IMF: Lithuania’s economy expands quickly but public finances and productivity need strengthening
The Lithuanian economy is showing resilience in a context of slowing external demand and elevated uncertainty. The country’s economy will continue to grow strongly this year and the next, but structural challenges need to be addressed to achieve long-term convergence of income levels with Western Europe by ensuring fiscal sustainability amid rising defence funding as well as by continuing to implement reforms that strengthen productivity, competitiveness, and growth potential. This is underlined in the latest International Monetary Fund (IMF) report for Lithuania.
“It is encouraging to see that the Lithuanian economy is resilient to various external shocks, but the challenges of the geopolitical situation remain. To strengthen national and regional defence capabilities and in view of the country’s strained public finances, we need to focus strongly on effective revenue collection. Therefore, we have already agreed with the IMF on expert support in strengthening tax administration and bridging the VAT gap. We hope that the analysis conducted and solutions proposed by the IMF will help to address this problem in a relatively quick and effective way,” says Rimantas Šadžius, Acting Minister of Finance.
“The Lithuanian economy is currently on the rise: the purchasing power of households continues to grow strongly, while the pace of economic growth is expected to strengthen next year. However, it is important to ensure that this is not a flash in the pan but rather a sustained trend of high growth. We need to take care of the economy’s potential, so it is essential to continue expanding Lithuania’s financial and capital sector and improving investment opportunities for businesses thereby contributing to the country’s productivity growth and competitiveness,” says Gediminas Šimkus, Chair of the Board of Lietuvos bankas.
Last year, Lithuania’s economy grew faster than expected, by 2.7%, as the population regained the purchasing power and domestic demand strengthened. Although private consumption slowed down at the beginning of this year, a recovery of investment driven by the EU funding and falling interest rates will boost GDP growth to 2.9%. The IMF estimates that economic growth will accelerate further to 3.4% next year, assuming that the population withdraws 40% of savings from the 2nd pillar pension funds in 2026–2027 and spends them on consumption. Over the medium term, the economic development should return to the potential growth rate of 2.5%.
However, the IMF sees the recent slowdown in productivity growth as the key challenge to the competitiveness and sustainable development of the Lithuanian economy in the long-term. To revive productivity growth, the IMF recommends strengthening the provision of marketable skills in the education system, including vocational training, as well as ensuring a smooth integration of immigrants, expanding the digitalisation of public services and use of artificial intelligence in economic activity and improving access to finance for businesses to stimulate investment.
Price growth will remain slightly elevated in the country and inflation will reach 3.2% this year and 2.7% next year. Price growth will be supported by strengthening consumption, still strong wage growth and tax changes.
Net immigration stabilised last year following the wave of arrivals from Ukraine and Belarus in 2022–2023. With the weaker supply of additional labour, the unemployment rate should fall from 7.1% in 2024 to 6.6% this year and 6.1% next year. The IMF projects the average wage growth to remain strong but slow down from 10.4% last year to 8.1% this year and 5.8% next year.
According to the IMF, the national budget deficit will be pushed up by the rising defence spending from 1.3% last year to 2.8% this year. It is expected to be around 4% next year and remain at a similar level in the medium term. The new tax changes will bring in additional revenue of around 0.6% GDP to the budget but the growing need to strengthen national defence and the associated necessary spending will potentially increase the government debt from 38% to 54% over five years from 2024. To stabilise the level of public debt, the IMF underlines the need to further increase the collection of budget revenue by broadening the property tax base, increasing the progressiveness of personal income tax, improving the collection of value added tax and reducing corporate income tax exemption.
According to the IMF, Lithuania has a small financial sector relative to other European countries. The banking sector accounts for the bulk of it and the capital market should be expanded. Banks remain liquid and well capitalised, profitability will remain high, albeit slightly lower, so the banking system is well prepared to cope with unexpected shocks. The IMF notes significant progress in tackling money laundering and terrorist financing risks in Lithuania and recommends that risks arising from non-resident activities continue to be closely monitored.
Lithuania has been a member of the IMF since 1992. Currently, the membership of the IMF includes 191 countries. Annual country consultations with the IMF are organised in accordance with Article IV of the IMF’s Articles of Agreement, which obligates the IMF member states to pursue the economic and financial policy that ensures domestic and global financial and economic stability.
Last updated: 17-09-2025
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