IMF Executive Board Concludes 2021 Article IV Consultation with Republic of Lithuania

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.