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IMF Country Report No. 22/251
REPUBLIC OF LITHUANIA
2022 ARTICLE IV CONSULTATION—PRESS RELEASE; AND STAFF REPORT
July 2022
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 2022 Article IV Consultation with the Republic of Lithuania, the following documents have been released and are included in this package:
A Press Release.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on a lapse-of-time basis, following discussions that ended on June 7, 2022, 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 11, 2022.
An Informational Annex prepared by the IMF staff.
The document listed below have been or will be separately released.
Selected Issues
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2022 International Monetary Fund
Press Release
PR22/276
IMF Executive Board Concludes 2022 Article IV Consultation with the Republic of Lithuania
FOR IMMEDIATE RELEASE
Washington, DC – June 28, 2022: On July 22, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Republic of Lithuania.
With resilient macroeconomic fundamentals, a decisive policy response, and a high immunization rate, the Lithuanian economy avoided a recession in 2020 and rebounded vigorously in 2021, outperforming the rest of the eurozone. Domestic demand was the main driver of growth—supported by low unemployment, double-digit wage growth, and a recovery of investment—which contributed to accelerating inflation by year-end. The external position remained strong, reflecting past competitiveness gains.
The recent spike in global energy and food prices and persistent supply bottlenecks have compounded inflationary pressures, disproportionately hurting the poor. As a result, inflation increased from the recent trough of -0.1 percent at the end of 2020 to 20.5 percent in June 2022, the second highest in the euro area. Inflation excluding energy and food components has increased alongside strong wage growth, suggesting that the surge in inflation has become broad based. Furthermore, the tight labor market and compressed profit margins could lead to further pressures from wages to price inflation.
Russia’s invasion of Ukraine has impacted activity and inflation with growth projected around 2 percent in 2022—about half the pre-war forecast. Projections are subject to significant uncertainty and abundant downside risks could further hinder growth. Inflation will remain elevated throughout 2022 and early 2023 because of high energy and commodity prices, tight labor market conditions, and persistent supply-side disruptions. This could lead to a wage-price spiral that could become entrenched, endangering macroeconomic stability. Risks to the outlook are skewed to the downside and include a further escalation of the war in Ukraine, lack of momentum in structural reforms, and tightening financial conditions. On the other hand, the economy could prove to be more resilient than projected, supported by the strong financial position of the private sector.
Executive Board Assessment2
The authorities’ response to the energy crisis aims to limit economic disruptions, provide targeted support to the vulnerable, and allow for market price signals. With a more targeted response than that adopted in other countries, the pass-through of higher energy prices to consumers has been significant, particularly for companies. While the support provided for the first half of 2022 was not in line with best practices, the more recent decision to allow a significant pass-through of energy prices and reflect this subsidy transparently in the budget is welcome. Pre-existing targeted programs to subsidize heating for vulnerable households have also been enhanced and the VAT rate on district heating for households was temporarily reduced to zero at a modest fiscal cost. Going forward, the subsidy to energy tariffs should gradually be phased out even if high energy prices proved persistent, with the bulk of the support being provided in a targeted manner to the more vulnerable.
Higher revenues from inflation allow the budget to accommodate pressures for higher social and defense spending in the short-term, but difficult tradeoffs await down the road. Permanent spending commitments add to pre-existing pressures. With discretionary spending low and lack of consensus on significant tax reform in the current environment, further increases in spending will result in a moderate deficit over the medium-term instead of the authorities’ goal of a balanced budget. This would still keep a strong fiscal position with public debt on a declining path. To avoid turning short-term challenges into structural problems, efforts should focus on improving the quality of spending while broadening environmental and housing-related taxes. To this end, the government’s proposal for revamping real estate taxation is a step in the right direction.
Given the risk of persistently high inflation, fiscal policy will need to be decisively countercyclical going forward. Although fiscal policy should ideally take a counter-cyclical stance in Lithuania given the lack of monetary policy, the moderately procyclical stance in 2022 is an appropriate response to the new environment with heightened uncertainty and downside risks, especially considering that half of the fiscal stimulus is on additional military spending on mostly imported equipment with little impact on domestic demand. Public debt is still projected to decline this year. A tightening of fiscal policy next year in line with the national fiscal rule will help minimize the risks of persistently high inflation. Furthermore, the increase in public sector wages and the minimum wage over the next few years should be consistent with expected inflation and productivity gains to provide a strong signal to the private sector and prevent a vicious wage-price spiral.
The banking system has ample capital and liquidity buffers to withstand a weakening economic environment or even greater shocks. The expected emergence of a large financial institution with a non-resident base business model will require prompt action by national and supranational authorities to ensure effective supervision under the existing European arrangements.
Further efforts are needed to mitigate money laundering risks in the financial sector, particularly from the dynamic and growing fintech sector. While the Bank of Lithuania (BoL) has made important strides in monitoring and supervision, the fast-growing non-resident activity in the fintech sector presents regulatory and supervisory challenges, with cross-border risks to the integrity of the AML/CFT framework. In this context, the focus should be shifted from growth of this sector to its consolidation, with a view toward mitigating risks. This should include more effective controls for access to the BoL’s payment system (CENTROlink). For virtual asset service providers, the Ministry of Interior and the Financial Intelligence Unit should develop risk-based supervision, stronger supervisory powers, and market entry controls. The AML/CFT supervisory capacity of the BoL will also need to be substantially strengthened, a process which will take time and require significant new resources and greater coordination with other jurisdictions.
The external position was moderately stronger than implied by fundamentals. The current account surplus decreased to pre-pandemic levels. National savings remained buoyant reflecting temporary factors rather than a long-term misalignment.
Structural reforms are necessary to ensure continued income convergence. The authorities need to address structural impediments by accelerating reforms in education and healthcare, and by closing gaps in the transportation infrastructure, and reducing information asymmetries that limit access to financing for small and medium enterprises. Ample fiscal space and European funds imply that upfront reform costs can be met without jeopardizing the fiscal position.
A comprehensive carbon tax will be necessary to achieve the authorities’ emission reduction objectives for 2030. Achieving the reduction in emissions and energy imports will require (i) reducing fossil fuels, (ii) investing in low-emission transportation, and (iii) raising energy efficiency. The introduction of an economy-wide carbon tax—set to gradually increase to EUR50 per metric ton of CO2 emissions by 2030—would help achieve these goals.
The next Article IV Consultation is expected to be completed on the standard 12-month cycle.
Lithuania: Selected Economic Indicators, 2017–27
2019 adjusted for tax reforms.
Calculation takes into account standard cyclical adjustments as well as absorption gap.
Lithuania: Selected Economic Indicators, 2017–27
| Life expectancy at birth (2020): 80 years (women), 70.1 years (men) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Quota (current, % of total): SDR 441.6 million, 0.09 percent | Per capita GDP (2021): € 19,760 | ||||||||||||
| Main products and exports: refined fuel, machinery and equipment; | Literacy Rate (2015): 99.8% | ||||||||||||
| chemicals, textiles, foodstuffs, plastics, wood products. | At-risk-of-poverty (after transfers), share of population (2020): 20.9% | ||||||||||||
| Key export markets: Russia, Latvia, Poland, Germany, U.S. | |||||||||||||
| 2017 | 201 8 | 2019 | 202 0 | 202 1 | 202 2 | 202 3 | 202 4 | 2025 | 2026 | 2027 | |||
| Projections | |||||||||||||
| Output | |||||||||||||
| Real GDP growth (annual percentage change) | 4.3 | 4.0 | 4.6 | -0.1 | 5.0 | 1.8 | 2.3 | 3.0 | 2.8 | 2.6 | 2.3 | ||
| Domestic demand (contribution to growth) | 2.7 | 3.3 | 1.4 | -3.9 | 5.7 | 3.8 | 4.3 | 3.8 | 3.5 | 3.2 | 2.9 | ||
| Domestic demand growth (year-on-year, in percent) | 2.6 | 3.4 | 1.6 | -4.0 | 5.9 | 4.1 | 4.5 | 4.0 | 3.6 | 3.2 | 3.0 | ||
| Private consumption growth (year-on-year, in percent) | 3.6 | 3.6 | 3.1 | -2.1 | 7.4 | 3.3 | 4.3 | 3.7 | 3.4 | 3.0 | 2.8 | ||
| Domestic fixed investment growth (year-on-year, in percent) | 8.9 | 10.0 | 6.6 | -1.8 | 7.0 | 3.6 | 6.6 | 5.9 | 5.4 | 4.9 | 4.5 | ||
| Inventories (contribution to growth) | -1.3 | -1.1 | -1.7 | -2.0 | -0.5 | 0.7 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Net external demand (contribution to growth) | 1.6 | 0.7 | 3.2 | 3.8 | -0.7 | -2.0 | -2.0 | -0.9 | -0.8 | -0.6 | -0.6 | ||
| Export growth (year-on-year, in percent) | 13.5 | 6.8 | 9.9 | 0.4 | 15.9 | -2.2 | 3.0 | 4.4 | 3.6 | 3.5 | 3.0 | ||
| Import growth (year-on-year, in percent) | 11.1 | 6.0 | 6.1 | -4.4 | 18.7 | 0.0 | 5.5 | 5.6 | 4.6 | 4.2 | 3.7 | ||
| Nominal GDP (in billions of euro) | 42.3 | 45.5 | 48.9 | 49.5 | 55.4 | 64.6 | 72.4 | 77.5 | 82.1 | 86.5 | 90.8 | ||
| Output gap (percent of potential GDP) | 0.3 | 0.7 | 1.6 | 0.0 | 1.6 | 0.6 | 0.2 | 0.1 | 0.0 | 0.0 | 0.0 | ||
| Employment | |||||||||||||
| Employment (annual percentage change) | -0.5 | 1.5 | 0.3 | -1.5 | 0.8 | 0.5 | 0.1 | 0.3 | 0.0 | -0.2 | -0.4 | ||
| Unemployment rate (year average, in percent of labor force) | 7.1 | 6.1 | 6.3 | 8.5 | 7.1 | 7.3 | 7.0 | 6.5 | 6.2 | 6.0 | 6.0 | ||
| Average monthly gross earnings (annual percentage change) 1/ | 8.2 | 9.9 | 8.8 | 10.1 | 10.5 | 17.2 | 14.5 | 5.8 | 5.6 | 5.6 | 5.5 | ||
| Average monthly gross earnings, real (annual percentage change) | 4.3 | 7.2 | 6.4 | 9.0 | 5.6 | -0.6 | 6.0 | 2.9 | 3.2 | 3.2 | 3.2 | ||
| Labor productivity (annual percentage change) | 4.8 | 2.5 | 4.3 | 1.4 | 4.2 | 1.3 | 2.2 | 2.6 | 2.8 | 2.8 | 2.8 | ||
| Prices | |||||||||||||
| HICP, period average (annual percentage change) | 3.7 | 2.5 | 2.2 | 1.1 | 4.6 | 17.9 | 8.5 | 3.0 | 2.4 | 2.4 | 2.3 | ||
| HICP core, period average (annual percentage change) | 2.6 | 1.9 | 2.3 | 2.6 | 3.4 | 9.3 | 5.8 | 3.6 | 2.6 | 2.4 | 2.4 | ||
| HICP, end of period (year-on-year percentage change) | 3.8 | 1.8 | 2.7 | -0.1 | 10.7 | 17.2 | 4.6 | 2.4 | 2.5 | 2.3 | 2.3 | ||
| GDP deflator (year-on-year percentage change) | 4.2 | 3.5 | 2.7 | 1.5 | 6.5 | 14.5 | 9.6 | 3.9 | 3.1 | 2.8 | 2.5 | ||
| General Government Finances | |||||||||||||
| Revenue (percent of GDP) | 33.6 | 34.5 | 35.2 | 35.7 | 37.7 | 38.3 | 37.2 | 36.7 | 36.4 | 36.2 | 36.2 | ||
| Of which EU grants | 0.6 | 0.7 | 0.9 | 0.6 | 0.7 | 1.5 | 0.8 | 0.7 | 0.7 | 0.6 | 0.6 | ||
| Expenditure (percent of GDP) | 33.2 | 34.0 | 34.8 | 42.9 | 38.7 | 40.2 | 38.5 | 37.9 | 37.6 | 37.4 | 37.2 | ||
| Of which: Non-interest | 32.1 | 33.1 | 33.9 | 42.3 | 38.3 | 40.0 | 38.3 | 37.7 | 37.3 | 37.0 | 36.9 | ||
| Interest | 1.1 | 0.9 | 0.9 | 0.7 | 0.4 | 0.3 | 0.2 | 0.2 | 0.3 | 0.4 | 0.4 | ||
| Fiscal balance (percent of GDP) | 0.4 | 0.5 | 0.5 | -7.3 | -1.0 | -2.0 | -1.3 | -1.2 | -1.2 | -1.2 | -1.0 | ||
| Fiscal balance excl. one-offs (percent of GDP) | 0.4 | 0.5 | 0.4 | -7.3 | -1.0 | -2.0 | -1.3 | -1.2 | -1.2 | -1.2 | -1.1 | ||
| Structural fiscal balance (percent of potential GDP) 2/ | 0.5 | 0.5 | 0.3 | -6.6 | -1.2 | -2.0 | -1.2 | -1.1 | -1.0 | -1.0 | -0.9 | ||
| General government gross debt (percent of GDP) | 39.3 | 33.7 | 35.9 | 46.6 | 44.7 | 42.1 | 38.3 | 36.5 | 35.2 | 34.1 | 33.1 | ||
| Of which: Foreign currency-denominated | 11.1 | 9.5 | 10.1 | 6.5 | 3.1 | 1.5 | 0.7 | 0.3 | 0.2 | 0.1 | 0.0 | ||
| Balance of Payments (in percent of GDP, unless otherwise specified) | |||||||||||||
| Current account balance | 0.6 | 0.3 | 3.5 | 7.3 | 1.4 | -1.5 | -1.5 | -1.0 | -0.5 | -0.2 | 0.1 | ||
| Current account balance (billions of euros) | 0.3 | 0.1 | 1.7 | 3.6 | 0.8 | -0.9 | -1.1 | -0.8 | -0.4 | -0.2 | 0.1 | ||
| Saving-Investment Balance (in percent of GDP) | |||||||||||||
| Gross national saving | 19.8 | 20.6 | 21.0 | 20.8 | 20.0 | 17.6 | 17.4 | 18.5 | 19.5 | 20.2 | 20.8 | ||
| Gross national investment | 19.2 | 20.4 | 17.6 | 13.5 | 18.6 | 19.1 | 18.8 | 19.6 | 20.0 | 20.5 | 20.7 | ||
| Foreign net savings | -0.6 | -0.3 | -3.5 | -7.3 | -1.4 | 1.5 | 1.5 | 1.0 | 0.5 | 0.2 | -0.1 | ||
2019 adjusted for tax reforms.
Calculation takes into account standard cyclical adjustments as well as absorption gap.
Lithuania: Selected Economic Indicators, 2017–27
| Life expectancy at birth (2020): 80 years (women), 70.1 years (men) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Quota (current, % of total): SDR 441.6 million, 0.09 percent | Per capita GDP (2021): € 19,760 | ||||||||||||
| Main products and exports: refined fuel, machinery and equipment; | Literacy Rate (2015): 99.8% | ||||||||||||
| chemicals, textiles, foodstuffs, plastics, wood products. | At-risk-of-poverty (after transfers), share of population (2020): 20.9% | ||||||||||||
| Key export markets: Russia, Latvia, Poland, Germany, U.S. | |||||||||||||
| 2017 | 201 8 | 2019 | 202 0 | 202 1 | 202 2 | 202 3 | 202 4 | 2025 | 2026 | 2027 | |||
| Projections | |||||||||||||
| Output | |||||||||||||
| Real GDP growth (annual percentage change) | 4.3 | 4.0 | 4.6 | -0.1 | 5.0 | 1.8 | 2.3 | 3.0 | 2.8 | 2.6 | 2.3 | ||
| Domestic demand (contribution to growth) | 2.7 | 3.3 | 1.4 | -3.9 | 5.7 | 3.8 | 4.3 | 3.8 | 3.5 | 3.2 | 2.9 | ||
| Domestic demand growth (year-on-year, in percent) | 2.6 | 3.4 | 1.6 | -4.0 | 5.9 | 4.1 | 4.5 | 4.0 | 3.6 | 3.2 | 3.0 | ||
| Private consumption growth (year-on-year, in percent) | 3.6 | 3.6 | 3.1 | -2.1 | 7.4 | 3.3 | 4.3 | 3.7 | 3.4 | 3.0 | 2.8 | ||
| Domestic fixed investment growth (year-on-year, in percent) | 8.9 | 10.0 | 6.6 | -1.8 | 7.0 | 3.6 | 6.6 | 5.9 | 5.4 | 4.9 | 4.5 | ||
| Inventories (contribution to growth) | -1.3 | -1.1 | -1.7 | -2.0 | -0.5 | 0.7 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Net external demand (contribution to growth) | 1.6 | 0.7 | 3.2 | 3.8 | -0.7 | -2.0 | -2.0 | -0.9 | -0.8 | -0.6 | -0.6 | ||
| Export growth (year-on-year, in percent) | 13.5 | 6.8 | 9.9 | 0.4 | 15.9 | -2.2 | 3.0 | 4.4 | 3.6 | 3.5 | 3.0 | ||
| Import growth (year-on-year, in percent) | 11.1 | 6.0 | 6.1 | -4.4 | 18.7 | 0.0 | 5.5 | 5.6 | 4.6 | 4.2 | 3.7 | ||
| Nominal GDP (in billions of euro) | 42.3 | 45.5 | 48.9 | 49.5 | 55.4 | 64.6 | 72.4 | 77.5 | 82.1 | 86.5 | 90.8 | ||
| Output gap (percent of potential GDP) | 0.3 | 0.7 | 1.6 | 0.0 | 1.6 | 0.6 | 0.2 | 0.1 | 0.0 | 0.0 | 0.0 | ||
| Employment | |||||||||||||
| Employment (annual percentage change) | -0.5 | 1.5 | 0.3 | -1.5 | 0.8 | 0.5 | 0.1 | 0.3 | 0.0 | -0.2 | -0.4 | ||
| Unemployment rate (year average, in percent of labor force) | 7.1 | 6.1 | 6.3 | 8.5 | 7.1 | 7.3 | 7.0 | 6.5 | 6.2 | 6.0 | 6.0 | ||
| Average monthly gross earnings (annual percentage change) 1/ | 8.2 | 9.9 | 8.8 | 10.1 | 10.5 | 17.2 | 14.5 | 5.8 | 5.6 | 5.6 | 5.5 | ||
| Average monthly gross earnings, real (annual percentage change) | 4.3 | 7.2 | 6.4 | 9.0 | 5.6 | -0.6 | 6.0 | 2.9 | 3.2 | 3.2 | 3.2 | ||
| Labor productivity (annual percentage change) | 4.8 | 2.5 | 4.3 | 1.4 | 4.2 | 1.3 | 2.2 | 2.6 | 2.8 | 2.8 | 2.8 | ||
| Prices | |||||||||||||
| HICP, period average (annual percentage change) | 3.7 | 2.5 | 2.2 | 1.1 | 4.6 | 17.9 | 8.5 | 3.0 | 2.4 | 2.4 | 2.3 | ||
| HICP core, period average (annual percentage change) | 2.6 | 1.9 | 2.3 | 2.6 | 3.4 | 9.3 | 5.8 | 3.6 | 2.6 | 2.4 | 2.4 | ||
| HICP, end of period (year-on-year percentage change) | 3.8 | 1.8 | 2.7 | -0.1 | 10.7 | 17.2 | 4.6 | 2.4 | 2.5 | 2.3 | 2.3 | ||
| GDP deflator (year-on-year percentage change) | 4.2 | 3.5 | 2.7 | 1.5 | 6.5 | 14.5 | 9.6 | 3.9 | 3.1 | 2.8 | 2.5 | ||
| General Government Finances | |||||||||||||
| Revenue (percent of GDP) | 33.6 | 34.5 | 35.2 | 35.7 | 37.7 | 38.3 | 37.2 | 36.7 | 36.4 | 36.2 | 36.2 | ||
| Of which EU grants | 0.6 | 0.7 | 0.9 | 0.6 | 0.7 | 1.5 | 0.8 | 0.7 | 0.7 | 0.6 | 0.6 | ||
| Expenditure (percent of GDP) | 33.2 | 34.0 | 34.8 | 42.9 | 38.7 | 40.2 | 38.5 | 37.9 | 37.6 | 37.4 | 37.2 | ||
| Of which: Non-interest | 32.1 | 33.1 | 33.9 | 42.3 | 38.3 | 40.0 | 38.3 | 37.7 | 37.3 | 37.0 | 36.9 | ||
| Interest | 1.1 | 0.9 | 0.9 | 0.7 | 0.4 | 0.3 | 0.2 | 0.2 | 0.3 | 0.4 | 0.4 | ||
| Fiscal balance (percent of GDP) | 0.4 | 0.5 | 0.5 | -7.3 | -1.0 | -2.0 | -1.3 | -1.2 | -1.2 | -1.2 | -1.0 | ||
| Fiscal balance excl. one-offs (percent of GDP) | 0.4 | 0.5 | 0.4 | -7.3 | -1.0 | -2.0 | -1.3 | -1.2 | -1.2 | -1.2 | -1.1 | ||
| Structural fiscal balance (percent of potential GDP) 2/ | 0.5 | 0.5 | 0.3 | -6.6 | -1.2 | -2.0 | -1.2 | -1.1 | -1.0 | -1.0 | -0.9 | ||
| General government gross debt (percent of GDP) | 39.3 | 33.7 | 35.9 | 46.6 | 44.7 | 42.1 | 38.3 | 36.5 | 35.2 | 34.1 | 33.1 | ||
| Of which: Foreign currency-denominated | 11.1 | 9.5 | 10.1 | 6.5 | 3.1 | 1.5 | 0.7 | 0.3 | 0.2 | 0.1 | 0.0 | ||
| Balance of Payments (in percent of GDP, unless otherwise specified) | |||||||||||||
| Current account balance | 0.6 | 0.3 | 3.5 | 7.3 | 1.4 | -1.5 | -1.5 | -1.0 | -0.5 | -0.2 | 0.1 | ||
| Current account balance (billions of euros) | 0.3 | 0.1 | 1.7 | 3.6 | 0.8 | -0.9 | -1.1 | -0.8 | -0.4 | -0.2 | 0.1 | ||
| Saving-Investment Balance (in percent of GDP) | |||||||||||||
| Gross national saving | 19.8 | 20.6 | 21.0 | 20.8 | 20.0 | 17.6 | 17.4 | 18.5 | 19.5 | 20.2 | 20.8 | ||
| Gross national investment | 19.2 | 20.4 | 17.6 | 13.5 | 18.6 | 19.1 | 18.8 | 19.6 | 20.0 | 20.5 | 20.7 | ||
| Foreign net savings | -0.6 | -0.3 | -3.5 | -7.3 | -1.4 | 1.5 | 1.5 | 1.0 | 0.5 | 0.2 | -0.1 | ||
2019 adjusted for tax reforms.
Calculation takes into account standard cyclical adjustments as well as absorption gap.
Title page
REPUBLIC OF LITHUANIA
STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION
July 11, 2022
KEY ISSUES
Context. The strong post-pandemic economic recovery was leading to an overheating economy and demand-side inflationary pressures. The war in Ukraine, including its impact on commodity prices, has, however, negatively impacted economic activity and further intensified inflationary pressures. With higher inflation for longer, policies should aim at preserving stability over the near-term while supporting the economy adapt to a higher interest rate environment over the medium-term. Although the current sociopolitical situation is less conducive to structural reforms, these remain key to ensuring sustained productivity growth that will support high wage growth and faster income convergence with Western Europe.
Key Policy Recommendations:
Mitigate supply-side macroeconomic disruptions and support the vulnerable. Smooth out excessive volatility of energy prices and support vulnerable groups without introducing economic disruptions. Ensure policies remain countercyclical while minimizing the risk of fueling widespread inflationary pressures. Addressing expenditure pressures going forward will require increasing revenues or a relaxation of fiscal targets. Preserve the policy framework that has served Lithuania so well.
Short-term deviations of wages from productivity can be accommodated. Given large past competitiveness gains, temporary deviations of real wages from productivity can be absorbed while the flexible labor market should self-correct them if they become entrenched. The implementation of structural reforms to support productivity and income growth remains a priority.
A maturing fintech sector requires a shift from growth to consolidation. Supervision and regulation will need to be stepped up commensurately with the qualitative and quantitative growth of the sector by strengthening AML/CFT supervision of non-resident cross-border payments.
Address climate change challenges while ensuring energy security and affordability. Efforts should focus on mitigation and adaptation while ensuring energy prices are not excessively volatile and are affordable.
Approved by
Philip Gerson (EUR) and Johannes Wiegand (SPR)
Discussions were held in Vilnius during May 26–June 7, 2022. The team comprised Messrs. Borja Gracia (head), Serhan Cevik, Enrique Flores, Anton Mangov (all EUR), and Jan Strasky (RES). Mr. Maksym Markevych (LEG) joined the mission from May 26 to June 1. Mr. Simonas Spurga (OED) participated in most of the meetings. Mses. Sadhna Naik, Rafaela Jarin, and Ritzy Dumo (all EUR) supported the mission from headquarters.
Contents
CONTEXT: AN OVERHEATING ECONOMY NOW FACING FURTHER INFLATIONARY AND SUPPLY-SIDE SHOCKS
RECENT DEVELOPMENTS: INFLATION EXACERBATED BY THE WAR AND SUPPLY-SIDE DISRUPTIONS
OUTLOOK AND RISKS
POLICY DISCUSSIONS: DEALING WITH INFLATION WITHOUT JEOPARDIZING LONG-TERM STABILITY
A. Fighting Inflation with Limited Policy Instruments and Loose Monetary Conditions
B. Introducing Key Reforms to Ensure Sustainable and Inclusive Growth
C. Greening Growth while Ensuring Energy Security
STAFF APPRAISAL
BOXES
1. Inflation May Prove Persistent, Eroding Real Incomes, and Increasing Inequality
2. Labor Shortages are Stoking Wage Growth in Most Sectors
3. Impact of Russia’s Invasion of Ukraine
FIGURES
1. COVID Developments
2. Inflation Developments
3. Macroeconomic Developments
4. Labor Market Developments
5. Banking Sector Developments
6. Fiscal Developments
7. Energy Imports by Partner Countries, 1990–2020
8. Evolving ML/FT Threats
9. Developments in Competitiveness
TABLES
1. Selected Economic Indicators, 2018–27
2. General Government Operations, 2018–27
3. Balance of Payments, 2018–27
4. Summary of Monetary Accounts, 2012–21
5. Financial Soundness Indicators, Banking Systems Data, 2013–21
ANNEXES
I. Implementation of Past IMF Recommendations
II External Sector Assessment
III Debt Sustainability Analysis
IV. Inflation Developments in Lithuania
V. Lithuania’s Energy Markets and Policy Response to Higher Energy Costs
VI. Risk Assessment Matrix
APPENDIX
I. Draft Press Release
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.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
