"The Government continues to implement a fiscal policy focused on long-term sustainability and not increasing inflationary pressure. It is extremely important to implement structural reforms that increase the economy's productivity and resilience to future shocks, including in areas such as education and health care. It is also important to accelerate the green transformation by developing the capacities of renewable energy resources – we are directing significant investment capacities for this purpose. In addition, we need to adopt tax reforms that create a more balanced, growth-friendly and socially just tax system. We can be pleased that the Fund's experts consider the tax proposals prepared by the Ministry of Finance to be a step in the right direction," says Minister of Finance Gintarė Skaistė.
"In a complex and challenging economic environment, inflation is not yet fully contained and central banks still have to finish their work. We are on the right track: the growth of prices in Lithuania is consistently slowing down, as shown by the latest May estimate. While manoeuvring in the conditions of the current macroeconomic uncertainty, at the same time, it remains extremely important for the institutions to focus and pay attention to solving structural issues important for the long-term development of the economy – the creation of a fairer tax system, the promotion of the development of an energetically secure, green and innovative economy," says Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.
According to him, one of the most important factors of the long-term growth of the Lithuanian economy will be ensuring the supply of highly qualified employees. Qualified human capital is an essential prerequisite for moving to the production and export of goods and services with higher added value. G. Šimkus, together with Minister of Finance G. Skaistė and the IMF mission head B. Garcia, discussed this at the seminar by the Bank of Lithuania and the IMF researchers on inflation and its impact on competitiveness in Lithuania held at the Faculty of Economics and Business Administration of Vilnius University on 7 June during the IMF mission.
According to the IMF, although Lithuania's economy withstood the COVID-19 pandemic and the first wave of shocks from Russia's war against Ukraine, high inflation in 2022 reduced the purchasing power of the population, which, together with deteriorating external demand, led to the slowdown of Lithuania's economy. The deterioration of the trade balance last year was mainly driven by the shock of raw material prices and was short-term. The IMF notes that the volume of exports of non-energy-related products grew last year, which shows that the competitiveness of the Lithuanian economy in the international arena has not decreased.
A global surge in energy and food prices and supply disruptions has accelerated inflation. Although the main factors increasing inflation in Lithuania are external, strong domestic demand also had an impact. Inflationary pressures are expected to ease further this year and return to a more sustainable level next year. The IMF notes that fiscal policy plays an important role in complementing monetary policy in the fight against inflation.
The IMF emphasizes that in the face of the need to increase the budget expenditure, it is necessary to ensure additional sustainable sources of income. Rebalancing the tax system from labour taxes towards taxes that are less distortive for growth, such as higher wealth, capital and environmental taxes, would help increase the budget revenue and strengthen the effectiveness of the tax system.
It should be emphasized that the Fund's experts positively assess the amendments to the Law on Excise Duties recently adopted by the Seimas, which provide for an environmental component, and consider the amendments to the tax system prepared by the Ministry of Finance to be a step in the right direction, responding to the principles of rebalancing of the tax system identified by the IMF.
According to the IMF, the banking sector in Lithuania is resistant to economic recession and shocks due to high capital and liquidity reserves. The Fund welcomed the proactivity of the Bank of Lithuania's macroprudential policy actions in controlling financial stability risks, especially related to the development of the real estate sector. In the event of a larger shock, macroprudential policy measures could be loosened.
As the Fintech sector transitions from rapid growth to maturity, the IMF has positively assessed the progress made in the prevention of money laundering and the financing of terrorism, including the tightening of requirements for virtual currency service providers and the increase in supervisory capacity of the Bank of Lithuania and the ongoing risk assessment of customers of the CENTROlink payment system.
The IMF emphasizes the need to accelerate reforms in areas such as education and health care in order to increase economic productivity. In order to solve the problems of climate change and ensure energy efficiency, it is necessary to accelerate the development of renewable energy and the efficiency of energy consumption by allocating sufficient investments. In this regard, the plan "New Generation Lithuania" and the effective use of EU Structural Funds play a significant role.
During the two-week consultations, the IMF experts met with the representatives of the Bank of Lithuania and the Ministry of Finance, as well as they had meetings with the representatives of the Presidency, the Seimas, the Government, other state institutions and the private sector.
Lithuania has been a member of the IMF since 1992. Currently, 190 countries belong to the IMF. The country's annual consultations with the IMF take place in accordance with Article IV of the MF’s Articles of Agreement, which obliges the member countries of the IMF to pursue such economic and financial policies that would ensure national and international financial and economic stability.
