Lithua­nia should fo­cus on fis­cal struc­tural re­forms: IMF

The Pak Banker - - COMPANIES/BOSS -

Mis­sions are un­der­taken as part of reg­u­lar (usu­ally an­nual) con­sul­ta­tions un­der Ar­ti­cle IV of the IMF's Ar­ti­cles of Agree­ment, in the con­text of a re­quest to use IMF re­sources (bor­row from the IMF), as part of dis­cus­sions of staff mon­i­tored pro­grams, or as part of other staff mon­i­tor­ing of eco­nomic de­vel­op­ments.

The au­thor­i­ties have con­sented to the pub­li­ca­tion of this state­ment. The views ex­pressed in this state­ment are those of the IMF staff and do not nec­es­sar­ily rep­re­sent the views of the IMF's Ex­ec­u­tive Board. Based on the pre­lim­i­nary find­ings of this mis­sion, staff will pre­pare a re­port that, sub­ject to man­age­ment ap­proval, will be pre­sented to the IMF Ex­ec­u­tive Board for dis­cus­sion and de­ci­sion.

Eco­nomic ac­tiv­ity is poised for a pickup this year as the drag from the un­fa­vor­able ex­ter­nal en­vi­ron­ment di­min­ishes. Thanks to many years of fis­cal ef­fort, the bud­get deficit now stands at an ap­pro­pri­ate level, and over the medium term the fo­cus should be on avoid­ing any de­te­ri­o­ra­tion in struc­tural terms. Sus­tain­ably ad­vanc­ing Lithua­nia's liv­ing stan­dards now de­pends on mak­ing de­ter­mined progress with struc­tural re­forms, which ideally should be bound to­gether in a com­pre­hen­sive and co­her­ent pack­age to pro­vide strate­gic di­rec­tion. There are sev­eral pri­or­i­ties: bet­ter de­vel­op­ing and uti­liz­ing hu­man re­sources; sup­port­ing the mod­ern­iza­tion of firms; fur­ther im­prov­ing the busi­ness cli­mate; and en­sur­ing that the struc­ture of tax­a­tion and pub­lic spend­ing is ef­fi­cient, pro-growth, and eq­ui­table. Many of th­ese re­forms are com­plex, in­clud­ing those con­sid­ered un­der the "New So­cial Model." The im­pli­ca­tions of their de­sign need to be care­fully and fully con­sid­ered be­fore mov­ing ahead. Com­pet­i­tive­ness of Lithua­nian ex­ports is ad­e­quate, but could come un­der pres­sure if cur­rent wage and pro­duc­tiv­ity trends per­sist. In this con­text, ef­forts to upgrade en­ter­prises should be re­dou­bled and it would be pru­dent to con­sider a pause in min­i­mum wage hikes un­til they can be jus­ti­fied by pro­duc­tiv­ity and com­pet­i­tive­ness gains.

Growth should reach 2.7 per­cent in 2016 and strengthen fur­ther in the outer years. As last year, the driv­ers will be solid pri­vate con­sump­tion on the back of ro­bust wage growth to­gether with strong in­vest­ment, re­flect­ing pent-up de­mand, high ca­pac­ity uti­liza­tion, and re­viv­ing bank lend­ing. Fur­ther­more, the drag from low ex­ports is set to di­min­ish com­pared to 2015, pri­mar­ily due to the eas­ing of re­ces­sion and cur­rency de­pre­ci­a­tion in Rus­sia and the CIS, giv­ing GDP growth an up­ward jolt. Over the medium term, growth is ex­pected to inch up fur­ther to around 3½ per­cent, but this is con­tin­gent on fur­ther re­forms. Risks to this out­look are mainly on the down­side. Con­sid­er­ing Lithua­nia's high de­gree of eco­nomic open­ness, pre­dom­i­nately down­side risks to the global growth out­look could spill over to the do­mes­tic econ­omy through trade chan­nels. Volatile fi­nan­cial con­di­tions abroad could af­fect Lithua­nia in­di­rectly via the for­eign banks that dom­i­nate its fi­nan­cial sys­tem, pri­mar­ily through credit sup­ply chan­nels. Do­mes­tic risks re­late to fu­ture com­petive­ness de­vel­op­ments. On the up­side, lower-than-pro­jected global en­ergy prices could boost pur­chas­ing power fur­ther. A cred­i­ble re­form pack­age would send a wel­come pos­i­tive sig­nal and pro­vide im­proved strate­gic di­rec­tion.

The struc­tural fis­cal deficit fell to an es­ti­mated ½ per­cent of GDP last year-a level that en­sures a re­li­able re­build­ing of fis­cal buf­fers if main­tained over time. Ex­pen­di­ture re­straint, rev­enues from buoy­ant wage and con­sump­tion growth, and in­cip­i­ent gains from im­proved tax ad­min­is­tra­tion de­liv­ered the fi­nal con­sol­i­da­tion stretch. If main­tained at this level over the medium term, the struc­tural bal­ance would re­li­ably put the pub­lic debt ra­tio on a down­ward path, af­ter its sharp rise since 2009. As a re­sult, fis­cal buf­fers would be re­built to bet­ter deal with fu­ture shocks and to cush­ion the rise of agere­lated spend­ing to some ex­tent. While the 2016 bud­get falls some­what short of achiev­ing a struc­tural deficit of ½ per­cent of GDP, the gap seems small enough to be bridged by care­ful bud­get ex­e­cu­tion. But there is no room for costly new ini­tia­tives this year.

Pol­icy mak­ers can now squarely fo­cus on fis­cal struc­tural re­forms. The em­pha­sis should be on mea­sures that pro­mote growth and re­duce in­come in­equal­ity, which is among the high­est in the EUnot only a so­cial con­cern but also the source of im­por­tant macroe­co­nomic im­pli­ca­tions.

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