“The Lithuanian economy has shown resilience in the face of the pandemic crisis and is already showing strong signs of recovery, while no significant risks to financial stability are observed. However, the country should focus more on structural reforms to increase productivity, to avoid getting stuck in the middle-income trap“. Let’s see how fiscal proactivity produced its magic.

These are the recommendations given in the report of the International Monetary Fund‘s expert group. “The Lithuanian economy has faced the pandemic shock without significant imbalances, with solid economic fundamentals. As the most difficult time for the economy hopefully has already passed, now is the right time to focus on productivity-increasing reforms. Ensuring long-term sustainable economic development creates the conditions for continued rapid convergence with Western European countries” said Gediminas Šimkus, Chairman of the Board of Directors of the Bank of Lithuania. “We are delighted that Lithuania’s economy is among the least affected in the European Union (EU) thanks to the support measures implemented. As economic growth accelerates, it is necessary to ensure further support targeted only at vulnerable sectors. Since the pandemic shock has subsided, we should focus on addressing the country’s long-standing problems. I am confident that the New Generation Lithuania plan will be a strong engine of reforms and investments that will increase the country’s competitiveness and growth potential” added Gintarė Skaistė, Minister of Finance.

IMF experts point out that Lithuania’s fiscal response to the crisis has been timely and adequate, providing significant support to both households and businesses. This was why the GDP contracted by only 0.8% in 2020, the second best result in the EU. In the first half of this year, real GDP growth reached 4.8%, while the level of economic output has already exceeded the pre-pandemic one. Overall, the long-term negative effect of the crisis on the country’s economic structure is expected to be limited. Therefore, as the economic recovery gains ground, state aid should be gradually reduced and targeted only at the most vulnerable sectors.

According to the IMF, after achieving a sustainable economic recovery, Lithuania needs to stimulate productivity growth and solve persistent structural problems, particularly in health and education. This would help maintain the competitiveness of the economy, creating the conditions for wage growth, while helping the country overcome the risk of the middle-income trap. The IMF also warned of potential risks of overheating in particular sectors or the economy as a whole in the medium and long term. Therefore, the importance of a properly balanced fiscal and macroprudential policy that corresponds to the business cycle is underlined. Potential risks to the economy include an uneven recovery in key trading partners, geopolitical tensions, disruptions in the vaccination process, and slow disbursement of EU funds for economic recovery.

The IMF also noted that the Lithuanian banking sector remains well-capitalized, liquid, and ready to continue financing the economy during the recovery phase. The Bank of Lithuania’s proactivity in strengthening the prevention of money laundering and terrorist financing, such as the foundation of the Centre of Excellence in Anti-Money Laundering, is also positive.