The country’s economic growth should stabilise at just above 2% in the medium term, according to the IMF.
The two-week IMF mission assessed Lithuania’s economic situation, the outlook for public finances, economic competitiveness, the situation in the energy sector and the reform agenda.
Head of the IMF mission Borja Gracia presented the expert conclusion on Friday, suggesting that global fragmentation means growth will be slower than before the recent crises.
Lithuania’s shock period was due to high prices and tightened monetary policy, he told a press conference.
Gracia noted that Lithuania is to face short term pressures from rising defence spending, which is already visible, but also from high interest rates, even though the ECB has just cut rates.
Demographic challenges and rising spending on pensions, health and green transformation will have a strong impact on growth in the long term and in the next decade, according to the IMF. In this context, Lithuania needs to reform its pension system, the head of the IMF mission advises.
The IMF observed that there is scope to increase tax revenues while preserving a competitive tax environment.
„Lithuania collects less tax revenue, around 9 percent of GDP, than the EU average and the system is heavily tilted towards indirect and labor income taxes. With a aging and projected to shrinking population, the tax burden will increasingly fall on a smaller base of taxpayers, exacerbating economic distortions and causing a further drop in labor force participation. There is scope to rebalance the tax system from consumption and labor towards wealth, capital and environmental taxes that can generate more revenue and improve efficiency,“ the IMF mission’s concluding statement says.
According to the IMF, Lithuania’s pension system should be reformed to increase social sustainability while preserving fiscal soundness.
„First, linking the statutory retirement age to longevity would help absorb spending pressures. Second, applying the personal income tax to pensions would provide budgetary resources to increase non-contributory pensions to help those receiving lower contributory pensions. Third, as it matures over time, the privately-funded component of the pension system will stabilize the replacement ratio—pension received at retirement relative to pre-retirement earnings. Any reform in this area should aim to create a stable environment with strong incentives to participate, ideally making participation compulsory, and strong disincentives for early withdrawals to reduce the pressure on the state-funded pay-as-you-go component,“ the IMF mission said.