On June 30, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Republic of Lithuania, and considered and endorsed the staff appraisal without a meeting.2
The economy has been gathering momentum, following sluggish performance in 2015 and most of 2016. Real GDP expanded by 3.9 percent in the first quarter of 2017 after rising by 2.3 percent in 2016. Strong private consumption, on the back of robust wage growth and low inflation that supported purchasing power, has long been a main driver of growth. More recently, exports have also been growing, as the external environment improves and the adverse effects from retaliatory Russian trade sanctions and depreciation of the Russian ruble wane. But gross fixed capital formation has remained weak so far, reflecting the still subdued absorption of European funds.
Building on recent momentum, economic growth should be strong this year rising to 3.2 percent. Improving external conditions and a turnaround in European funds absorption, as well as high capacity utilization, should spur exports and investment. Private consumption will likely remain robust, although some moderation is to be expected as real wages decelerate. Strong domestic demand will pull in imports, leading to a modest deterioration of the trade balance despite improving export prospects. Annual average HICP inflation is set to spike to 3.4 percent this year, because of higher global energy prices and excise tax hikes earlier this year.
The main policy challenge is to reinvigorate income convergence with Western Europe. For it to be sustainable, Lithuania needs to narrow its productivity gap. Further structural reforms are the main lever to make progress, while macroeconomic and financial stability need to be maintained.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.