Lithuania needs economic reforms, additional revenue sources – IMF

VILNIUS – The International Monetary Fund (IMF) recommends that against a backdrop of high inflation, Lithuania align fiscal and monetary policies through targeted support measures, carry out reforms aimed at boosting its economic potential, and consider additional sustainable sources of revenue.

To further increase social spending, address long-term challenges and invest in renewable energy and energy-saving solutions, Lithuania has to improve the quality of public spending and raise additional budget revenue by broadening the tax base through property and environmental taxes and eliminating distortionary tax exemptions.  

The Fund's experts made the recommendations after last week's visit to Lithuania, the Bank of Lithuania said in a press release on Monday. 

The IMF welcomes the government's response to the energy price shock, which has mitigated the negative impact on the economy and households, but underlines that the support measures place a significant burden on the budget and recommends considering more targeted measures in the future, according to the press release.

The Fund notes that the Lithuanian economy has shown remarkable resilience in the face of Russia's war against Ukraine and the energy price shock, and will grow faster than expected this year.  due to strong macroeconomic fundamentals, large policy buffers and a flexible labor market. 

"According to the IMF, the good result lies in the available fiscal space, which allows for an effective response to emerging shocks, labor market flexibility and rapid economic growth before the outbreak of Russia's war against Ukraine," the central bank said.

However, growth is expected to slow down in 2023 because of high inflation and weakening external demand. 

"Despite more cautious forecasts, the labor market remains strong and the unemployment rate is lower than before the pandemic. This supports rapid wage growth, which, together with other factors, in particular external ones, contributes to inflationary pressures," according to the press release.