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Lithuania — IMF Issues 2009 Article IV Statement,
by Mike Godfrey, Tax-News.com, Washington
Monday, June 29, 2009
The IMF has issued a mission concluding statement in respect of its Article IV consultations with Lithuania. It stated that the original and May 2009 supplementary budgets implemented measures worth about 7% of GDP to contain the deterioration in the budget deficit in line with available financing. The budget deficit had risen as the revenues associated with the boom had dissipated but the legacy of unsustainable social and wage spending remained, according to the IMF.
Lithuania risked a 'sustained increase in its borrowing needs and costs, and a rising debt burden' in spite of the substantial measures taken and proposed so far. Therefore the IMF recommended consolidation in the medium-term of about 7% of GDP to safeguard fiscal sustainability and pave the way for euro adoption. The IMF thought this should be guided by the need to secure a permanent improvement in the structure and effectiveness of government spending.
The IMF welcomed plans to prepare a comprehensive package of reforms to be implemented with the 2010 budget. It thought steps to reduce costs in the public administration and ensure the viability of the social security system should be granted high priority. Such measures were needed to 'unwind the unsustainable increases granted in recent years and ... to allow the full restoration of transfers to the pension system', in the view of the IMF. The IMF stated that there is little scope for tax cuts and it would also be prudent to bolster revenue by strengthening tax administration, broadening the tax base, and streamlining tax incentives. Although challenging in the context of large scale adjustment, the IMF considered it important to provide space for social safety nets to protect the most vulnerable.
The IMF considered that the Lithuanian government needed to demonstrate its 'strong commitment to fiscal structural reform' by commencing in 2009. The package of measures recently proposed to parliament struck a 'good balance between structural measures that realign high public sector costs with the rest of the economy and revenue measures that alleviate pressing financing needs'. These measures could help reduce the 2009 budget deficit by approximately LTL1.5bn - to a level that should be fully financeable in the opinion of the IMF.
In order to strengthen fiscal institutions and promote fiscal discipline, the IMF thought contingent liabilities associated with government guarantees should be closely monitored, managed, and integrated into fiscal policy analysis. In the medium-term, the fiscal framework needed to be revamped to 'promote discipline and savings in good times... for a greater cushion in future downturns'. The IMF recommended that the annual budget be grounded in a multi-year framework and budget targets formulated in cyclically adjusted terms.
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