Lithuania: Time to reconsider an IMF program?
Overview:
Lithuania is undergoing a dramatic economic contraction. Inflation is falling and the current account deficit returning to more sustainable levels. However, the combination of reduced capital inflows, the currency board and running loose fiscal policy now require a major fiscal tightening that will exacerbate the economic downturn. The new government is making significant fiscal adjustments as it seeks to keep the budget deficit below 3% of GDP and is committed to gaining EU entry as soon as possible. It has, though, rejected requesting an IMF program. While the former is a sound external policy anchor the latter position may prove unsustainable. An IMF program would improve investor confidence and allow access to other IFI funds to support the budget and help alleviate the harsh economic adjustment.