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27/03/2020   The balanced economic growth in 2019 is outweighed by the exceptionally uncertain environment

The National Audit Office of Lithuania, implementing the functions of the budget policy monitoring institution (hereinafter - the Fiscal Institution), has carried out the assessment of the Economic Development Scenario for 2020–2023 prepared by the Ministry of Finance and, after taking into account the conditions of exceptional uncertainty, concluded it to be suitable for the preparation of the Stability Programme of Lithuania for 2020. The Fiscal Institution noted the risk of the change of internal and external conditions, which might have a significant effect on the deterioration of the economic situation, the scenario may not materialize.

Internal situation and especially external macroeconomic environment are important for the small and open economy of Lithuania. The observed spread of COVID-19 is becoming the key factor deteriorating the growth forecasts of world economies. The observed state of the USA and the large Member States of the euro area, namely Germany, France, Italy, and Spain, is tense: the industry sector is negatively affected, supply chains are disturbed, while the domestic and external demand as well as tourism flows are decreasing.

The significance of the external environment is strengthened by the ministers’ approval of the proposal to activate the general escape clause of the Stability and Growth Pact. Such proposal was initiated by the European Commission (EC) and approved by the ministers in the Economic and Financial Affairs Council meeting on 23 March 2020. It was a response to the announcement of the EC and the Council that the COVID-19 pandemic can be considered as “an unusual event outside the control of public authorities”. The Ministry of Finance submitted the updated Economic Development Scenario on 20 March 2020. Together with this scenario, they provided a notice on the initiation of exceptional circumstances to the Fiscal Institution. According to the legislation and following the situation in the world and in Lithuania, the Fiscal Institution has issued an opinion that the current or/and foreseeable situation in the country complies with the definition of the term unusual event which allows the establishment of exceptional circumstances.

“However, the situation in the European Union and Lithuania should be eased by the endorsement of the escape clause of the Stability and Growth Pact. It provides flexibility to deviate from the budgetary requirements that would be usually applied in accordance with the European fiscal framework in the medium term. Such exceptional circumstances mean not only the possibility not to comply with the rules of fiscal discipline but also to accept the commitment and responsibility during these challenging times as well. The aim should be to provide the society with as much information as possible on the economic situation in the country and, at least quarterly, update the Economic Development Scenario”, says Jurga Rukšėnaitė, Director of Budget Policy Monitoring Department.

The Fiscal Institution indicates that internal risk factors in Lithuania are mostly related to the domestic demand and demographic challenges. As the economy shrinks in 2020, it is foreseen a possibility of lower consumer expectations that would lead to the encouragement of postponing the consumption for the future. In addition, household consumption depends on possibilities to remain in the labour market during the period of quarantine, especially in case it is extended.

The contraction of 1.3% of Lithuania’s real gross domestic product is foreseen in the Economic Development Scenario as a result of expected shrinkage of trading partners’ economies, the negative impact of the spread of COVID-19 on foreign and domestic demand, the implemented measures to mitigate the spread of the virus, and the effect of comparative basis.

The Ministry of Finance has publicly announced its Economic Development Scenario for 2020-2023 on 20 March. Together with this scenario, they submitted a notice on the initiation of exceptional circumstances to the Fiscal Institution. The Fiscal Institution submitted its opinion on the endorsement of this scenario and an opinion on the compliance of the unusual event with the definition of exceptional circumstances to the Parliament (Seimas) on 27 March.

 

Responsible for the information Communication Division
Last updated on 27 July 2020

National Audit Office of Lithuania

Pamėnkalnio St 27, LT-01113 Vilnius, Phone: + 370 5 266 6793, + 370 5 266 6752, Email: nao@vkontrole.lt.