According to the latest assessment of the IMF, Lithuania’s economy will slightly contract this year due to domestic and foreign demand dampened by inflation. However, it is expected to bounce back to growth next year due to a pick-up in consumption and higher public investment. 

After a technical recession recorded at the beginning of the year, Lithuania’s economy stabilized in the second quarter, and prices fell for the fourth consecutive month in August. The resilience of Lithuania’s economy is driven by a strong labor market, low private sector indebtedness, and recovering real income, as well as significant corporate and bank reserves.

The IMF highlights that, despite the energy price shock, Lithuania remains competitive. This is mainly due to productivity growing faster than wages in the last decade, especially in the exporting manufacturing sector, as well as a flexible labor market, allowing the economy to adjust to shocks. To continue increasing productivity and the standard of living, the IMF emphasizes the importance of structural reforms, especially in education and health. Why not liberalization and competitiveness?

According to the IMF, Lithuania’s economy may contract by 1.4% this year before growing by 2.9% next year. According to the IMF, the biggest risk to Lithuania’s economy is the scenario where inflation remains significantly higher than the euro area average over a longer period of time, as this would reduce both domestic and foreign demand due to negative effects on competitiveness. 

However, as of now the gap between inflation in Lithuania (6.4% in August) and the euro area (5.3% in August) has narrowed, while domestic prices have been declining for the fourth consecutive month (-0.2% in August). According to the IMF forecasts, annual inflation in Lithuania will decline from 6.4% in August to 4.1% at the end of 2023, and it is expected to be 3% at the end of 2024. 

The IMF recommends gradually tightening the fiscal policy, as foreseen in the Stability Programme of Lithuania for 2023, thereby contributing to the curbing of inflation. It is highlighted that this year, due to the lower-than-expected demand for compensation for energy costs, unspent funds need to be redirected towards reducing the budget deficit.

The IMF stresses that Lithuania’s banking sector is particularly resilient due to high liquidity and capital buffers, as well as significant improvement in profitability due to unusual circumstances. House price levels are stabilizing and their overvaluation is declining.

The IMF also welcomes Lithuania’s progress in the prevention of money laundering and terrorist financing, including the increase of resources for financial sector supervision. According to the IMF, it is crucial to further strengthen the risk management framework in the country’s financial sector, including the crypto-asset sector.

The IMF views the package of tax change proposals approved by the Government as a step in the right direction. The narrative underlines the need to reduce the number of tax incentives and introduce environmental taxes. How can this enhance productivity and competitiveness? Unfortunately, there’s no mention of the latter. Here the IMF’s recipe is just on enhancing income redistribution through the state budget.