Linas Jegelevičius for the BNN
The International Monetary Fund’s (IMF) latest mission has praised the Lithuanian government’s efforts to curb record-high EU-wide inflation and, thence, staggering prices. The Fund says inflation should recede by the end of the year, however, many Lithuanian decision-makers and analysts alike take the prognosis with a grain of salt.
«That Lithuania is the runner-up after Estonia on the inflation ranking in the European Union the Lithuanian government is responsible. Simply speaking, the Cabinet is evading the acute issue, chalking it up to the war. The reason why Lithuania has such insane prices is that our Energy pricing commission and the Competition Council do not work properly. Abroad, respective institutions are very actively engaged in the price control mechanism – not in Lithuania. In France, the parliamentarians voted for legislation aiming to regulate fuel prices. Similar initiatives have taken place elsewhere, not here,» Naglis Puteikis, a former member of the Lithuanian parliament, the Seimas, and now advisor to MP Petras Gražulis, told BNN.
Lithuania’s annual inflation rate climbed to 18.9 percent in May of 2022 from 16.8 percent in the previous month. It was the highest inflation rate since September of 1996, with food & non-alcoholic beverage prices surging 24.8 percent, the most since September 1996, amid soaring global commodity prices.
But Borja Gracia, the head of the International Monetary Fund’s mission to Lithuania, claims Lithuania had «a very good response» to the inflation, triggered, first of all, by the pandemic.
Whereas the inflation driven by the war in Ukraine is likely to stabilise and begin to moderate in the second half of the year, Gracia said.
The head of the IMF mission told the Verslo Zinios business daily annual inflation in Lithuania was expected to reach 18 percent this year and stand at 8 percent next year, compared to the April projections of 13.3 and 4.3 percent respectively.
However, risks to the outlook for the Lithuanian economy are clearly tilted to the downside as they include a further escalation of the war, lack of momentum in structural reforms, and tightening financial conditions, he pointed out.
Lithuania’s Finance Minister Gintarė Skaistė says the government was currently not considering any additional measures to tackle inflation, but could bring them forward in autumn, if necessary.
«According to current estimates, inflation will stabilise and begin to moderate in autumn. If we see a different situation, some additional measures could be brought forward in autumn. However, it is now a little too early to say what the economy will look like then,» she told Lithuanian media.
To alleviate elderly people’s burdens, the Lithuanian Ministry of Social Welfare and Labour has announced of a five-percent increase of pensions, but critics of the government says the measure is not sufficient.
The Finance Minister, however, did not rule out that extra taxes, like, for example, universal tax on all residential properties could be imposed. Yet Skaiste is denying that it is intended to fill up the country’s coffers.
The ministry envisions that the municipalities will manage to-be residential property tax.
Read also: Lithuanian businessman fined for breaching Ukrainian labour rights
It has said it could be between 0.3 up to 3 percent of value of an estate. But even if adopted, the law would go in effect only from 2025.
«This just proves me that the Government is scrambling to find new ways to replenish the shallow budget. I’d not be surprised if there are more taxes on the way,» Puteikis emphasised to BNN.
In its latest Financial Stability Review released earlier this week, the Bank of Lithuania identified three main risks to the country’s financial system.
First, they stem from Russia’s war against Ukraine. The commodity price shock and the substantial severance of trade links with countries affected by the war may make it difficult for some companies to repay loans, the Bank says.
In its opinion, this could lead to losses for banks and negatively affect overall economic growth.
Secondly, risks from prolonged high inflation and possible increase in interest rates may make vulnerable households and businesses face problems making loan repayment contributions if high inflation persists and interest rates rise.
However, according to the Bank of Lithuania, this risk is mitigated by the significant savings accumulated by households during the pandemic and the capital buffers of companies and banks. Moreover, higher interest rates will have a positive impact on financial stability in the long term as they will help to dampen inflation and cool down the real estate market.
And thirdly, there is a risk of potential overheating of the housing market.
«As housing prices, which have risen rapidly during the pandemic, begin to deviate from fundamentals, there are more and more signs of unsustainable real estate market development, ultimately leading to the increase in the risk of falling prices and consequent growth of losses,» the Bank of Lithuania said.
The Bank of Lithuania estimates that housing prices currently exceed the values based on fundamental factors, which include economic, income or population growth, by about 9 percent.
According to it, the rapid price growth is mainly driven by a widening gap between housing demand and supply. During the pandemic, demand for housing increased significantly, while the supply of new housing remained almost unchanged and has even been falling recently.
Furthermore, in the short term, the supply of new housing may be constrained by the increase in construction prices reflecting the rise in raw material prices, and by the possibility of building permits being granted.
Having assessed the potential risks, the Bank of Lithuania has already taken precautionary measures and tightened the down payment requirement for the second and subsequent housing loans and introduced the capital requirement of 2 percent for housing loan portfolios of banks.
These measures are expected to cool down the market of investment transactions with loans but will not directly affect the market for dwellings bought with own funds, which are most numerous, the Bank said.
mportantly, the Bank of Lithuania says it «welcomes» the ongoing discussion on the revision of the universal real estate tax pattern and is currently examining the submitted proposals.
«A properly calibrated real estate tax could reduce excess demand for housing and thus help balance the real estate market,» the central bank believes.
Real estate in Lithuania is overvalued by a tenth, according to the Bank.
BNN ANALYSES | Lithuania’s inflation spirals out, but IMF placates – it should recede by the end of 2022
