The economy has staged an impressive recovery, with real GDP expected to grow by 6¼ percent in 2011. The export-led recovery has broadened to domestic demand, and the unemployment rate has fallen. Looking ahead, weaker external demand and higher external financing costs will slow the economy, with growth in 2012 projected at 3½ percent. Risks are clearly on the downside. An intensification of global financial strains could lead to even weaker external demand and jeopardize funding. With external conditions worsening, the priority is to reinforce macro stability.
The fiscal deficit has narrowed substantially since 2009, mostly reflecting expenditure restraint. A further reduction in the fiscal deficit to 2.8 percent of GDP in 2012 is essential to put debt on a downward path, reduce financing needs, and preserve euro adoption aspirations. Attention should be paid to the sustainability of the adjustment, including by ensuring that any further spending cuts protect the most vulnerable. Beyond 2012, additional consolidation will be needed to reach the medium-term objective of a small budget surplus.
While the banking system as a whole appears well-positioned to withstand adverse shocks, prompt corrective action is needed to address remaining pockets of weakness. The strong recovery has boosted banking system profitability; substantial increases in capital have raised the average capital adequacy ratio; and the average liquidity ratio is well above the regulatory minimum. However, some banks have made lower loan loss provisions than other banks, despite having higher NPL ratios. In these banks, it will be necessary to assess risks conservatively, to make adequate loan loss provisions, and to increase capital if needed.
The economy has started a welcome rebalancing towards tradable sectors. Sustained growth over the medium term will require increased labor participation, labor reallocation to tradable sectors, and higher investment. To support the latter, further efforts are needed to improve the business environment.
The government has a one-vote majority in parliament. Parliamentary elections are expected in October 2012.
IMF. Published: November 21, 2011.Country Report No. 11/326. Lithuania.Published: November 21, 2011
