Lithuania will recuperate its economic losses in 18 months, says Central Bank

Lithuania will recuperate its economic losses in 18 months, says Central Bank

Vitas Vasiliauskas, Chairman of the Board, Bank of Lithuania, talks fintech, and explains how monetary and supervision policies have adapted to mitigate COVID-19


Lithuania, together with its neighbors in the Baltics, has received global praise for its effective handling of the coronavirus crisis. Having overcome the healthcare challenge, today the focus is on reactivating the economy. Let us begin by talking about the magnitude of COVID-19’s economic impact on Lithuania and, as chairman of the republic’s central bank, what is your outlook for the second half of 2020?

Of course, Lithuania and the other Baltic countries are open economies, so the global environment is very important for us. The pandemic has affected us, however our baseline scenario is that we can expect some recovery in the second half of this year. We still do not have hard enough data that could allow us to precisely judge how much of an impact we have faced. We are talking about -0.93 percent from quarter to quarter. Our current forecast for the whole of 2020 would be a contraction of the economy of around 7-8 percent.


Could you tell us more about your projections?

We have also updated our mild (-7 percent) and severe (-17 percent) scenarios, narrowing the gap to the baseline scenario, if compared with our forecasts in March.. We also believe that the contraction in 2020 was so severe that we do not think that we will be able to catch up and recuperate what we lost this year. We will need at least a year and a half.


As a strategic partner for economic stability, the central bank works closely in tandem with the government and the private sector to tackle the challenges resulting from the drop in economic activity observed during the lockdown period. What are the types of instruments and strategies that you are enabling and promoting throughout the financial system in Lithuania today in order to mitigate the effects of the economic downturn?

First, we took a look at our monetary policy. As you know, we are part of the eurozone so, of course, the Bank of Lithuania is a part of the European Central Bank’s (ECB’s) monetary policy and we are purchasing assets according to its policies. Secondly, the Bank of Lithuania also has a supervisory mandate for our financial system. What we have done in that area is abolish our cyclical capital buffer, which gave some fresh life to our banking system. This, of course, allowed for additional reserves for new credit throughout.


In the European context, there is some discrepancy among different members of the European Union (EU) about how to tackle the economic impact of COVID-19. You sit on the board of the ECB, have spoken of the need to use all instruments available in the European Stability Mechanism and made an additional case for collective European debt, also known as “Coronabonds”. Can you explain a little about the ECB’s Pandemic Emergency Purchasing program (PEP) and how it differs from the Outright Monetary Transactions (OMT) launched during the financial crisis over a decade ago?

The main difference between PEP and OMT is that PEP is a specific horizontal asset purchase program and OMT is a country-specific program.


Over the last decade, Lithuania has been on a steady growth path, having made strides in diversifying its economy and embracing digitalization. Today, it ranks 11th in the World Bank’s Ease of Doing Business report and 39 out of 141 economies in the Global Competitiveness index. You have been chairman of its central bank for nearly ten yearsduring this period, how has your institution harnessed the power of digitizalition and promoted its use across the Lithuanian banking system?

Being part of Europe means that we are very dependent on the banking sector being the main channel of finance. In Lithuania’s case, the banking sector is very concentrated. We want to create alternative channels for financing our economy. That is one of the reasons why we are very active in the fintech area. Another direction we are following very closely is looking for a pan-European solution for financial services, as we still have a very fragmented financial services market in Europe. For example, it is quite difficult for Lithuania’s businesses to get credit from a German bank and vice versa.


Lithuania has successfully built a global brand in fintech, having positioned itself as a global hub and leading the EU in this industry. 2019 was a phenomenal year for the sector, seeing a 50-percent growth in the number of fintech companies established in the country, which now number 210. Under your leadership, the Bank of Lithuania has played an instrumental role in harboring this new industry and taking on its regulation. Could you tell us about your experience in this sector so far?

As I said previously, the main reason for our increasing activities in this field is mostly related to the concentration in our banking sector. We also understand all the risks related with traditional and nontraditional factors. First of all, those risks are related to corporate culture, with money laundering and with antiquated IT solutions. Now, we are at a stage where we pay much more attention to the substance of the fintech industry rather than the marketing issues surrounding it. I think that is a very important position to be in.