Washington, DC: On August 25, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Republic of Lithuania.
Lithuania experienced the mildest contraction in Europe during the pandemic, benefiting from a strong starting position of the economy and a decisive policy response. Output fell by only 0.8 percent in 2020 compared to an average decline of 6.7 percent in the euro area. Growth recovered strongly in the third quarter of last year as containment measures eased, and momentum picked up in the first quarter of this year despite renewed containment restrictions. The impact on labor has varied across sectors-trade, transport and accommodation sectors were the hardest hit last year-with hours worked rather than employment absorbing most of the shock in the labor market.
For the first time, Lithuania was able to respond to a large negative shock with countercyclical policies, supported by large buffers in the economy and euro area membership. Improved fundamentals, large fiscal space and lower borrowing cost allowed for increased spending to support workers, businesses, and the healthcare system. Fiscal support relied largely on budget measures, in contrast to other countries that relied on off- budget and off-balance sheet measures. The Bank of Lithuania proactively eased countercyclical capital requirements, while the country benefited from accommodative ECB policies.
Output is expected to exceed pre-pandemic levels this year and surpass the pre-pandemic trend next year. Domestic demand is expected to drive the recovery, as pent-up demand and European funds are set to boost private consumption and investment.
Executive Board Assessment [2]
Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities’ decisive policies, which have contributed to the resilience of the economy during the COVID-19 pandemic and should help limit long-term economic scarring. Directors noted that the economy is poised for a robust recovery, supported by strong fundamentals, available policy space enabled by years of prudent policies, and sizeable grants from the European Union (EU). They stressed the need for continued vigilance, in light of the still high uncertainty, and for targeted support where it is most needed, while pressing ahead with priority reforms.
Directors agreed that fiscal policy should remain supportive and targeted at viable firms and households most affected by the pandemic. They recommended that, as the recovery advances, support should be withdrawn gradually in tandem with the pace of recovery. Directors highlighted the importance of rebuilding buffers to create space for social spending and investment in infrastructure and human capital. They saw the benefits of developing a comprehensive medium-term fiscal strategy to guide this effort, covering tax reforms and high-quality expenditure measures.
Directors encouraged proactive financial policies that balance supporting the recovery with safeguarding the resilience of the financial system. They agreed that further macroprudential actions may be necessary if signs of elevated risks emerge, particularly in the residential real estate sector. Noting the maturing Fintech sector, Directors emphasized the need to continue enhancing supervisory capacity and strengthening the AML/CFT framework.
Directors stressed the importance of implementing structural reforms to address long-standing economic and social challenges, including high poverty rates and regional disparities, which have increased budget rigidities. They agreed that the strong recovery and EU funds provide an opportunity to advance difficult reforms, including in education, healthcare, climate change, and digitalization. Directors also recommended prioritizing reforms to boost productivity, address demographic strains, and ensure continued convergence to euro area income levels.
Lithuania: Selected Economic Indicators, 2020-26 | |||||||||||||||
Life expectancy at birth (2019): 81 years (women), 71.5 years (men) | Per capita GDP (2018): € 17,510 | ||||||||||||||
Quota (current, % of total): SDR 441.6 million, 0.09 percent | Literacy rate (2015): 99.8% | ||||||||||||||
Main products and exports: refined fuel, machinery and equipment, chemicals, textiles, foodstuffs, plastics, wood products. Key export markets: Russia, Latvia, Poland, Germany, U.S. | At-risk-of-poverty (after transfers), share of population (2019): 20.6% | ||||||||||||||
2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | |||||||||
Projections | |||||||||||||||
Output | |||||||||||||||
Real GDP growth (annual percentage change) | -0.8 | 4.4 | 4.1 | 3.1 | 2.9 | 2.6 | 2.4 | ||||||||
Domestic demand growth (year-on-year, in percent) | -5.2 | 7.0 | 6.8 | 4.9 | 4.0 | 4.0 | 3.7 | ||||||||
Private consumption growth (year-on-year, in percent) | -2.0 | 6.4 | 5.9 | 4.4 | 3.6 | 3.4 | 3.4 | ||||||||
Domestic fixed investment growth (year-on-year, in percent) | -0.2 | 10.8 | 10.6 | 7.0 | 5.8 | 5.9 | 5.0 | ||||||||
Inventories (contribution to growth) | -3.8 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||||
Net external demand (contribution to growth) | 4.2 | -2.0 | -2.3 | -1.6 | -1.1 | -1.4 | -1.3 | ||||||||
Nominal GDP (in billions of euro) | 48.9 | 52.4 | 56.0 | 59.2 | 62.3 | 65.3 | 68.2 | ||||||||
Output gap (percent of potential GDP) | -0.9 | 0.3 | 0.9 | 0.6 | 0.4 | 0.2 | 0.0 | ||||||||
Employment | |||||||||||||||
Unemployment rate (year average, in percent of labor force) | 8.5 | 6.7 | 6.1 | 6.0 | 5.9 | 5.8 | 5.7 | ||||||||
Average monthly gross earnings (annual percentage change) 2/ | 10.1 | 7.4 | 6.9 | 6.2 | 5.7 | 5.5 | 5.2 | ||||||||
Average monthly gross earnings, real (CPI-deflated, annual percentage change) | 9.0 | 4.0 | 4.1 | 3.5 | 3.2 | 3.2 | 3.0 | ||||||||
Labor productivity (annual percentage change) | 0.6 | 2.7 | 3.8 | 3.1 | 3.0 | 2.8 | 2.6 | ||||||||
Prices | |||||||||||||||
HICP, period average (annual percentage change) | 1.1 | 3.2 | 2.8 | 2.7 | 2.5 | 2.3 | 2.2 | ||||||||
HICP core, period average (annual percentage change) | 2.6 | 2.8 | 3.0 | 2.6 | 2.4 | 2.3 | 2.2 | ||||||||
HICP, end of period (year-on-year percentage change) | -0.1 | 3.4 | 2.8 | 2.6 | 2.5 | 2.3 | 2.2 | ||||||||
GDP deflator (year-on-year percentage change) | 1.1 | 2.6 | 2.7 | 2.6 | 2.2 | 2.1 | 2.1 | ||||||||
General government finances | |||||||||||||||
Fiscal balance (percent of GDP) | -7.4 | -5.5 | -2.9 | -1.5 | -1.1 | -0.5 | -0.4 | ||||||||
Fiscal balance excl. one-offs (percent of GDP) | -7.4 | -5.5 | -2.9 | -1.5 | -1.1 | -0.5 | -0.4 | ||||||||
Structural fiscal balance (percent of potential GDP) 1/ | -6.3 | -5.0 | -2.8 | -1.4 | -0.9 | -0.4 | -0.3 | ||||||||
Revenue (percent of GDP) | 36.0 | 36.7 | 37.0 | 36.6 | 35.7 | 36.0 | 35.5 | ||||||||
Of which EU grants | 0.8 | 1.4 | 1.6 | 1.2 | 0.6 | 0.9 | 0.7 | ||||||||
Expenditure (percent of GDP) | 43.4 | 42.2 | 39.9 | 38.2 | 36.8 | 36.5 | 36.0 | ||||||||
Of which: Non-interest | 42.7 | 41.6 | 39.3 | 37.6 | 36.2 | 36.0 | 35.5 | ||||||||
Interest | 0.7 | 0.7 | 0.6 | 0.6 | 0.5 | 0.5 | 0.5 | ||||||||
General government gross debt (percent of GDP) | 47.1 | 47.8 | 45.9 | 44.3 | 42.5 | 40.5 | 38.6 | ||||||||
Of which: Foreign currency-denominated | 6.6 | 3.4 | 1.6 | 0.8 | 0.4 | 0.2 | 0.1 | ||||||||
Balance of payments | |||||||||||||||
Current account balance (percent of GDP) | 8.3 | 6.7 | 4.8 | 3.4 | 2.2 | 1.0 | -0.3 | ||||||||
Current account balance (billions of euros) | 4.1 | 3.5 | 2.7 | 2.0 | 1.4 | 0.6 | -0.2 | ||||||||
Sources: Lithuanian authorities; World Bank; Eurostat; and IMF staff estimates and projections. | |||||||||||||||
Note: Data are presented on ESA2010, and BPM6 manuals basis. | |||||||||||||||
1/ Calculation takes into account standard cyclical adjustments as well as absorption gap. | |||||||||||||||
[1] 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.
[2] 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: https://www.IMF.org/external/np/sec/misc/qualifiers.htm .