The Lithuanian economy is rebounding but needs “ambitious” reform to tackle adverse demographics, poverty, and income inequality, the International Monetary Fund (IMF) said on June 25, as its staff concluded a mission in the Baltic state.

In order to mitigate demographic pressures, Lithuania should reduce the labour tax wedge, link retirement to life expectancy, and tighten early retirement schemes, the IMF said. Encouraging immigration could also help reduce the shortage of labour.

Lithuania should also work towards boosting productivity in order to ensure sustainable growth in wages or face losing a competitive edge if wages grow out of sync with productivity growth, the fund said.

“[The IMF] encouraged the authorities to implement reforms that boost productivity growth. Top priorities are education and healthcare reform,” the IMF said in a statement.

Reforming pension system is also important for reducing old-age poverty but needs to be carried out with care so as not to undermine fiscal sustainability.

There is a sound environment for the reforms, as Lithuania has stuck to countercyclical fiscal policy in recent years, rebuilding fiscal buffers to address external shocks and medium-term fiscal pressures.

The economy is doing well, having grown by 3.9% in 2017, compared to an expansion of just 2.3% in 2016. Growth came as a result of the acceleration of investment, which benefited from credit growth and high capacity utilisation.

Private consumption remained the main engine of growth, though it was held back by decelerating real wages, the IMF also notes.

With the economy expanding above potential, growth is expected to moderate over time. Growth in 2018 is projected at 3.2% because of weaker exports and a slowdown of consumption driven by negative employment growth. Investment spending should pick up, however, thanks to faster EU funds absorption, the IMF forecasts.