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 slightest contraction in Europe during the pandemic, benefiting from a strong starting position in the economy and a decisive political response. Production fell only 0.8% in 2020, compared to an average decline of 6.7% in the euro area. Growth picked up sharply in the third quarter of last year as containment measures eased and momentum accelerated in the first quarter of this year despite further containment restrictions. The impact on work has varied across sectors – the trade, transport and accommodation sectors were hit hardest last year – with hours worked rather than employment absorbing most of the shock over the past year. the work market.

For the first time, Lithuania was able to respond to a significant negative shock with countercyclical policies, supported by strong cushions in the economy and membership of the euro area. Improved fundamentals, ample fiscal space, and lower borrowing costs have made it possible to increase spending to support workers, businesses and the healthcare system. Budget support relied heavily on fiscal measures, unlike other countries which relied on off-budget and off-balance sheet measures. The Bank of Lithuania proactively eased countercyclical capital requirements, while the country benefited from the ECB’s accommodative policies.

Production is expected to exceed pre-pandemic levels this year and exceed the pre-pandemic trend next year. Domestic demand is expected to stimulate the recovery, as pent-up demand and EU funds are expected to boost private consumption and investment.

Board assessment [2]

The executive directors approved the orientation of the staff appraisal. They praised the authorities’ decisive policies, which have contributed to the resilience of the economy during the COVID-19 pandemic and are expected to help limit long-term economic scars. Directors noted that the economy is poised for a robust recovery, supported by solid fundamentals, available policy space afforded by years of prudent policies and significant subsidies from the European Union (EU). They stressed the need for continued vigilance, given the still high uncertainty, and targeted support where it is most needed, while pursuing priority reforms.

Directors agreed that fiscal policy should remain supportive and focused on viable businesses and households most affected by the pandemic. They recommended that as the recovery progresses, support should be phased out in line with the pace of the recovery. Directors stressed the importance of replenishing buffers to create space for social spending and investments in infrastructure and human capital. They saw the benefits of developing a comprehensive medium-term fiscal strategy to guide this effort, covering high-quality tax reforms and spending measures.

Directors encouraged proactive financial policies that balance supporting the recovery with maintaining the resilience of the financial system. They agreed that further macroprudential actions may be needed if signs of high risks emerge, especially in the residential real estate sector. Noting the maturation of the FinTech sector, the directors stressed the need to continue to improve supervisory capacities and strengthen 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 fiscal rigidities. They agreed that the strong recovery and EU funds provide an opportunity to push forward difficult reforms, especially in the areas of education, health, climate change and digitization. Directors also recommended prioritizing reforms aimed at boosting productivity, tackling demographic pressures and ensuring continued convergence towards euro area income levels.