Republic of Lithuania: 2022 Article IV Consultation-Press Release; and Staff Report

International Monetary Fund. European Dept.

doi:10.5089/9798400214547.002.A001

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International Monetary Fund. European Dept.

International Monetary Fund. European Dept.
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Publication Date:: 28 Jul 2022

eISBN:: 9798400214547

ISBN:: 9798400214547

Language:: English

Keywords:: core inflation; inflation inequality; price signal; statistics Lithuania; energy price fluctuation; e port; price volatility; Merchandise export price

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The strong post-pandemic economic recovery was leading to an overheating economy and demand-side inflationary pressures. The war in Ukraine, including its impact on commodity prices, has, however, negatively impacted economic activity and further intensified inflationary pressures. With higher inflation for longer, policies should aim at preserving stability over the near-term while supporting the economy adapt to a higher interest rate environment over the medium-term. Although the current sociopolitical situation is less conducive to structural reforms, these remain key to ensuring sustained productivity growth that will support high wage growth and faster income convergence with Western Europe.

Abstract

Context: An Overheating Economy Now Facing Further Inflationary and Supply-Side Shocks

1. The robust post-pandemic economic recovery resulted in demand-driven inflationary pressures later compounded by high energy prices and the war in Ukraine. With resilient macroeconomic fundamentals, a decisive policy response, and high immunization, the economy avoided a recession in 2020 and rebounded vigorously in 2021, outperforming the rest of the euro area. All remaining COVID-19 restrictions were removed on May 1, 2022 (Figure 1). High real wage growth supported by a tight labor market, loose monetary conditions, and strong private sector balance sheets were fueling an overheating economy. In this context, high energy prices and supply-side disruptions in energy and commodity markets resulting from Russia’s invasion of Ukraine have and will continue to negatively affect economic activity and add to inflationary pressures (Box 1 and Figure 2). Thus, inflation is expected to remain high in the short-term and be more persistent over the medium-term than previously anticipated, creating new challenges for policymakers given the lack of autonomous monetary policy.

2. Strong macroeconomic fundamentals, large policy buffers, and a flexible labor market are key factors in explaining the resilience of Lithuania’s economy. Notwithstanding the higher volatility associated with being a small open economy, Lithuania can count on euro area membership, macroeconomic flexibility, and prudent policies as sources of stability. Thus, the economy seems well-placed to address a deteriorating environment. The emerging risk of high inflation creating a reinforcing cycle with wages that could become entrenched, with its asymmetric social impact, could stall structural reforms, erode competitiveness, and scar the country’s long-term growth prospects. In this context, the government is committed to continuing to implement prudent policies and avoid policy actions in response to short-term challenges that introduce distortions or weaken the strong policy framework. While the focus has been placed on responding to unprecedented shocks—COVID first and now the impact of the war—long-standing structural challenges regarding productivity, income convergence, and demographics persist and need to be addressed, too.

Recent Developments: Inflation Exacerbated by the War and Supply-side Disruptions

3. Prior to Russia’s invasion of Ukraine, the Lithuanian economy as on a strong recovery path and showing signs of overheating. Domestic demand was the main driver of growth, supported by double-digit wage growth—the highest in the euro area over the past two years—and a recovery of investment (Figure 3). Unemployment was returning to pre-pandemic levels, with rising job vacancies and robust wage growth pointing to strong, tightening labor market conditions, with employment reaching pre-pandemic levels by mid-2021 (Figure 4). The strength of aggregate employment, however, masks considerable heterogeneity across economic sectors, as employment in activities more affected by the pandemic tended to experience a slower recovery (Box 2). The booming residential real estate market, increasing credit growth, and core inflation rising more than twice as fast as the eurozone average confirmed the trend of an overheating economy. The external position weakened, driven by a significant but declining trade surplus.

4. Demand-driven inflation precedes the recent spike in energy and commodity prices and the impact of the war, which have further fueled inflationary pressures. Inflation increased from -0.1 percent at the end of 2020 to 6.4 percent by September 2021, before energy prices surged, and reached 20.5 percent in June 2022—the second highest rate in the euro area. This is driven by global supply bottlenecks, higher energy and commodity prices, and above-trend growth in employment and disposable income. At the same time, the E ‘s monetary policy stance was looser than warranted for Lithuania alone given its more advanced cyclical position. The authorities have taken steps to limit the increase in administered energy prices (Annex V). Core inflation, excluding energy and food components, has also increased alongside strong wage growth, suggesting that the surge in consumer prices is increasingly more broad-based. Furthermore, the fast-rising cost of living and continuing labor shortages will maintain upward pressure on wages and inflation. Higher consumer prices have put a greater strain on low-income households that face a higher inflation rate as they allocate 60 percent more of their consumption on food and energy than do higher-income ones.

^{Box 1.}

Inflation May Prove Persistent, Eroding Real Incomes, and Increasing Inequality^¹

Inflation dynamics in Lithuania reflect both external and domestic factors. The decomposition of inflation into energy and food prices, associated mainly with external factors, as well as services and non-energy industrial goods, driven by domestic factors, shows that inflation, particularly in services, has been strong throughout the pandemic (Annex IV). In mid-2021, energy and food prices started to pick up too. Elevated inflation is likely to persist even when external price pressures subside due to an increase in inflation persistence in the aftermath of the pandemic (Cevik, 2022a).

Inflation inequality seems to be increasing in Lithuania. The adverse effect of the recent increase in inflation is more pronounced for households in low-income quantiles who spend the highest share of their incomes on energy and food. Income-quintile specific inflation rates calculated using household budget survey data confirm that inflation is higher—and increasingly so with the level of inflation—for lower income quintiles than for the top income quintile, disproportionately reducing their purchasing power.

^¹ Data on consumption expenditure by income quintile come from Household Budget Survey 2015.

5. The financial system remains profitable, well-capitalized, and liquid. Capital adequacy ratios neared 23 percent at end-2021, well above the required minimum, and profitability remains below pre-pandemic levels but above those of euro area peers (Figure 5). The banking sector remains highly liquid, and loan-to-deposit ratios are at historic lows. Asset quality has further improved, with non-performing loan (NPLs) ratios among the lowest in the EU. Credit growth to households remains solid and credit to nonfinancial corporations is recovering strongly—after taking a dip in 2020 as firms had ample liquidity giv en strong government aid. The composition of the loan portfolio shifted further toward mortgages in 2021, against the backdrop of a marked increase in residential real estate prices. Electronic m oney institutions (EMI) and payment institutions (PI) continued their rapid expansion, with their income soaring by 250 percent from 2020—as payment transactions increased by 280 percent. With the fintech sector becoming increasingly mature, the authorities have shifted their efforts towards strengthening the AML/CFT framework.

^{Box 2.}

Labor Shortages are Stoking Wage Growth in Most Sectors

The rebound in the labor market has reignited pre-pandemic labor shortages. Employment growth post-pandemic has been particularly strong in communications, transportation, and manufacturing, intensifying labor shortages and putting significant pressure on wages. Job vacancies increased markedly in 2021, in line with other Baltic countries. While employment growth has been strong, total hours worked remain below pre-pandemic levels. Persistently high but declining structural unemployment reflects skills mismatches and a lack of skilled labor in high value-added sectors, while the number of long-term unemployed remains twice as high as pre-pandemic.

Labor costs have grown strongly in most sectors amid tight labor market conditions, which are expected to remain. By end-2021, labor costs per hour worked in manufacturing, construction, and services were more than 15 percent higher than a year earlier. Labor cost increases were broad-based, ranging from 7 percent in transportation to 43 percent in hospitality. High public sector wage growth since 2017 and moderate private sector wages in 2020 have increased the gap between public and private sector remuneration— currently around 10 percent. Lithuania has one of the highest shares of low-income earners in the EU—more than 22 percent—second only to Latvia. Large increases in the minimum wage have sought to address this issue but, with a single national high minimum wage relative to average wages of around 45–50 percent, the minimum wage disproportionately affects employment of low-skilled, young workers in rural areas where it is likely to incentivize informality (see Annex III, IMF Country Report No. 18/185).

6. The fiscal position continued to improve prior to the unprecedented shock triggered by Russia’s invasion of Ukraine. Thanks to the strong recovery and prudent policies in general, the fiscal position improved markedly in 2021—by 6.3 percentage points—to an overall deficit of 1 percent of GDP (Figure 6). Given the transitory and targeted nature of most pandemic support measures, this improvement required no fiscal effort, bringing government debt down to 44.7 percent of GDP. In 2022, however, the war in Ukraine is undermining fiscal performance due to lower growth and higher spending on military, refugees, energy subsidies, additional pension increases, and transfers to the state-owned railway company affected by sanctions to Belarus. In April 2022, the government announced a fiscal package of about 3.5 percent of GDP, half of which is repurposing of existing budget allocations and use of EU funds.

Package of Fiscal Measures, 2022

Sources: Ministry of Finance; staff estimates. Note: The difference amounting to about 0.2 percent of GDP between the estimates of staff and authorities is due to the difference in nominal GDP projections in 2022.

Package of Fiscal Measures, 2022

		In million EUR	Percent of GDP
Energy subsidies
	Households	570	0.9
	Firms	120	0.2
Increase in minimum untaxable income threshold		103	0.2
Temporary VAT reduction on central heating		23	0.0
Increase in old-age pensions		68	0.1
Additional benefits and heating aid		106	0.2
Social assistance for refugees		384	0.6
Support to affected sectors		9	0.0
Support to the railway company		155	0.2
Solar power grant to households		35	0.1
Additional military spending		298	0.5
Additional infrastructure and security spending		3	0.0
Additional other spending		235	0.4
Total		2,110	3.3

Package of Fiscal Measures, 2022

		In million EUR	Percent of GDP
Energy subsidies
	Households	570	0.9
	Firms	120	0.2
Increase in minimum untaxable income threshold		103	0.2
Temporary VAT reduction on central heating		23	0.0
Increase in old-age pensions		68	0.1
Additional benefits and heating aid		106	0.2
Social assistance for refugees		384	0.6
Support to affected sectors		9	0.0
Support to the railway company		155	0.2
Solar power grant to households		35	0.1
Additional military spending		298	0.5
Additional infrastructure and security spending		3	0.0
Additional other spending		235	0.4
Total		2,110	3.3

7. Lithuania’s external position was moderately stronger than fundamentals in 2021. The current account surplus decreased to pre-pandemic levels. National savings remained buoyant reflecting temporary factors rather than a long-term misalignment (see Annex II). Exports of goods and freight services proved resilient to the introduction of the EU mobility package, while exports of financial and IT services were boosted by the growth of fintech in the wake of Brexit. The 2021 SDR allocation of 423.3 million (around EUR512 million) has been kept as part of international reserves.

^{Box 3.}

Impact of Russia’s Invasion of Ukraine

Under the baseline assumption of no further escalation, the impact on the economy will be modest through direct trade linkages and sanctions^¹ but, like other countries, will be magnified by a worsened global outlook, rising commodity p rices, and confidence effects.

Trade linkages with Russia, Ukraine, and Belarus are considerable, but a large fraction represents re-exports. Lithuania’s e ports to these countries are a out a si th of total exports in 2021, which will be significantly affected adding to lower external demand. Importers are already facing higher import prices and supply disruptions, particularly in some industries such as metals, chemicals, and furniture. At the same time, about 90 percent of exports of goods to Russia and Belarus and 30 percent of exports to Ukraine are re-exports. Finally, after the 2014 sanctions, Lithuanian companies proved flexible in reorienting to new markets and substituting alternative inputs.

The conflict will also affect Lithuania’s trading partners within the EU. The hit to activity in trading partners will result in weaker demand from the EU which accounts for the lion’s share of merchandise exports of Lithuanian origin (about 60 percent). This effect will be partly offset by slowing import growth given the high import content of exports.

The heightened uncertainty could dampen activity further. A loss of investor confidence and higher inflation could erode household disposable income and corporate profitability and thereby weigh on private investment and consumption. The war is expected to dent real GDP growth by about 2 percentage points in 2022 relative to the pre-conflict baseline. Half of that impact would come from the disruption of trade with Russia, Ukraine, and Belarus.

^¹ Lithuania has imposed sanctions on Russia, including the central bank and selected banks. The List of EU sanctions adopted following Russia’s invasion of Ukraine is available on the EU website. Analysis of the global spillovers of sanctions can be found in April 2022 World Economic Outlook.

8. While the outbreak of the war in Ukraine will have far-reaching consequences, economic links to Russia have been declining and Lithuania stands on a resilient footing. Lithuania has historical ties with Russia, but trade and financial linkages have become significantly less important over time with Lithuania’s integration into the European Union (EU) and the euro area (Figure 7). The share of exports to Russia, Ukraine, and Belarus was 16 percent as of end-2021, down from 30 percent in 2014 before the introduction of sanctions and countersanctions due to Russia’s annexation of Crimea, but re-exports account for a significant share of this, particularly in the case of Russia (Box 3). Therefore, Lithuania enters this crisis with ample buffers, robust private balance sheets, a profitable financial sector, and a strong external position that point to a resilient economy. So far, the increase in long-term bond spreads relative to Germany has been modest (about 20 basis points), while equity markets have remained broadly stable. There were some modest deposit withdrawals in the early days of the war, but the level of deposits remains at an historic high and significantly above a year earlier.

Pre War vs. Pre GFC vs. Pre Covid

Source: Eurostat, Haver, IMF staff calculations

^{^1/}2019 excludes tax and pension reform adjustment

^{^2/}2008 and 2019

^{^3/}2009 and 2019

Pre War vs. Pre GFC vs. Pre Covid

		2007	2019	2021
Current Account (percent GDP)		-13.1	52	1.4
Savings-Investment balances:
	Non-financial corporate	-3.5	;.7
	Households	-42	-1.6
	General government	-0.8	0.5
	Financial corporate	0.3	0.7
Output gap (percent potential GDP)		13.4	0.8	0.9
Nominal wage growth^¹		19.3	8.8	10.5
Inflation^²		11.2	2.2	4.6
Budget balance (percent GDP)		-0.8	0.5	-1.0
Structural balance (percent potential GDP)		-6.4	0.6	-1.0
Effective interest rate on public debt^³		7.0	2.8	1.0

Source: Eurostat, Haver, IMF staff calculations

^{^1/}2019 excludes tax and pension reform adjustment

^{^2/}2008 and 2019

^{^3/}2009 and 2019

Pre War vs. Pre GFC vs. Pre Covid

		2007	2019	2021
Current Account (percent GDP)		-13.1	52	1.4
Savings-Investment balances:
	Non-financial corporate	-3.5	;.7
	Households	-42	-1.6
	General government	-0.8	0.5
	Financial corporate	0.3	0.7
Output gap (percent potential GDP)		13.4	0.8	0.9
Nominal wage growth^¹		19.3	8.8	10.5
Inflation^²		11.2	2.2	4.6
Budget balance (percent GDP)		-0.8	0.5	-1.0
Structural balance (percent potential GDP)		-6.4	0.6	-1.0
Effective interest rate on public debt^³		7.0	2.8	1.0

Source: Eurostat, Haver, IMF staff calculations

^{^1/}2019 excludes tax and pension reform adjustment

^{^2/}2008 and 2019

^{^3/}2009 and 2019

Outlook and Risks

9. The outlook assumes a significant but manageable impact from the war (Box 3). The baseline projections are shaped by the assumptions of no further escalation of the war and a gradual decline in commodity prices in 2023 and beyond towards pre-war levels.

Real GDP growth in Lithuania is projected to slow markedly in 2022, but with little permanent effect on potential output. Economic growth is projected to be half the pre-war forecast due to lo er contribution from net e ports reflecting the country’s trade linkages with Russia, Ukraine, and Belarus, as well as significantly lower demand from EU trading partners in 2022.^¹ Strong balance sheets, Recovery and Resilience Facility (RRF) funds, and a tight labor market are expected to limit the impact of the conflict on domestic demand, despite high inflation eroding real disposable incomes. As a result, the output gap is estimated to be positive but small in 2022 and close going forward.
Inflation will remain elevated for longer. High global energy and food prices and supply-side disruptions will keep inflation high throughout 2022 and early 2023. Core inflation is also expected to remain elevated on the back of tight labor market conditions. While inflation is expected to decelerate in 2023 and beyond, helped by declining commodity prices, there is considerable uncertainty regarding its future path and degree of persistence, with risks skewed to the upside.

Main Macroeconomic Variables Under Baseline

	2022	2023	2024	2025	2026	2027
Real GDP growth	1.8	2.3	3.0	2.8	2.6	2.3
Output gap	0.6	0.2	0.1	0.0	0.0	0.0
Inflation	17.9	8.5	3.0	2.4	2.4	2.3
Pre-war real GDP growth projection	3.9	3.1	2.6	2.4	2.3	2.3

Main Macroeconomic Variables Under Baseline

	2022	2023	2024	2025	2026	2027
Real GDP growth	1.8	2.3	3.0	2.8	2.6	2.3
Output gap	0.6	0.2	0.1	0.0	0.0	0.0
Inflation	17.9	8.5	3.0	2.4	2.4	2.3
Pre-war real GDP growth projection	3.9	3.1	2.6	2.4	2.3	2.3

10. Abundant downside risks could hinder growth and lead to high and persistent inflation. Global inflation could prove long-lasting, with higher interest rates and more volatile financial markets. While Lithuania has ample buffers to respond to shocks, risks to the outlook are clearly tilted to the downside. There are also other risks associated with a further escalation of the war, refugees, the lingering conflict with China, lack of momentum in structural reforms, and tightening financial conditions, especially at the peak of the real estate market. In response to these shocks and among other policies, automatic stabilizers should be allowed to respond and targeted support to the vulnerable might be needed (Annex VI). On the upside, the economy could prove more resilient than projected and precautionary savings weaker than expected due to the strength of private sector balance sheets and strong fundamentals.

Authorities’ Views

11. The authorities broadly agree ith staff’s assessment of the out look an risks but highlight the significant uncertainty facing the world economy. They emphasize the resilience of the Lithuanian economy during the pandemic but acknowledge that the war in Ukraine will have significant social and economic ramifications. The authorities expect inflation to moderate in the second half of the year but see persistently high inflation as a significant risk going forward. They indicate that while risks to the outlook are skewed to the downside, Lithuania has ample policy and macroeconomic buffers to absorb shocks.

Policy Discussions: Dealing with Inflation Without Eopardizing Long-Term Stability

Policy discussions focused on the impact of the war, including high energy prices, and the policy response. They also focused on how the economy could achieve a soft landing from the overheating experience last year and the current supply-side shocks avoiding a vicious inflation-wage spiral that would trigger imbalances. Thus, the main challenge in the short-term is how to respond to high and persistent inflation without an independent monetary policy. Over the medium-term, the economic challenges focused on how to adapt to a higher inflation-and-higher interest rate environment.

A. Fighting Inflation with Limited Policy Instruments and Loose Monetary Conditions

12. High and persistent inflation is the biggest challenge faced by the Lithuanian economy in the short-term. After years of high real wage growth and low inflation, demand-driven inflationary pressures started to build last year. These were compounded at the end of the year by external factors related to high energy and commodity prices that were expected to be transitory. However, supply-side inflationary pressures have intensified after the war with further supply-side disruptions, which could result in second-round effects and become entrenched. While the ECB is entering into a tightening cycle, its monetary policy stance is expected to remain looser than warranted for Lithuania alone. Thus, higher and more volatile inflation is expected to stay for longer and will pose significant challenges.

13. The response to high energy prices needs to provide the proper price signals, while minimizing their disruptive economic impact and supporting vulnerable groups. Energy price fluctuations should be allowed to pass through to domestic consumers while targeted support should be provided to vulnerable groups. However, in the face of extraordinarily large energy price increases, a full pass-through might dent households’ disposable income and companies’ profitability to such an extent that it would create large and undesirable macroeconomic disruptions—some companies have temporarily ceased production when energy prices have exceeded a certain level. Thus, policy actions aimed at preventing this excessive volatility in energy prices could play a role in the current juncture provided they have clear sunset clauses and do not eliminate the price signal.

14. The authorities’ mu ti-pronged approach aimed at limiting economic disruption, provided targeted support, and allowed for market price signals. Most of the gas and electricity market is deregulated, implying a significant pass-through of electricity and natural gas prices. Gasoline and diesel are unregulated and have not been subsidized, allowing full pass-through of prices. However, most households are in the regulated segment of the market. Regulated prices also increased significantly, albeit the authorities took some measures to limit the increase that have been extended to all households since July until the end of the year (Annex V). They also enhanced pre-existing targeted programs to subsidize heating for vulnerable households, and temporarily reduced the value-added tax (VAT) rate on district heating for all households to zero at a moderate expected cost of EUR23 million.

15. Fiscal policy will be moderately pro-cyclical this year in response to the new environment, with new spending leading to a deterioration of the underlying fiscal position. The 2022 budget was prepared when inflationary pressures and an overheating economy with a tight labor market were expected to generate a revenue windfall and reduce spending pressures. While revenues are still expected to remain buoyant, the windfall will be smaller because of the negative impact of the war on activity. At the same time, it will increase expenditures and create some permanent spending commitments, such as additional defense expenditures of around 0.5 percent of GDP. As a result, the budget deficit is projected to widen by 1 percent of GDP. Beyond temporary factors, the underlying fiscal stance is estimated to be moderately pro-cyclical this year. In 2023 and beyond, however, the fiscal position should be tightened in a counter-cyclical manner, in line with the national fiscal rule without activating the escape clause, for a more effective management of aggregate demand. Furthermore, in the current high inflation environment, the increase in public sector wages and the minimum wage over the next few years will provide a strong signal to the private sector and could, if set cautiously, help prevent a vicious wage-price spiral. Deficits over the medium-term are expected to moderate, consistent with the national fiscal rule— which is tighter than the EU framework—while the increase in the debt burden is manageable given low and declining government debt ratios benefiting from high nominal GDP growth. At the same time, Lithuania will continue to benefit from cohesion funds (11 percent of GDP over the 2021–27 programming period) and RRF funds (3 percent of GDP), which should help address infrastructure needs and preserve ample fiscal space against future shocks at a time of heightened uncertainty.

16. With an uncertain outlook, the impact of the war accentuates Lithuania’s pre-existing long-standing structural fiscal challenges given ample social demands. Budgetary pressures over the medium-term will come from aging-related spending, particularly on pensions—the most important tool available for redistribution—with one of the highest old-age dependency ratios in the EU, and that is expected to double by 2060. In particular, recent pension adjustments have exceeded, once again, what the existing formula prescribes. While the formula aims to ensure financial sustainability, it would result in significantly lower replacement ratios, jeopardizing the social sustainability of the system. Thus, further increases in social spending, which remains at a level below the EU average, are likely and will require better social programs. Spending pressures over the medium-term, including from higher interest rates, combined with already low discretionary spending, mean that further increases in spending will require either increasing revenues or a relaxation of the fiscal rule. Nevertheless, tax reform plans have been postponed. Thus, a comprehensive fiscal strategy that incorporates plans to deal with these pressures should focus on (i) improving the quality of spending, (ii) broadening the tax base in growth-friendly ways by eliminating distortionary tax expenditures (which amounted to EUR2.4 billion in 2021), and (iii) strengthening the composition and collection of environmental and housing-related taxes.^²

17. Given ample buffers, the financial system is well-placed to withstand a deteriorating economic environment. Given excess capital and liquidity ratios and healthy profitability, the financial system can adjust to the weaker macroeconomic environment. In fact, Bank of Lithuania (BoL) stress tests suggest that the system would be able to absorb losses under a severe downside scenario assuming a cumulative decline in output and real estate price of 7.5 and 17.5 percent respectively over two years. As the ECB gradually tightens monetary policy in the medium-term, banks’ profitability ill likely improve as interest margins are respected to increase while the portfolio quality is expected to remain resilient given the strong balance sheet of households and corporates.

18. To address potential risks to the financial sector from rising residential real estate prices, the BoL has implemented a series of macroprudential measures. These include tighter down payment requirements for second and subsequent housing loans and a new sectoral systemic risk buffer for banks with the largest mortgage portfolios. The distribution of loan-to-value ratios on new loans has shifted down since the measure was implemented. The BoL estimates that these measures could reduce new mortgages by 10 percent and slow house price growth by as much as 3 percent. However, the effectiveness of capital-based measures might be limited given excess capital and the profitability of the banking system. Addressing some of the underlying structural bottlenecks in housing supply will help contain real estate prices that, over the last year, appear to have deviated from fundaments in the Vilnius area. This would require a comprehensive approach to regional development and changes in land-use policies to increase allocation to residential housing.

Macroprudential Actions

Measures	Effective Date
Increased down payments for second and subsequent mortgages	February 1
New sectoral buffer to institutions with mortgage portfolios > EUR50 million	July 1

Macroprudential Actions

Measures	Effective Date
Increased down payments for second and subsequent mortgages	February 1
New sectoral buffer to institutions with mortgage portfolios > EUR50 million	July 1

19. Given higher uncertainty, the emphasis should remain on mitigating potential financial stability risks. While the banking sector remains among the most concentrated in the EU, the degree of concentration across loan segments—and most notably consumer loans—has declined after the third largest bank completed its restructuring. At the same time, interest rates on loans have declined without affecting credit standards. Low interest rates and strong household income are factors driving the boom in the residential real estate market. However, rapidly rising house prices, record sales, buyer intent indicators, and an increase in secondary mortgages may be signs of overheating. Nearly half of real estate transactions do not involve a mortgage, suggesting that an increase in interest rates may have a limited effect on house prices. The expected rapid growth of an online fintech bank focused on nonresident activity and ambitious expansion plans across the EU will require sustained supervisory efforts by national and supranational authorities.

20. While the fintech sector has continued to expand, efforts should focus on consolidating the gains and strengthening regulation and supervision. Thanks to a supportive business environment and regulatory framework, Lithuania has since 2016 attracted an evergrowing number of fintech companies, with 35 new market participants in 2021, becoming the largest fintech hub in the EU in terms of licensed companies.^³ Core business activities include payment services, financial software, lending, digital banking, and blockchain. In addition, Lithuania has become a hub for virtual asset service providers (VASP), with most of the 407 registered VASPs entering in the last year. In 2021, specialized banks increased their market share fourfold, to 2.3 percent of total assets. The number of employees working in the sector has also grown steadily, reaching 5,900 at the end of last year—about 30 percent of employment in the financial and insurance sector. Against this background, the BoL has taken steps to enhance the governance and compliance culture of licensed fintech operators, including by developing a risk-based approach to AML/CFT supervision and consistent outreach and guidance to supervised entities. The focus of Lithuanian fintech hub on cross-border payments, most conducted by non-resident with transactions’ origination and destination outside Lithuania reshaped the financial sector and risk profile of the country, requiring commensurate resources and capacity for effective supervision, regulation, and law enforcement across different government agencies.

21. The AML/CFT framework requires further strengthening to respond to the increasing money laundering and terrorism financing (ML/TF) risks from non-resident activity.^⁴ Following the MEVL assessment which rated Lithuania’s ML system as insufficiently effective in ten out of eleven areas, the authorities have strengthened the AML/CFT legislative framework, developed a risk-based approach to AML/CFT supervision, and increased the BoL and the financial intelligence unit staffing and other resources. However, the substantial increase in the volume of cross-border payments, including with higher risk jurisdictions, driven in part by the BoL’s enabling EMI and PI to use its payment system for EEA payments directly, has increased the ML/TF threat (Figure 8). The AML/CFT supervisory coverage of the financial sector should be broadened and the BoL’s resources and capacity increased, while AML/CFT controls to access the BoL payment system (CENTROlink) by non-bank payment services providers should continue to be strengthened. The light registration regime for VASPs has attracted a substantial number of new entrants, requiring the development of robust AML/CFT risk-based supervision of VASPs combined with stronger supervisory powers and market entry controls.

Authorities’ Views

22. The authorities emphasized the need to address the challenges posed by the high energy and commodity prices by protecting the most vulnerable while safeguarding stability. After a significant improvement in the fiscal position last year, the authorities have taken advantage of this fiscal space and responded to the shock caused y Russia’s invasion of Ukraine y providing substantial support to households and firms and raising military spending. They highlighted their commitment to prudent fiscal policy and plan to implement countercyclical policies going forward provided energy and food prices moderate as expected. The authorities broadly agreed that the tax system needs adjustments, particularly in the area of real estate (where they have initiated a reform proposal broadening immovable property taxation) and environmental taxation.

23. The authorities will continue their proactive supervisory approach to banks and, after the initial success in establishing a dynamic fintech sector, will focus on further enhancing its maturity and risk management. With growing signs of overvaluation in the residential real estate market, they see incipient signs of risk to financial stability that could require further tightening borrower-based measures or increasing the countercyclical capital buffer. The authorities understand that with a growing fintech sector, the emphasis should be placed on its maturity in order to mitigate associated risks. They agree on the need to further increase supervisory resources and strengthen AML/CFT controls, including for VASPs, and controls to access the payment system. In this regard, they emphasize that parliament has recently amended the AML/CFT law enhancing the regulatory framework applicable to virtual asset service providers.

B. Introducing Key Reforms to Ensure Sustainable and Inclusive Growth

24. Lithuania has strong institutions, good governance, and a robust policy framework, the most important pillars for sustainable growth. Building on these strengths, structural reforms are necessary to ensure continued income convergence (Annex VI IMF Country Report 21/192).

25. The structural flexibility of the economy helps absorb shocks, reducing the burden on fiscal policy in the context of a currency union. Already high labor-market flexibility has increased following the reform of the labor code in 2017 that deregulated temporary contracts and working-time arrangements. The reform provided more flexibility to employers regarding hiring and dismissal of both permanent and temporary workers, at the potential cost of increasing labor market duality. The effects of increased flexibility were partly compensated by increasing the benefits and duration of the unemployment insurance. At the same time, the minimum wage, unchanged in the years following the global financial crisis, has increased significantly in the last decade at an average annual rate of 12 percent, the second fastest in the EU. While productivity gains have supported wage growth, Lithuania is facing labor shortages due to population aging and low net immigration. Along with previous efforts to increase the inflow of skilled workers from abroad, refugees from Ukraine could help alleviate some labor market shortages in specific sectors such as hospitality.

26. A competitive export sector is able to withstand temporary deviations between wages and productivity while the flexible labor market should correct long-term deviations. The driver of Lithuania’s convergence since the glo al financial crisis has been high productivity in the tradeable sector that has preserved competitiveness and supported wage growth. Even recent high real wage growth in the tradeable sector has been, on average, in line with productivity. With wages equalizing across sectors, productivity growth has been broadly in line with wage growth even for non-tradeables, making Lithuania competitive and helping to increase its export share faster than peers (Figure 9). Thus, even if nominal wages remain elevated or increase further in the next few years when inflation starts moderating—accelerating income convergence—potential temporary deviations between real wages and productivity growth should not have a lasting negative impact. Furthermore, since wage setting largely happens at the firm level, wages are sensitive to unemployment resulting in a self-correction mechanism if these deviations become entrenched.

27. Lithuania has an opportunity to address structural impediments to growth, thanks to financial support from the EU. The top priorities remain education and healthcare reforms (IMF Country Report No. 21/192, Annex VI). Closing the gaps in transport infrastructure, human capital, and access to financing for SMEs are also priority areas for structural reforms efforts.

C. Greening Growth while Ensuring Energy Security

28. The Baltics are increasingly vulnerable to climate change, while geopolitical tensions have brought energy security to the fore. While the projected increase in temperature over the next century could initially provide a boost to economic activity in colder regions of the northern hemisphere such as Lithuania, greater volatility associated with higher temperatures will bring significant downside risks. At the same time Russia’s invasion of Ukraine—unsettling global energy markets—has highlighted the risks associated with energy dependency and price volatility.

29. Changing the energy matrix and further improving energy efficiency could bring a significant reduction in carbon (CO2) emissions and strengthen energy security. Moving away from fossil fuels is necessary to mitigate climate change. Unfortunately, the current pace of international CO2 emission reductions is still not consistent with the goals of the Paris agreement. In the case of Lithuania, the reduction in CO2 emissions has been slower than the EU average, largely because of the continuing increase in emissions in agriculture, transportation, services, and buildings.^⁵ Increasing the share of renewables and other non-hydrocarbon energy and further improving energy efficiency could contribute to a significant reduction in emissions and imported sources of energy.^⁶ To balance the need for energy security while advancing in the goal to reduce emissions, Lithuania has already taken steps to increase the share of renewables and has eliminated all energy-related imports from Russia. The introduction of a national economy-wide carbon tax—set to gradually increase to EUR50 per metric ton of CO2 emissions by 2030—will be needed to reach Lithuania’s emission target y 2030. At the same time, however, since long-term climate risks cannot be eliminated, decisive action to strengthen physical, financial, institutional, and social resilience will also be needed.

Authorities’ Views

30. The authorities agree on the importance of structural reforms to achieve faster convergence and accelerate the green transition. Noting the critical role of competitiveness in sustainable high wage growth and income convergence, they highlight the pursuit of a broad spectrum of structural reforms—from education and healthcare to innovation policy. Notwithstanding the challenging environment at the moment, they remain committed to continue implementing the government’s ambitious reform agenda. Green transition to renewables is a top priority not only for meeting climate change mitigation pledges, but also to further reduce dependence on imported sources of energy.

Staff Appraisal

31. The authorities’ response to the energy crisis aims to limit economic disruptions, provide targeted support to the vulnerable, and allow for market price signals. With a more targeted response than that adopted in other countries, the pass-through of higher energy prices to consumers has been significant, particularly for companies. While the support provided for the first half of 2022 was not in line with best practices, the more recent decision to allow a significant pass-through of energy prices and reflect this subsidy transparently in the budget is welcome. Preexisting targeted programs to subsidize heating for vulnerable households have also been enhanced and the VAT rate on district heating for households was temporarily reduced to zero at a modest fiscal cost. Going forward, the subsidy to energy tariffs should gradually be phased out even if high energy prices proved persistent, with the bulk of the support being provided in a targeted manner to the more vulnerable.

32. Higher revenues from inflation allow the budget to accommodate pressures for higher social and defense spending in the short-term, but difficult tradeoffs await down the road. Permanent spending commitments add to pre-existing pressures. With discretionary spending low and lack of consensus on significant tax reform in the current environment, further increases in spending will result in a moderate deficit over the medium-term instead of the authorities’ goal of a balanced budget. This would still keep a strong fiscal position with public debt on a declining path. To avoid turning short-term challenges into structural problems, efforts should focus on improving the quality of spending while broadening environmental and housing-related taxes. To this end, the government’s proposal for revamping real estate taxation is a step in the right direction.

33. Given the risk of persistently high inflation, fiscal policy will need to be decisively countercyclical going forward. Although fiscal policy should ideally take a counter-cyclical stance in Lithuania given the lack of monetary policy, the moderately procyclical stance in 2022 is an appropriate response to the new environment with heightened uncertainty and downside risks, especially considering that half of the fiscal stimulus is on additional military spending on mostly imported equipment with little impact on domestic demand. Public debt is still projected to decline this year. A tightening of fiscal policy next year in line with the national fiscal rule will help minimize the risks of persistently high inflation. Furthermore, the increase in public sector wages and the minimum wage over the next few years should be consistent with expected inflation and productivity gains to provide a strong signal to the private sector and prevent a vicious wage-price spiral.

34. The banking system has ample capital and liquidity buffers to withstand a weakening economic environment or even greater shocks. The expected emergence of a large financial institution with a non-resident base business model will require prompt action by national and supranational authorities to ensure effective supervision under the existing European arrangements.

35. Further efforts are needed to mitigate money laundering risks in the financial sector, particularly from the dynamic and growing fintech sector. While the BoL has made important strides in monitoring and supervision, the fast-growing non-resident activity in the fintech sector presents regulatory and supervisory challenges, with cross-border risks to the integrity of the AML/CFT framework. In this context, the focus should be shifted from growth of this sector to its consolidation, with a view toward mitigating risks. This should include more effective controls for access to the oL’s payment system E R link). For virtual asset service providers, the Ministry of Interior and the Financial Intelligence Unit should develop risk-based supervision, stronger supervisory powers, and market entry controls. The AML/CFT supervisory capacity of the BoL will also need to be substantially strengthened, a process which will take time and require significant new resources and greater coordination with other jurisdictions.

36. The external position was moderately stronger than implied by fundamentals. The current account surplus decreased to pre-pandemic levels. National savings remained buoyant reflecting temporary factors rather than a long-term misalignment.

37. Structural reforms are necessary to ensure continued income convergence. The authorities need to address structural impediments by accelerating reforms in education and healthcare, and by closing gaps in the transportation infrastructure, and reducing information asymmetries that limit access to financing for small and medium enterprises. Ample fiscal space and European funds imply that upfront reform costs can be met without jeopardizing the fiscal position.

38. A comprehensive carbon tax will be necessary to achieve the authorities’ emission reduction objectives for 2030. Achieving the reduction in emissions and energy imports will require (i) reducing fossil fuels, (ii) investing in low-emission transportation, and (iii) raising energy efficiency. The introduction of an economy-wide carbon tax—set to gradually increase to EUR50 per metric ton of CO2 emissions by 2030—would help achieve these goals.

39. The next Article IV Consultation is expected to be completed on the standard 12-month cycle.

^{Table 1.}

Lithuania: Selected Economic Indicators, 2018–27

Sources: Lithuanian authorities; World Bank; Eurostat; and IMF staff estimates and projections. Note: Data are presented on ESA2010, and BPM6 manuals basis.

^{^1/}2019 adjusted for tax reforms.

^{^2/}Calculation takes into account standard cyclical adjustments as well as absorption gap.

^{Table 1.}

Lithuania: Selected Economic Indicators, 2018–27

Life expectancy at birth (2020): 80 years (women), 70.1 years (men)
Quota (current, % of total): SDR 441.6 million, 0.09 percent	Per capita GDP (2021):	€ 19,760
Main products and exports: refined fuel, machinery and equipment, chemicals, textiles, foodstuffs, plastics, wood products	Literacy rate (2015):	99.8%
	At-risk-of-poverty (after transfers), share of population (2020):	20.9%
Key export markets: Russia, Latvia, Poland, Germany, U.S.

					2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
									Projections
Out					put
	Real GDP growth (annual percentage change)				4.0	4.6	-0.1	5.0	1.8	2.3	3.0	2.8	2.6	2.3
		Domestic demand (contribution to growth)			3.3	1.4	-3.9	5.7	3.8	4.3	3.8	3.5	3.2	2.9
		Domestic demand growth (year-on-year, in percent)			3.4	1.6	-4.0	5.9	4.1	4.5	4.0	3.6	3.2	3.0
			Private consumption growth (year-on-year, in percent)		3.6	3.1	-2.1	7.4	3.3	4.3	3.7	3.4	3.0	2.8
			Domestic fixed investment growth (year-on-year, in percent)		10.0	6.6	-1.8	7.0	3.6	6.6	5.9	5.4	4.9	4.5
			Inventories (contribution to growth)		-1.1	-1.7	-2.0	-0.5	0.7	0.0	0.0	0.0	0.0	0.0
		Net external demand (contribution to growth)			0.7	3.2	3.8	-0.7	-2.0	-2.0	-0.9	-0.8	-0.6	-0.6
			Export growth (year-on-year, in percent)		6.8	9.9	0.4	15.9	-2.2	3.0	4.4	3.6	3.5	3.0
			Import growth (year-on-year, in percent)		6.0	6.1	-4.4	18.7	0.0	5.5	5.6	4.6	4.2	3.7
	Nominal GDP (in billions of euro)				45.5	48.9	49.5	55.4	64.6	72.4	77.5	82.1	86.5	90.8
	Output gap (percent of potential GDP)				0.7	1.6	0.0	1.6	0.6	0.2	0.1	0.0	0.0	0.0
Employment
	Employment (annual percentage change)				1.5	0.3	-1.5	0.8	0.5	0.1	0.3	0.0	-0.2	-0.4
	Unemployment rate (year average, in percent of labor force)				6.1	6.3	8.5	7.1	7.3	7.0	6.5	6.2	6.0	6.0
	Average monthly gross earnings (annual percentage change) ^1/				9.9	8.8	10.1	10.5	17.2	14.5	5.8	5.6	5.6	5.5
	Average monthly gross earnings, real (annual percentage				7.2	6.4	9.0	5.6	-0.6	6.0	2.9	3.2	3.2	3.2
	Labor productivity (annual percentage change)				2.5	4.3	1.4	4.2	1.3	2.2	2.6	2.8	2.8	2.8
Prices
	HICP, period average (annual percentage change)				2.5	2.2	1.1	4.6	17.9	8.5	3.0	2.4	2.4	2.3
	HICP core, period average (annual percentage change)				1.9	2.3	2.6	3.4	9.3	5.8	3.6	2.6	2.4	2.4
	HICP, end of period (year-on-year percentage change)				1.8	2.7	-0.1	10.7	17.2	4.6	2.4	2.5	2.3	2.3
	GDP deflator (year-on-year percentage change)				3.5	2.7	1.5	6.5	14.5	9.6	3.9	3.1	2.8	2.5
General Government Finances
	Revenue (percent of GDP)				34.5	35.2	35.7	37.7	38.3	37.2	36.7	36.4	36.2	36.2
		Of which EU grants			0.7	0.9	0.6	0.7	1.5	0.8	0.7	0.7	0.6	0.6
	Expenditure (percent of GDP)				34.0	34.8	42.9	38.7	40.2	38.5	37.9	37.6	37.4	37.2
		Of which: Non-interest			33.1	33.9	42.3	38.3	40.0	38.3	37.7	37.3	37.0	36.9
				Interest	0.9	0.9	0.7	0.4	0.3	0.2	0.2	0.3	0.4	0.4
	Fiscal balance (percent of GDP)				0.5	0.5	-7.3	-1.0	-2.0	-1.3	-1.2	-1.2	-1.2	-1.0
	Fiscal balance excl. one-offs (percent of GDP)				0.5	0.4	-7.3	-1.0	-2.0	-1.3	-1.2	-1.2	-1.2	-1.1
	Structural fiscal balance (percent of potential GDP) ^2/				0.5	0.3	-6.6	-1.2	-2.0	-1.2	-1.1	-1.0	-1.0	-0.9
	General government gross debt (percent of GDP)				33.7	35.9	46.6	44.7	42.1	38.3	36.5	35.2	34.1	33.1
		Of which: Foreign currency-denominated			9.5	10.1	6.5	3.1	1.5	0.7	0.3	0.2	0.1	0.0
Balance of Payments (in percent of GDP, unless otherwise specified)
	Current account balance				0.3	3.5	7.3	1.4	-1.5	-1.5	-1.0	-0.5	-0.2	0.1
	Current account balance (billions of euros)				0.1	1.7	3.6	0.8	-0.9	-1.1	-0.8	-0.4	-0.2	0.1
Saving-Investment Balance (in percent of GDP)
	Gross national saving				20.6	21.0	20.8	20.0	17.6	17.4	18.5	19.5	20.2	20.8
	Gross national investment				20.4	17.6	13.5	18.6	19.1	18.8	19.6	20.0	20.5	20.7
	Foreign net savings				-0.3	-3.5	-7.3	-1.4	1.5	1.5	1.0	0.5	0.2	-0.1

Sources: Lithuanian authorities; World Bank; Eurostat; and IMF staff estimates and projections. Note: Data are presented on ESA2010, and BPM6 manuals basis.

^{^1/}2019 adjusted for tax reforms.

^{^2/}Calculation takes into account standard cyclical adjustments as well as absorption gap.

^{Table 1.}

Lithuania: Selected Economic Indicators, 2018–27

Life expectancy at birth (2020): 80 years (women), 70.1 years (men)
Quota (current, % of total): SDR 441.6 million, 0.09 percent	Per capita GDP (2021):	€ 19,760
Main products and exports: refined fuel, machinery and equipment, chemicals, textiles, foodstuffs, plastics, wood products	Literacy rate (2015):	99.8%
	At-risk-of-poverty (after transfers), share of population (2020):	20.9%
Key export markets: Russia, Latvia, Poland, Germany, U.S.

					2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
									Projections
Out					put
	Real GDP growth (annual percentage change)				4.0	4.6	-0.1	5.0	1.8	2.3	3.0	2.8	2.6	2.3
		Domestic demand (contribution to growth)			3.3	1.4	-3.9	5.7	3.8	4.3	3.8	3.5	3.2	2.9
		Domestic demand growth (year-on-year, in percent)			3.4	1.6	-4.0	5.9	4.1	4.5	4.0	3.6	3.2	3.0
			Private consumption growth (year-on-year, in percent)		3.6	3.1	-2.1	7.4	3.3	4.3	3.7	3.4	3.0	2.8
			Domestic fixed investment growth (year-on-year, in percent)		10.0	6.6	-1.8	7.0	3.6	6.6	5.9	5.4	4.9	4.5
			Inventories (contribution to growth)		-1.1	-1.7	-2.0	-0.5	0.7	0.0	0.0	0.0	0.0	0.0
		Net external demand (contribution to growth)			0.7	3.2	3.8	-0.7	-2.0	-2.0	-0.9	-0.8	-0.6	-0.6
			Export growth (year-on-year, in percent)		6.8	9.9	0.4	15.9	-2.2	3.0	4.4	3.6	3.5	3.0
			Import growth (year-on-year, in percent)		6.0	6.1	-4.4	18.7	0.0	5.5	5.6	4.6	4.2	3.7
	Nominal GDP (in billions of euro)				45.5	48.9	49.5	55.4	64.6	72.4	77.5	82.1	86.5	90.8
	Output gap (percent of potential GDP)				0.7	1.6	0.0	1.6	0.6	0.2	0.1	0.0	0.0	0.0
Employment
	Employment (annual percentage change)				1.5	0.3	-1.5	0.8	0.5	0.1	0.3	0.0	-0.2	-0.4
	Unemployment rate (year average, in percent of labor force)				6.1	6.3	8.5	7.1	7.3	7.0	6.5	6.2	6.0	6.0
	Average monthly gross earnings (annual percentage change) ^1/				9.9	8.8	10.1	10.5	17.2	14.5	5.8	5.6	5.6	5.5
	Average monthly gross earnings, real (annual percentage				7.2	6.4	9.0	5.6	-0.6	6.0	2.9	3.2	3.2	3.2
	Labor productivity (annual percentage change)				2.5	4.3	1.4	4.2	1.3	2.2	2.6	2.8	2.8	2.8
Prices
	HICP, period average (annual percentage change)				2.5	2.2	1.1	4.6	17.9	8.5	3.0	2.4	2.4	2.3
	HICP core, period average (annual percentage change)				1.9	2.3	2.6	3.4	9.3	5.8	3.6	2.6	2.4	2.4
	HICP, end of period (year-on-year percentage change)				1.8	2.7	-0.1	10.7	17.2	4.6	2.4	2.5	2.3	2.3
	GDP deflator (year-on-year percentage change)				3.5	2.7	1.5	6.5	14.5	9.6	3.9	3.1	2.8	2.5
General Government Finances
	Revenue (percent of GDP)				34.5	35.2	35.7	37.7	38.3	37.2	36.7	36.4	36.2	36.2
		Of which EU grants			0.7	0.9	0.6	0.7	1.5	0.8	0.7	0.7	0.6	0.6
	Expenditure (percent of GDP)				34.0	34.8	42.9	38.7	40.2	38.5	37.9	37.6	37.4	37.2
		Of which: Non-interest			33.1	33.9	42.3	38.3	40.0	38.3	37.7	37.3	37.0	36.9
				Interest	0.9	0.9	0.7	0.4	0.3	0.2	0.2	0.3	0.4	0.4
	Fiscal balance (percent of GDP)				0.5	0.5	-7.3	-1.0	-2.0	-1.3	-1.2	-1.2	-1.2	-1.0
	Fiscal balance excl. one-offs (percent of GDP)				0.5	0.4	-7.3	-1.0	-2.0	-1.3	-1.2	-1.2	-1.2	-1.1
	Structural fiscal balance (percent of potential GDP) ^2/				0.5	0.3	-6.6	-1.2	-2.0	-1.2	-1.1	-1.0	-1.0	-0.9
	General government gross debt (percent of GDP)				33.7	35.9	46.6	44.7	42.1	38.3	36.5	35.2	34.1	33.1
		Of which: Foreign currency-denominated			9.5	10.1	6.5	3.1	1.5	0.7	0.3	0.2	0.1	0.0
Balance of Payments (in percent of GDP, unless otherwise specified)
	Current account balance				0.3	3.5	7.3	1.4	-1.5	-1.5	-1.0	-0.5	-0.2	0.1
	Current account balance (billions of euros)				0.1	1.7	3.6	0.8	-0.9	-1.1	-0.8	-0.4	-0.2	0.1
Saving-Investment Balance (in percent of GDP)
	Gross national saving				20.6	21.0	20.8	20.0	17.6	17.4	18.5	19.5	20.2	20.8
	Gross national investment				20.4	17.6	13.5	18.6	19.1	18.8	19.6	20.0	20.5	20.7
	Foreign net savings				-0.3	-3.5	-7.3	-1.4	1.5	1.5	1.0	0.5	0.2	-0.1

Sources: Lithuanian authorities; World Bank; Eurostat; and IMF staff estimates and projections. Note: Data are presented on ESA2010, and BPM6 manuals basis.

^{^1/}2019 adjusted for tax reforms.

^{^2/}Calculation takes into account standard cyclical adjustments as well as absorption gap.

^{Table 2.}

Lithuania: General Government Operations, 2018–27

(ESA 2010 aggregates, in percent of GDP)

Sources: Ministry of Finance; Ministry of Social Security; and IMF staff estimates. Note: Passive projections from 2022 onward. Projections incorporate only announced budgetary measures.

^{Table 2.}

Lithuania: General Government Operations, 2018–27

(ESA 2010 aggregates, in percent of GDP)

					2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
									Projections
Statement of Operations
Revenue					34.5	35.2	35.7	37.7	38.3	37.2	36.7	36.4	36.2	36.2
Revenue excluding EU grants					33.8	34.3	35.0	37.0	36.7	36.3	36.0	35.7	35.5	35.6
	Tax revenue				17.1	20.4	20.3	22.1	21.9	21.6	21.3	21.2	21.1	21.1
		Direct taxes			5.7	8.9	8.8	9.9	9.5	9.3	9.1	9.1	8.9	8.9
				Personal income tax	4.0	7.1	7.1	7.5	7.4	7.3	7.2	7.2	7.2	7.2
				Corporate income tax	1.5	1.6	1.6	2.1	2.0	2.0	1.8	1.8	1.7	1.7
		Indirect taxes			11.5	11.5	11.6	12.2	12.4	12.2	12.2	12.1	12.1	12.2
				VAT	7.7	7.9	7.9	8.6	8.7	8.6	8.5	8.5	8.5	8.5
				Excises	3.2	3.0	3.1	3.0	3.0	3.0	3.0	3.0	3.0	3.0
				Other	0.6	0.6	0.5	0.7	0.7	0.7	0.7	0.7	0.7	0.7
	Social contributions				13.0	10.0	10.7	10.7	10.8	10.9	10.8	10.8	10.8	10.9
	Grants				0.7	0.9	0.6	0.7	1.5	0.8	0.7	0.7	0.6	0.6
	Other revenue				3.7	3.9	4.0	4.2	4.0	3.9	3.9	3.7	3.7	3.7
Total Expenditure					34.0	34.8	42.9	38.7	40.2	38.5	37.9	37.6	37.4	37.2
	Current spending				30.8	31.6	38.6	35.4	36.5	35.0	34.6	34.3	34.1	33.9
			Compensation of employees		9.7	10.2	11.3	10.9	10.8	10.9	10.9	10.9	10.9	10.9
			Goods and services		4.4	4.4	4.5	4.7	5.5	5.2	5.2	5.2	5.1	5.1
			Interest payments		0.9	0.9	0.7	0.4	0.3	0.2	0.2	0.3	0.4	0.4
				Foreign	0.8	0.6	0.2	0.1	0.2	0.1	0.2	0.2	0.3	0.3
				Domestic	0.1	0.2	0.5	0.3	0.0	0.0	0.0	0.0	0.1	0.1
			Subsidies		0.4	0.4	2.5	1.6	1.8	1.2	0.6	0.5	0.4	0.4
			Grants		0.8	0.8	1.1	0.9	0.8	0.8	0.8	0.8	0.8	0.8
			Social benefits		13.4	13.9	16.8	15.3	15.3	14.7	15.0	15.0	15.2	15.3
			Other expense		1.1	1.1	1.8	1.5	2.0	2.0	1.8	1.7	1.3	1.0
		Capital spending			3.2	3.2	4.3	3.3	3.7	3.4	3.3	3.3	3.3	3.3
Net Lending (+) / Borrowing (-)					0.5	0.5	-7.3	-1.0	-2.0	-1.3	-1.2	-1.2	-1.2	-1.0
Net Lending (+) / Borrowing (-) excl. one-offs					0.5	0.4	-7.3	-1.0	-2.0	-1.3	-1.2	-1.2	-1.2	-1.1
Net acquisition of financial assets					-2.0	5.5	3.7	2.1	1.8	-0.6	-0.5	-0.5	-0.5	-0.4
		Domestic			-1.6	3.5	5.2	2.1	1.8	-0.5	-0.5	-0.5	-0.5	-0.4
		Foreign			-0.4	2.0	-1.5	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Net incurrence of liabilities					-2.6	5.1	11.1	3.0	3.8	0.7	0.7	0.7	0.7	0.6
		Domestic			0.0	-0.8	5.6	0.9	0.5	-1.3	0.2	0.5	0.7	0.7
		Foreign			-2.6	5.9	5.4	2.1	3.4	2.0	0.5	0.2	0.0	-0.1
Financial Balance Sheet
Financial assets					26.2	30.9	34.3	34.0	…	…	…	…	…	…
	Currency and deposits				5.6	8.9	12.9	13.0	…	…	…	…	…	…
	Securities other than shares				0.6	1.0	0.3	0.5	…	…	…	…	…	…
	Loans				1.2	1.7	1.9	2.2	…	…	…	…	…	…
	Shares and other equity				14.1	13.7	13.5	12.9	…	…	…	…	…	…
	Other financial assets				4.6	5.7	5.7	5.3	…	…	…	…	…	…
Financial liabilities					40.8	44.5	55.5	51.4	… …	… …	… …	… …	… …	… …
	Currency and deposits				0.4	0.4	0.2	0.2	…	…	…	…	…	…
	Securities other than shares				31.4	34.8	42.3	37.5	…	…	…	…	…	…
	Loans				5.0	5.1	8.1	8.6	…	…	…	…	…	…
	Other liabilities				3.9	4.3	4.8	5.0	…	…	…	…	…	…
	Net financial worth				-14.6	-13.6	-21.2	-17.4	… …	… …	… …	… …	… …	… …
Memorandum Items:
	GDP (in millions of euros)				45,515	48,860	49,507	55,383	64,583	72,410	77,469	82,073	86,531	90,809
	General government debt (Maastricht def.)				33.7	35.9	46.6	44.7	42.1	38.3	36.5	35.2	34.1	33.1
			Foreign debt		29.3	33.1	38.2	36.3	34.5	32.7	31.1	29.5	28.1	26.7
			Domestic debt		4.4	2.8	8.4	8.4	7.6	5.6	5.4	5.6	6.0	6.4

Sources: Ministry of Finance; Ministry of Social Security; and IMF staff estimates. Note: Passive projections from 2022 onward. Projections incorporate only announced budgetary measures.

^{Table 2.}

Lithuania: General Government Operations, 2018–27

(ESA 2010 aggregates, in percent of GDP)

					2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
									Projections
Statement of Operations
Revenue					34.5	35.2	35.7	37.7	38.3	37.2	36.7	36.4	36.2	36.2
Revenue excluding EU grants					33.8	34.3	35.0	37.0	36.7	36.3	36.0	35.7	35.5	35.6
	Tax revenue				17.1	20.4	20.3	22.1	21.9	21.6	21.3	21.2	21.1	21.1
		Direct taxes			5.7	8.9	8.8	9.9	9.5	9.3	9.1	9.1	8.9	8.9
				Personal income tax	4.0	7.1	7.1	7.5	7.4	7.3	7.2	7.2	7.2	7.2
				Corporate income tax	1.5	1.6	1.6	2.1	2.0	2.0	1.8	1.8	1.7	1.7
		Indirect taxes			11.5	11.5	11.6	12.2	12.4	12.2	12.2	12.1	12.1	12.2
				VAT	7.7	7.9	7.9	8.6	8.7	8.6	8.5	8.5	8.5	8.5
				Excises	3.2	3.0	3.1	3.0	3.0	3.0	3.0	3.0	3.0	3.0
				Other	0.6	0.6	0.5	0.7	0.7	0.7	0.7	0.7	0.7	0.7
	Social contributions				13.0	10.0	10.7	10.7	10.8	10.9	10.8	10.8	10.8	10.9
	Grants				0.7	0.9	0.6	0.7	1.5	0.8	0.7	0.7	0.6	0.6
	Other revenue				3.7	3.9	4.0	4.2	4.0	3.9	3.9	3.7	3.7	3.7
Total Expenditure					34.0	34.8	42.9	38.7	40.2	38.5	37.9	37.6	37.4	37.2
	Current spending				30.8	31.6	38.6	35.4	36.5	35.0	34.6	34.3	34.1	33.9
			Compensation of employees		9.7	10.2	11.3	10.9	10.8	10.9	10.9	10.9	10.9	10.9
			Goods and services		4.4	4.4	4.5	4.7	5.5	5.2	5.2	5.2	5.1	5.1
			Interest payments		0.9	0.9	0.7	0.4	0.3	0.2	0.2	0.3	0.4	0.4
				Foreign	0.8	0.6	0.2	0.1	0.2	0.1	0.2	0.2	0.3	0.3
				Domestic	0.1	0.2	0.5	0.3	0.0	0.0	0.0	0.0	0.1	0.1
			Subsidies		0.4	0.4	2.5	1.6	1.8	1.2	0.6	0.5	0.4	0.4
			Grants		0.8	0.8	1.1	0.9	0.8	0.8	0.8	0.8	0.8	0.8
			Social benefits		13.4	13.9	16.8	15.3	15.3	14.7	15.0	15.0	15.2	15.3
			Other expense		1.1	1.1	1.8	1.5	2.0	2.0	1.8	1.7	1.3	1.0
		Capital spending			3.2	3.2	4.3	3.3	3.7	3.4	3.3	3.3	3.3	3.3
Net Lending (+) / Borrowing (-)					0.5	0.5	-7.3	-1.0	-2.0	-1.3	-1.2	-1.2	-1.2	-1.0
Net Lending (+) / Borrowing (-) excl. one-offs					0.5	0.4	-7.3	-1.0	-2.0	-1.3	-1.2	-1.2	-1.2	-1.1
Net acquisition of financial assets					-2.0	5.5	3.7	2.1	1.8	-0.6	-0.5	-0.5	-0.5	-0.4
		Domestic			-1.6	3.5	5.2	2.1	1.8	-0.5	-0.5	-0.5	-0.5	-0.4
		Foreign			-0.4	2.0	-1.5	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Net incurrence of liabilities					-2.6	5.1	11.1	3.0	3.8	0.7	0.7	0.7	0.7	0.6
		Domestic			0.0	-0.8	5.6	0.9	0.5	-1.3	0.2	0.5	0.7	0.7
		Foreign			-2.6	5.9	5.4	2.1	3.4	2.0	0.5	0.2	0.0	-0.1
Financial Balance Sheet
Financial assets					26.2	30.9	34.3	34.0	…	…	…	…	…	…
	Currency and deposits				5.6	8.9	12.9	13.0	…	…	…	…	…	…
	Securities other than shares				0.6	1.0	0.3	0.5	…	…	…	…	…	…
	Loans				1.2	1.7	1.9	2.2	…	…	…	…	…	…
	Shares and other equity				14.1	13.7	13.5	12.9	…	…	…	…	…	…
	Other financial assets				4.6	5.7	5.7	5.3	…	…	…	…	…	…
Financial liabilities					40.8	44.5	55.5	51.4	… …	… …	… …	… …	… …	… …
	Currency and deposits				0.4	0.4	0.2	0.2	…	…	…	…	…	…
	Securities other than shares				31.4	34.8	42.3	37.5	…	…	…	…	…	…
	Loans				5.0	5.1	8.1	8.6	…	…	…	…	…	…
	Other liabilities				3.9	4.3	4.8	5.0	…	…	…	…	…	…
	Net financial worth				-14.6	-13.6	-21.2	-17.4	… …	… …	… …	… …	… …	… …
Memorandum Items:
	GDP (in millions of euros)				45,515	48,860	49,507	55,383	64,583	72,410	77,469	82,073	86,531	90,809
	General government debt (Maastricht def.)				33.7	35.9	46.6	44.7	42.1	38.3	36.5	35.2	34.1	33.1
			Foreign debt		29.3	33.1	38.2	36.3	34.5	32.7	31.1	29.5	28.1	26.7
			Domestic debt		4.4	2.8	8.4	8.4	7.6	5.6	5.4	5.6	6.0	6.4

Sources: Ministry of Finance; Ministry of Social Security; and IMF staff estimates. Note: Passive projections from 2022 onward. Projections incorporate only announced budgetary measures.

^{Table 3.}

Lithuania: Balance of Payments, 2018–27

(Billions of Euros, unless otherwise indicated)

Sources: Data provided by the Lithuanian authorities; IMF International Financial and Trade Statistics; and IMF staff estimates and projections.

^{^1/}Government external debt does not include guaranteed loans.

^{^2/}Derived from national accounts data.

^{Table 3.}

Lithuania: Balance of Payments, 2018–27

(Billions of Euros, unless otherwise indicated)

				2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
								Projections
Current Account Balance				0.1	1.7	3.6	0.8	-0.9	-1.1	-0.8	-0.4	-0.2	0.1
	Merchandise trade balance			-2.8	-2.3	-0.4	-2.9	-5.4	-5.4	-5.5	-5.6	-5.8	-6.0
		Exports (f.o.b.)		24.6	26.0	25.5	31.7	38.4	40.8	42.0	43.4	44.8	46.4
		Imports (f.o.b.)		27.3	28.3	25.9	34.5	43.8	46.2	47.5	49.0	50.5	52.4
	Services balance			3.6	4.9	5.0	5.2	5.9	6.3	6.5	6.8	7.0	7.2
		Exports		9.7	11.8	10.9	12.9	15.6	16.6	17.1	17.6	18.2	18.8
		Imports		6.0	6.9	5.9	7.7	9.7	10.3	10.5	10.9	11.2	11.6
	Primary income balance			-1.4	-1.7	-1.4	-1.5	-2.0	-2.5	-2.4	-2.2	-2.0	-1.8
		Receipts		1.1	1.1	1.1	1.3	1.1	1.5	1.8	2.1	2.4	2.7
		Payments		2.6	2.8	2.6	3.2	3.1	4.0	4.2	4.3	4.4	4.5
	Secondary income balance			0.7	0.8	0.5	0.3	0.5	0.5	0.6	0.6	0.6	0.6
Capital and Financial Account Balance				0.8	-1.7	-3.3	-0.1	2.0	2.1	0.5	0.3	0.1	0.0
	Capital account balance			0.7	0.8	0.9	0.9	1.1	1.2	1.1	1.2	1.2	1.3
	Foreign direct investment balance			-0.3	-1.2	-0.5	-1.2	-1.5	-1.6	-1.5	-1.3	-1.2	-1.1
	Portfolio investment balance			1.7	-2.4	-1.8	0.7	-1.0	-0.5	0.7	0.9	1.0	1.1
	Financial derivatives			0.0	0.0	0.0	0.0	0.1	0.1	0.1	0.1	0.1	0.1
	Other investment balance Other private sector			-1.5	6.0	6.5	1.5	1.5	1.0	1.3	1.3	1.2	1.2
Errors and omissions				0.2	-0.7	-0.7	-0.1	0.0	0.0	0.0	0.0	0.0	0.0
Overall Balance				1.2	-0.6	-0.3	0.6	1.1	1.0	-0.3	-0.2	-0.1	0.1
Financing				-1.1	0.6	0.4	-0.6	-1.1	-1.0	0.3	0.2	0.1	-0.1
	Gross international reserves (increase: -)			…	…	…	…	…	…	…	…	…	…
	Use of Fund credit, net			0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
	Other prospective financing			0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
In Percent of GDP (unless indicated)
	Current Account Balance			0.3	3.5	7.3	1.4	-1.5	-1.5	-1.0	-0.5	-0.2	0.1
		Trade balance of goods and services		1.9	5.3	9.3	4.2	0.8	1.2	1.3	1.4	1.4	1.4
		Exports		75.2	77.3	73.5	80.4	83.7	79.1	76.3	74.4	72.9	72.0
		Imports		73.3	72.1	64.2	76.2	82.9	77.9	75.0	73.0	71.5	70.6
		Primary income		-3.1	-3.5	-2.9	-2.8	-3.1	-3.4	-3.1	-2.7	-2.3	-2.0
		Secondary income		1.6	1.7	0.9	0.5	0.8	0.8	0.8	0.8	0.7	0.7
	Capital and Financial Account Balance			1.8	-3.4	-6.6	-0.2	3.1	2.9	0.6	0.3	0.1	0.0
		Capital account balance		1.6	1.7	1.9	1.7	1.7	1.6	1.5	1.5	1.4	1.4
		Foreign direct investment balance		-0.6	-2.4	-1.1	-2.1	-2.3	-2.2	-1.9	-1.6	-1.4	-1.3
		Portfolio investment balance		3.7	-4.9	-3.6	1.3	-1.5	-0.7	0.9	1.1	1.2	1.2
		Financial derivatives balance		0.0	0.0	0.0	0.0	0.1	0.1	0.1	0.1	0.1	0.1
		Other investment balance		-3.3	12.3	13.1	2.7	2.3	1.4	1.7	1.5	1.4	1.3
	Overall Balance			2.5	-1.2	-0.7	1.1	1.7	1.4	-0.4	-0.2	-0.1	0.1
	Gross External Debt ^1/			78.1	66.4	70.6	70.8	61.0	55.6	51.9	48.7	46.1	43.7
		Public		49.9	42.1	46.3	44.3	38.9	36.4	34.2	32.4	30.7	29.2
			Short-term	22.5	11.0	10.9	12.5	9.6	8.2	7.5	7.1	6.8	6.5
			Long-term	27.4	31.0	35.4	31.8	29.3	28.2	26.7	25.3	24.0	22.8
		Private		28.2	24.3	24.3	26.5	22.1	19.2	17.6	16.4	15.3	14.4
			Short-term	17.9	11.6	10.0	13.8	13.0	12.9	13.5	14.3	15.2	16.1
			Long-term	10.3	12.7	14.3	12.7	9.1	6.3	4.1	2.1	0.1	-1.7
	Gross external debt (in percent of GS exports)			103.8	85.9	96.0	88.1	72.9	70.3	68.0	65.5	63.2	60.7
	Net external debt			14.2	11.6	0.2	-5.5	-6.9	-6.4	-6.2	-6.5	-6.9	-7.7
	Net international investment position			-30.4	-24.0	-15.8	-7.2	-6.3	-6.0	-5.6	-4.8	-3.8	-2.4
	Merchandise export volume (percent change) ^2/			6.8	9.9	0.4	15.9	-2.2	3.8	4.4	3.6	3.4	3.1
	Merchandise import volume (percent change) ^2/			6.0	6.1	-4.4	18.7	0.0	6.3	5.6	4.6	4.2	3.8
	Merchandise export prices (percent change) ^2/			3.0	0.4	-4.1	5.6	24.2	2.2	-1.4	-0.4	-0.1	0.5
	Merchandise import prices (percent change) ^2/			4.6	-0.6	-5.6	11.9	26.9	-0.7	-2.6	-1.6	-0.9	-0.2
	GDP (in billion of Euros)			45.5	48.9	49.5	55.4	64.6	72.5	77.4	81.9	86.3	90.6

Sources: Data provided by the Lithuanian authorities; IMF International Financial and Trade Statistics; and IMF staff estimates and projections.

^{^1/}Government external debt does not include guaranteed loans.

^{^2/}Derived from national accounts data.

^{Table 3.}

Lithuania: Balance of Payments, 2018–27

(Billions of Euros, unless otherwise indicated)

				2018	2019	2020	2021	2022	2023	2024	2025	2026	2027
								Projections
Current Account Balance				0.1	1.7	3.6	0.8	-0.9	-1.1	-0.8	-0.4	-0.2	0.1
	Merchandise trade balance			-2.8	-2.3	-0.4	-2.9	-5.4	-5.4	-5.5	-5.6	-5.8	-6.0
		Exports (f.o.b.)		24.6	26.0	25.5	31.7	38.4	40.8	42.0	43.4	44.8	46.4
		Imports (f.o.b.)		27.3	28.3	25.9	34.5	43.8	46.2	47.5	49.0	50.5	52.4
	Services balance			3.6	4.9	5.0	5.2	5.9	6.3	6.5	6.8	7.0	7.2
		Exports		9.7	11.8	10.9	12.9	15.6	16.6	17.1	17.6	18.2	18.8
		Imports		6.0	6.9	5.9	7.7	9.7	10.3	10.5	10.9	11.2	11.6
	Primary income balance			-1.4	-1.7	-1.4	-1.5	-2.0	-2.5	-2.4	-2.2	-2.0	-1.8
		Receipts		1.1	1.1	1.1	1.3	1.1	1.5	1.8	2.1	2.4	2.7
		Payments		2.6	2.8	2.6	3.2	3.1	4.0	4.2	4.3	4.4	4.5
	Secondary income balance			0.7	0.8	0.5	0.3	0.5	0.5	0.6	0.6	0.6	0.6
Capital and Financial Account Balance				0.8	-1.7	-3.3	-0.1	2.0	2.1	0.5	0.3	0.1	0.0
	Capital account balance			0.7	0.8	0.9	0.9	1.1	1.2	1.1	1.2	1.2	1.3
	Foreign direct investment balance			-0.3	-1.2	-0.5	-1.2	-1.5	-1.6	-1.5	-1.3	-1.2	-1.1
	Portfolio investment balance			1.7	-2.4	-1.8	0.7	-1.0	-0.5	0.7	0.9	1.0	1.1
	Financial derivatives			0.0	0.0	0.0	0.0	0.1	0.1	0.1	0.1	0.1	0.1
	Other investment balance Other private sector			-1.5	6.0	6.5	1.5	1.5	1.0	1.3	1.3	1.2	1.2
Errors and omissions				0.2	-0.7	-0.7	-0.1	0.0	0.0	0.0	0.0	0.0	0.0
Overall Balance				1.2	-0.6	-0.3	0.6	1.1	1.0	-0.3	-0.2	-0.1	0.1
Financing				-1.1	0.6	0.4	-0.6	-1.1	-1.0	0.3	0.2	0.1	-0.1
	Gross international reserves (increase: -)			…	…	…	…	…	…	…	…	…	…
	Use of Fund credit, net			0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
	Other prospective financing			0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
In Percent of GDP (unless indicated)
	Current Account Balance			0.3	3.5	7.3	1.4	-1.5	-1.5	-1.0	-0.5	-0.2	0.1
		Trade balance of goods and services		1.9	5.3	9.3	4.2	0.8	1.2	1.3	1.4	1.4	1.4
		Exports		75.2	77.3	73.5	80.4	83.7	79.1	76.3	74.4	72.9	72.0
		Imports		73.3	72.1	64.2	76.2	82.9	77.9	75.0	73.0	71.5	70.6
		Primary income		-3.1	-3.5	-2.9	-2.8	-3.1	-3.4	-3.1	-2.7	-2.3	-2.0
		Secondary income		1.6	1.7	0.9	0.5	0.8	0.8	0.8	0.8	0.7	0.7
	Capital and Financial Account Balance			1.8	-3.4	-6.6	-0.2	3.1	2.9	0.6	0.3	0.1	0.0
		Capital account balance		1.6	1.7	1.9	1.7	1.7	1.6	1.5	1.5	1.4	1.4
		Foreign direct investment balance		-0.6	-2.4	-1.1	-2.1	-2.3	-2.2	-1.9	-1.6	-1.4	-1.3
		Portfolio investment balance		3.7	-4.9	-3.6	1.3	-1.5	-0.7	0.9	1.1	1.2	1.2
		Financial derivatives balance		0.0	0.0	0.0	0.0	0.1	0.1	0.1	0.1	0.1	0.1
		Other investment balance		-3.3	12.3	13.1	2.7	2.3	1.4	1.7	1.5	1.4	1.3
	Overall Balance			2.5	-1.2	-0.7	1.1	1.7	1.4	-0.4	-0.2	-0.1	0.1
	Gross External Debt ^1/			78.1	66.4	70.6	70.8	61.0	55.6	51.9	48.7	46.1	43.7
		Public		49.9	42.1	46.3	44.3	38.9	36.4	34.2	32.4	30.7	29.2
			Short-term	22.5	11.0	10.9	12.5	9.6	8.2	7.5	7.1	6.8	6.5
			Long-term	27.4	31.0	35.4	31.8	29.3	28.2	26.7	25.3	24.0	22.8
		Private		28.2	24.3	24.3	26.5	22.1	19.2	17.6	16.4	15.3	14.4
			Short-term	17.9	11.6	10.0	13.8	13.0	12.9	13.5	14.3	15.2	16.1
			Long-term	10.3	12.7	14.3	12.7	9.1	6.3	4.1	2.1	0.1	-1.7
	Gross external debt (in percent of GS exports)			103.8	85.9	96.0	88.1	72.9	70.3	68.0	65.5	63.2	60.7
	Net external debt			14.2	11.6	0.2	-5.5	-6.9	-6.4	-6.2	-6.5	-6.9	-7.7
	Net international investment position			-30.4	-24.0	-15.8	-7.2	-6.3	-6.0	-5.6	-4.8	-3.8	-2.4
	Merchandise export volume (percent change) ^2/			6.8	9.9	0.4	15.9	-2.2	3.8	4.4	3.6	3.4	3.1
	Merchandise import volume (percent change) ^2/			6.0	6.1	-4.4	18.7	0.0	6.3	5.6	4.6	4.2	3.8
	Merchandise export prices (percent change) ^2/			3.0	0.4	-4.1	5.6	24.2	2.2	-1.4	-0.4	-0.1	0.5
	Merchandise import prices (percent change) ^2/			4.6	-0.6	-5.6	11.9	26.9	-0.7	-2.6	-1.6	-0.9	-0.2
	GDP (in billion of Euros)			45.5	48.9	49.5	55.4	64.6	72.5	77.4	81.9	86.3	90.6

Sources: Data provided by the Lithuanian authorities; IMF International Financial and Trade Statistics; and IMF staff estimates and projections.

^{^1/}Government external debt does not include guaranteed loans.

^{^2/}Derived from national accounts data.

^{Table 4.}

Lithuania: Summary of Monetary Accounts, 2012–21

(Billions of Euros, unless otherwise indicated)

Sources: Bank of Lithuania; and IMF staff estimates and projections.

^{^1/}Excludes local government deposits; includes counterpart funds.

^{^2/}Loans to households and non-financial corporations.

^{^3/}BOP basis. Differs from gross foreign assets as shown in the monetary authority’s balance sheet because of valuation effects (BoP-basis official reserves include accrued interest on deposits and securities but exclude investments in shares and other equity).

^{Table 4.}

Lithuania: Summary of Monetary Accounts, 2012–21

(Billions of Euros, unless otherwise indicated)

				2012	2013	2014	2015	2016	2017	2018	2019	2020	2021
Monetary Authority
	Gross foreign assets			6.4	6.0	7.9	2.9	3.0	4.2	5.7	5.3	4.7	5.9
	Gross foreign liabilities			0.0	0.0	0.1	0.2	0.2	0.2	0.3	0.5	1.2	3.2
	Net foreign assets			6.4	6.0	7.8	2.7	2.8	4.0	5.3	4.7	3.5	2.6
	Net domestic assets			-1.7	-1.0	-1.9	6.5	9.8	11.7	13.4	10.8	17.0	22.1
		Net credit to government		-1.1	-0.5	-1.2	0.0	1.0	-0.1	1.2	0.3	10.1	8.9
		Credit to banks		0.0	0.0	0.0	1.0	0.7	0.6	0.5	0.3	6.3	16.8
		Credit to private sector		0.0	0.0	0.0	1.7	4.8	8.0	8.9	8.2	0.5	0.4
		Other items, net		-0.7	-0.6	-0.7	3.8	3.3	3.3	2.9	1.9	0.2	-3.9
	Reserve money			4.7	4.9	5.9	9.1	12.6	15.7	18.8	15.5	20.6	24.8
		Currency outside the central bank		3.3	3.4	1.7	6.1	6.2	6.4	6.8	7.1	7.8	8.4
			Currency outside banks	3.0	3.2	1.4	5.7	5.8	6.0	6.3	6.6	7.3	7.8
			Cash in vaults of banks	0.3	0.3	0.3	0.4	0.4	0.4	0.4	0.5	0.4	0.5
		Deposit money banks’ deposits with BoL		1.4	1.5	4.3	3.1	6.4	9.3	12.0	8.5	12.8	16.4
Banking Survey
	Net foreign assets			2.8	2.9	4.5	-2.3	-3.5	-2.7	-2.2	-1.8	-2.7	-4.4
		Monetary authority		6.4	6.0	7.8	2.7	2.8	4.0	5.3	4.7	3.5	2.6
		Banks and other banking institutions		-3.6	-3.1	-3.3	-5.0	-6.2	-6.7	-7.5	-6.5	-6.2	-7.0
	Net domestic assets			12.9	13.5	12.1	24.3	27.1	27.7	30.0	32.5	41.3	50.1
		Net claims on government ^1/		0.3	1.7	0.5	1.7	2.3	0.7	1.9	1.0	10.4	10.0
			Monetary authority	-1.1	-0.5	-1.2	0.0	1.0	-0.1	1.2	0.3	10.1	8.9
			Banks and other banking institutions	1.4	2.1	1.7	1.8	1.3	0.8	0.8	0.6	0.3	1.1
		Credit to private sector		15.3	14.9	14.8	17.1	21.3	25.2	27.2	27.1	19.0	21.4
		Credit to nonbank financial institutions		1.3	0.9	0.9	3.1	6.5	9.9	11.2	10.4	2.3	2.5
		Other items, net		-4.0	-4.0	-4.1	2.5	-3.1	-8.1	-10.3	-5.9	9.6	16.2
	Broad Money			15.7	16.4	16.6	22.0	23.6	25.0	27.8	30.7	38.6	45.7
		Currency outside banks		3.0	3.2	1.4	5.7	5.8	6.0	6.3	6.6	7.3	7.8
		Deposits		12.7	13.2	15.2	16.3	17.8	19.0	21.5	24.1	31.3	37.9
			In national currency	9.3	9.7	11.3	15.4	16.9	18.1	20.6	23.1	30.3	36.7
			In foreign currency	3.4	3.5	4.0	0.9	0.9	0.9	0.9	1.0	1.0	1.2
Memorandum Items:
	Reserve money (yearly percent change)			-6.4	4.9	20.9	53.3	38.4	24.9	19.3	-17.4	32.4	20.5
	Broad money (yearly percent change)			7.2	4.4	1.2	32.9	7.2	5.8	11.4	10.4	25.8	18.4
	Private sector credit (yearly percent change)			-0.8	-2.3	-0.9	4.1	7.1	4.5	6.0	3.3	-1.8	13.4
	Money multiplier			3.3	3.3	2.8	2.4	1.9	1.6	1.5	2.0	1.9	1.8
	Currency outside banks, in percent of deposits			23.6	24.0	8.9	34.9	32.5	31.6	29.3	27.3	23.4	20.7
	Foreign-currency deposits (percent of total deposits)			26.4	26.5	26.0	5.5	5.1	4.8	4.1	4.1	3.1	3.3
	Foreign-currency loans (percent of total loans) ^2/			72.7	72.1	72.7	0.9	0.6	0.5	0.4	0.3	0.2	0.2
	Velocity of broad money			2.1	2.1	2.2	1.7	1.6	1.7	1.6	1.6	1.3	1.2
	Gross official reserves (billions of U.S. dollars) ^3/			8.4	8.0	8.8	1.9	3.0	4.6	4.9	5.6	4.9	6.1
	Gross official reserves (billions of euros) ^3/			6.4	6.0	7.9	2.9	3.0	4.2	5.7	5.3	4.7	5.9
	GDP			33.4	35.0	36.6	37.3	38.9	42.3	45.5	48.9	49.5	55.4

Sources: Bank of Lithuania; and IMF staff estimates and projections.

^{^1/}Excludes local government deposits; includes counterpart funds.

^{^2/}Loans to households and non-financial corporations.

^{Table 4.}

Lithuania: Summary of Monetary Accounts, 2012–21

(Billions of Euros, unless otherwise indicated)

				2012	2013	2014	2015	2016	2017	2018	2019	2020	2021
Monetary Authority
	Gross foreign assets			6.4	6.0	7.9	2.9	3.0	4.2	5.7	5.3	4.7	5.9
	Gross foreign liabilities			0.0	0.0	0.1	0.2	0.2	0.2	0.3	0.5	1.2	3.2
	Net foreign assets			6.4	6.0	7.8	2.7	2.8	4.0	5.3	4.7	3.5	2.6
	Net domestic assets			-1.7	-1.0	-1.9	6.5	9.8	11.7	13.4	10.8	17.0	22.1
		Net credit to government		-1.1	-0.5	-1.2	0.0	1.0	-0.1	1.2	0.3	10.1	8.9
		Credit to banks		0.0	0.0	0.0	1.0	0.7	0.6	0.5	0.3	6.3	16.8
		Credit to private sector		0.0	0.0	0.0	1.7	4.8	8.0	8.9	8.2	0.5	0.4
		Other items, net		-0.7	-0.6	-0.7	3.8	3.3	3.3	2.9	1.9	0.2	-3.9
	Reserve money			4.7	4.9	5.9	9.1	12.6	15.7	18.8	15.5	20.6	24.8
		Currency outside the central bank		3.3	3.4	1.7	6.1	6.2	6.4	6.8	7.1	7.8	8.4
			Currency outside banks	3.0	3.2	1.4	5.7	5.8	6.0	6.3	6.6	7.3	7.8
			Cash in vaults of banks	0.3	0.3	0.3	0.4	0.4	0.4	0.4	0.5	0.4	0.5
		Deposit money banks’ deposits with BoL		1.4	1.5	4.3	3.1	6.4	9.3	12.0	8.5	12.8	16.4
Banking Survey
	Net foreign assets			2.8	2.9	4.5	-2.3	-3.5	-2.7	-2.2	-1.8	-2.7	-4.4
		Monetary authority		6.4	6.0	7.8	2.7	2.8	4.0	5.3	4.7	3.5	2.6
		Banks and other banking institutions		-3.6	-3.1	-3.3	-5.0	-6.2	-6.7	-7.5	-6.5	-6.2	-7.0
	Net domestic assets			12.9	13.5	12.1	24.3	27.1	27.7	30.0	32.5	41.3	50.1
		Net claims on government ^1/		0.3	1.7	0.5	1.7	2.3	0.7	1.9	1.0	10.4	10.0
			Monetary authority	-1.1	-0.5	-1.2	0.0	1.0	-0.1	1.2	0.3	10.1	8.9
			Banks and other banking institutions	1.4	2.1	1.7	1.8	1.3	0.8	0.8	0.6	0.3	1.1
		Credit to private sector		15.3	14.9	14.8	17.1	21.3	25.2	27.2	27.1	19.0	21.4
		Credit to nonbank financial institutions		1.3	0.9	0.9	3.1	6.5	9.9	11.2	10.4	2.3	2.5
		Other items, net		-4.0	-4.0	-4.1	2.5	-3.1	-8.1	-10.3	-5.9	9.6	16.2
	Broad Money			15.7	16.4	16.6	22.0	23.6	25.0	27.8	30.7	38.6	45.7
		Currency outside banks		3.0	3.2	1.4	5.7	5.8	6.0	6.3	6.6	7.3	7.8
		Deposits		12.7	13.2	15.2	16.3	17.8	19.0	21.5	24.1	31.3	37.9
			In national currency	9.3	9.7	11.3	15.4	16.9	18.1	20.6	23.1	30.3	36.7
			In foreign currency	3.4	3.5	4.0	0.9	0.9	0.9	0.9	1.0	1.0	1.2
Memorandum Items:
	Reserve money (yearly percent change)			-6.4	4.9	20.9	53.3	38.4	24.9	19.3	-17.4	32.4	20.5
	Broad money (yearly percent change)			7.2	4.4	1.2	32.9	7.2	5.8	11.4	10.4	25.8	18.4
	Private sector credit (yearly percent change)			-0.8	-2.3	-0.9	4.1	7.1	4.5	6.0	3.3	-1.8	13.4
	Money multiplier			3.3	3.3	2.8	2.4	1.9	1.6	1.5	2.0	1.9	1.8
	Currency outside banks, in percent of deposits			23.6	24.0	8.9	34.9	32.5	31.6	29.3	27.3	23.4	20.7
	Foreign-currency deposits (percent of total deposits)			26.4	26.5	26.0	5.5	5.1	4.8	4.1	4.1	3.1	3.3
	Foreign-currency loans (percent of total loans) ^2/			72.7	72.1	72.7	0.9	0.6	0.5	0.4	0.3	0.2	0.2
	Velocity of broad money			2.1	2.1	2.2	1.7	1.6	1.7	1.6	1.6	1.3	1.2
	Gross official reserves (billions of U.S. dollars) ^3/			8.4	8.0	8.8	1.9	3.0	4.6	4.9	5.6	4.9	6.1
	Gross official reserves (billions of euros) ^3/			6.4	6.0	7.9	2.9	3.0	4.2	5.7	5.3	4.7	5.9
	GDP			33.4	35.0	36.6	37.3	38.9	42.3	45.5	48.9	49.5	55.4

Sources: Bank of Lithuania; and IMF staff estimates and projections.

^{^1/}Excludes local government deposits; includes counterpart funds.

^{^2/}Loans to households and non-financial corporations.

^{Table 5.}

Lithuania: Financial Soundness Indicators, Banking Systems Data, 2013–21

(In percent unless otherwise indicated)

Sources: Bank of Lithuania; and http://fsi.imf.org/. Notes: Banking system data was compiled by aggregating banks solo (i.e. no cross-border cross-sector consolidation) data. No intra-sector adjustments were made. FSIs were mostly derived from supervisory data and comprise all banks and foreign bank branches incorporated in Lithuania, except if stated otherwise. Starting 2008, bank financial data is collected through FINREP tables (EU-wide common reporting templates). This might have some influence on the values of the indicors compiled. The fact should be considered when making straightforward comparison of time series.

^{^1/}Excluding foreign bank branches.

^{^2/}As defined in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012.

^{^3/}Consolidated data are used. Due to changes in consolidation methodology, data from Q1 2014 are not entirely comparable with previous. 2015 Q3 – 2016 Q1 data were adjusted eliminating accounting changes due to the transaction between Swedbank, AB, and Danske Bank A/S Lithuania Branch.

^{^4/}From end-2005 to Q1–2008, NPLs are loans overdue more than 60 days. Untill 2004 NPLs are loans in Substandard, Doubtful and Loss loans categories. Starting June 2008, non-performing loans are defined as the sum of impaired loans and non-impaired loans that are overdue more than 60 days.

^{^5/}Specific provisions include allowances for both individually and collectively assessed loans.

^{^6/}Specific provisions include provisions against general portfolio risk until end-2004. From end-2005, due to the change in definition of NPLs, specific provisions are not directly attributable to the NPLs. Therefore, the ratio may be negative.

^{^7/}Specific provisions include allowances for both individually and collectively assessed loans.

^{^8/}According to Nace 1 up to Sept 2011. Data according to Nace 2 thereafter.

^{^9/}Total profits (losses) after tax. Interim quarterly results are annualized.

^{^10/}Composition of liquid assets and current liabilities is defined in the Liquidity Ratio Calculation Rules approved by Resolution No. 1 of the Board of the Bank of Lithuania of 29 January 2004.

^{^11/}Consolidated data; due to changes in data consolidation methodology, data from Q1 2014 are not entirely comparable with previous data.

^{^12/}The large majority of foreign currency loans and foreign currency liabilities were in euros, to which the national currency ‘litas’ was pegged via a currency board arrangement until 2015 when the euro was introduced as a national currency.

^{^13/}As defined in Rules for Calculation of Capital Adequacy approved by Bank of Lithuania Board Resolution No. 138 of 9 November 2006.

^{^14/}As of 2018, breakdown for loans that are overdue more than 60 days is no longer available in FINREP.

^{Table 5.}

Lithuania: Financial Soundness Indicators, Banking Systems Data, 2013–21

(In percent unless otherwise indicated)

			Dec-13	Dec-14	Dec-15	Dec-16	Dec-17	Dec-18	Dec-19	Dec-20	Dec-21
Capital adequacy
	Regulatory capital to risk-weighted assets ^1/ ^2/		17.6	21.3	24.9	19.4	19.1	18.6	23.7	24.0	23.5
	Regulatory Tier 1 capital to risk-weighted assets ^1/ ^2/		17.1	20.9	24.3	19.1	18.8	18.5	23.3	23.6	23.2
	Capital to assets ^1/		12.6	12.9	11.1	10.4	9.4	8.6	9.1	8.1	7.1
Asset quality
	Nonperforming loans to capital ^1/ ^3/		42.6	46.9	38.3	35.5	28.6	26.9	15.2	15.0	8.6
	Nonperforming loans net of provisions to capital ^1/ ^3/		19.7	29.8	25.0	23.2	18.8	20.0	10.5	10.4	6.0
	Nonperforming loans to total (non-interbank) loans ^1/ ^3/		11.6	7.0	5.7	4.1	3.1	2.5	1.5	1.4	0.7
	Nonperforming loans to capital ^1/ 3/ ^4/		42.6	46.9	38.3	35.5	28.6	26.9	15.2	15.0	8.6
		o/w impaired loans to capital ^1/ ^4/ ^4/	27.4	29.1	23.4	23.1	18.4	26.0	14.3	14.2	7.7
		o/w non-impaired loans overdue more than 60 days to capital ^1/ ^3/ ^4/ ^14/	15.2	8.0	6.4	7.9	5.8	..	..	..	..
	Nonperforming loans net of provisions to capital ^1/ ^3/ ^4/ ^5/		19.7	29.8	25.0	23.2	22.9	20.0	10.5	10.4	6.0
	Nonperforming loans to total (non-interbank) loans ^3/ ^4/		11.0	7.0	5.7	4.1	4.1	2.5	1.5	1.4	0.7
		o/w impaired loans to total (non-interbank) loans ^4/	8.5	4.7	3.8	3.1	2.2	2.4	1.4	1.3	0.6
		o/w non-impaired loans overdue more than 60 days to total (non-interbank) loans ^4/ ^14/	2.5	1.2	1.0	0.9	0.6	..	..	..	..
	Impairment losses to total (non-interbank) loans ^6/ ^7/		4.2	2.5	2.0	1.4	1.1	0.8	0.6	0.6	0.4
	Impairment losses to nonperforming loans ^3/ ^4/ ^6/ ^7/		53.7	36.5	34.7	34.7	30.8	33.4	39.4	43.8	56.8
Sectoral distribution of corporate loans ^8/
	Agriculture, forestry and fishing		2.8	2.9	3.6	3.7	3.6	3.6	3.2	3.5	3.0
	Mining and quarrying		0.5	0.5	0.5	0.5	0.5	0.4	0.3	0.3	0.2
	Manufacturing		17.9	15.7	14.7	14.2	14.3	14.0	14.9	14.7	14.6
	Electricity, gas, steam and air conditioning supply		7.6	9.5	11.0	8.7	4.7	5.3	7.4	5.7	5.3
	Water supply; sewerage, waste management and remediation activities		0.8	1.0	1.0	0.9	0.8	0.6	0.6	0.7	1.0
	Construction		8.6	7.3	6.1	5.4	5.2	3.7	3.1	2.9	3.1
	Wholesale and retail trade; repair of motor vehicles and motorcycles		19.3	20.3	21.9	21.3	22.7	25.4	23.0	19.4	21.3
	Transportation and storage		5.7	5.0	5.8	5.8	6.1	8.7	9.3	9.0	8.1
	Accommodation and food service activities		2.7	2.6	2.4	2.4	2.4	3.0	2.6	3.1	2.3
	Information and communication		0.8	0.9	0.8	2.4	2.4	2.0	1.8	1.1	0.8
	Real estate activities		28.3	27.8	26.3	26.6	25.8	25.0	27.0	31.9	32.5
	Professional, scientific and technical activities		2.6	3.7	2.6	3.2	5.0	2.6	1.8	2.2	3.0
	Administrative and support service activities		1.0	1.8	2.0	3.0	4.4	2.6	2.4	2.9	2.6
	Remaining activities		1.2	1.1	1.3	1.8	2.2	3.0	0.0	0.0	0.0
	Residential real estate loans to total (non-interbank) loans		38.0	28.7	29.8	31.3	31.3	31.1	30.1	27.8	24.5
	Large exposures to regulatory capital ^1/ ^5/		..	..	..	..		..	..	..	..
Earnings and profitability
	RoE ^1/ ^9/		8.9	8.1	9.0	14.0	12.5	12.7	12.3	10.7	10.3
	RoA ^9/		1.2	1.3	0.9	1.0	1.1	1.3	1.1	0.8	0.8
	Interest margin to gross income		24.3	49.9	49.7	50.3	53.3	53.7	52.2	53.9	51.2
	Noninterest expenses to gross income		60.5	56.6	55.3	50.9	53.2	50.5	47.5	52.7	55.7
	Trading and foreign exchange gains (losses) to gross income		9.9	8.2	6.2	4.3	7.2	6.2	6.2	6.3	7.4
	Personnel expenses to noninterest expenses		38.3	38.7	42.7	43.6	41.7	42.2	43.2	43.5	41.3
Liquidity
	Liquidity coverage ratio		..	..	..	266.3	281.9	254.2	272.4	743.3	392.3
	Liquidity ratio (liquid assets to current liabilities) ^10/		41.2	43.6	..	..		..	..	..	..
	Liquid assets to total assets ^10/		24.0	29.3	..	15.3	23.6	25.6	28.9	37.0	43.7
	Current liabilities to total liabilities ^10/		73.1	81.6	..	..		..	..	..	..
	3-month VILIBOR-EURIBOR spread, b.p. ^8/		12.0	10.0	..	..		..	..	..	..
	Spread between highest and lowest interbank rate, b.p. ^10/		39.0	25.0	..	..		..	..	..	..
	Loan to deposit ratio in the banking sector ^11/		121.5	101.6	98.6	99.0	94.6	89.3	81.9	61.4	64.0
Foreign exchange risk
	Foreign-currency-denominated loans to total (non-interbank) loans ^12/		68.7	..	..	..		..	..	..	..
	Foreign-currency-denominated liabilities to total liabilities ^12/		48.2	..	..	..		..	..	..	..
	Net open position in foreign exchange to regulatory capital ^1/ ^13/		0.4	0.4	0.1	0.0	0.0	0.0	0.0	..	..
Memo item
	Provisioning (in percent of NPLs)		16.5	.	.	.		.	.	.	.