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23/09/2020   As the economy recovers faster than expected, it is important to assess internal and external risks

The National Audit Office of Lithuania, implementing the functions of the budget policy monitoring institution (Fiscal Institution), has carried out the assessment of the Economic Development Scenario for 2020–2023 prepared by the Ministry of Finance and concluded it to be suitable for the preparation of budgets attributed to the general government sector. However, the risk of the change of internal and external conditions, which might have a significant effect on the deterioration of the economic situation, remains and the scenario may not materialise.

In the first half of 2020, Lithuania’s real gross domestic product contracted less than expected, i.e. 1%, as compared to the corresponding period of the previous year. Better economic results were determined by a recovering retail trade, industry and a smaller-than-expected fall in exports of goods and services.

Persistent external and internal risk factors support the cautious sentiments of households and businesses. The decline in domestic demand in the world economies due to COVID-19 is having a negative effect on the volume of euro area foreign trade The ongoing conflict between the United States of America (USA) and China, the stalling trade agreement between the European Union (EU) and the United Kingdom, the political uncertainty arising from the presidential election in the USA is exacerbating global instability and could have a negative impact on the EU’s external demand. Consequently, this would also reduce Lithuania’s exports.

Meanwhile, internal risk factors are mainly related to COVID-19, domestic demand and labour market trends. Regarding the current demographic situation and the existing uncertainty, there is a risk that the number of the employed persons may decline more than expected and domestic demand would be even weaker in the context of growing saving rate of consumers.

“During preparation of general government budgets, when the application of fiscal discipline rules has been temporarily limited, prudent and transparent budgetary planning remains relevant. With lower than projected revenue collection, it is important to ensure responsible planning of the budgets attributed to the general government sector for 2021. A significant increase in the general government debt requires stabilisation of its growth and to set the direction of its reduction in future ", – notes Jurga Rukšėnaitė, Director of the Budget Policy Monitoring Department.

In the Economic Development Scenario, gross domestic product is projected to contract by 1.5 % in 2020. Economic growth for 2021-2022 is projected to be driven by final consumption expenditure. Average monthly gross earnings are projected to continue to grow faster than prices. However, there is a risk that private consumption expenditure may fall more than expected if cautious consumer expectations worsen in the event of a deterioration in economic or epidemiological situation. For Lithuania, as a small and open economy, international trade is important. As the economic indicators of foreign trade partners deteriorate, risk to the slowdown of Lithuania’s export growth over the medium term remains.

According to the assessment of the Fiscal Institution, the temperature of Lithuania’s economy, which has been increasing until COVID-19, has decreased in Q2 2020. As the economic indicators improve, forecast for the Q3 in the updated graph indicates that the economic temperature is likely to remain lower than in 2017–2019.

 

Opinion on the Endorsement of the Economic Development Scenario

 

Responsible for the information Communication Division
Last updated on 18 November 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.