Lithuania’s sound economic management of recent years has helped it weather the Covid-19 storm. Now the country must build a more inclusive future on those foundations, says a new OECD report.
Effective containment measures, a well-functioning health system and swift public support to firms and households have helped Lithuania to weather the Covid-19 crisis to date.
That said, the pandemic still carries significant economic risks, and a recent upsurge in infections is highly concerning. Once a recovery is under way, Lithuania should aim to reform public companies, strengthen public finances, and ensure that growth benefits all people and regions, according to a new report from the Organisation for Economic Cooperation and Development (OECD).
The OECD’s latest Economic Survey of Lithuania says that prior to Covid-19, good economic management and an investment-friendly business climate were helping to lift average Lithuanian incomes closer to advanced country levels.
While the recession provoked by the virus has been milder than elsewhere – with GDP projected to drop by just two per cent in 2020, one of the smallest drops in the European Union, before rebounding by 2.7 per cent in 2021 – Lithuania’s small and open economy will be vulnerable to any prolonged disruption to world trade.
The OECD suggests that increasing public investment and improving governance at state-owned enterprises could help lift growth and productivity. Other reforms, says the report, should focus on improving the effectiveness of spending and taxation.
Over the longer term, Lithuania should establish a clear debt reduction path and a long-term debt target.
“Lithuania’s sound economic management of recent years, and its swift response to both the health and economic aspects of the pandemic, are helping the country to weather the Covid-19 crisis,” says OECD Secretary-General Angel Gurría. “It is now key to build on these achievements and restart the reform engine to ensure robust, sustainable and inclusive growth for the future.”
The pandemic has exposed high levels of income inequality in Lithuania, where relative poverty is high among the unemployed, the less educated, single parents and older people due to a tax-benefit system that is insufficiently redistributive. The survey recommends Lithuania to continue providing temporary support to people and businesses hit by Covid-19, as well as to increase regular social support while retaining incentives to work.
In terms of support to the economy, the survey notes that while Lithuania’s government spending has increased considerably over the past two years, it remains below the OECD average. Public investment also remains low.
Given the importance of modernising infrastructure and stimulating crisis-hit demand, the survey recommends maintaining or increasing current levels of investment and improving investment quality by carrying out rigorous cost-benefit analysis for individual projects.
Increasing investment in rural areas, and giving local government more say in tax policy and spending, could help reduce regional disparities and promote inclusive growth.
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