14 June 2012

IMF: Lithuania - concluding statement of the 2012 staff visit

Key policy priorities are to complete the fiscal consolidation, continue to strengthen the resilience of the banking system, and further advance structural reforms to boost potential growth and promote sustainable job creation.

Fiscal consolidation needs to be completed, and a fiscal deficit of 3 per cent of GDP this year is appropriate. While revenue and expenditure performance so far in 2012 has been broadly in line with expectations, this needs to be sustained in the coming months. On this basis, the IMF projects that the deficit will reach 3 per cent of GDP. Contingency measures should be prepared in case revenue shortfalls or expenditure overruns materialize. Should the authorities choose measures on the expenditure side, care should be taken to ensure that vulnerable groups are protected. Looking ahead, a further reduction in the fiscal deficit by 1 percentage point per year is appropriate and additional fiscal measures will be needed. Given that most of the consolidation has so far taken place through expenditure restraint, consideration should be given to implementing revenue measures. This could include expanding real estate and vehicle taxation, which are progressive and less distortive than other taxes. In light of the uncertain external environment, it will be important that budget preparation is based on sufficiently prudent assumptions about the macro-economic outlook.

Despite these generally encouraging developments, credit growth has remained negative. Although this partly represents low credit demand given the uncertain outlook for growth, credit supply factors are also at play. Deleveraging by foreign owned banks has reduced the loan-to-deposit ratio to 124 per cent at end-March, down from its peak of 187 per cent at end-2008. While this partly represents a healthy rebalancing and a shift towards more stable funding sources, it is important that credit availability is not unduly constrained, as this could dampen the recovery going forward. The continued commitment of parent banks to their Baltic subsidiaries is welcome in this regard.

Structural reforms would help boost medium-term growth. To return to potential growth over the medium term, reduce unemployment, and lower public debt, further progress is needed on structural reforms. Key priorities include further pension reform to help address costs associated with demographic trends, fiscal reforms to help ensure that fiscal policy can play a stabilising role in downturns (including through the introduction of a fiscal rule), and energy sector reforms to reduce costs. While it is essential that competitiveness gains are not eroded, it is also important to ensure that low-income workers earn a sustainable wage. For this reason, the IMF supports a moderate increase in the minimum wage in conjunction with measures to improve job matching and reduce obstacles to job creation.

Press release

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