Front Matter Page
IMF Country Report No.13/081
REPUBLIC OF LITHUANIA
2013 ARTICLE IV CONSULTATION
March 2013
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2013 Article IV consultation with Lithuania, the following documents have been released and are included in this package:
Staff Report for the 2013 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on February 11, 2013, with the officials of Lithuania on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on March 7, 2013. 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.
Informational Annex prepared by the IMF.
Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its March 22, 2013 discussion of the staff report that concluded the Article IV consultation.
Statement by the Executive Director for Lithuania.
The document listed below has been or will be separately released:
Selected Issues Paper
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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©2013 International Monetary Fund
Front Matter Page
REPUBLIC OF LITHUANIA
STAFF REPORT FOR THE 2013 ARTICLE IV CONSULTATION
March 7, 2013
Key Issues
Outlook and risks. Significant macroeconomic rebalancing has taken place since the 2008–09 crisis and the recovery is well underway. But growth is expected to moderate to 3 percent in 2013 (from 3.6 percent in 2012), as the effects of a bumper harvest unwind. Over the medium term, growth should gradually rise toward its potential of around 3¾ percent, but this hinges on a recovery in investment. Risks have moderated, but remain on the downside as renewed financial stress or weak growth in Europe would adversely affect Lithuania.
Fiscal policy. The fiscal deficit has declined significantly, from 9½ percent of GDP in 2009 to an estimated 3 percent of GDP in 2012. The 2013 budget—with a deficit target of 2½ percent of GDP—appropriately balances supporting the recovery with the need for further consolidation. Going forward, further fiscal consolidation is needed to fully rebuild fiscal space. But, the composition of adjustment should shift to the revenue side, given Lithuania’s low revenue-to-GDP ratio and substantial scope to increase wealth taxation.
Financial stability. The mostly foreign-owned banking system is, overall, well-capitalized and liquid, but weaknesses in some domestically-owned banks had to be forcefully addressed. The Bank of Lithuania’s intervention of two domestically-owned banks and two credit unions underscores the importance of effective supervision.
Credit growth. The financial sector has an essential role to play in enabling sound credit expansion to support economic growth. While a balanced approach to credit policies is clearly important to avoid the excesses of the boom years, adequate credit expansion is needed to support investment. Reducing obstacles to the resolution of non-performing loans could help ease constraints on credit supply.
Competitiveness. Reaching potential growth will require that competitiveness gains since the crisis are preserved. Going forward, it will be critical to boost investment through improvements in the business climate and to address challenges in the labor market through training and active labor market policies.
Political situation. A new government took office in late 2012 and has advocated greater social inclusion, job creation, higher pensions and wages, and enhanced tax progressivity.
Approved By
Mahmood Pradhan and Elliott Harris
Discussions were held in Vilnius during January 31-February 11, 2013.
The team comprised Ms. Kozack (head), Messrs. Klingen and Agarwal, Mmes. Everaert and Geng (all EUR). Ms. Arust (OED) joined the discussions. Several meetings were coordinated with visiting teams from the EC and the ECB. The mission also briefly visited Stockholm to discuss banking sector linkages between Sweden and Lithuania.
Contents
CONTEXT
RECENT DEVELOPMENTS
A. An Ongoing Recovery
B. The Banking System
OUTLOOK AND RISKS
POLICY DISCUSSIONS
A. Securing Fiscal Space
B. The Financial Sector—Playing its Supportive Role in Enabling Growth
C. Competitiveness—a Driver for Longer-Term Growth
D. Euro Adoption
STAFF APPRAISAL
BOXES
1. External Linkages and Spillovers from the Global Economy
2. The Composition of Fiscal Consolidation in Lithuania
3. Raising Revenue Through More Progressive Taxation in Lithuania
4. Tax Policy Recommendations
5. Does Low Credit Growth Reflect a Lack of Demand or Supply?
FIGURES
1. Lithuania: Real Sector, 2010-12
2. Labor Market and Competitiveness, 2008–12
3. Banking Sector
4. Recent Fiscal Developments, 2009–12
1A. External Debt Sustainability Analysis: Bound Tests 1/ 2/
2A. Public Debt Sustainability: Bound Tests 1/ 2/
TABLES
1. Selected Economic Indicators, 2010–18
2. General Government Operations, 2010–18
3. Balance of Payments, 2010–18
4. Summary of Monetary Accounts, 2007–14
5. Financial Soundness Indicators, Banking System Data, 2006–12
1A. External Debt Sustainability Framework, 2007–18
2A. Public Sector Debt Sustainability Framework, 2007–18
APPENDIX
The Rise and Fall of Snoras Bank
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REPUBLIC OF LITHUANIA
STAFF REPORT FOR THE 2013 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX
March 7, 2013
Prepared By
European Department
Contents
FUND RELATIONS
STATISTICAL ISSUES
Front Matter Page
Public Information Notice (PIN) No. 13/34
FOR IMMEDIATE RELEASE
March 28, 2013
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