Opinion on the endorsement of the Economic Development Scenario

The National Audit Office, implementing the functions of the fiscal institution, has assessed and endorses the Economic Development Scenario for 2022–2025 published by the Ministry of Finance on 31 March, which is suitable for the preparation of Stability Programme of Lithuania for 2022. With increased uncertainty over the war in Ukraine, the risk remains that the scenario may not materialise with changes in internal and external conditions leading to a significant change in the economic situation. 

In the December 2021 Economic Development Scenario, the Ministry of Finance forecasted that the country’s economic development in 2022 would remain significant (3.7 %) but would be slower than in 2021. This was mainly driven by disruptions in raw materials and supply chains caused by the pandemic and by rising energy prices. These problems have been intensified by the war in Ukraine launched by Russia in February 2022.

Uncertainty about the further development and duration of the Russia’s war in Ukraine, the sanctions imposed by the European Union and the US on Russia and Belarus, and the impact of possible counter-sanctions, increase the risk of longer-than-expected disruptions in supply chains, higher prices of raw materials and energy resources, and lower expectations of business and households. 

“Lithuania’s international trade volume with Russia and Belarus has decreased since 2014, but the Baltic states have remained the largest importers from these countries in the European Union. In 2021, Lithuania imported mainly mineral fuels, wood and articles of wood, iron and steel, and fertilizers from Russia and Belarus. Imports of mineral fuels are important for energy-intensive industries in Lithuania, such as oil refining or fertilizer production. The changed geopolitical situation significantly increased the need to reallocate the import markets of energy resources and other raw materials", says Saulė Skripkauskienė, Head of Budget Monitoring Department. 

Internal risk factors relate to inflation, the sensitivity of the transport, construction and manufacturing sectors and the expectations of the households as well as business investments. Inflation, largely driven by energy and food prices, has the greatest impact on the purchasing power of pensioners and low-income earners. This may lead to an increase in poverty indicators and the need for additional assistance to support domestic consumption. Furthermore, there is a risk that the projects planned to be financed by the European Union will not be implemented, as the actual cost of project implementation may exceed the forecasted price at the time of design process. 

As the implementation of the tax plan for January–February 2022 does not exceed the multi-annual trend, the uncertainty regarding the collection of excess revenue is high. As the demand for current expenditure increases and revenue remains uncertain, it is important to look for structural sources of revenue that contribute not only to reducing the risk of increasing demand for borrowed funds, but also to managing the risk of debt increases. This may be important in the future if the geographical situation would lead to an increase in Lithuania’s debt service costs. 

The Economic Development Scenario prepared by the Ministry of Finance projects real GDP to grow by 1.6 % in 2022 and inflation to reach 9.8 %. Lithuania’s international trade is expected to be mostly affected by the war in Ukraine, but the country’s economic growth will be supported by household consumption expenditure and investment. Uncertainty is high, but as the geopolitical situation stabilises and markets for imports of raw materials are reallocated, real GDP growth is projected to accelerate to 2.5 % in 2023 and the slowdown in inflation - to 3.0 %. 

The updated heatmap of the Lithuanian economy shows that, against the backdrop of accelerating net inflation in Q1 2022 the temperature of the Lithuanian economy is likely to be higher than in 2021. 

The measures proposed in the package on “Mitigation of the Effects of Inflation and Strengthening Energy Independence” presented on 1 April 2022 are important and targeted in the situation faced by the lowest income households. Meanwhile, measures aimed at horizontal gas and electricity price compensation reduce incentives for rational resource consumption and stimulate domestic demand, which increases inflation. For this reason, additional general government revenue is needed. The demand for similar packages may be repeated, so the question of “who will pay” should not be postponed for the future. In addition to rising defence spending, ageing-related expenditure and other commitments will put pressure on long-term spending. 

Opinion on the endorsement of the Economic Development Scenario