20/10/2022 - Lithuania’s post-pandemic economic recovery has been thrown off course as Russia’s war of aggression against Ukraine led to surging inflation and slowing economic growth. Continued careful management of public finances along with structural reforms will help Lithuania to navigate these new challenges and emerge stronger and more resilient, according to a new OECD report.
The latest OECD Economic Survey of Lithuania says Lithuania has been among the fastest growing OECD economies of the past decade. Strong exports and integration into global value chains helped to drive its rapid recovery from the pandemic. Now, Lithuania is impacted by the fallout from the war in Ukraine. GDP growth is projected to be modest at 1.6% in 2022 and 1.3% in 2023 amid falling exports and uncertainty over energy supply.
Soaring prices for oil and gas, and to a lesser extent food and housing, pushed annual inflation above 22% in September, the second-highest level in the euro area.
The Survey says fiscal policy should contribute to mitigating inflationary pressures, while support for high energy prices should be temporary and targeted at the most vulnerable households and firms. The Survey recommends prioritising reforms to sustain productivity growth and boost employment, such as improving the governance of public firms, upgrading education and strengthening apprenticeships to bring skills in line with labour market needs, and doing more to foster innovation and the adoption of digital technologies.
“Lithuania showed great economic resilience during the COVID-19 crisis, helped by sound financial and fiscal policies,” said OECD Acting Chief Economist Alvaro Pereira. “The war in Ukraine is now posing new challenges, but Lithuania is well placed to tackle these, providing targeted support to cushion the impacts of Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine while rebuilding fiscal space gradually and looking ahead to ways to strengthen employment and support productivity gains.”
To help turn new investment into sustainable growth, the Survey recommends that Lithuania builds on its past progress in reducing the number of state-owned enterprises and improving their governance. Lithuania has a business-friendly climate with effective regulation that both supports domestic firms and helps to attract foreign ones. Subjecting all public entities to the same legal, financial, and regulatory framework as private firms is essential to level the playing field.
Accelerating the digital transition will be key to further increasing productivity. There is scope to further increase investment in research and development, including through a more balanced combination of tax-incentives and direct support to small innovative firms. Barriers to the adoption of advanced technologies can be reduced by improving digital infrastructure and access to finance. Enhancing digital skills would help to broaden the digital transformation.
Over time, it will be important to address the fiscal costs of a rapidly ageing population, including finding ways to increase the adequacy of the pension system while maintaining its sustainability.
See an Overview of the Survey with key findings and charts (this link can be included in media articles)
For further information, journalists are invited to contact Catherine Bremer in the OECD Media Office (+33 1 45 24 80 97).
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