The Bank of Lithuania points out that the IMF forecasts were prepared even before the extremely positive year 2023. for second quarter GDP and labor market data.
The Central Bank report indicates that the biggest risk for the Lithuanian economy, the IMF identifies a scenario in which inflation in the country remains significantly above the euro area average for a longer period, as this would reduce not only domestic demand but also foreign demand. due to the negative impact on competitiveness.
It is true that lately the difference between inflation in Lithuania (6.4 percent in August) and in the euro area (5.3 percent in August) has narrowed and prices in the country have fallen to the fourth consecutive month (-0.2 percent). in August).
Moreover, since the Lithuanian economy is catching up with the economies of other eurozone countries, slightly higher inflation in Lithuania is a normal part of the convergence process.
The IMF predicts that in 2023 Annual inflation in Lithuania will decrease by 6.4 percent. in August to 4.1 percent. at the end of the year, and in 2024 at the end, it should represent 3 percent.
The IMF recommends that fiscal policy be gradually tightened, as planned in Lithuania’s stability program for 2023, and thus contribute to the suppression of inflation. It is pointed out that this year, due to the lower than expected need for offsetting energy costs, unspent funds should be directed towards reducing the budget deficit.
The IMF regards the package of tax change proposals approved by the government as a step in the positive direction and also stresses the need to shift the tax burden from labor income to property and capital, to reduce the number of incentives taxes and to introduce environmental taxes. . According to the IMF, this would increase the redistribution of income through the state budget.
The IMF points out that the Lithuanian banking sector is extremely resilient due to its large liquidity and capital reserves, and that the significantly improved profitability due to unusual circumstances also contributes to this. The level of real estate prices is stabilizing and their overvaluation is decreasing. It is stressed that due to the increase in base rates, rising interest rates on loans pose a significant risk to the financial sector, so it is important to closely monitor developments in this sector.
The IMF also mentions that the banks’ solidarity contribution should be a temporary measure.
The IMF also positively assesses Lithuania’s progress in the area of prevention of money laundering and terrorist financing, including the increase in resources allocated to financial sector supervision. According to him, there is a need to continue strengthening the risk management system in the country’s financial sector, including in the crypto assets sector.
Furthermore, the IMF stresses that the Lithuanian economy remains competitive, despite the energy price shock. The reasons for this are the fact that productivity has grown faster than wages over the past decade, especially in the exporting industrial sector, as well as the highly flexible labor market, which allows the economy to adapt to shocks. The IMF also positively assesses the civil service reform approved this year, which will contribute to the flexibility of the labor market and the efficiency of the public sector. In order for Lithuania to continue to increase its productivity and raise its standard of living, the IMF stresses the importance of implementing structural reforms, particularly in the areas of education and health.
Source: The Delfi