IMF: Lithuania's economy demonstrates resilience, but it is necessary to address labour market challenges, strengthen the sustainability of public finances and boost investment in productivity and innovation
Experts from the International Monetary Fund (IMF) stress in their latest report to Lithuania that Lithuania’s economy continues to demonstrate resilience against the backdrop of global shocks, but productivity-enhancing reforms are essential to maintain sustainable growth in the long term. The IMF emphasizes the importance of strengthening the labour market, public finances and the pension system, as well as the need to promote investment in innovation, technology and business competitiveness, to ensure smoother access to finance for companies and to facilitate private investment. According to the Fund's assessment, Lithuania's growth potential in the future will be determined by its ability to address demographic challenges, increase labour market efficiency, stimulate investment and accelerate the deployment of technology and innovation.
“The assessment of the International Monetary Fund confirms that Lithuania’s economy remains resilient despite a challenging geopolitical environment, energy price volatility and other external challenges. However, the long-term success of the country's economy will depend on our ability to implement reforms that boost productivity, innovation and investment. Last but not least, it is important to ensure sustainable public finances that allow the financing of the top state priorities – national security, quality public services and social security. Therefore, we will continue to strive for responsible decisions that would strengthen Lithuania's competitiveness and growth potential in the future", Minister of Finance Taurimas Valys states.
"The IMF stresses that we need to rely not only on strong domestic demand, but also on sustainable long-term sources of growth. We particularly appreciate the Fund's insights about small and medium-sized enterprises' access to finance, without which they are unable to invest and grow. The Bank of Lithuania consistently strives to ensure that businesses have as many financing alternatives as possible: we have harmonised the requirements for smaller issuances in the Baltic States, increased the threshold for public offers without a prospectus, provided capital market measures for the entire life cycle of the company, contributed to the development of a strengthened ILTE supervision model, analysed barriers to business financing and looked for effective ways to remove them," Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania, says.
The IMF forecasts that Lithuania's economy will grow by 2.8% in 2026. Economic activity will be supported by strong domestic demand, wage growth, investment from EU funds, the stimulation of fiscal policy and the disbursing of the pension Pillar II. At the same time, inflation will accelerate to 5.2% this year, mainly due to higher energy prices, strong domestic demand and the impact of some tax developments, but inflation is expected to normalise over the medium term.
The economic outlook continues to be accompanied by heightened uncertainty. The IMF estimates that geopolitical tensions, potential trade disruptions and energy price volatility may have a negative impact on economic activity and price developments. On the other hand, stronger domestic demand could partly cushion the impact of external factors and support economic growth in the near term.
The IMF notes that some of the factors supporting current economic growth are temporary and that it is therefore important to shift to more sustainable sources of growth in the coming years, based on productivity growth, investment and structural reforms. According to the Fund experts, it is important for Lithuania to improve the adaptability of the labour market to economic changes, deepen capital markets, expand access to finance for companies and accelerate the development of digitalisation and innovation.
In the context of an ageing population, growing defence financing needs and rising long-term spending, the IMF underlines the importance of sustainable public finances. The Fund considers it necessary to strengthen fiscal sustainability by ensuring more efficient revenue collection and improving the efficiency of public spending. The IMF also highlights the importance of a stable and predictable multi-pillar pension system and calls for its long-term sustainability, preserving public incentives to accumulate pensions and strengthening the resilience of the system to demographic challenges.
Labour market challenges have been identified as one of the most important structural barriers to higher employment and productivity growth. Despite stable economic growth, high labour demand and rapid wage growth, the unemployment rate in Lithuania has been around 7% since 2018. According to the Fund's assessment, this reflects persisting structural labour market inequalities, especially among young people, the elderly, lower-skilled workers and the regional population.
The IMF estimates that the unemployment rate is primarily determined by the mismatch between workers' skills and labour market needs. This is compounded by regional labour market disparities and relatively limited opportunities for job-seekers to acquire new or marketable skills. The Fund therefore stresses the importance of strengthening vocational training, re-skilling and up-skilling, better adapting the education system to the labour market needs and making it easier for the population to find employment where labour demand is greatest. The IMF stresses that progress in these areas would contribute to higher employment, productivity and faster long-term economic growth.
In the area of public finances, the IMF notes the importance of ensuring sound and stable public revenue sources, more efficient use of public resources and maintaining sufficient fiscal buffers to respond to future economic and fiscal challenges for long-term fiscal sustainability.
The IMF notes the importance of further strengthening the country's energy resilience by investing in renewable energy development, energy storage solutions and electricity grid infrastructure. This would help reduce Lithuania's dependence on energy imports, increase resilience to fluctuations in external energy prices and contribute to strengthening the country's competitiveness. The Fund also stresses the importance of closer integration into the European Union's single market for goods, capital and labour, which would help to stimulate investment, increase productivity and strengthen Lithuania's growth potential.
To achieve faster productivity growth, it is essential to improve companies' access to financing and encourage the adoption of technology. According to the Fund, Lithuania's competitiveness would be strengthened by deeper capital markets, faster digitalisation, wider application of artificial intelligence in business and increased investment in research and experimental development.
In its report, the IMF allocated a separate analytical supplement to the financing situation of small and medium-sized businesses in Lithuania. It highlights that small and medium-sized enterprises (SMEs) with fewer than 250 employees account for more than 99% of all enterprises in the country and generate almost two-thirds of Lithuania's gross domestic product. However, the IMF points out that the growth potential of the sector and investment in the development of productive capacity is still limited by the challenges of access to finance and the lack of skilled workers.
The Fund notes that SMEs financing opportunities in Lithuania are hampered by the bank-dominated and rather concentrated financial system, as well as by some of the highest collateral requirements among OECD countries. The total SMEs debt financing gap is estimated at around EUR 1 billion. At the same time, the IMF acknowledges that Lithuania has made significant progress in developing the capital market, particularly in the areas of Baltic market integration, the First North bond market, the FinTech sector and market infrastructure. However, as in many small countries, the biggest challenge remains the size of the market, liquidity and the expansion of the investor base.
The IMF recommends strengthening non-bank sources of financing, mobilising long-term domestic savings through the pension system, enhancing the role of institutional investors, supporting the EU Savings and Investments Union initiatives, and ensuring the sustainable use of the National Development Bank's ILTE and EU guarantee instruments. The Fund also stresses the importance of financial literacy, as smaller companies often lack information about the funding opportunities available to them.
According to the IMF, Lithuania's financial system remains stable, and the banking sector is well capitalised and resilient to shocks. At the same time, the Fund notes that accelerating lending and house price growth require constant vigilance, which is why it is important to continue to monitor the situation closely and be prepared to take measures to contain potential risks.
Full IMF report is available here.
Lithuania has been a member of the International Monetary Fund since 1992. The IMF currently unites 191 countries. Consultations under Article IV of the IMF Treaty take place on a regular basis and are designed to assess the economic and financial policies of the States with a view to strengthening economic and financial stability.