International Monetary Fund: It is important for Lithuania to restore productivity growth and mobilise additional sources of budget revenue
According to the International Monetary Fund (IMF) experts, Lithuania's economy has successfully weathered many unprecedented shocks in recent years and, after moderate growth in 2023, is expected to continue growing this year after gaining momentum last year. They also note that in order to increase spending on defence and social security, Lithuania needs to mobilise additional sources of revenue and attain greater efficiency in the public sector.
“As corporate profitability improves this year and households’ financial situation improves, economic growth is expected to strengthen further. Although the economic forecasts are positive, looking ahead, the implementation of structural reforms that would enhance the competitiveness and productivity of the Lithuanian economy is necessary. In view of the changed security environment, in the near future we will have to agree on systemic solutions to ensure sustainable funding to strengthen Lithuania’s defence capabilities,” Minister of Finance Rimantas Šadžius said.
“Lithuania’s economy is growing confidently and this is what sets it apart from most European Union countries. We are particularly pleased with the growing importance of high value-added products and services in our economy. However, it would be wrong to rest on our laurels, because there is still a lot of room for productivity growth. The key to success here is to increase public and private investment in the acquisition of marketable skills, technologies and the development of research and innovation. Another key moment is the challenges of an ageing population. It is important to agree on a stable pension system that would encourage people to consistently accumulate and prepare for a dignified old age,” Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania, stated.
The IMF experts note that Lithuania's economic recovery has so far been mainly driven by private consumption, while the external sector has also contributed to growth, especially due to high exports of services. It is pointed out that easing monetary conditions, the recovery of corporate profits, and the healthy financial position of households will have a positive impact on future economic growth, however, risks arise from the external environment. Weaker-than-expected demand in Lithuania's key euro area trading partners and political uncertainty in major global economies may affect domestic sentiment and export performance.
According to the IMF experts, inflation will accelerate this year, partly due to higher indirect taxes, and it will stabilise above 2% in the medium term. Due to the recent inflation shock and rapid wage growth, the price and wage levels have increased, and it is necessary to pay more attention to strengthening productivity in order to preserve the competitiveness of Lithuanian exporters.
Lithuania's budget deficit and government debt-to-GDP ratio are projected to increase this year due to the planned significant increase in defence spending and pressure to increase social benefits. It is noted that the challenges of the social security system require further incentives for society to save more for retirement, and the implementation of the Green Deal will also entail additional costs.
The IMF experts stress that any redistribution of public spending, including in the areas of education, health care and pensions, will require substantial political compromises, so additional revenue-generating tax measures will be key to safeguarding policy credibility and fiscal sustainability.
The IMF notes that the Lithuanian banking sector is well capitalised, with ample liquidity buffers and low levels of non-performing loans. Profitability of banks remains historically high, despite falling interest rates and a temporary solidarity contribution extended until the end of 2025.
Housing market activity and prices in Lithuania have been increasing since the second half of 2024, while commercial real estate activity remains subdued.
The IMF statement is available here.
Last updated: 11-02-2025
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