Lithuania should focus on medium-term fiscal pressures

Pages230

Page 230

Lithuania's GDP grew by 7.5 percent in 2005, with declining unemployment, high capacity utilization, and buoyant asset prices, according to the IMF's recent economic review. But rising inflation has exceeded the Maastricht inflation reference rate, delaying euro adoption. The economy has continued to be stimulated by fiscal and European Union (EU) expenditures.

The IMF Executive Board welcomed Lithuania's economic performance, attributing it to strong macroeconomic policies, wideranging structural reforms, and EU integration. But, the Directors cautioned, imbalances are emerging. Rapid growth of consumption and of investment in property and construction have contributed to inflation and new financial vulnerabilities. Over the longer term, challenges are likely to arise from international tax competition, demand for public goods, emigration, and pressures on international competitiveness.

Lithuania has a sizable current account deficit but low external indebtedness, and the risks from accumulating external shortterm debt will need close monitoring. Rapid credit growth has supported households' increasing appetite for mortgages and corporate demands in nontradables sectors. The Directors saw no need to slow the pace of credit growth directly, but encouraged the authorities to conduct forward-looking...

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