Despite the challenges posed by Russia’s war against Ukraine, Lithuania’s economy is showing resilience. The International Monetary Fund (IMF) predicts that economic growth will remain positive this year and is expected to reach 1.8%. Significant inflationary pressures in 2022 should ease as energy and raw material prices stabilise next year. According to the Ministry, the IMF underlines the importance of focusing on targeted support to the most vulnerable groups in the short term and, in the longer term, of continuing to implement structural reforms to strengthen the economy’s growth potential and resilience to shocks of Finances.
“Lithuania, like other EU countries, is facing economic challenges due to Russia’s war in Ukraine – from rising energy prices to broken supply chains. However, Lithuania’s economy is showing resilience, with growth expected to slow this year, albeit at a slower pace than forecast before the war, and the labour market remaining resilient. The IMF welcomes the decisions taken by the government to cushion the negative effects of the war. I share the assessment of the Fund’s experts that possible additional support measures should be targeted, well-defined, short-term and, above all, not increase inflationary pressures. Against the backdrop of near-term challenges, we must not lose sight of the long-standing problems: we must continue implementing reforms to strengthen growth potential and resilience. In this respect, the reforms and investments in areas such as green growth and digital transformation planned in the New Generation Lithuania plan are crucial,” says Minister of Finance G. Skaistė.
Lithuania’s economy has weathered the pandemic shock well and will show strong growth in 2021. IMF experts warn that high uncertainty and geopolitical risks could adversely affect economic growth trends and lead to persistently high inflation, driven mainly by external factors such as the significant increase in international prices for energy, raw materials and food in the context of Russia’s war against Ukraine.
The IMF welcomes the Government’s policy choice and the 2.26 billion package prepared in April this year to cushion the impact of the energy price shock on the country’s economy, business and society. However, the IMF points out that, to avoid additional inflationary pressures, further support measures in the face of the shock need to be targeted, temporary and aimed at the most vulnerable groups.
Given rising spending needs, the IMF encourages the search for additional sustainable sources of budgetary revenue, for example, through changes in property and environmental taxes, thereby broadening the tax base based on less growth-damaging taxes. In this respect, the IMF sees the Ministry of Finance’s proposal to change the property tax model as a step in the right direction.
The IMF report states that Lithuania’s trade links and energy dependence on Russia have been steadily declining since Lithuania’s accession to the EU, and this process has accelerated further after the annexation of Crimea in 2014. In 2021, Lithuania’s share of exports to Russia, Ukraine and Belarus was only 16%, and 90% of exports to Russia were re-exported (non-Lithuanian) goods, which put Lithuania’s economy in a solid position to face Russia’s war on Ukraine.
“Lithuania’s economic ties with Russia have been steadily declining for several years. The Lithuanian economy met Russia’s war against Ukraine in a strong position with sufficient fiscal reserves, a well-capitalised and shock-resistant financial sector and a strong external position. Accordingly, the impact of the war on the Lithuanian economy is limited, at least for the time being, and the economy will continue to grow, albeit at a slower pace. Despite the unfavourable geopolitical environment, we need to make progress in implementing productivity-enhancing reforms, which are necessary to ensure further income convergence with Western countries,” said Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.
According to the IMF, the banking system in Lithuania is well capitalised and liquid, ready to withstand larger economic shocks and adapt to a changing situation. The financial situation of companies and households is underlined as being relatively sound, but the rapid increase in property prices remains a source of risk. The IMF welcomed the steps taken by the Bank of Lithuania in the area of macro-prudential policy, including a higher down payment requirement for non-first home purchases.
The IMF stresses that, although the current situation is less conducive to implementing structural reforms due to the war in Ukraine, the long-term challenges for the Lithuanian economy remain. It is important to accelerate reforms in education and health care to address transport infrastructure gaps to ensure sustained productivity growth and continue the rapid convergence of incomes with Western Europe. EU investments, including the “Next Generation Lithuania” plan, are expected to give the necessary impetus to the necessary transformation and reforms. It is also necessary to continue to tackle climate change and strengthen energy security. According to the IMF, including a CO2 component in the environmental tax system would create the necessary incentives to reduce energy consumption and environmentally damaging emissions and add to the public budget.
This year, the IMF mission paid particular attention to the fintech sector and the assessment of Lithuania’s anti-money laundering and anti-terrorist financing system (AML/CFT). According to the IMF experts, given the rapid development of the fintech sector, further strengthening of the sector’s regulation, including AML/CFT, market entry and supervision mechanisms, must be pursued with the necessary resources at the level of the responsible authorities.