On June 20, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Republic of Lithuania.
The economy picked up steam in 2017, following two years of sluggish growth. Real GDP expanded by 3.9 percent largely because of the acceleration of investment, which benefited from credit growth and high capacity utilization. Private consumption remained the main engine of growth, though it was held back by decelerating real wages. The external current account swung to a modest surplus with exports benefiting from past investments in export capacity and improved external demand. Rising wages, driven by a tightening labor market, and tax hikes led to a spike in inflation to 3.7 percent. With positive macroeconomic conditions, the government continued to consolidate public finances resulting in a headline budget surplus for the second year in a row. Data for the first quarter of 2018 point to a modest deceleration of the economy and inflation.
With Lithuania’s economy expanding well above potential, growth is expected to moderate over time to a more sustainable pace. Growth in 2018 is projected at 3.2 percent, mainly because of weaker exports after a very strong performance last year and a slowdown of consumption driven by negative employment growth. Investment spending should pick up, however, thanks to faster EU funds absorption. Inflation is projected to moderate because of the waning effects of the 2017 tax hikes, lower wage increases, and a slowing economy.
Being a small open economy, Lithuania is highly vulnerable to a retreat from global trade, renewed euro area strains, geopolitics and global growth. On the domestic front, emigration and population aging, and lack of reforms are the main risks to the economic outlook.
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.