According to experts, the pandemic has drastically changed Lithuania’s economic situation – both the financial sector and the habits and needs of Lithuanians over the past year. Simonas Krėpšta, Member of the Board of the Bank of Lithuania, spoke about this in the “Verslo pozicija” programme on Žinių Radio, lrytas.lt reported
Predictions have not come true
“If we look at the forecasts we made a year ago, the forecasts at the beginning of the pandemic and during the pandemic were quite gloomy,” says S. Krėpšta, a member of the Board of the Bank of Lithuania.
“Even today, the country’s economy has caught up to the pre-pandemic level: wages are growing at double-digit rates, the real estate market is very active,” comments Krėpšta. The economist believes that even at the beginning of the pandemic, the reality was much better than the most optimistic forecasts of experts.
The International Monetary Fund also said to believe that if inflation risks are short-lived, the economy has the potential to reach a higher point next year than it did before the coronavirus pandemic. “Lithuania’s economy has ‘contracted’ at one of the lowest rates in the EU,” the economist emphasised.
However, the Bank of Lithuania board member says that while the situation is good, the negative burden on health and social sectors has not been avoided.
“Forecasts are always uncertain and determined by many factors that no one can predict,” comments Mr Krėpšta. One of the most influential factors is the inflation wave.
Too high inflation is just as dangerous as too low inflation or deflation, as it slows down the economy and unbalances the expectations and plans of people and businesses.
According to Krėpšta, this is a short-term risk – inflation of 8% should return to 2% next year. According to the economist, two-thirds of inflation is caused by external factors that cannot be controlled.
Rising commodity, fuel or gas prices and the risk of tight supply chains are unlikely to be a risk in the near future. Geopolitical factors also regulate supply, according to the expert.
“It is the mismatch between demand and supply that has turned out to be all the ugliness, and this is what accounts for most of the inflation,” he points out.
Changes are happening fast
According to Krėpšta, the Lithuanian economy is currently witnessing a significant change in the way people spend their money: less is being spent in cafes and cinemas, but more is being spent on the household and other types of goods.
“A pandemic brings about this change, which normally takes decades, in half a year or a year,” says the economist, summarising the situation regarding the Lithuanian spending trends. According to Krėpšta, the economy has to adapt quickly to a rapid change, which creates certain price imbalances in the market.
Another change is the divergence in the gross domestic product in the face of the crisis. The expert points out that the global financial crisis, which was faced more than a decade ago with a national currency, was more severe than the current one, which was faced in the euro area.
“We have lower unemployment simply because interest rates have remained low, and we have not had any volatility or devaluation risk”, he says. Thus, according to the economist, the benefits of joining the euro outweigh the costs in the short term and bring positive news.
However, S.Krėpšta says that such economic growth brings strong demand and Lithuanian activity in the real estate market: “The market is not overheated, but it is warming up.”
“Our economists estimate that real estate market prices are somewhere around 7% higher than they should be,” the economist comments. According to him, this is the reason why “cooling” measures were taken in September: a stricter loan-to-mortgage ratio was introduced for second and larger loans.
“Additional capital buffers for banks would be a primary preventive measure that would go some way to stem the rising systemic risk,” says Mr Krėpšta.
He points out that the situation in the labour market is tense, but wage growth is already visible. The average wage bill in the country is below the European Union average.
Innovation needs to be embraced
According to the expert, there are several ways to understand financial technology. It can be specific payment and e-money institutions or specialised banks developing innovative business models.
“A broader perception, which is the focus of the Bank of Lithuania and other supervisors, is new technologies in the financial sector,” says Krėpšta. New and innovative solutions improve the consumer experience when receiving a service, make financial technology more efficient and make most services cheaper.
According to Krėpšta, the best example is instant payments. Five years ago, bank users had to wait a day or even a whole weekend for a money transfer to reach another bank. Today, according to the economist, many Lithuanian banks already have instant payment functionality – transfers are made in just a few seconds.
Although economists are sceptical about the innovation of cryptocurrencies, calling it “crypto-assets”, in a technological sense, it is also an innovation that central banks are currently analysing how they can apply ideas.
“You cannot be too cautious about innovation because it is very easy to become detached from innovation and end up on the margins,” says the expert. Every fintech innovation has a prospect, but the long-term impact and cost benefits also need to be weighed.
The economist stresses that Lithuania’s breakthrough in the financial sector and technological advances have been rapid. As a result, the country already has a developed economic system that can contribute to the transformation of global markets.
However, Krėpšta does not see a breakthrough in financial literacy among the population: “We see that fraud prevention in countries where financial literacy is higher, it is much harder to be deceived by various offers and not to lose so much money through fraudulent schemes.”
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