in surplus in 2010. Private sector deleveraging is expected to continue through 2010, with the stock of credit to the private sector as a percent of GDP declining further. Nonetheless, rollover rates on external credit lines will improve substantially given the already sharp downward adjustment in 2009. With capital transfers, FDI and government debt issuance is helping compensate the outflows, and reserves are expected to rise. Despite deleveraging, the external debt-to-GDP ratio is expected to peak only this year, at close to 90 percent, before declining over the medium term. Still, the external debt dynamics remain particularly sensitive to shocks. (Appendix 1).

uA01fig12

External Debt -to-GDP Ratios for Select Emerging Markets, 2009

(Percent)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: WEO

8. Risks to the near-term outlook are broadly balanced, although tail risks remain.

  • On the upside, global demand could be stronger than expected. The recent depreciation of the euro, if it persists, could stimulate net exports to non-EU trading partners, more than offsetting the adverse effect of energy prices. The impetus to domestic demand provided by exports and EU funds could also be stronger but would contribute to narrowing the current account surplus. At 40 percent of GDP, household debt remains low relative to other EU countries suggesting deleveraging may be less prolonged.

  • On the downside, uncertainty in international markets remains a source of risk, while poor asset quality in banks could hamper the recovery. Prolonged stress in Southern Europe could impact trading partner growth, and risk tensions in financial markets with possible implications for Lithuania’s sovereign financing costs that have so far declined. In an extreme event where markets would freeze as in the fall of 2008, the government could rely on its deposits that currently cover 5 months of expected cash requirements, and on domestic debt issues as it did in early 2009. Direct financial linkages to Southern European countries are limited, as is the exposure of the Nordic parent banks who supported their subsidiaries through 2009. Further deleveraging could take place, however, if conditions on wholesale funding markets become difficult. A shock to growth, or to the current account, stemming from lower growth in trading partners could also push external debt on an upward trajectory. Beside the external risks, pressures on the banking system from poor asset quality or problems in weaker banks, heavier debt burdens arising from further deflationary pressure, and a weaker supply of credit could hamper the recovery, although the comparatively lower debt burden and high degree of openness may alleviate some deflationary pressure.

II. The Road Ahead

9. Restoring fiscal sustainability and ensuring financial stability are the authorities’ key economic objectives. This supports the long standing currency board arrangement (CBA) and conditions for successful Euro adoption. The latter, would allow an orderly exit from the CBA, eliminate currency risks and reduce liquidity risk, a consideration given the high degree of euroization (over 70 percent of bank assets but just one-third of deposits). Realizing the ambitious 2014 timeline for euro adoption will require addressing three key challenges: putting the public finances back on a sustainable footing, safeguarding the health of the financial system, and rebalancing the economy towards tradables to foster more balanced growth and job creation.

A. Securing a Sustainable and Equitable Fiscal Consolidation

10. High deficits and rising debt are generating vulnerabilities. Despite economic growth and recent adjustment measures, the deficit is only expected to decline to 7¾ percent of GDP in 2010, reflecting the role of exports and inventories (both lightly taxed bases) in driving the recovery. The modest revenue gains are also partly offset by increased transfers for social assistance, support to job creation schemes, and compliance problems that have both reduced excise collections and given rise to municipal government arrears. The arrears reflect lower personal income tax revenues due to continued rise in unemployment and fall in wages. Beyond 2010, if no new measures are taken, deficits would rise to 9–10 percent of GDP, reflecting rising debt service costs, EU co-financing requirements, the expiration of temporary measures, and full reinstatement of transfers to Pillar II pensions. Public debt would breach the 60 percent Maastricht ceiling as early as 2013. Coupled with rising rollover needs, the government’s gross financing need would reach 20 percent of GDP by 2015 while the public debt burden would remain very vulnerable to lower growth outturns (Appendix 1).

uA01fig13

General Government Fiscal Deficit 1/

(Percent of GDP)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Eurostat, and IMF staff calculations.1/ ESA 95 Basis
uA01fig14

General Government Debt Burden 1/

(Percent of GDP)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Eurostat; and IMF staff calculations.1/ ESA 95 Basis

11. Additional fiscal consolidation is needed to secure sound public finances. The convergence program (CP) targets reducing the deficit to 5.8 percent of GDP in 2011 and to 3 percent by 2012. While ambitious, this timeframe is appropriate as a more gradual adjustment risks undermining market confidence as well as the euro adoption goal. More importantly, achieving these targets would substantially lower public debt and financing needs, while saving up to 1⅓ percent of GDP in interest costs over the medium term. Extending measures due to expire by 2011 (2½ percent of GDP) is a necessary start, but not enough. Some 5½ percent of GDP in additional measures—about half the consolidation achieved to date—is required. Economic growth cannot substitute for this consolidation: in the unlikely event that growth returns to its pre-crisis levels, the adjustment need would still amount to 3 percent of GDP.

12. A balanced consolidation will require insuring the sustainability of the social insurance system and broadening the tax base. Given the size of adjustment already implemented, and the need for additional consolidation, a broad package of expenditure and revenue measures is required to sustainably reduce the deficit (Box 2). While many options are available, a broad-based package would help avoid further cuts in core public services generate resources pending gains from slower yielding structural reforms, while helping to reduce the impact on the poor. Quickly announcing concrete proposals would underpin the credibility of the fiscal targets and market confidence, especially ahead of the municipal and parliamentary elections in 2011 and 2012.

Yields of Options for Revenue and Social Insurance-Led Adjustment

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Source: IMF staff estimates.

Estimated yields for the two proposed measures are mutually exclusive. Combined yield estimated at 0.7 percent of GDP.

13. Reform of the social security system should be assigned the highest priority (Box 3). The social security agency’s (Sodra) deficit is forecast to reach 3½ percent of GDP in 2010, with almost half due to pensions and the rest reflecting rapidly increasing—and extremely generous by EU standards—parental benefits. Options for consolidating the latter include limiting the duration of benefits, introducing a benefit cap, lowering the replacement ratio, and eliminating duplicate payments. Tighter certification of sickness and disability benefits would also yield savings over time.

uA01fig15

Decomposition of Sodra’s balance

(Percent of GDP)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Sodra, IMF staff calculations
uA01fig16

Sickness, Maternity/Paternity and Unemployment benefits

(Millions of litas)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

14. Restoring the financial viability in the pension system calls for far reaching reforms. Increasing the retirement age and linking it to longevity will start addressing aging-related pressures. To reduce future liabilities and increase the link between contributions and benefits, it will also be necessary to rely more heavily on a mandatory funded system with the basic social pension financed by transfers from the state budget. However, such reforms yield savings slowly. In the meantime, aligning the tax treatment of pensions—which are currently taxed neither at the contribution nor payment stage—with other income could be an option to help restore financial viability and fund the social pension. Pension taxation would be more equitable than an alternative of reducing pension levels. About half of all pensioners—those on the lower end of the income distribution—would be better-off relative to an option that entailed an across-the-board cut in payments, and the poorest pensioners would be shielded by the income tax allowance. It would also bring those on higher incomes that contribute to the funded pillars and those with multiple or working pensions more fully into the tax net.

uA01fig17

Comparing Options: Pension Income under a Propotional Cut in Pensions Verus Pension Taxation

(Litas per month)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Sodra; and IMF staff calculations.

15. Exploiting new revenue sources and closing existing tax loopholes would broaden the adjustment effort (Box 4). As a proportion of GDP, the overall tax burden is comparatively low, and wealth taxes are less than 25 percent of the EU average. A broad-based real estate tax on individual property at a low rate, and an annual registration fee on cars would yield substantial revenue. It would also limit the need for increases in profits or income taxes that could deter investment or job creation, while placing the burden of adjustment on wealthier households. Gradually phasing out the tax relief on mortgage interest payments and corporate tax incentives would reduce the bias towards debt finance and broaden the tax base. Meanwhile, there is scope to improve VAT compliance where the gap to EU benchmarks is high. Tax administration would also be strengthened through the introduction of mandatory income tax declarations and life-style surveys.

16. Structural reforms in the education and health sectors will also generate savings over the longer-term. Implementation of the World Bank recommendations to change financing formulae to ensure student-teacher ratios evolve in-line with the declining population will generate savings of over 1.3 percent of current GDP by 2020. With health costs set to increase by about 4 percent of GDP by 2050, encouraging consolidation within the dense hospital network and a greater reliance on primary care, out-patient services, and patient copayments would promote efficiency. On-going reforms in the procurement of pharmaceutical and other services should also help reduce the cost of health-related inputs.

17. Improvements to the fiscal framework would support consolidation. A more comprehensive reporting of contingent liabilities and tax expenditures is needed, as is a better monitoring and control of municipal arrears and finances. Formal mid-year budget reviews would also enhance the responsiveness of policies. Once the debt burden has been anchored at a sustainable level, changes to the fiscal rule to prevent pro-cyclical spending in good times, as set out in the authorities’ convergence program, would allow fiscal policy to play a more effective stabilizing role in the management of economic cycles.

18. The authorities are strongly committed to meeting their fiscal deficit targets. They aim to design an ambitious adjustment package, comprising a few large reforms rather than a series of smaller measures. The various options that staff outlined are being considered, including the possibility of a greater reliance on funded pensions. This could be accompanied by a more gradual reinstatement of transfers to the second pillar to help compensate Sodra for the associated revenue loss, and by a possible VAT rate increase to fund the basic pension. The authorities are seeking broad political support for such a package and are actively seeking to explain the benefits of various measures, including new tax instruments. They are keen to avoid recourse to further wage and pension or across-the-board cuts that would harm the recovery, deepen deflation, and disproportionally impact the poor.

Options for Social Insurance System Reform.

Social security system (Sodra) finances have deteriorated substantially. Contributions have fallen sharply as wages in the economy adjust to their new level after the boom. However, the large benefit increases granted in the boom leave Sodra’s spending far in excess of its revenues. Steps are needed to align benefits with resources and to restore the long-term viability of the pension system.

Non-pension benefits. Exceed their earmarked contributions and incentives across unemployment, sickness and maternity/paternity benefit systems are not well-aligned:

  • Maternity/paternity benefits are generous by EU standards. Payments are 120 percent the average economy-wide wage, increasingly benefit the better-off, and risk reducing female labor supply.

  • Sickness benefits are still prone to moral hazard notwithstanding recent increases in the share paid by employers. Increasing employer coverage from 2 to 7 days and stricter monitoring would better align incentives.

  • Unemployment benefits fail to provide adequate income support. In the medium term, replacement rates should be increased once fiscal space emerges.

uA01fig18

Indicators of Maternity/Paternity and Sickness Benefits

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Sodra, IMF staff calculations
uA01fig19

Maternity/Paternity (Female beneficiaries), Distribution of Average Benefits

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Sodra.

Ensuring the long-term viability of the pension system. The current system is facing rising liabilities due to implicit and explicit entitlements that are not covered by contributions. To ensure long-term viability:

  • Increasing the retirement age and linking it to the dependency ratio will help address the impact of aging and migration pressures.

  • The pension system could rely more heavily on the funded component to reduce future liabilities—provided ways are found to compensate Sodra for the income lost in the transition.

  • The basic minimum pension could be more efficiently funded by the budget given the government’s ability to raise resources through sources which are broader and less distortive than contributions.

  • Employers’ social security contributions on behalf of employees escape the tax net. Taxing them at either the contributions or benefit stage would remove a double-tax benefit.

  • Social insurance beneficiaries accrue entitlements without paying equivalent contributions and the pension formula overcompensates recent earnings. Rescaling the wage conversion parameters and automatic indexation to wage trends would make the system less discretionary.

Options for Revenue-Supported Adjustment1/

Lithuania’s tax structure remains very concentrated, with the most efficient tax instruments underutilized. Owing mainly to high social contribution rates, the share of labor taxes is similar to advanced euro area countries but the share of wealth taxes is low and many loopholes persist. There is thus ample scope to improve efficiency and equity while raising revenue.

Wealth taxes. Research by the OECD finds wealth taxes are the least distortive and harmful to growth compared to other tax instruments.2/

uA01fig20

Tax structure in Lithuania

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Eurostat, 2007
  • There is considerable room to expand immovable property taxation to residential housing. Countries at Lithuania’s income level generally collect about ¾ percent of GDP in such revenue. Given the distribution of housing values in Lithuania, generating such a yield would require a low-rate tax imposed on a broad-base. Exempting primary residences would significantly erode the base, duplicate the capital gains exemption, and favor middle and high income earners.

  • Introducing an annual motor vehicle license fee, scaled according to engine size, would serve as a green tax besides taxing wealth, and fall more heavily on high income earners. Other countries typically generate about ½ percent of GDP from such fees.

Removing tax loopholes. While many tax exemptions have been abolished, those remaining are not compatible with the corporate tax code and enterprises still enjoy generous exemptions.

  • The income tax codes provide many exemptions for property income, while asset price gains are not captured by the capitals gain tax. Personal income tax allowances for children combined with maternity/paternity benefits appear generous.

  • Abolishing the zero corporate income tax in free-economic zones would help preclude leakage via transfer pricing. Incentives, like the reduced rate for small enterprises, have proved ineffective in other countries and could be reconsidered.

Tax compliance. There is indicative evidence of a large and pro-cyclical shadow economy. Strengthening tax compliance would maximize the gain from tax reforms.

Private Consumption Based VAT Efficiency Decomposition

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Source: Reckon (2009), IMF staff computations. Note: all estimates and calculations refer to year 2006.
  • Low VAT efficiency in Lithuania is driven by a high compliance gap that is estimated to cost 2 percent of GDP. This has made VAT collections excessively volatile over the cycle: VAT arrears are now up by ½ percent of GDP compared to the boom years. Meanwhile smuggling and cross-border shopping have contributed to lower-than expected excise revenue. Closing half of the VAT compliance gap would yield up to ¾ percent of GDP over the medium-term.

1/ See Selected Issues paper. 2/ Arnold, Jens, 2008, OECD Working Paper No. 643.

B. Enhancing Financial Stability: Promoting Loss Recognition and Capitalization

19. The overall banking system is sound but the outlook will continue to be challenging. The high level of unemployment will entail an increasing share of households facing financial distress with implications for credit risk, while the level of corporate bankruptcies has risen sharply (up by 45 percent in 2009). Thus, even under current expectations of modest recovery, NPLs could rise further, albeit at a declining pace, peaking at about 23 percent in 2010 according to BoL simulations under baseline stress test scenarios. Still, the banking system reports high capital levels—with Tier I capital accounting for two thirds of total capital—that leaves system-wide capital levels more resilient to potential shocks. BoL stress tests suggest that even under a severely adverse scenario which would result in NPLs exceeding 30 percent by 2011, the system-wide CAR would remain above the regulatory 8 percent minimum.

20. Aggregate financial soundness indicators mask substantial divergences across the system (Figure 5). Internationally-owned banks have injected new capital worth about 2 percent of GDP, bringing their CAR to an average of 16 percent, and increased the cover of provisions to more than 40 percent of NPLs by March 2010. However, audited financial statements suggest that the remainder group of banks—that account for about 18 percent of total assets and almost 30 percent of household deposits—has made more limited capital injections, mainly in the form of subordinated debt (Tier II capital). The CAR of these banks had risen to 12 percent by end-March 2010. NPLs in these banks, in part explained by a heavier involvement in corporate credit, accounted for almost 30 percent of gross loans and the coverage of loan-loss provisions was just over 15 percent (4 percent of gross loans). This suggests a greater reliance on collateral to mitigate potential losses, at a time when collateral is particularly difficult to value and realize given the sharp correction and limited activity in asset markets. Moreover, some of these banks have recently resumed lending, including to distressed sectors such as construction or real estate.

Figure 5.
Figure 5.

Lithuania: Financial Sector Policy Challenges

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Commercial banks’ audited statements and Bank of Lithuania.
uA01fig21

Adjustment of Banks’ Lending from Boom to Bust 1/

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Association of Lithuanian Banks; and IMF Staff Estimates.1/ Size of each bubble reflects the corresponding bank’s share in total deposits.2/ Loans net of provisions.

21. Looking ahead, banks’ capacity to generate capital from profits will remain limited. Interest rate margins have narrowed, and at this stage of the cycle, with further asset deterioration still a possibility, a return to rapid loan growth risks adding to non-performing loans. Banks that bolstered liquidity through a strategy of attracting high-cost deposits, maintained or increased their exposure to distressed sectors and relied more heavily on collateral to limit potential losses will face particular challenges in generating future income and may need new capital infusions. Using published data, staff stress tests indicate that for this group of banks a further increase in NPLs by 20 percent—with loan recovery through collateral foreclosure assumed to be made at 30 percent—would require additional capital injections of about 1 percent of GDP. If problems were to arise in a bank, systemic risks nonetheless appear limited, with significant spillovers to the liquidity of the wider system unlikely given the relatively small size of these banks and strong parent bank support for the largest banks.

uA01fig22

Indicators of Bank Profitablility

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: IMF Global Financial Stability Report (April 2010), central banks and supervisory authorities.

22. Addressing these challenges will require a more forward looking approach. To proactively ensure bank viability, especially from less capitalized and provisioned institutions, the BoL should request banks to provide forward-looking business plans under a common stress scenario. The plans would show each bank’s capacity to meet minimum prudential standards (including solvency and liquidity), and generate reasonable level of cash income (before loan provisioning) over a 24-month period. Should some banks show financial weaknesses, a restructuring plan would accordingly be required. Staff also recommends an independent professional assessment of the consistency of collateral valuation across institutions to identify areas for further improvement, especially considering shortcomings in collateral foreclosure due to market illiquidity and the reported rise in fraudulent bankruptcies. Moving to a semi-annual audit schedule for two years, and rotating external auditing teams within firms as early as feasible would also enhance the incentives for more timely recognition of loan losses.

23. Given the high level of nonperforming loans, ongoing efforts to fine-tune the legal framework to facilitate voluntary debt restructuring are essential. Efforts underway to strengthen the corporate bankruptcy law, and introduce a personal bankruptcy act are welcome. Corporate debt restructuring procedures could be enhanced by addressing legal and institutional shortcomings for the treatment of fraudulent bankruptcies, clarifying the roles of courts and bankruptcy administrators and training sufficient staff, and granting senior creditor status to new financing. Restructuring efforts should continue to be based on a voluntary approach. Mandatory moratoriums on debt payments risk increasing the level of non-performing loans in the banking system and delaying the recovery of solvent borrowers.

24. In line with global initiatives, steps to enhance contingency planning and resolution frameworks should continue. The by-laws for the 2009 Financial Stability Law are now awaiting European Commission approval. Earlier IMF recommendations to expand the resolution tool-kit to allow a purchase and assumption transaction and the creation of bridge banks are pending on-going discussions at the EU-level. Beyond appropriate legal tools, it is important to run regular crisis drills to identify weaknesses and bottlenecks in crisis management, communication, intervention, and resolution procedures. In this regard, staff welcomes Lithuania’s forthcoming participation in the Nordic Baltic Cross Border Crisis Group and the recent MOU on crisis planning that set outs the rules and procedures governing the exchange of information between the Ministry of Finance, BoL and Financial Securities Regulator.

25. The authorities saw the banking system as a whole as well equipped to deal with new challenges given high capital and liquidity ratios, but views differed on the risks posed by less-capitalized and provisioned institutions. They observed that the stricter definition of NPLs in Lithuania should be taken into account when comparing provisioning coverage levels across countries. The supervisory department stressed its ongoing efforts to ensure banks’ inject additional capital if needed under specific time-bound plans following annual on-site inspections, as well as the requirement that banks prepare stress test scenarios to identify capital shortages (although these use banks’ own assumptions). The authorities acknowledged the dispersion of soundness indicators across banks. The fact that some banks had lower levels of provisioning than others was viewed by the supervisory department as the consequence of higher collateral requirements in particular on corporate credit. Moreover, collateral valuations were deemed conservative, validated by auditors and cross-checked by the supervisor’s in-house expert. The supervisor viewed semi-annual audits and the rotation of audit teams as risking an increase in the regulatory burden and cost on banks and stretching audit firms’ human resource capacity.

C. Fostering Long-Run Growth

26. Export performance will be a key determinant of medium-term growth. A return to pre-crisis growth rates is unlikely as the expansion largely reflected an unsustainable domestic demand-driven boom in non-tradable sectors, financed by external borrowing. Going forward, domestic demand will likely remain subdued for some time as the private sector deleverages, unemployment remains high and the corporate sector restructures, putting the onus on exports to drive the economy. Overall, medium-term potential growth is expected to be in the 3½ percent range (the pre-crisis estimated rate was 6 percent). Given this, real GDP would only recover its pre-crisis levels in 2014/15. With the output gap only closing then, inflation pressures will remain muted while the gradual recovery in domestic demand slowly reduces the current account surplus.

uA01fig23

Output and Potential Output 1/

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: Haver; and IMF staff calculations.1/ In logs.

27. Amid improving competitiveness indicators, Lithuania’s export prospects appear promising (Box 5). Lithuania was able to contain costs in the tradable sector during the boom, despite wage and price inflation in non-tradable sectors. This helped more than double Lithuania’s share of global exports over the decade, including in relatively high value-added sectors. To date, the export recovery has been brisk which, combined with steep adjustment in wage costs during the crisis, suggest competitiveness is improving. At this juncture, overvaluation does not appear to present a significant policy challenge, with CGER overvaluation estimates at modest levels. Moreover, CGER is based on the CPI rather than the manufacturing-ULC REER, which is more relevant for competitiveness and which rose less during the boom.

Competitiveness1/

Competitiveness was not seriously eroded during the boom and ongoing wage declines help allay concerns that internal costs are too high.

Lithuania’s CPI-based real effective exchange rate (REER) appreciated by 15 percent between 2000 and October 2008, driven firstly by nominal exchange rate changes and then, in the second half of the decade, by rising wage and price inflation in non-tradable sectors. The REER appreciated a further 8 percent in the following six months as floating rate partner currencies depreciated sharply (notably Russia and Poland). While this has since partially reversed, deflation has not yet had an impact, and the closure of Ignalina will delay the correction further by raising energy prices.

uA01fig24

CPI-based Real Effective Exchange Rate

(Jan. 2000=100)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: INS.
uA01fig25

Detail from Sept. 2008

(Sep. 2008=100)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: INS.

Analysis using CGER methodologies suggest moderate and declining overvaluation, yielding an average estimate over the three methods of 6.6 percent. The macroeconomic balance and external sustainability estimates are sensitive to the impact of the (highly uncertain) medium-term current account forecast, while the equilibrium real exchange rate approach may exaggerate estimated over-valuation if structural changes are not well captured in the data.

CGER-style Misalignment Estimates, 2009

(Percent)

article image
Source: IMF staff calculations.

Economy-wide unit labor cost-based REER measures have appreciated by about 40 percent between the first quarter of 2000 and the last of 2008. However, this was entirely driven by non-tradable sectors. In contrast to its Baltic neighbors, Lithuania managed wage restraint in export sectors such as manufacturing where costs relative to trade partners actually fell between 2000 and 2008 and its export market share more than doubled, with gains particularly marked in some high valued-added areas such as capital goods.

uA01fig26

ULC-based REERs, 2000–09

(Jan. 2000=100)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: DGEC FIN and staff calculations
uA01fig27

Share of Global Exports Goods and Services

(2000=100)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Source: WEO.

Recent wage declines have been most pronounced in sectors such as construction or real estate services, but even in manufacturing labor costs have fallen by some 10 percent. This bodes well for the country’s future competitiveness.

1/ See Selected Issues paper

28. The high level of unemployment calls for decisive policy action. Proposals in parliament to expand fixed-term contracts, ease dismissal requirements and allow greater flexibility in overtime will, if implemented, further increase labor market flexibility and encourage firms to hire earlier in the recovery. Plans to support job creation via EU funds and by lowering social contributions for one year to 7.7 percent on first time hires could help alleviate youth unemployment and bolster employment more generally. However, enhancing coordination across government agencies and easing administrative and procurement bottlenecks will help realize the ambitious targets for EU fund absorption.

29. Wide-ranging efforts to improve the business climate could promote new investment. The administrative and reporting burden on firms will be eased, by inter alia clustering and then merging the 76 public agencies tasked with supervising firms’ operations. The government is proactively seeking to boost FDI, and its efforts have resulted in a number of high profile investments. Reform of state-owned enterprises through the disinvestment of non-core activities and the attraction of strategic investors could reinforce this effort.

30. The authorities see structural reform as essential to sustain the recovery. They are optimistic that on-going efforts to improve the business climate and enhance flexibility in the labor code will make Lithuania a more attractive investment destination. Increased absorption of EU funds is key to their efforts to create jobs and promote investment. Measures are being taken to simplify and increase the effectiveness of the EU funds’ administration system, to strengthen administrative capacities of the institutions managing EU funds programs and to provide technical support for beneficiaries in preparing and implementing projects. The authorities viewed any estimates of the remaining overvaluation of the exchange rate as lacking significance particularly given the uncertainty surrounding such estimates. The gains in world market share and recovery in exports this year, combined with the on-going wage adjustment suggest in their view that exchange rate competitiveness is not a significant policy challenge.

III. Staff Appraisal

31. The economy is recovering supported by a determined policy response and the global upturn. The authorities’ decisive financial sector and fiscal policies helped Lithuania to weather the crisis and generate conditions for recovery. Staff expects real GDP to grow modestly in 2010, with broadly balanced risks around the forecast. Looking ahead, medium term growth is expected to be lower than in the boom, with real GDP only recovering its pre-crisis levels in 2014/15.

32. Further fiscal consolidation is needed to place deficits and debt on a sustainable path. The debt burden could break the Maastricht ceiling as early as 2013, if no new measures are taken. Some 5½ percent of GDP in additional effort is required suggesting a comprehensive package of expenditure and revenue measures will be needed. Early announcement of specific measures would underpin the credibility of the fiscal targets. Given the large adjustment to date, there is a need to strike a balance between a broadening of the tax base to yield greater revenues on one side, and insuring the sustainability of the social insurance system on the other, in ways that protect the most vulnerable.

33. Tackling the deficit in the social security system and expanding the revenue base would achieve adjustment in a sustainable, pro-growth, and equitable manner. Sodra’s deficit is large, reflecting in roughly equal measure overly generous parental benefits and an unsustainable pension system. Reducing parental benefits to EU standards—along with a comprehensive pension reform that raises the retirement age, moves to a more funded system, and provides adequate funding of the minimum basic pension—would sustainably reduce Sodra’s deficit. Exploiting new revenue sources, such as a real estate tax on personal property and annual car tax, would help raise revenue in the least distortionary way. It would also ensure the wealthier bear a greater share of the adjustment burden. There is also substantial scope to bolster revenues over time by enhancing tax compliance.

34. The banking system has weathered the crisis but challenges remain. Capital and liquidity indicators have improved but the level of non-performing loans is high. Audited accounts suggest the effort to provision for expected losses has been uneven across the system, while banks’ capital and capacity to generate cash income will likely remain under pressure.

35. A more forward looking approach would increase incentives to recognize losses and increase provisions and capital across the system. Regulators should continue to closely monitor the sufficiency of banks’ loan loss provisions and request banks increase their capital as needed under a strict timeframe. Requiring banks to prepare forward-looking business plans under a common stress scenario would help assess their viability. This effort should be complemented with an independent professional assessment of the consistency of collateral valuation across institutions, a semi-annual audit schedule, and rotation of external auditing teams within audit firms. To ensure the recovery of viable borrowers and the adequate protection of creditors, on-going reforms to strengthen the legal framework for voluntary debt restructuring is key and should remain the preferred procedure.

36. A sustained recovery also hinges on the ability of the economy to rebalance towards tradables. Prospects for the export sector are encouraging. During the boom years, Lithuania was able to contain costs in the export sector and gain world market share, despite rapid wage and price inflation in non-tradables. This, combined with a significant fall in wage costs in the downturn, is supporting competitiveness and staff considers than any residual overvaluation is modest.

37. The rising level of unemployment is a growing social and economic challenge, making it imperative to advance with structural reforms. Recent packages to support employment generation through increased absorption of EU funds are welcome, as are the new proposals to further enhance labor market flexibility. Steps to improve the business climate and the performance of state-owned enterprises could help stimulate investment.

38. It is proposed to hold the next Article IV consultation on the regular 12-month cycle.

Appendix: Debt Sustainability Analysis

Table 1.

Lithuania: Public Sector Debt Sustainability Framework, 2005–2015

(Percent of GDP, unless otherwise indicated)

article image

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(r − π(1+g) − g + αε(1+ rj]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r -π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Figure 1.
Figure 1.

Lithuania: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Sources: International Monetary Fund, country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).
Table 2.

Lithuania: External Debt Sustainability Framework, 2005–2015

(Percent of GDP, unless otherwise indicated)

article image

Derived as [r - g - ρ(1+g) + εα(1 +r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-ρ(1 +g) + εα(1 +r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ϵ > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure 2.
Figure 2.

Lithuania: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2010, 201; 10.5089/9781455203796.002.A001

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.3/ One-time real depreciation of 30 percent occurs in 2010.
1

Excluding rate reductions in corporate and personal income taxes.

2

The ruling requires that cuts in working pensions be made proportional to those in other pensions and that the pension cuts be compensated when the economy recovers, though the amount and timing of compensation are flexible.

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Republic of Lithuania: 2010 Article IV Consultation: Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Lithuania
Author:
International Monetary Fund