The recent International Monetary Fund (IMF) mission noted that Lithuania’s economy remains resilient: even in the background of new challenges and uncertainties posed by the conflict in Ukraine, positive economic growth is expected, which should reach nearly 2% of the GDP this year. Inflation will remain higher this year but is expected to decline significantly in 2023 as the impact of the energy price shock is supposed to fade. According to the IMF, the main challenge in the short term is to contain inflation, and looking ahead it is important to boost productivity through structural reforms in education and health care. “The IMF welcomes the Government’s actions to mitigate the impact of increased prices, especially energy prices, on the country’s economy, business, and society, particularly on most socially vulnerable groups. The decisions taken are helping the Lithuanian economy to continue showing upward trends even in the face of a major shock, while the cessation of energy imports from Russia – gas, oil, and electricity – is increasing our resilience to future shocks,” said Gintarė Skaistė, Minister of Finance. However, now it’s time to fight inflation.

Following a rapid recovery from the Covid-19 pandemic, the Lithuanian economy faced Russia’s war against Ukraine in a strong position. The trade ties and energy dependence on Moscow have been steadily declining since Lithuania’s accession to the EU, a trend that accelerated after the annexation of Crimea in 2014. In 2021, Lithuania’s share of exports to Ukraine, Russia, and Belarus combined made up only 16%, while 90% of its exports to Russia consisted of re-exported goods, and therefore, the impact of the war on the Lithuanian economy due to trade disruptions is not particularly significant.

Global energy, food price hikes, and supply bottlenecks have accelerated inflation which reached the annual rate of 18.5% in May 2022. However, the IMF experts point out that inflation is driven not only by external factors but also by strong domestic demand, while the labor market remains tight. In this context, the IMF welcomes the Government’s response in the form of a €2.26 billion package to mitigate the impact of the energy price shock on the country’s economy, business, and society. It is underlined that further fiscal policy measures in the face of shocks should be targeted and aimed at the most vulnerable groups. As for medium to longer-term horizons, the IMF stresses the need to look for additional sustainable sources of the budget revenue, for example, by implementing changes to immovable property and environmental taxes, thereby broadening the tax base on the grounds of taxes that are less harmful to economic growth. In this respect, the proposal made by the Ministry of Finance of the Republic of Lithuania to change the real estate tax model is evaluated positively.

At the same time, the Bank of Lithuania published the monetary financial institution (MFI) balance sheet and interest rate data for April 2022. Deposits of Lithuanian residents with credit institutions declined by €572.7 million, or 1.7%, over the month (their annual growth rate was 3.7%). General government and financial sector deposits decreased by €341.2 million and €136.4 million respectively and amounted to €3.2 billion and €886.0 million respectively at the end of April. Non-financial corporation deposits contracted by €187.1 million, or 2%, and their annual growth rate was negative (-4.3%). Household deposits grew by €92.0 million, or 0.5%, and their annual growth rate was positive (6.7%). At the end of April 2022, non-financial corporation and household deposits amounted to €9.0 billion and €20.0 billion respectively.

Loans are increasing despite the rise in interest rates. Those granted by credit institutions to Lithuanian residents increased by €400.9 million, or 1.7%, over the month (their annual growth rate stood at 16.2%). Loans to Lithuanian non-financial corporations and households increased by €267.8 million and €121.1 million, or 2.9% and 1.0% respectively in a month (their annual growth rate stood at 18.9% and 11.6% respectively). Loans to Lithuanian households for house purchase, consumption, and other purposes granted by credit institutions increased by €99.2 million, €12.7 million, and €9.2 million over the month, to €10.6 billion, €826.1 million, and €1.3 billion respectively.

In the assessment of the IMF, the banking sector in Lithuania is well capitalized and liquid, and ready to withstand even large-scale economic shocks. The financial situation of firms and households is sufficiently sound, but the rapid increase in property prices remains a source of risk. Accordingly, the steps taken by the Bank of Lithuania in the area of macroprudential policy, including a higher down payment requirement to buy non-first housing, were welcomed.