## Republic of Lithuania: IMF staff report excerpt (cr17177)

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### Recent developments and cyclical stance
- Real GDP growth: 2.3 percent in 2016; real GDP expanded by 3.9 percent in Q1 2017.
- Main drivers:
  - Strong private consumption driven by robust wage growth and low inflation that supported purchasing power.
  - Exports recently growing as external environment improves and adverse effects from retaliatory Russian trade sanctions and depreciation of the Russian ruble wane.
  - Gross fixed capital formation remained weak, reflecting subdued absorption of European Structural and Investment Funds (ESIFs) under the Multiannual Financial Framework (MFF) 2014–20.
- Output gap: staff estimates the output gap to be small and negative, owing to slack in the tradables sector; spare capacity appears exhausted in the labor‑intensive non‑tradables sector.
- Labor market signals: rapid wage growth indicative of a tightening labor market and large minimum wage hikes and compensation for weak post‑GFC wage developments.
- Financial conditions:
  - Private‑sector credit growth turned positive mid‑2015; reached 7.7 percent for households and 5.4 percent for non‑financial companies in April (year‑on‑year).
  - Stock of private sector credit at 42 percent of GDP.
  - Banks: strong capitalization, high liquidity, healthy profits; watch for spillovers from Nordic parent banks.
  - Housing prices rising, transactions approaching 2007 peak but still historically low after inflation adjustment.
- External sector: current account deficit narrowed from 2.3 to 0.9 percent of GDP in 2016; energy‑related terms‑of‑trade improvement contributed 1.8 percentage points.

### Outlook and projections
- Growth forecast:
  - Real GDP growth projected: 3.2 percent in 2017; 3.2 percent in 2018; 3.2 percent in 2019.
  - Domestic demand growth: 3.4 percent in 2017; 3.6 percent in 2018; 3.7 percent in 2019.
  - Private consumption growth: 4.2 percent in 2017; 3.8 percent in 2018; 3.5 percent in 2019.
  - Domestic fixed investment growth: 2.7 percent in 2017; 4.8 percent in 2018; 5.5 percent in 2019.
- Inflation:
  - HICP, period average: 0.7 percent (2016) rising to 3.4 percent in 2017; projected 2.0 percent (2018), 2.2 percent (2019).
  - HICP, end of period: 2.0 percent (2016) projected 3.0 percent (2017).
- External demand and trade:
  - Exports of goods and services (volume change): 3.5 percent (2016) projected 4.3 percent (2017).
  - Imports of goods and services (volume change): 3.9 percent (2016) projected 4.5 percent (2017).
  - Net external demand contribution to growth: -0.5 in 2016; projected -0.3 in 2017.
- Risks and dynamics:
  - Strong domestic demand will pull in imports, causing a modest deterioration of the trade balance despite improving exports.
  - Annual average HICP inflation set to spike to 3.4 percent in 2017 because of higher global energy prices and excise tax hikes earlier in 2017.
  - Persistent increase of unit labor costs—some 5 percent for both the whole economy and manufacturing in 2016—and signs of sliding export shares require close monitoring.

### Fiscal and financial assessment
- Fiscal outcomes:
  - 2016 fiscal balance: 0.3 percent of GDP (first ever fiscal surplus).
  - Structural fiscal balance (percent of potential GDP): 0.6 in 2016 (staff assessment).
  - Public debt ratio fell to some 40 percent of GDP in 2016.
- Medium‑term fiscal stance and recommendations:
  - Recommended medium‑term target: structural fiscal deficit of 0.5 percent of GDP.
  - Room under the 0.5 percent of GDP target available to finance fiscal structural reforms; one‑off costs of structural reforms should be accommodated in addition.
  - Longer‑term pressures from rising age‑related spending and declining EU funds: recommendation to boost low tax revenues primarily through tax administration improvements, and consider selected tax policy measures.
- Public finance projections (selected figures):
  - Revenue (percent of GDP): 34.5 (2016); projected 35.3 (2017), 36.8 (2018), 36.4 (2019).
  - Expenditure (percent of GDP): 34.2 (2016); projected 35.8 (2017), 36.7 (2018), 36.4 (2019).
  - Fiscal balance (percent of GDP): 0.3 (2016); projected -0.4 (2017), 0.1 (2018), 0.0 (2019).
  - General government gross debt (percent of GDP): 40.2 (2016); projected 38.3 (2017), 36.3 (2018), 34.4 (2019).
- Financial sector stability:
  - No immediate risks to stability; strong soundness indicators and stress tests attest resiliency.
  - Recommend strengthening Nordic‑Baltic cooperation, including planned crisis simulation exercise with ECB supervisors participating.
  - Monitor revival of credit growth to ensure prudent pace; continue attention to strength of some small non‑systemic financial institutions.
  - Credit union reform is on track and should be completed in line with current plans.

### Structural reform priorities and policy recommendations
- Overarching challenge:
  - Reinvigorate income convergence with Western Europe by narrowing productivity gap; structural reforms are the main lever while preserving macroeconomic and financial stability.
- Education system overhaul (top priority):
  - Address poor educational outcomes by improving management of educational institutions, stepping up standard setting and enforcement, tackling rising overcapacities due to declining school‑age populations, and ensuring better pay for a smaller teaching staff.
  - Reform needed at all levels: higher education, vocational training, general education.
- Innovation promotion:
  - Current efforts achieved relatively little compared to allocated public resources.
  - Reduce fragmentation: merge implementing, advisory, and decision‑making institutions.
  - Use fewer promotion instruments more flexibly for a broader range of innovation activities.
  - Step up direct financial support for innovation‑related outlays by businesses rather than adding underused programs.
- Labor market and business environment:
  - Adoption of a modern Labor Code strengthens business environment; address potential deficiencies after experience is gathered.
  - Ongoing governance reform for state‑owned enterprises is welcome.
- Fiscal structural reforms with pro‑growth and pro‑equity focus:
  - Consider lowering social contributions for low‑wage earners, broadening active labor market programs (ALMPs), and making unemployment benefits more generous.
  - Improve quality of public spending through performance‑based budgeting.
  - Avoid sharp unwarranted fiscal consolidation; revisit fiscal rules viewed as unnecessarily stringent relative to EU and euro area requirements.

### Executive Board assessment (summary)
- Endorsed staff appraisal: cyclical upswing welcome but productivity gap with Western Europe stopped narrowing in last three years, raising sustainability questions for income convergence.
- Key message: maintain sound macroeconomic and financial management and identify priority structural reforms that promote growth and income equality, pushing ahead with implementation.
- Financial sector: resilient but Nordic‑Baltic cooperation should be strengthened; monitor credit revival and small non‑systemic institutions; complete credit union reform.

### Selected key statistics
- Per capita GDP (2016): € 13,500
- Literacy rate (2015): 99.8 %
- At‑risk‑of‑poverty (after transfers), share of population (2015): 29.3%
- Real GDP growth (annual percentage change): 3.5 (2014), 1.8 (2015), 2.3 (2016), 3.2 (2017), 3.2 (2018), 3.2 (2019)
- Private consumption growth (year‑on‑year, in percent): 4.3 (2014), 4.1 (2015), 5.6 (2016), 4.2 (2017), 3.8 (2018), 3.5 (2019)
- Domestic fixed investment growth (year‑on‑year, in percent): 3.7 (2014), 4.7 (2015), -0.5 (2016), 2.7 (2017), 4.8 (2018), 5.5 (2019)
- HICP, period average (annual percentage change): 0.2 (2014), -0.7 (2015), 0.7 (2016), 3.4 (2017), 2.0 (2018), 2.2 (2019)
- General government gross debt (percent of GDP): 40.5 (2014), 42.7 (2015), 40.2 (2016), 38.3 (2017), 36.3 (2018), 34.4 (2019)
- Current account balance (percent of GDP): 3.6 (2014), -2.3 (2015), -0.9 (2016), -1.6 (2017), -1.5 (2018), -1.8 (2019)
- Gross national saving: 22.3 (2014), 17.6 (2015), 15.5 (2016), 15.4 (2017)
- Gross national investment: 18.7 (2014), 19.9 (2015), 16.4 (2016), 17.0 (2017)

### Box 1 — External Sector Assessment (highlights)
- Recent growth and sectoral shifts:
  - Growth projection or outcome: "9.3 percent after 7.9 percent in 2016."
  - Resources could shift into the non‑tradables sector, where productivity growth has historically been low and is likely to remain so.
- External position assessment (2016):
  - Current account assessed as "broadly consistent with medium-term fundamentals and desirable policies."
  - EBA-lite methodology finds only "a small positive current account gap."
- Medium-term external risks and channels:
  - Vulnerabilities from "a possible reversal of recent terms-of-trade gains," "a revival of investment and associated imports," and "a prospective decline in ESIFs in the 2021–27 MFF."
- Charted indicators (as presented): Nominal ULCs 2000-16, Export Market Shares 2000-16, Credit to NFCs and HHs 2006-17:Q1, Housing Prices 2006-16.

### Competitiveness, Current Account Norms, and Gaps
- Current account gap: 0.9 percent of GDP.
- The gap is primarily due to fiscal policy in the rest of the world being looser than desirable in the medium-term.
- No immediate need for Lithuania to adjust its policies, but should closely monitor competitiveness to ensure wage and productivity developments align better than in recent years.
- EBA-lite current account norm derivation is highly sensitive to demographic projections; the gap calculations are based on the midpoint between UN and Eurostat population projections.
- Exchange rate and REER assessments:
  - ERER: estimated REER overvaluation of 2.9 percent.
  - ES: exchange rate undervaluation of 1.8 percent.
  - EBA-lite: REER undervaluation of 1.7 percent.
- NIIP strengthened to -43 percent of GDP in 2016 from -58 percent of GDP before the GFC.
- Loan-to-deposit ratio fell from almost 200 percent to around 100 percent.
- Foreign direct investment accounts for close to two-thirds of the negative NIIP position.

### Outlook and inflation dynamics (from External Sector Assessment)
- Staff projects real GDP growth pegged at 3.2 percent in the next two years, fast enough to close the output gap in 2018.
- Potential growth expected to lift to just over 3 percent in the medium term as productivity growth recovers.
- In the medium term, current account deficit expected to settle at some 2.5 percent of GDP.
- Annual average HICP inflation projected to spike to 3.4 percent in 2017 because of:
  - base effect from the sharp rise in global energy prices in late 2016;
  - excise tax hikes this March, which add some 0.7 ppt.
- Inflation would fall back in 2018 and reestablish its historical margin of 0.75 ppt over the euro area average typical of a catching-up economy.

### Risks — likelihood, transmission, and recommended responses (highlights)
- Retreat from cross-border integration: Medium likelihood (short to medium term). Response: Participate in global and European policy responses; diversify exports.
- Policy and geopolitical uncertainties: High/Medium likelihood (short to medium term). Response: Participate in coordinated policy responses at the European level; let fiscal stabilizers operate freely and consider discretionary fiscal policy.
- Weaker-than-expected global growth: High/Medium likelihood (medium term). Response: Diversify exports; spur domestic productivity growth.
- Financial conditions risk (significant further strengthening of the U.S. dollar and/or higher rates): High (short term). Response: Let automatic fiscal multipliers operate freely; consider discretionary fiscal policy if severe growth setback.
- European bank distress: Medium (short term). Response: Step up collaboration with home country supervisors and crisis preparedness.
- Risks to competitiveness from wage growth outstripping productivity: Medium (medium term). Response: Boost productivity growth and cool wage dynamics.
- Risks to income convergence if productivity fails to pick up and structural reforms fall short: High (medium term). Response: Implement a focused structural reform program.

### Fiscal policy measures in 2017 (percent of GDP)
- Revenue measures: -0.13
  - Personal income tax: -0.36
  - Other direct taxes: 0.01
  - VAT: 0.01
  - Excises: 0.20
  - Social contributions: 0.01
- Expenditure measures: 1.16
  - Compensation of employees 1/: 0.29
  - Social benefits 1/: 0.60
  - Capital spending 2/: 0.27
- Net impact on budget balance: -1.28
- Notes: 1/ Against a counterfactual of not granting any wage or benefit increases. 2/ Includes defense expenditure.

### Tax revenue and administration diagnostics
- Lithuania’s tax‑to‑GDP ratio is one of the lowest in Europe.
- Staff estimates of contributors to tax underperformance relative to the EU (percent of GDP):
  - Total tax revenues shortfall: 10.7
  - Tax administration: 3.8
  - Tax policy: 1.2
  - Economic structure: 5.7
- Suggested measures:
  - Improve tax administration (VAT register progress noted; need more audit/verification capacity).
  - Target high‑wealth individuals and construction sector.
  - Consider unifying tax and social contribution collection with more autonomy for the merged entity.
  - Revisit tax policy: personal and corporate income tax rates are low and contain special schemes; wealth and capital income are lightly taxed.

### Labor market, wages, and financial supervision
- Unemployment rate (year average): 10.7 (2014), 7.9 (2016); projections 7.4 (2017), 7.2 (2018).
- Average monthly gross earnings (annual percentage change): 4.5 (2014), 5.1 (2015), 7.9 (2016), projected 7.6 (2017), thereafter around 5.6–5.5.
- Government actions: forgoing minimum wage hikes this year and loosening immigration restrictions for selected professions.
- Bank supervision centralized in the Bank of Lithuania; recommendations to strengthen accountability and decision-making of the Supervision Service and governance of consumer dispute resolution.
- Continue cooperation in the Nordic‑Baltic Stability Group (NBSG); MoU on liquidity provision concluded; planned crisis simulation exercise.
- Housing price developments not an immediate concern; macroprudential tools in place.

### Education, skills, and innovation (selected metrics and priorities)
- Tertiary attainment rate: 58.3 percent (exceeds EU average of 39 percent) but educational outcomes compare unfavorably.
- PISA scores: Mathematics 478, Science 475, Reading 472.
- PIAAC IT score: 267; share of high performers 41.8; IT high performers 17.6.
- Vocational training underdeveloped: 26.8 percent upper‑secondary enrollment vs. 48 percent in the EU.
- Educational inefficiencies:
  - Approximately 30 percent too many teachers in general education.
  - None of the 42 regional vocational training centers runs near capacity.
  - Tertiary education: 22 universities, 23 colleges, and 22 research institutes for a population of less than 3 million.
- Innovation challenges:
  - ESIFs totaling some €770 million, or 1.9 percent of 2017 GDP, earmarked for RDI promotion for 2014–20.
  - Current RDI system is highly fragmented; take‑up of tax incentives modest; few firms use 300 percent R&D deduction.
- IMF staff recommendations:
  - Merge institutions into a single entity in charge of innovation; create a separate entity for basic research and education.
  - Streamline promotion instruments into broader and more flexible instruments.
  - Make funds available directly to businesses to a much larger extent.
  - Recognize limited effectiveness of income tax incentives for early‑stage firms.

### Social protection and pensions
- Pension spending: some 7 percent of GDP currently; projected to rise to 9.4 percent of GDP by 2035.
- Replacement ratios currently around one third; demographic changes and new pension formula may reduce replacement ratio to as little as 20 percent.
- IMF recommendations:
  - Revisit the pension formula to at least preserve replacement ratios.
  - Consider increasing the retirement age further once 65 years for men and women are phased in.
  - Scale back incidence of disability pensions and allow more immigration from non‑EU countries.

### Annex I — Public Sector Debt and External Sustainability Analysis (DSA) — Baseline scenario (selected figures)
- Nominal gross public debt (percent of GDP): 29.9 (2015); 42.7 (2016); 40.2 (2017); 38.1 (2018); 35.8 (2019); 33.8 (2020); 31.9 (2021); 30.1 (2022); Projection (final column): 28.4.
- Public gross financing needs (percent of GDP): 8.5 (2015); 6.6 (2016); 5.9 (2017); 4.1 (2018); 5.6 (2019); 3.0 (2020); 3.5 (2021); 2.5 (2022); Projection (final column): 4.2.
- Real GDP growth (percent): 2.8 (2015); 1.8 (2016); 2.3 (2017); 3.2 (2018); 3.2 (2019); 3.2 (2020); 3.1 (2021); 3.1 (2022); Projection (final column): 3.0.
- Inflation (GDP deflator, percent): 3.8 (2015); 0.2 (2016); 1.2 (2017); 2.7 (2018); 2.0 (2019); 2.2 (2020); 2.4 (2021); 2.5 (2022); Projection (final column): 2.5.
- Effective interest rate (percent): 5.4 (2015); 3.8 (2016); 3.3 (2017); 3.6 (2018); 4.0 (2019); 4.2 (2020); 4.3 (2021); 4.5 (2022); Projection (final column): 4.5.
- Sovereign spreads: EMBIG (bp): 43; 5Y CDS (bp): 71.
- Ratings (Foreign / Local): Moody's A3 / A3; S&P A- / A-; Fitch A- / A-.
- Contribution to change in gross public sector debt (annual, percent of GDP): 2.5 (2015); 2.2 (2016); -2.5 (2017); -2.1 (2018); -2.3 (2019); -2.0 (2020); -1.9 (2021); -1.8 (2022); -1.7 (projection); cumulative: -11.8.
- Identified debt‑creating flows (percent of GDP): 3.1 (2015); 4.0 (2016); -1.1 (2017); -1.9 (2018); -2.1 (2019); -1.8 (2020); -1.8 (2021); -1.7 (2022); -1.5 (projection); cumulative: -10.8.
- Primary deficit (percent of GDP): 2.8 (2015); -1.1 (2016); -1.4 (2017); -1.0 (2018); -1.6 (2019); -1.4 (2020); -1.3 (2021); -1.3 (2022); -1.2 (projection); cumulative: -7.8.

### Composition of public debt and alternative scenarios (selected assumptions)
- Baseline scenario key macro assumptions (2017–2022):
  - Real GDP growth: 3.2 (2017), 3.2 (2018), 3.2 (2019), 3.1 (2020), 3.1 (2021), 3.0 (2022).
  - Inflation: 2.7 (2017), 2.0 (2018), 2.2 (2019), 2.4 (2020), 2.5 (2021), 2.5 (2022).
  - Primary Balance: 1.0 (2017), 1.6 (2018), 1.4 (2019), 1.3 (2020), 1.3 (2021), 1.2 (2022).
  - Effective interest rate: 3.6 (2017), 4.0 (2018), 4.2 (2019), 4.3 (2020), 4.5 (2021), 4.5 (2022).
- Historical scenario key assumptions include slower growth and weaker primary balances in later years; constant Primary Balance scenario holds Primary Balance at 1.0 (2017–2022).

### External Debt Sustainability Framework (selected figures)
- External debt (percent of GDP) baseline: 60.7 (2012); 52.9 (2013); 52.5 (2014); 68.4 (2015); 78.0 (2016); 79.2 (2017); 76.0 (2018); 72.2 (2019); 68.3 (2020); 64.8 (2021); 61.6 (2022).
- Debt-stabilizing non-interest current account: -1.5 (percent of GDP).
- Change in external debt (percent of GDP): 3.0 (2012); -7.8 (2013); -0.4 (2014); 15.9 (2015); 9.6 (2016); 1.1 (2017); -3.2 (2018); -3.8 (2019); -3.9 (2020); -3.6 (2021); -3.2 (2022).
- Identified external debt-creating flows (percent of GDP): 1.9 (2012); -5.6 (2013); -4.7 (2014); 13.0 (2015); -0.7 (2016); -0.4 (2017); -0.5 (2018); -0.1 (2019); 0.8 (2020); 1.1 (2021); 1.3 (2022).
- Current account deficit, excluding interest payments (percent of GDP): -1.1 (2012); -2.8 (2013); -4.2 (2014); 0.6 (2015); -0.5 (2016); 0.6 (2017); 0.6 (2018); 0.9 (2019); 1.5 (2020); 1.6 (2021); 1.7 (2022).
- Exports (percent of GDP): 63.5 (2012); 63.2 (2013); 60.8 (2014); 68.4 (2015); 67.2 (2016); 77.1 (2017); 77.4 (2018); 77.0 (2019); 76.3 (2020); 76.7 (2021); 77.4 (2022).
- Imports (percent of GDP): 62.8 (2012); 62.3 (2013); 59.4 (2014); 69.0 (2015); 66.4 (2016); 77.7 (2017); 78.0 (2018); 77.7 (2019); 77.3 (2020); 77.9 (2021); 79.0 (2022).
- External debt-to-exports ratio (percent): 95.7 (2012); 83.7 (2013); 86.3 (2014); 100.0 (2015); 116.2 (2016); 102.6 (2017); 98.1 (2018); 93.8 (2019); 89.5 (2020); 84.5 (2021); 79.6 (2022).
- Gross external financing need (billion US$): 15.1 (2012); 12.9 (2013); 10.9 (2014); 12.1 (2015); 14.1 (2016); 19.4 (2017); 21.3 (2018); 20.1 (2019); 21.5 (2020); 21.1 (2021); 21.2 (2022).
- Gross external financing need (percent of GDP): 35.1 (2012); 27.8 (2013); 22.3 (2014); 29.2 (2015); 33.0 (2016); 44.5 (2017); 46.6 (2018); 41.7 (2019); 42.2 (2020); 39.3 (2021); 37.5 (2022).

### Staff appraisal and priorities (concluding highlights)
- Emerging cyclical upswing is welcome, but productivity gap with Western Europe stopped narrowing in the last three years; sustainability of income convergence is in question.
- Maintain sound macroeconomic and financial management; identify and implement priority structural reforms to promote growth and income equality.
- Overhauling the education system is the top structural reform priority.
- Innovation policy needs consolidation, fewer institutions, and more direct financial support to businesses for innovation‑related outlays.
- Recommended next Article IV Consultation on a 12‑month cycle.

*Source: IMF staff report for the 2017 Article IV consultation with the Republic of Lithuania (cr17177).*

### 2.3 percent in 2016. Strong private consumption, on the back of robust wage growth and low

### cr17177 - 2.3 percent in 2016. Strong private consumption, on the back of robust wage growth and low

### Recent developments and cyclical stance
- Real GDP growth: 2.3 percent in 2016; real GDP expanded by 3.9 percent in Q1 2017.  
- Main drivers:
  - Strong private consumption driven by robust wage growth and low inflation that supported purchasing power.
  - Exports recently growing as external environment improves and adverse effects from retaliatory Russian trade sanctions and depreciation of the Russian ruble wane.
  - Gross fixed capital formation remained weak, reflecting subdued absorption of European Structural and Investment Funds (ESIFs) under the Multiannual Financial Framework (MFF) 2014–20.
- Output gap: staff estimates the output gap to be small and negative, owing to slack in the tradables sector; spare capacity appears exhausted in the labor‑intensive non‑tradables sector.
- Labor market signals: rapid wage growth indicative of a tightening labor market and large minimum wage hikes and compensation for weak post‑GFC wage developments.
- Financial conditions:
  - Private‑sector credit growth turned positive mid‑2015; reached 7.7 percent for households and 5.4 percent for non‑financial companies in April (year‑on‑year).
  - Stock of private sector credit at 42 percent of GDP (historically modest).
  - Banks: strong capitalization, high liquidity, healthy profits; watch for spillovers from Nordic parent banks.
  - Housing prices rising, transactions approaching 2007 peak but still historically low after inflation adjustment.
- External sector: current account deficit narrowed from 2.3 to 0.9 percent of GDP in 2016; energy‑related terms‑of‑trade improvement contributed 1.8 percentage points.

### Outlook and projections
- Growth forecast:
  - Real GDP growth projected to rise to 3.2 percent in 2017 and to remain at 3.2 percent in 2018 and 2019 (table: 2017 3.2, 2018 3.2, 2019 3.2).
  - Domestic demand growth: 3.4 percent in 2017; projections 3.6 percent (2018), 3.7 percent (2019).
  - Private consumption growth: 4.2 percent in 2017; projections 3.8 percent (2018), 3.5 percent (2019).
  - Domestic fixed investment growth: 2.7 percent in 2017; projections 4.8 percent (2018), 5.5 percent (2019).
- Inflation:
  - HICP, period average: 0.7 percent (2016) rising to 3.4 percent in 2017; projected 2.0 percent (2018), 2.2 percent (2019).
  - HICP, end of period: 2.0 percent (2016) projected 3.0 percent (2017).
- External demand and trade:
  - Exports of goods and services (volume change): 3.5 percent (2016) projected 4.3 percent (2017).
  - Imports of goods and services (volume change): 3.9 percent (2016) projected 4.5 percent (2017).
  - Net external demand contribution to growth: -0.5 in 2016 and projected -0.3 in 2017.
- Risks and dynamics:
  - Strong domestic demand will pull in imports, causing a modest deterioration of the trade balance despite improving exports.
  - Annual average HICP inflation set to spike to 3.4 percent in 2017 because of higher global energy prices and excise tax hikes earlier in 2017.
  - Persistent increase of unit labor costs—some 5 percent for both the whole economy and manufacturing in 2016—and signs of sliding export shares require close monitoring.

### Fiscal and financial assessment
- Fiscal outcomes:
  - 2016 fiscal balance: 0.3 percent of GDP (first ever fiscal surplus).
  - Structural fiscal balance (percent of potential GDP): 0.6 in 2016 (staff assessment).
  - Public debt ratio fell to some 40 percent of GDP in 2016 (table: General government gross debt 40.2 percent in 2016).
- Medium‑term fiscal stance and recommendations:
  - Recommended medium‑term target: structural fiscal deficit of 0.5 percent of GDP considered appropriate.
  - Room under the 0.5 percent of GDP target available to finance fiscal structural reforms; one‑off costs of structural reforms should be accommodated in addition.
  - Longer‑term pressures from rising age‑related spending and declining EU funds: recommendation to boost low tax revenues primarily through tax administration improvements, and consider selected tax policy measures.
- Public finance projections (table highlights):
  - Revenue (percent of GDP): 34.5 (2016); projected 35.3 (2017), 36.8 (2018), 36.4 (2019).
  - Expenditure (percent of GDP): 34.2 (2016); projected 35.8 (2017), 36.7 (2018), 36.4 (2019).
  - Fiscal balance (percent of GDP): 0.3 (2016); projected -0.4 (2017), 0.1 (2018), 0.0 (2019).
  - General government gross debt (percent of GDP): 40.2 (2016); projected 38.3 (2017), 36.3 (2018), 34.4 (2019).
- Financial sector stability:
  - No immediate risks to stability; strong soundness indicators and stress tests attest resiliency.
  - Recommend strengthening Nordic‑Baltic cooperation, including planned crisis simulation exercise with ECB supervisors participating.
  - Monitor revival of credit growth to ensure prudent pace; continue attention to strength of some small non‑systemic financial institutions.
  - Credit union reform is on track and should be completed in line with current plans.

### Structural reform priorities and policy recommendations
- Overarching challenge:
  - Reinvigorate income convergence with Western Europe by narrowing productivity gap; structural reforms are the main lever while preserving macroeconomic and financial stability.
- Education system overhaul (top priority):
  - Address poor educational outcomes by improving management of educational institutions, stepping up standard setting and enforcement, tackling rising overcapacities due to declining school‑age populations, and ensuring better pay for a smaller teaching staff.
  - Reform needed at all levels: higher education, vocational training, general education.
- Innovation promotion:
  - Current efforts achieved relatively little compared to allocated public resources.
  - Reduce fragmentation: merge implementing, advisory, and decision‑making institutions.
  - Use fewer promotion instruments more flexibly for a broader range of innovation activities.
  - Step up direct financial support for innovation‑related outlays by businesses rather than adding underused programs.
- Labor market and business environment:
  - Adoption of a modern Labor Code strengthens business environment; address potential deficiencies after experience is gathered.
  - Ongoing governance reform for state‑owned enterprises is welcome.
- Fiscal structural reforms with pro‑growth and pro‑equity focus:
  - Consider lowering social contributions for low‑wage earners, broadening active labor market programs (ALMPs), and making unemployment benefits more generous.
  - Improve quality of public spending through performance‑based budgeting (payoffs may materialize only over time).
  - Avoid sharp unwarranted fiscal consolidation; revisit fiscal rules viewed as unnecessarily stringent relative to EU and euro area requirements.

### Executive Board assessment (summary)
- Endorsed staff appraisal: cyclical upswing welcome but productivity gap with Western Europe stopped narrowing in last three years, raising sustainability questions for income convergence.
- Key message: maintain sound macroeconomic and financial management and identify priority structural reforms that promote growth and income equality, pushing ahead with implementation.
- Financial sector: resilient but Nordic‑Baltic cooperation should be strengthened; monitor credit revival and small non‑systemic institutions; complete credit union reform.

### Selected key statistics (from table)
- Per capita GDP (2016): € 13,500
- Literacy rate (2015): 99.8 %
- At‑risk‑of‑poverty (after transfers), share of population (2015): 29.3%
- Real GDP growth (annual percentage change): 3.5 (2014), 1.8 (2015), 2.3 (2016), 3.2 (2017), 3.2 (2018), 3.2 (2019)
- Private consumption growth (year‑on‑year, in percent): 4.3 (2014), 4.1 (2015), 5.6 (2016), 4.2 (2017), 3.8 (2018), 3.5 (2019)
- Domestic fixed investment growth (year‑on‑year, in percent): 3.7 (2014), 4.7 (2015), -0.5 (2016), 2.7 (2017), 4.8 (2018), 5.5 (2019)
- HICP, period average (annual percentage change): 0.2 (2014), -0.7 (2015), 0.7 (2016), 3.4 (2017), 2.0 (2018), 2.2 (2019)
- General government gross debt (percent of GDP): 40.5 (2014), 42.7 (2015), 40.2 (2016), 38.3 (2017), 36.3 (2018), 34.4 (2019)
- Current account balance (percent of GDP): 3.6 (2014), -2.3 (2015), -0.9 (2016), -1.6 (2017), -1.5 (2018), -1.8 (2019)
- Gross national saving: 22.3 (2014), 17.6 (2015), 15.5 (2016), 15.4 (2017)
- Gross national investment: 18.7 (2014), 19.9 (2015), 16.4 (2016), 17.0 (2017)

*Source: IMF staff report for the 2017 Article IV consultation with the Republic of Lithuania (staff estimates and projections as presented in the provided content).*

### 9.3 percent after 7.9 percent in 2016. Resources could shift into the non-tradables sector, where

### Box 1. Republic of Lithuania: External Sector Assessment

### Recent growth and sectoral shifts
- Growth projection or outcome: "9.3 percent after 7.9 percent in 2016."
- Resources could shift into the non-tradables sector, where productivity growth has historically been low and is likely to remain so.

### External position assessment (2016)
- In 2016, the current account was assessed to be "broadly consistent with medium-term fundamentals and desirable policies."
- The EBA-lite methodology finds only "a small positive current account gap."

### Medium-term external risks and channels
- The external position could suffer and compound adverse effects from:
  - "a possible reversal of recent terms-of-trade gains,"
  - "a revival of investment and associated imports,"
  - "a prospective decline in ESIFs in the 2021–27 MFF."
- Sectoral productivity concern: persistence of low productivity growth in non-tradables if resources shift there.

### Charted indicators and coverage (as presented)
- Lithuania and EU-28: Nominal ULCs, 2000-16 (2000=100). Axis ticks shown include 80, 90, 100, 110, 120, 130, 140, 150, 160, 170, 180 and years 2000, 2002, 2004, 2006, 2008, 2010, 2012, 2014, 2016.
- Lithuania: Export Market Shares, 2000-16 (Percent change, goods and services). Series shown as "Total" and "Excl. Russia."
- Lithuania: Credit to NFCs and HHs, 2006-17:Q1. Series referenced: Euros (2006:Q1=100); HICP discounted (2006:Q1=100); Wage discounted (2006:Q1=100); Percent of GDP (RHS).
- Lithuania: Housing Prices, 2006-16. Series referenced: GDP discounted (2006:Q1=100); HICP discounted (2006:Q1=100); Wage discounted (2006:Q1=100). Years/quarters run from 2006:Q1 through 2016 (and 2017:Q1 in credit series).

_International Monetary Fund_

### 0.9 percent of GDP and an associated small real effective exchange rate undervaluation of 1.7 percent. The

### cr17177 - 0.9 percent of GDP and an associated small real effective exchange rate undervaluation of 1.7 percent. The

### Competitiveness, Current Account Norms, and Gaps
- Current account gap: 0.9 percent of GDP.
- The gap is primarily due to fiscal policy in the rest of the world being looser than desirable in the medium-term.
- No immediate need for Lithuania to adjust its policies, but should closely monitor competitiveness to ensure wage and productivity developments align better than in recent years.
- A reversal of last year’s terms-of-trade gain and a revival of investment could widen the current account balance.
- EBA-lite current account norm derivation is highly sensitive to demographic projections:
  - UN projections imply a much more negative current account norm (they seem to understate population aging).
  - Eurostat projections imply a less negative norm (they appear to overstate population aging).
  - Current account gap calculations here are based on the midpoint between both population projections.

### Exchange Rate and Real Effective Exchange Rate (REER) Assessments
- Equilibrium Real Exchange Rate approach (ERER): estimated REER overvaluation of 2.9 percent (REER close to equilibrium).
- External Sustainability Approach (ES): actual current account balance is higher than the level that would stabilize Lithuania’s net foreign asset position; exchange rate undervaluation of 1.8 percent.
- EBA-lite approach: REER undervaluation of 1.7 percent.
- Overall: mixed results with only small deviations from calculated benchmarks.

### Net International Investment Position (NIIP) and External Vulnerabilities
- NIIP strengthened to -43 percent of GDP in 2016 from -58 percent of GDP before the GFC.
- Rollback of parent bank funding chiefly responsible for NIIP improvement.
- Loan-to-deposit ratio of the Lithuanian banking system declined from almost 200 percent to around 100 percent.
- Foreign direct investment accounts for close to two-thirds of the negative NIIP position.
- Risks of sudden withdrawal and associated external pressures are therefore low.

### Outlook and Key Macroeconomic Projections
- Staff projects real GDP growth pegged at 3.2 percent in the next two years, fast enough to close the output gap in 2018.
- Potential growth expected to lift to just over 3 percent in the medium term as productivity growth recovers.
- In the medium term, current account deficit expected to settle at some 2.5 percent of GDP.
- Annual average HICP inflation projected to spike to 3.4 percent this year because of:
  - base effect from the sharp rise in global energy prices in late 2016;
  - excise tax hikes this March, which add some 0.7 ppt.
- On staff’s wage and growth projections, inflation would fall back in 2018 and reestablish its historical margin of 0.75 ppt over the euro area average typical of a catching-up economy.
- Private consumption expected to remain robust, with some moderation as real wages decelerate.
- Strong domestic demand will pull in imports, leading to a gradual deterioration of the trade balance despite improving export prospects.

### Risks—Likelihood, Transmission, and Recommended Responses (Highlights)
- Retreat from cross-border integration: Medium likelihood (short to medium term). Impact via trade and confidence. Recommended response: Participate in global and European policy responses; diversify exports.
- Policy and geopolitical uncertainties: High/Medium likelihood (short to medium term). Impact via trade, confidence, and FDI. Recommended response: Participate in coordinated policy responses at the European level; let fiscal stabilizers operate freely and consider discretionary fiscal policy.
- Weaker-than-expected global growth: High/Medium likelihood (medium term). Impact via trade, confidence, and FDI. Recommended response: Participate in coordinated policy responses at the European level; diversify exports; spur domestic productivity growth.
- Financial conditions risk (significant further strengthening of the U.S. dollar and/or higher rates): High (short term). Impact limited due to low leverage; recommended response: Let automatic fiscal multipliers operate freely; consider discretionary fiscal policy in case of severe growth setback.
- European bank distress: Medium (short term). Potential spillovers from parent banks to Lithuania. Recommended response: Step up collaboration with home country supervisors and crisis preparedness.
- Risks to competitiveness from wage growth outstripping productivity: Medium (medium term). Recommended response: Redouble efforts to boost productivity growth and cool wage dynamics.
- Risks to income convergence if productivity fails to pick up and structural reforms fall short: High (medium term). Recommended response: Redouble efforts to implement a focused structural reform program.

### Fiscal Policy and Public Finances
- General government balance set to deteriorate to -0.4 percent of GDP in 2017.
- Structural balance corresponding to -0.1 percent of GDP after accounting for one-offs and staff’s output gap estimate.
- A medium-term target for the structural balance of -0.5 percent of GDP is advisable:
  - Would reduce public debt ratio to 31 percent of GDP by 2022 (compared to 15 percent of GDP prior to the GFC).
  - Provides buffers for external shocks, demographic spending pressures, and prospective decline of ESIFs in the 2021–27 MFF.
- Room under this target is available to strengthen the supply side; one-off costs for structural reforms should be accommodated.

Lithuania: Main Fiscal Measures in 2017 (Percent of GDP)
- Revenue measures: -0.13
  - Personal income tax: -0.36
  - Other direct taxes: 0.01
  - VAT: 0.01
  - Excises: 0.20
  - Social contributions: 0.01
- Expenditure measures: 1.16
  - Compensation of employees 1/: 0.29
  - Social benefits 1/: 0.60
  - Capital spending 2/: 0.27
- Net impact on budget balance: -1.28

(Notes in source: 1/ Against a counterfactual of not granting any wage or benefit increases. 2/ Includes defense expenditure.)

- Lithuania’s tax-to-GDP ratio is one of the lowest in Europe.
  - Staff estimates of contributors to tax underperformance relative to the EU (Percent of GDP): total tax revenues shortfall 10.7; tax administration 3.8; tax policy 1.2; economic structure 5.7 (table-style breakdown present in source).
- Suggested measures to boost revenues and medium-term fiscal sustainability:
  - Improve tax administration (VAT register progress noted; need more audit/verification capacity).
  - Target high-wealth individuals and construction sector.
  - Consider unifying tax and social contribution collection with more autonomy for the merged entity.
  - Revisit tax policy: personal and corporate income tax rates are low and contain special schemes; wealth and capital income are lightly taxed.

- Lithuania’s fiscal rules are more stringent than EU/euro area requirements; adjustment mechanism likely to kick in for 2019 and 2020, imposing a sharply negative fiscal impulse that is inadvisable under cyclical and medium-term structural considerations.

### Labor Market, Wages, and Financial Stability
- Wage developments need close monitoring; competitiveness and inflation risks if real wage growth outpaces productivity.
- Government steps welcomed: forgoing minimum wage hikes this year and loosening immigration restrictions for selected professions.
- Bank supervision centralized in the Bank of Lithuania; system is effective but:
  - Consider further strengthening accountability and decision-making of the Supervision Service.
  - Enhance governance of consumer dispute resolution through more independent oversight.
  - Continue cooperation in the Nordic-Baltic Stability Group (NBSG): MoU on liquidity provision concluded; planned crisis simulation exercise.
  - Collect data for network stress testing; establish agency-specific crisis management plans.
- Housing price developments not an immediate concern; macroprudential tools in place. Strength of some small non-systemic institutions and credit union reform need attention.

### Structural Reforms: Business Environment, Labor Code, SOEs
- Business environment generally favorable; Lithuania ranked third in CESEE on ease of doing business and competitiveness.
- New labor code adopted in early June (implementation postponed to July) with reforms including:
  - Shortened notice and severance pay periods.
  - Updated contract types.
  - Requirement to establish work councils.
  - Improved wage transparency.
  - Right to time off for training.
- Issues to monitor in labor code implementation:
  - Safeguards limiting use of fixed-term contracts.
  - Restrictions on overtime.
  - Whether more generous unemployment benefits could substitute for planned central fund for supplementary severance pay.
- SOE reforms in context of OECD accession: merge smaller SOEs with similar functions; ensure greater presence of independent board and management members in all SOEs.

### Education, Skills, and Innovation Priorities
- Tertiary attainment rate: 58.3 percent (exceeds EU average of 39 percent) but educational outcomes compare unfavorably.
- PISA and PIAAC results:
  - Lithuania PISA scores: Mathematics 478, Science 475, Reading 472.
  - PIAAC IT score: 267; share of high performers 41.8; IT high performers 17.6 (table-format data preserved).
  - OECD averages and EU averages provided in source tables for comparison.
- Skills and labor market alignment issues:
  - Adult skills lag in “ability to work in a technology-rich environment.”
  - Share of high achievers in numeracy and literacy considerably lower than elsewhere.
  - Vocational training underdeveloped: 26.8 percent upper-secondary enrollment vs. 48 percent in the EU.
  - Misalignment in tertiary education fields with labor market needs; many university graduates subsequently enroll in vocational training.
  - Some 40 percent of firms reported an inadequately qualified workforce as a major constraint (compared to around 16 percent on average in both the OECD and the EU).
- Educational overcapacity and inefficiencies:
  - Approximately 30 percent too many teachers in general education.
  - None of the 42 regional vocational training centers runs near capacity.
  - Tertiary education: 22 universities, 23 colleges, and 22 research institutes for a population of less than 3 million.
- Recommended education policy actions:
  - Empower educational management and hold it to account.
  - Better exploit standard-setting powers of the Ministry of Education and Science.
  - Reform funding incentives tied to enrollment to reduce incentives to lower standards and proliferate programs.
  - Reallocate efficiency gains toward better pay for educators and teacher training.

- Innovation challenges:
  - Innovation outcomes lag EU and top performers by a large margin.
  - Business R&D outlays remain low; patent applications modest; non-scientific innovation performance weak (source notes these priorities).

*International Monetary Fund — Republic of Lithuania: selected content from the IMF staff report excerpt included in the provided PDF content.*

### introduction of new products, processes, or organizational structures, also disappoints. This is

### cr17177 - introduction of new products, processes, or organizational structures, also disappoints. This is

### Innovation promotion and RDI
- ESIFs totaling some €770 million, or 1.9 percent of 2017 GDP, are earmarked for RDI promotion for the period 2014–20.
- Current system is highly fragmented across the Ministry of Economy, the Ministry of Education and Science, the Ministry of Finance, government, and parliament; many institutions have narrow mandates and there is no effective coordination, increasing administrative costs and making the system difficult to navigate.
- Take-up of tax incentives has been modest; few firms avail themselves of the possibility to deduct 300 percent of R&D outlays as expense for income tax purposes.
- IMF staff recommendations:
  - Merge institutions into a single entity in charge of innovation, akin to the Israel Innovation Authority, and a separate entity for basic research and education akin to the Planning and Budget Committee of the Council for Higher Education in Israel.
  - Streamline promotion instruments into broader and more flexible instruments rather than small-scale, step-specific schemes.
  - Make funds available directly to businesses to a much larger extent instead of primarily supplying public-sector services and infrastructure with limited private demand.
  - Recognize that income tax incentives are likely of secondary importance as young and innovative firms rarely generate large profits in early years.

### Education and skills
- Education reform priorities: improve management of educational institutions, step up standard setting and enforcement, tackle rising overcapacities from declining school-age populations, and ensure better pay for a smaller teaching staff.
- Government actions and intentions:
  - Plan to merge universities as a first step has been put forward.
  - Authorities agreed that the current RDI system is overly fragmented and would benefit from upgrading the institutional framework, consolidating RDI-related strategic documents, and evaluating and streamlining innovation support measures.
- Emphasis on vocational training and lifelong learning: more emphasis on training, including for those currently employed; spare capacities at vocational training centers could be deployed to reduce future job loss risk.

### Fiscal structural reform for pro-growth and pro-equity outcomes
- Recommended medium-term target: structural fiscal deficit of 0.5 percent of GDP.
- Room under this target is available to finance fiscal structural reforms; larger initiatives would need offsetting measures.
- Key fiscal policy recommendations:
  - Consider cutting social security contributions for low-wage earners; currently social contributions of almost 40 percent apply from the first euro earned.
  - Consider introducing a basic allowance for social contributions (phased out for higher incomes to limit budgetary costs).
  - Make unemployment benefits more generous and broaden active labor market programs (ALMPs); current unemployment benefit duration under consideration to extend from 6 to 9 months.
  - Increase emphasis on training and deploy spare capacities at vocational training centers.
  - Improve tax revenues primarily through tax administration improvements, and selected tax policy measures.
- Authority actions:
  - Increased the basic personal-income-tax allowance legislated under the previous administration.
  - Proposed additional tax incentives for RDI activities that would create the most generous such scheme in Europe: technological improvements fully deductible under corporate income tax; introduction of an innovation box taxing innovation-related income at a lower rate.
  - Opened a public consultation process on tax reforms in early June and after the mission.

### Social protection, pensions, and inequality
- Pension spending already accounts for some 7 percent of GDP and is projected to rise to 9.4 percent of GDP by 2035.
- Replacement ratios are currently around one third; demographic changes and new pension formula may reduce replacement ratio to as little as 20 percent.
- IMF recommendations:
  - Revisit the pension formula to at least preserve replacement ratios.
  - Consider increasing the retirement age further once 65 years for men and women are phased in.
  - Scale back incidence of disability pensions and allow more immigration from non-EU countries.
- Income-inequality context:
  - Unemployment contributes more to income inequality than elsewhere in Europe.
  - ALMP spending is low by international standards; more than one third of interventions are public works.
  - Social protection spending and ALMP spending comparisons shown in figures and text (data sources: Eurostat; IMF staff estimates).

### Labor market and employment
- Employment and labor market developments:
  - Unemployment rate (year average) declined from 10.7 in 2014 to 7.9 in 2016, with projections 7.4 in 2017 and 7.2 in 2018 (Table 1).
  - Average monthly gross earnings (annual percentage change) were 4.5 in 2014, 5.1 in 2015, 7.9 in 2016, projected 7.6 in 2017, and thereafter around 5.6–5.5.
- Recommendations:
  - Broaden ALMPs, emphasize training (including for those employed), and support municipality-led integrated employment and skill upgrading programs under preparation in a new Law on Employment.

### Financial sector stability and supervision
- Financial sector assessment:
  - No immediate risks to stability; strong soundness indicators and stress tests attest to resiliency.
  - Spillovers from vulnerabilities in parent banks are a potential risk; Nordic-Baltic cooperation should be strengthened.
  - Revival of credit growth is welcome but should be monitored; some small non-systemic financial institutions need attention.
  - Credit union reform is on track and should be completed per current plans.
- Specific indicators (Table 4 and figures):
  - General government gross debt around 40.2–42.7 percent of GDP in recent years (Table 1 and Table 2).
  - Return on Assets (RoA) around 1.3–1.5 percent in recent years (Table 4).
  - Nonperforming loans to total (non-interbank) loans fell to 4.1 percent by Dec-16 (Table 4).
  - Liquidity and capital ratios remain supportive of stability (Table 4).

### External sector and competitiveness
- Lithuania’s external balance broadly consistent with medium-term fundamentals; external stability and exchange rate alignment not immediate concerns.
- Risks:
  - Persistent increase of unit labor costs and signs of sliding export shares require close monitoring.
- Balance of payments highlights (Table 3):
  - Current account balance in percent of GDP: 3.6 in 2014; -2.3 in 2015; -0.9 in 2016; projected -1.6 in 2017 and moving to -2.6 by 2022.
  - Gross external debt: 69.8 percent of GDP in 2014; 75.9 percent in 2015; 86.4 percent in 2016.

### Staff appraisal and priorities
- Key messages:
  - Emerging cyclical upswing is welcome, but productivity gap with Western Europe stopped narrowing in the last three years; sustainability of income convergence is in question.
  - Maintaining sound macroeconomic and financial management is important; priority structural reforms must be identified and implemented to promote growth and income equality objectives.
  - Overhauling the education system should be top priority among structural reforms.
  - Innovation promotion policy needs consolidation, fewer institutions, and more direct financial support to businesses for innovation-related outlays.
  - Recent adoption of a modern Labor Code strengthens the business environment; any deficiencies should be addressed after experience with implementation.
  - Recommended next Article IV Consultation on a 12-month cycle.

*REPUBLIC OF LITHUANIA — INTERNATIONAL MONETARY FUND (cr17177).*

### Annex I. Public Sector Debt and External Sustainability Analysis

### Annex I. Public Sector Debt and External Sustainability Analysis (DSA)

### Public DSA — Baseline Scenario (Republic of Lithuania)
- As of March 27, 2017 — Nominal gross public debt (in percent of GDP):
  - 2015: 29.9
  - 2016: 42.7
  - 2017: 40.2
  - 2018: 38.1
  - 2019: 35.8
  - 2020: 33.8
  - 2021: 31.9
  - 2022: 30.1
  - Projection (final column): 28.4
- Public gross financing needs (in percent of GDP):
  - 2015: 8.5
  - 2016: 6.6
  - 2017: 5.9
  - 2018: 4.1
  - 2019: 5.6
  - 2020: 3.0
  - 2021: 3.5
  - 2022: 2.5
  - Projection (final column): 4.2
- Real GDP growth (in percent):
  - 2015: 2.8
  - 2016: 1.8
  - 2017: 2.3
  - 2018: 3.2
  - 2019: 3.2
  - 2020: 3.2
  - 2021: 3.1
  - 2022: 3.1
  - Projection (final column): 3.0
- Inflation (GDP deflator, in percent):
  - 2015: 3.8
  - 2016: 0.2
  - 2017: 1.2
  - 2018: 2.7
  - 2019: 2.0
  - 2020: 2.2
  - 2021: 2.4
  - 2022: 2.5
  - Projection (final column): 2.5
- Nominal GDP growth (in percent):
  - 2015: 6.9
  - 2016: 2.0
  - 2017: 3.5
  - 2018: 6.0
  - 2019: 5.4
  - 2020: 5.4
  - 2021: 5.7
  - 2022: 5.7
  - Projection (final column): 5.6
- Effective interest rate (in percent; defined as interest payments divided by debt stock at end of previous year):
  - 2015: 5.4
  - 2016: 3.8
  - 2017: 3.3
  - 2018: 3.6
  - 2019: 4.0
  - 2020: 4.2
  - 2021: 4.3
  - 2022: 4.5
  - Projection (final column): 4.5
- Sovereign spreads:
  - EMBIG (bp): 43 (note 3)
  - 5Y CDS (bp): 71
- Ratings (Foreign / Local):
  - Moody's: A3 / A3
  - S&P: A- / A-
  - Fitch: A- / A-

- Contribution to change in gross public sector debt (in percent of GDP):
  - Change in gross public sector debt (annual): 2.5 (2015), 2.2 (2016), -2.5 (2017), -2.1 (2018), -2.3 (2019), -2.0 (2020), -1.9 (2021), -1.8 (2022), -1.7 (projection), cumulative: -11.8
  - Identified debt-creating flows: 3.1 (2015), 4.0 (2016), -1.1 (2017), -1.9 (2018), -2.1 (2019), -1.8 (2020), -1.8 (2021), -1.7 (2022), -1.5 (projection), cumulative: -10.8
  - Primary deficit (in percent of GDP): 2.8 (2015), -1.1 (2016), -1.4 (2017), -1.0 (2018), -1.6 (2019), -1.4 (2020), -1.3 (2021), -1.3 (2022), -1.2 (projection), cumulative: -7.8
  - Primary (noninterest) revenue and grants (in percent of GDP): 34.0 (2015), 34.5 (2016), 34.2 (2017), 35.2 (2018), 36.6 (2019), 36.2 (2020), 36.2 (2021), 36.1 (2022), 36.0 (projection), cumulative: 216.3
  - Primary (noninterest) expenditure (in percent of GDP): 36.8 (2015), 33.5 (2016), 32.8 (2017), 34.2 (2018), 35.0 (2019), 34.8 (2020), 34.9 (2021), 34.8 (2022), 34.8 (projection), cumulative: 208.5
  - Automatic debt dynamics (contribution, in percent of GDP): 0.0 (2015), 5.1 (2016), 0.3 (2017), -0.9 (2018), -0.5 (2019), -0.4 (2020), -0.4 (2021), -0.4 (2022), -0.3 (projection), cumulative: -3.0
  - Interest rate/growth differential (contribution, in percent of GDP): -0.3 (2015), 0.7 (2016), -0.1 (2017), -0.9 (2018), -0.5 (2019), -0.4 (2020), -0.4 (2021), -0.4 (2022), -0.3 (projection), cumulative: -3.0
    - Of which: real interest rate: 0.5 (2015), 1.4 (2016), 0.9 (2017), 0.3 (2018), 0.7 (2019), 0.7 (2020), 0.6 (2021), 0.6 (2022), 0.6 (projection), cumulative: 3.3
    - Of which: real GDP growth: -0.8 (2015), -0.7 (2016), -0.9 (2017), -1.2 (2018), -1.2 (2019), -1.1 (2020), -1.0 (2021), -1.0 (2022), -0.9 (projection), cumulative: -6.3
  - Exchange rate depreciation contribution: 0.2 (2015), 4.4 (2016), 0.4 (2017), remainder: not shown
  - Other identified debt-creating flows: 0.4 (2015), 0.0 (2016 onward)
    - LTU_FIS: Privatization Receipts (Negative): 0.4 (2015), 0.0 (2016 onward)
  - Contingent liabilities: 0.0 (all years)
  - Residual, including asset changes: -0.6 (2015), -1.8 (2016), -1.4 (2017), -0.2 (2018), -0.2 (2019), -0.2 (2020), -0.2 (2021), -0.1 (2022), -0.1 (projection), cumulative: -1.0

- Cumulative change in gross public sector debt over projection horizon: -11.8 (percent of GDP).

### Composition of Public Debt and Alternative Scenarios
- Underlying assumptions (selected, in percent unless indicated):
  - Baseline scenario key assumptions (2017–2022):
    - Real GDP growth: 3.2 (2017), 3.2 (2018), 3.2 (2019), 3.1 (2020), 3.1 (2021), 3.0 (2022)
    - Inflation: 2.7 (2017), 2.0 (2018), 2.2 (2019), 2.4 (2020), 2.5 (2021), 2.5 (2022)
    - Primary Balance: 1.0 (2017), 1.6 (2018), 1.4 (2019), 1.3 (2020), 1.3 (2021), 1.2 (2022)
    - Effective interest rate: 3.6 (2017), 4.0 (2018), 4.2 (2019), 4.3 (2020), 4.5 (2021), 4.5 (2022)
  - Historical scenario key assumptions (2017–2022):
    - Real GDP growth: 3.2 (2017), 2.2 (2018), 2.2 (2019), 2.2 (2020), 2.2 (2021), 2.2 (2022)
    - Inflation: 2.7 (2017), 2.0 (2018), 2.2 (2019), 2.4 (2020), 2.5 (2021), 2.5 (2022)
    - Primary Balance: 1.0 (2017), -2.3 (2018), -2.3 (2019), -2.3 (2020), -2.3 (2021), -2.3 (2022)
    - Effective interest rate: 3.6 (2017), 4.0 (2018), 4.3 (2019), 4.6 (2020), 4.9 (2021), 5.1 (2022)
  - Constant Primary Balance scenario:
    - Primary Balance held at 1.0 (2017–2022)
    - Other macro assumptions as in baseline; Effective interest rate slightly different: 3.6 (2017), 4.0 (2018), 4.2 (2019), 4.3 (2020), 4.5 (2021), 4.6 (2022)

- Graphical indicators presented (qualitative):
  - Gross Nominal Public Debt (in percent of GDP) and Public Gross Financing Needs (in percent of GDP) are projected to decline over 2017–2022 under the baseline.
  - Debt composition by maturity (short-term vs medium and long-term) and by currency (local vs foreign currency) shown as percent of GDP across 2006–2022 with projected declines.

### External Debt Sustainability Framework (2012–22)
- Baseline: External debt (in percent of GDP):
  - 2012: 60.7
  - 2013: 52.9
  - 2014: 52.5
  - 2015: 68.4
  - 2016: 78.0
  - 2017: 79.2
  - 2018: 76.0
  - 2019: 72.2
  - 2020: 68.3
  - 2021: 64.8
  - 2022: 61.6
- Debt-stabilizing non-interest current account: -1.5 (percent of GDP)
- Change in external debt (in percent of GDP):
  - 2012: 3.0
  - 2013: -7.8
  - 2014: -0.4
  - 2015: 15.9
  - 2016: 9.6
  - 2017: 1.1
  - 2018: -3.2
  - 2019: -3.8
  - 2020: -3.9
  - 2021: -3.6
  - 2022: -3.2
- Identified external debt-creating flows (4+8+9, in percent of GDP):
  - 2012: 1.9
  - 2013: -5.6
  - 2014: -4.7
  - 2015: 13.0
  - 2016: -0.7
  - 2017: -0.4
  - 2018: -0.5
  - 2019: -0.1
  - 2020: 0.8
  - 2021: 1.1
  - 2022: 1.3
- Current account deficit, excluding interest payments (percent of GDP):
  - 2012: -1.1
  - 2013: -2.8
  - 2014: -4.2
  - 2015: 0.6
  - 2016: -0.5
  - 2017: 0.6
  - 2018: 0.6
  - 2019: 0.9
  - 2020: 1.5
  - 2021: 1.6
  - 2022: 1.7
- Exports and imports (percent of GDP):
  - Exports: 63.5 (2012), 63.2 (2013), 60.8 (2014), 68.4 (2015), 67.2 (2016), 77.1 (2017), 77.4 (2018), 77.0 (2019), 76.3 (2020), 76.7 (2021), 77.4 (2022)
  - Imports: 62.8 (2012), 62.3 (2013), 59.4 (2014), 69.0 (2015), 66.4 (2016), 77.7 (2017), 78.0 (2018), 77.7 (2019), 77.3 (2020), 77.9 (2021), 79.0 (2022)
- Net non-debt creating capital inflows (negative) (percent of GDP): 0.1 (2012), 0.3 (2013), 0.4 (2014), 1.7 (2015), 0.7 (2016), 0.6 (2017), 0.5 (2018), 0.6 (2019), 0.9 (2020), 0.9 (2021), 0.7 (2022)
- Automatic debt dynamics (percent of GDP):
  - 2012: 2.9
  - 2013: -3.1
  - 2014: -0.9
  - 2015: 10.7
  - 2016: -0.8
  - 2017: -1.5
  - 2018: -1.6
  - 2019: -1.6
  - 2020: -1.5
  - 2021: -1.4
  - 2022: -1.1
  - Contribution from nominal interest rate (percent): 2.0 (2012), 1.6 (2013), 1.5 (2014), 1.6 (2015), 1.3 (2016), 0.9 (2017), 0.8 (2018), 0.8 (2019), 0.7 (2020), 0.7 (2021), 0.8 (2022)
  - Contribution from real GDP growth (percent): -2.2 (2012), -2.0 (2013), -1.8 (2014), -1.1 (2015), -1.5 (2016), -2.5 (2017), -2.4 (2018), -2.3 (2019), -2.2 (2020), -2.0 (2021), -1.9 (2022)
  - Contribution from price and exchange rate changes (percent): 3.2 (2012), -2.7 (2013), -0.6 (2014), 10.3 (2015), -0.6 (2016), ... (ellipsis as in source)
- Residual, including change in gross foreign assets (percent of GDP): 1.1 (2012), -2.2 (2013), 4.3 (2014), 2.9 (2015), 10.3 (2016), 1.5 (2017), -2.6 (2018), -3.7 (2019), -4.7 (2020), -4.7 (2021), -4.5 (2022)
- External debt-to-exports ratio (in percent): 95.7 (2012), 83.7 (2013), 86.3 (2014), 100.0 (2015), 116.2 (2016), 102.6 (2017), 98.1 (2018), 93.8 (2019), 89.5 (2020), 84.5 (2021), 79.6 (2022)
- Gross external financing need (in billions of US dollars):
  - 2012: 15.1
  - 2013: 12.9
  - 2014: 10.9
  - 2015: 12.1
  - 2016: 14.1
  - 2017: 19.4
  - 2018: 21.3
  - 2019: 20.1
  - 2020: 21.5
  - 2021: 21.1
  - 2022: 21.2
- Gross external financing need (in percent of GDP):
  - 2012: 35.1
  - 2013: 27.8
  - 2014: 22.3
  - 2015: 29.2
  - 2016: 33.0
  - 2017: 44.5 (ten-year)
  - 2018: 46.6 (ten-year)
  - 2019: 41.7
  - 2020: 42.2
  - 2021: 39.3
  - 2022: 37.5

- Key macroeconomic assumptions underlying baseline (selected averages and series):
  - Real GDP growth (percent): historical average 3.8; 2012: 3.5; 2013: 3.5; 2014: 1.8; 2015: 2.3; 2016: 2.2; projections: 3.2 (2017), 3.2 (2018), 3.2 (2019), 3.1 (2020), 3.1 (2021), 3.0 (2022)
  - GDP deflator in US dollars (change in percent): -5.2 (historical), 4.7, 1.2, -16.4, 0.9, 2.1, 11.2, -1.4, 1.7, 2.2, 2.5, 2.2, 2.0 (series as shown)
  - Nominal external interest rate (in percent): 3.5 (historical), 2.9, 2.9, 2.5, 2.0, 3.4, 1.0, 1.2, 1.1, 1.1, 1.0, 1.1, 1.2
  - Growth of exports (US dollar terms, in percent): 16.1 (historical), 8.0, 0.7, -4.3, 1.4, 9.3, 17.4, 16.9, 5.4, 4.8, 4.9, 5.9, 6.0
  - Growth of imports (US dollar terms, in percent): 11.1 (historical), 7.5, -0.2, -1.2, -0.6, 7.8, 19.3, 19.1, 5.5, 5.0, 5.2, 6.3, 6.5
  - Current account balance, excluding interest payments (percent of GDP): 1.1 (historical), 2.8, 4.2, -0.6, 0.5, -0.4, 4.4, -0.6, -0.6, -0.9, -1.5, -1.6, -1.7
  - Net non-debt creating capital inflows (percent of GDP): -0.1 (historical), -0.3, -0.4, -1.7, -0.7, -0.7, 0.7, -0.6, -0.5, -0.6, -0.9, -0.9, -0.7

### External Debt Sustainability — Bound Tests and Shocks
- Baseline external debt level highlighted in charts: 62 (percent of GDP) for baseline reference (noted in multiple scenario charts).
- Historical and scenario median/average projections displayed in bound tests for:
  - Interest rate shock (permanent one-half standard deviation)
  - Non-interest current account shock
  - Growth shock
  - Combined shock (including permanent 1/4 standard deviation shocks)
  - Real depreciation shock (one-time 30 percent in 2010)
- Representative scenario values shown in panels (figures in source):
  - Historical scenario peak values: 68 (historical box)
  - Scenario outcomes (examples shown in chart labels): baseline 62; interest-rate shock scenario value shown as 63 in some panels; combined shock panel shows 73; real depreciation shock panel shows 90; growth shock panel shows 72; current account shock panel shows 72.
- Notes on shocks (from source footnotes):
  - Individual shocks are permanent one-half standard deviation shocks.
  - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - One-time real depreciation of 30 percent occurs in 2010 for that scenario.

### Fund Relations, Statistical and Data Issues (selected factual points)
- Membership Status: Joined April 29, 1992; Article VIII.
- Quota: 441.60 SDR Million (100.00 percent of quota).
- SDR Department net cumulative allocation: 137.24 SDR Million (100.00 percent); holdings 137.29 (100.04 percent).
- Outstanding Purchases and Loans: None.
- Latest financial arrangements listed (historic Stand-By arrangements in 2001, 2000, 1994; amounts and dates provided in source).
- Exchange rate arrangement: As of January 1, 2015, currency is the euro; prior details on litas exchange arrangements provided in source.
- Anti‑Money Laundering / Combating Financing of Terrorism:
  - MONEYVAL assessment in April 2012; report published December 2012.
  - Lithuania was rated partially compliant on nineteen FATF Recommendations; Compliance Enhancing Procedure (CEP) applied; CEP ended at step 1 in April 2015.
  - MONEYVAL noted progress but further work needed on R.5, R.13/SR.IV and SR.III as of April 2016; regular follow-up ongoing; next full evaluation scheduled spring 2018 (as stated).
  - Lithuania transposing the 4th Anti Money Laundering and Terrorist Financing Directive (expected improvements described in source).
- Statistical issues (data standards and practices):
  - Lithuania subscribes to SDDS since May 1996; metadata posted on DSBB since April 1997.
  - National accounts compiled by Statistics Lithuania (SL) in accordance with ESA 2010 from 2005 onwards.
  - Non-observed economy estimated at 28.5 percent of GDP in 2012 (source estimate).
  - CPI base period: 2010; HICP base period: 2005.
  - Government finance statistics: GFSM 2014 adopted October 2014; annual and quarterly historical data converted back to 2010.
  - Balance of payments compiled under BPM6 from 2004 data onwards.
  - Data dissemination: BoL, SL, MoF, and NASDAQ OMX Baltic websites cited as data sources (URLs in source).
- Table of Common Indicators (as of May 31, 2017) — data frequency and timeliness categories provided in source; data quality assessments summarized (methodological soundness and accuracy assessments listed as O, LO, LNO, etc., in source table).

*Source: IMF staff.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17177.pdf_