2025-02-06
IMF: Lithuania needs to revive productivity growth and look for additional sources of budget revenue
According to International Monetary Fund (IMF) experts, Lithuania’s economy has successfully weathered many unprecedented shocks in recent years: it grew moderately in 2023 and 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 look for additional sources of budget revenue and seek greater efficiency of the public sector.
“Lithuania’s economy is showing robust growth, 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, we cannot rest on our laurels because there is still a lot of room for productivity growth. The key to success is to increase public and private investment in in-demand skills development, technology, as well as research, development, and innovation. The challenges of an ageing population are another major concern. It is important to agree on a robust pension system that would encourage people to consistently accumulate their pensions and prepare for dignified retirement,” said Gediminas Šimkus, Chair of the Board of Lietuvos bankas.
“Against a backdrop of growing corporate profitability and improving household financial situation this year, economic growth is expected to strengthen further. Although the economic projections are positive, there is a need for structural reforms that would enhance the competitiveness and productivity of the Lithuanian economy in the longer term. In view of the changed security environment, we will have to agree on systemic solutions in the near future to ensure sustainable funding to strengthen Lithuania’s defence capabilities,” says Minister of Finance Rimantas Šadžius.
IMF experts note that Lithuania’s economic recovery has so far been mainly driven by private consumption; the external sector has also contributed to growth, especially due to high exports of services. It is stressed that easing monetary policy, recovering corporate profitability and good financial situation of households will have a positive impact on future economic growth, although the external environment poses some risks. Lower-than-expected demand in Lithuania’s main euro area trade partners and political uncertainty in major global economies may affect domestic sentiment and export performance.
According to IMF experts, inflation will accelerate this year, partly due to higher indirect taxes, and it will stabilise above 2% over the medium term. Due to the recent inflation shock and rapid wage growth, prices and wages have increased, thus more attention must be paid 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 rise this year due to the planned significant boost in defence spending and pressure to increase social benefits. It is underlined that the challenges of the social security system require further incentives for society to save more for retirement, and the implementation of the green transition will also entail additional costs.
IMF experts note that any redistribution of public spending, including in education, health care and pensions, will require substantial political tradeoffs, therefore revenue-generating tax measures will be key to preserving policy credibility and fiscal sustainability.
The IMF notes that the Lithuanian banking sector is well capitalised, with sufficient liquidity buffers and low levels of non-performing loans. Bank profitability 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 rising since the second half of 2024, but activity in the commercial real estate market remains subdued.
Read the IMF report here.