## 1ltuea2019002 ## Source details **Canonical URL:** [1ltuea2019002](https://www.imf.org/-/media/files/publications/cr/2019/1ltuea2019002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1ltuea2019002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1ltuea2019002.pdf.json) --- ### 1. Bank Competition — structure, performance, risks - At end-2018, 7 banks and 9 foreign branches were operating in Lithuania. - The three largest banks accounted for 84 percent of system assets. - Two Swedish Banks account for about 60 percent of Lithuania’s banking system assets. - Funding and portfolio trends: - Customer deposits increased by about 11 percent in 2018, exceeding the growth of the loan portfolio (in line with nominal GDP at about 7 percent). - The composition of the loan portfolio has increasingly shifted towards mortgages. - The loan portfolio is less than 50 percent of GDP and significantly below the pre-crisis peak of 64 percent. - Competition and profitability indicators: - H-Statistic ≈ 0.87 (among the highest in Europe, suggesting strong competition). - Net interest margin broadly in line with the European average. - Share of non-interest income relatively high (reflecting large reliance on customer deposits). - Return on assets slightly above 1 percent in 2018. - Return on equity around 12 percent in 2018. - Cost-to-income ratios among the most efficient in Europe. - Financial soundness and risks: - Capital adequacy ratios continue to exceed requirements. - Non-performing loans remain below the EU average. - High profitability appears to reflect high efficiency rather than weak competition. - Spillovers from real-estate related vulnerabilities in Nordic parent banks remain a potential risk; ameliorated in 2018 as Swedish authorities implemented mortgage-related macroprudential policies and increased the CCyB. - Recent developments that may have reduced competition: exit of a medium-size bank and restructuring of the third-largest bank (seeking to increase reliance on deposits rather than parent funding). - Modest increase in mortgage interest margins may reflect increased maturities; impact on margins for non-financial corporate credit is uncertain. - Policy implications and recommended responses: - Monitor concentration effects despite high measured competition (H-Statistic ≈ 0.87). - Maintain oversight of cross-border spillovers and coordinate with home-country supervisors. - Continue assessing macroprudential settings (mortgage-related measures and CCyB) to mitigate spillovers and housing market risks. - Track funding composition shifts (increased deposit reliance) and loan portfolio evolution (mortgage share, loan-to-GDP levels) for implications on credit supply and resilience. ### Authorities' assessment, outlook, and fiscal guidance - Authorities broadly agreed with staff’s assessment of the outlook and risks. - Outlook: - Domestic demand, supported by a tight labor market, will continue to drive growth while external demand will weaken in key European partners. - Limited progress on key reforms expected given the election cycle and uncertain external environment; Lithuania better prepared to weather a downturn. - Fiscal stance and recommendations: - Staff finds the 2019 budget stance procyclical; recommends a neutral stance and projects a fiscal impulse of 0.6 percent of GDP with a slightly increasing output gap. - Authorities estimate substantially higher potential growth and view the fiscal stance as involving a very modest tightening over the next two years. - Lithuania has substantial fiscal space given low borrowing costs and moderate (though above pre-crisis level) debt. - Recommendation: prevent slippages and increase effectiveness of fiscal policy by closer monitoring of fiscal risks in a transparent and comprehensive framework. - Macroeconomic and fiscal projections (The Authorities and IMF Staff Estimates): - Real GDP growth - Ministry of Finance: 2017 4.1; 2018 3.5; 2019 2.6; 2020 2.4 - IMF: 2017 4.1; 2018 3.5; 2019 3.2; 2020 2.6 - Potential growth - Ministry of Finance: 2017 2.5; 2018 3.1; 2019 3.5; 2020 3.5 - IMF: 2017 2.6; 2018 3.0; 2019 2.9; 2020 2.7 - Output gap - Ministry of Finance: 2017 1.7; 2018 2.9; 2019 2.0; 2020 0.9 - IMF: 2017 0; 2018 0.5; 2019 0.7; 2020 0.6 - Overall balance - Ministry of Finance: 2017 0.5; 2018 0.7; 2019 0.4; 2020 0.2 - IMF recommendations: 2019 0.8; 2020 0.6 - IMF projections: 2017 0.5; 2018 0.7; 2019 0.3; 2020 0.2 - Structural balance - Ministry of Finance: 2017 -0.7; 2018 -0.5; 2019 -0.4; 2020 -0.3 - IMF recommendations: 2019 0.7; 2020 0.6 - IMF projections: 2017 0.7; 2018 0.8; 2019 0.2; 2020 0.1 - Fiscal impulse1/ - Ministry of Finance: 2017 -0.2; 2018 -0.2; 2019 -0.1; 2020 -0.1 - IMF recommendations: 2019 0.1; 2020 0.1 - IMF projections: 2017 0.1; 2018 -0.1; 2019 0.6; 2020 0.1 - Note: 1/ A positive fiscal impulse signifies a loosening of fiscal stance. ### Macroprudential policy and financial resilience - BoL has sole responsibility and a broad set of instruments; macroprudential policy used proactively. - Emerging moderate cyclical systemic risks: relatively high pace of credit growth and housing prices rising faster than income. - BoL actions: - Raised CCyB to 0.5 percent at end-2017 and to 1 percent in mid-2018. - Most banks were already above the new capital requirement and have large and rising liquidity buffers given high deposit growth. - Effects observed: - Since CCyB increases, corporate loan growth moderated but mortgage growth remains relatively high. - Nordic-Baltic Stability Group cooperation and a joint financial crisis management exercise strengthen crisis preparedness. - Resilience developments: - Elimination of the pre-crisis current account deficit and a strong external position reduced financing risks. - Banks, households, and NFCs have deleveraged and become less vulnerable. - Cross-sectoral exposures have decreased, reducing contagion risks. - Public sector net-worth worsened partly due to balance sheet transfers from the private sector; euro area membership ameliorates redenomination risks. ### Structural reforms, labor market, pensions, and social policy - Key reform priorities: - Accelerate structural reforms in education, healthcare, and innovation to sustain wage growth without harming competitiveness. - Use fiscal space to provide transitional support where reforms entail short-term costs. - Education and healthcare: - Education: Oversized system not aligned with demographics; recommendations include reducing number of teachers and consolidating schools/universities. Parliament approved reform in 2018; implementation stalled without municipal buy-in. - Healthcare: System hospital-care centered; recommendations include rationalizing hospitals, improving out-patient and long-term care, expanding primary care, developing copayments, and strengthening municipal accountability. Healthcare reform vetoed by the President. - Tax and pensions: - Tax reform made the system more progressive and marginally reduced the labor tax wedge; Lithuania collects less revenue than peers from capital, wealth, real estate and environmental taxes. - Pension reform: participation in the second pillar became mandatory with limited opting-out; basic pensions transferred to the state budget; concerns remain about low and falling replacement ratios and social sustainability. - Recommendations: link retirement age to life expectancy, tighten early retirement, raise gross pensions (to preserve replacement ratios) and subject them to progressive PIT, strengthen multi-pillar system, scale back disability pensions incidence. - Labor market and ALMPs: - Labor market is flexible; 2017 labor code amendments increased flexibility. - Structural unemployment relatively high; skills mismatch above OECD averages; share of unskilled labor significantly above demand. - ALMP spending low and heavily reliant on EU funds (two-thirds of total); composition inadequate—employment subsidies dominate while training has been limited. - Recommendation: focus employment subsidies on the most disadvantaged groups and scale up well-designed training programs. ### Social protection, poverty reduction, and policy trade-offs - Targeted means-tested social protection should be the main tool to reduce poverty given limited resources. - Designs should avoid welfare dependency and disincentives to work; in-work benefits can reduce inequality and increase employment. - Child benefits: - Design and generosity should balance poverty reduction and potential disincentives to work, particularly for women. - Fiscal constraint: - Social protection spending well below the EU average; further increases likely require higher revenues or broadening the tax base. - Combating informality can provide resources but gains are unreliable. ### Fintech development, market metrics, opportunities, and supervisory challenges - Strategic goals: - Authorities support fintech to increase high-skill jobs and retain human capital. - Market metrics and growth: - 2018: about 170 fintech companies (117 in 2017; more than triple the number in 2014). - Authorities estimate fintech employment at 2,600 persons, with 700 jobs added in 2018. - Licensing (end-2018): 47 e-money licenses; 33 licenses for payment institutions. - Company focus distribution: payments services about 44 percent; lending 15 percent; banking 11 percent; Blockchain 11 percent. - In 2017, value of transactions in Lithuania’s market forecasted at around EUR 1.1 billion. - Policies and infrastructure: - BoL has granted more than 110 licenses to fintech companies; introduced specialized banking in 2017 with lower initial capital requirements. - Newcomer program (2017) one-stop shop; e-licensing tool enables remote license applications; BoL seeks to issue licenses within 90 days. - Regulatory sandbox exists; blockchain sandbox being implemented. Application up to 4 months; testing period envisaged for 6 months. - Payments infrastructure: CENTROlink gateway to SEPA; SCT Inst introduced November 2017; fee ranges: €0.02–0.04 for SCT Inst and €0.05-0.07 for SEPA direct debit (SDD). - PSD2 and open banking: public consultation launched; plan to establish an API register by end-2019. - Opportunities and strategic implications: - Increased competition expected, particularly from fintech on payment services and lending/advisory services. - Completion of third-largest bank restructuring (24 percent of system assets) should increase competition in a highly concentrated market. - Lithuanian banks likely to concentrate on traditional banking for residents; fintech likely to focus on non-residents given EU market access. - Risks and supervisory challenges: - AML/CFT risks and supervision challenges significant; national ML/TF risk assessment identifies use of technology in money transfers as a high-risk area. - BoL’s 2017 Financial Stability Report highlights regulatory, cyber, and business-model risks from untested fintech activities. - Focus of entrants on non-residents (currently 3 percent of total deposits) could shift banking business models and increase AML/CFT supervisory complexity. - Scope to improve AML/CFT regime effectiveness and ensure adequate resources across agencies. ### AML/CFT evaluation, legislative changes, and recommendations - MONEYVAL mutual evaluation (December 2018): - Assessed level of effectiveness of most aspects of Lithuania’s AML/CFT regime as moderate (second lowest of four ratings); all moderate except one substantial. - Recommendations for BoL: enhance risk-based supervision, further develop ML/FT risk assessment, intensify use of sanctions for AML/CFT violations. - Legislative and institutional actions: - New AML/CFT law came into force on July 13, 2017. - Lithuania transposed the 4th AMLD; secondary legal acts amended in 2017 to improve beneficial owner identification, broaden PEP definition, strengthen sanctions, and extend scope to gambling, real estate agents, and crowdfunding platforms. - Central registers of beneficial ownership are in process; expected transposition of the 5th AMLD by January 2020 (includes making public registers of beneficial owners and including virtual currencies and custodian wallet providers). - Procedural history and follow-up: - April 2012 and December 2018 MONEYVAL assessments documented; 2012 CEP applied and ended at step 1 in April 2015. - April 2016 and September 2017 plenary actions removed Lithuania from regular follow-up after noting sufficient remedial steps. - December 2018 mutual evaluation included recommendations to be addressed by the 2020 plenary session, including updating the National Risk Assessment. - Key dates and numeric items: - December 2018: 5th round mutual evaluation adopted. - July 13, 2017: new AML/CFT law came into force. - January 2020: expected transposition date for the 5th AMLD. - Nineteen FATF Recommendations: number on which Lithuania was rated partially compliant in 2012. ### Macroeconomic and sectoral developments — recent indicators and projections - Real GDP growth (annual percentage change): - 2015: 2.0; 2016: 2.4; 2017: 4.1; 2018: 3.5; 2019: 3.2; 2020: 2.6; 2021: 2.5; 2022: 2.4; 2023: 2.3; 2024: 2.3 - Domestic demand growth (year-on-year, percent): - 2015: 6.4; 2016: 2.3; 2017: 2.9; 2018: 2.9; 2019: 3.8; 2020: 3.5; 2021: 3.3; 2022: 3.1; 2023: 3.1; 2024: 3.1 - Nominal GDP (billions of euro): - 2015: 37.4; 2016: 38.8; 2017: 42.2; 2018: 45.1; 2019: 47.7; 2020: 50.2; 2021: 52.6; 2022: 55.1; 2023: 57.6; 2024: 60.2 - Output gap (percent of potential GDP): - 2015: -1.1; 2016: -1.4; 2017: 0.0; 2018: 0.5; 2019: 0.7; 2020: 0.6; 2021: 0.4; 2022: 0.2; 2023: 0.1; 2024: 0.0 - Current account balance (percent of GDP): - 2015: -2.8; 2016: -0.8; 2017: 0.9; 2018: 1.6; 2019: 1.2; 2020: 1.1; 2021: 0.6; 2022: 0.1; 2023: -0.4; 2024: -0.8 - Labor market: - Unemployment rate (year average, percent): 2015: 9.1; 2016: 7.9; 2017: 7.1; 2018: 6.1; 2019: 5.9; 2020: 5.8; 2021: 5.7; 2022: 5.6; 2023: 5.5; 2024: 5.5 - Average monthly gross earnings (annual percent change): 2015: 5.1; 2016: 7.9; 2017: 8.2; 2018: 9.9; 2019: 8.0; 2020: 6.5; 2021: 5.4; 2022: 4.9; 2023: 4.7; 2024: 4.6 - Labor productivity (annual percent change): 2015: 0.8; 2016: 0.4; 2017: 4.6; 2018: 2.0; 2019: 2.6; 2020: 2.4; 2021: 2.4; 2022: 2.4; 2023: 2.4; 2024: 2.4 - Fiscal aggregates (percent of GDP): - Revenue: 2015: 34.7; 2016: 34.4; 2017: 33.6; 2018: 34.7; 2019: 35.7; 2020: 35.8; 2021: 35.8; 2022: 35.8; 2023: 35.7; 2024: 35.7 - Expenditure: 2015: 34.9; 2016: 34.1; 2017: 33.1; 2018: 34.0; 2019: 35.4; 2020: 35.5; 2021: 35.7; 2022: 35.7; 2023: 35.6; 2024: 35.6 - Fiscal balance: 2015: -0.2; 2016: 0.3; 2017: 0.5; 2018: 0.7; 2019: 0.3; 2020: 0.2; 2021: 0.1; 2022: 0.1; 2023: 0.1; 2024: 0.1 - Structural fiscal balance: 2015: -0.1; 2016: 0.8; 2017: 0.7; 2018: 0.8; 2019: 0.2; 2020: 0.1; 2021: 0.1; 2022: 0.1; 2023: 0.1; 2024: 0.1 - General government gross debt (percent of GDP): 2015: 42.6; 2016: 39.9; 2017: 39.4; 2018: 34.2; 2019: 32.0; 2020: 30.2; 2021: 28.7; 2022: 27.3; 2023: 26.0; 2024: 24.7 - External sector: - Current account (billions of euros): 2015: -1.0; 2016: -0.3; 2017: 0.4; 2018: 0.7; 2019: 0.6; 2020: 0.6; 2021: 0.3; 2022: 0.1; 2023: -0.2; 2024: -0.5 - Gross external debt (percent of GDP): 2015: 75.7; 2016: 85.2; 2017: 83.6; 2018: 78.5; 2019: 73.2; 2020: 69.6; 2021: 66.8; 2022: 63.7; 2023: 61.0; 2024: 58.5 - Net international investment position: 2015: -43.7; 2016: -42.7; 2017: -35.9; 2018: -29.5; 2019: -26.3; 2020: -23.6; 2021: -21.5; 2022: -20.0; 2023: -19.2; 2024: -18.8 - Merchandise trade balance (billions of euros): 2015: -2.0; 2016: -1.8; 2017: -1.9; 2018: -2.6; 2019: -3.0; 2020: -3.4; 2021: -3.8; 2022: -4.2; 2023: -4.7; 2024: -5.2 ### Public sector debt and external sustainability (Annex I — DSA and EDF) - Public Sector DSA — Baseline (as of July 10, 2019; general government): - Nominal gross public debt (percent of GDP): 2017: 35.4; 2018: 39.4; 2019: 34.2; 2020: 32.0; 2021: 30.2; 2022: 28.7; 2023: 27.3; 2024: 26.0; 2024 (final column) 24.7 - Public gross financing needs (percent of GDP): 2017: 9.0; 2018: 4.1; 2019: 5.9; 2020: 1.6; 2021: 3.9; 2022: 3.2; 2023: 2.2; 2024: 1.1; 2024 (final) 1.2 - Real GDP growth (percent): 2017: 1.2; 2018: 4.1; 2019: 3.5; 2020: 3.2; 2021: 2.6; 2022: 2.5; 2023: 2.4; 2024: 2.3; 2024 (final): 2.3 - Effective interest rate (percent): 2017: 5.1; 2018: 3.0; 2019: 2.4; 2020: 1.9; 2021: 1.6; 2022: 1.5; 2023: 1.7; 2024: 1.8; 2024 (final): 1.9 - Ratings (Foreign / Local): Moody's A3 / A- ; S&P's A3 / A ; Fitch A- / A- - Cumulative change in gross public sector debt (2017–2024): 2.7; -0.5; -5.2; -2.2; -1.8; -1.5; -1.4; -1.3; -1.2; cumulative -9.4 - Identified debt-creating flows (2017–2024): 4.5; -4.0; -1.7; -1.4; -1.0; -0.6; -0.4; -0.2; -0.2; cumulative -4.0 - Primary deficit (percent of GDP): 2017: 2.9; 2018: -0.8; 2019: -0.5; 2020: -0.2; 2021: 0.1; 2022: 0.3; 2023: 0.4; 2024: 0.5; 2024 (final): 0.4; cumulative 1.5 - Primary revenue and grants (percent of GDP): 2017: 33.7; 2018: 32.7; 2019: 33.6; 2020: 34.7; 2021: 34.8; 2022: 34.9; 2023: 34.9; 2024: 34.9; 2024 (final): 34.9; cumulative 208.9 - Primary expenditure (percent of GDP): 2017: 36.6; 2018: 32.0; 2019: 33.1; 2020: 34.5; 2021: 34.8; 2022: 35.2; 2023: 35.3; 2024: 35.3; 2024 (final): 35.3; cumulative 210.5 - Automatic debt dynamics (percent of GDP) (2017–2024): 1.3; -3.2; -1.2; -1.3; -1.1; -1.0; -0.8; -0.7; -0.7; cumulative -5.5 - Interest rate/growth differential (2017–2024): 0.2; -2.0; -1.7; -1.3; -1.1; -1.0; -0.8; -0.7; -0.7; cumulative -5.5 - Real interest rate contribution: 0.9; -0.5; -0.4; -0.2; -0.3; -0.2; -0.2; -0.1; -0.1; cumulative -1.1 - Real GDP growth contribution: -0.7; -1.5; -1.3; -1.0; -0.8; -0.7; -0.7; -0.6; -0.6; cumulative -4.4 - External Debt Sustainability Framework (2014–24) — Baseline: - Baseline external debt-to-GDP (percent): 2014: 64.8; 2015: 74.2; 2016: 81.1; 2017: 87.6; 2018: 74.9; 2019: 74.9; 2020: 72.2; 2021: 70.4; 2022: 68.3; 2023: 66.6; 2024: 65.2 - Debt-stabilizing non-interest current account: -5.2 - Identified external debt-creating flows (2014–2024): -8.7; 11.6; -4.2; -11.2; -13.0; -5.2; -4.4; -4.1; -3.5; -3.0; -2.4 - External debt-to-exports ratio (percent) (2014–2024): 80.1; 98.1; 109.6; 108.3; 91.1; 90.9; 88.0; 87.8; 84.9; 83.2; 81.7 - Gross external financing need (billions of US dollars) 4/ (2014–2024): 15.0; 14.7; 13.4; 18.5; 22.6; 19.9; 21.6; 21.6; 22.5; 21.9; 23.4 ### Annex II — Stock-Flow Analysis (boom, bust, recovery) - Main conclusions: - No imbalances have reemerged during the recovery that would require a sudden and dramatic adjustment in a potential downturn. - Significant deleveraging of banks, households and NFCs has made these sectors less vulnerable. - NFCs remain the largest and weakest balance sheet but exposures to banks and households have declined significantly; systemic and contagion risks associated with NFCs have declined. - Government net worth deteriorated (partly reflecting balance sheet transfers from private sector); new public debt mostly held by non-residents. - Cross-sectoral exposures and contagion potential reduced compared to pre-crisis levels. - Key magnitudes and dynamics: - Pre-crisis boom (2003–08): real per capita GDP growth around 10 percent over 2003–08; current account deficits exceeded 15 percent of GDP in the Baltics by 2008. - Bust: NFCs reduced liabilities by 50 percent of GDP three quarters into the crisis; households’ net financial position fell correspondingly. - Recovery (2008–18) stock changes: - NFCs deleveraged by 38 percent of GDP; net worth improved by 38 percent of GDP. - NFC exposures to households and banks fell by 11 and 16 percent of GDP respectively. - Banks reduced balance sheet size by almost 20 percent and maintained a balanced net financial position. - Public sector net financial position deteriorated by 23 percent of GDP. ### Staff appraisal: priorities and commitments - Macroeconomic context: - Strong macroeconomic and fiscal performance but long-term challenges remain (demographics, social disparities, external uncertainty). - Prudent fiscal policy, flexible labor market, and proactive macroprudential policies have preserved stability and should be maintained. - Structural reforms: - Urgent need to implement education, healthcare and innovation reforms to raise productivity and living standards. - Planned wage increases in education and health should be made conditional on progress in network optimization. - Authorities’ commitments: - Agreed on need to increase productivity via reforms in education, healthcare and innovation. - Promoting fintech seen as helpful to develop capital markets and spur innovation and competition, conditional on providing adequate resources to agencies and enhancing multi-agency supervisory collaboration. *Source: 1ltuea2019002 — REPUBLIC OF LITHUANIA — INTERNATIONAL MONETARY FUND.* ### 1. Bank Competition ______________________________________________________________________________ 6 ### 1. Bank Competition ### Overview of banking sector structure and recent developments - At end-2018, 7 banks and 9 foreign branches were operating in Lithuania. - The three largest banks accounted for 84 percent of system assets. - Two Swedish Banks account for about 60 percent of Lithuania’s banking system assets. - The system increasingly relies on customer deposits for funding; customer deposits increased by about 11 percent in 2018, exceeding the growth of the loan portfolio (in line with nominal GDP at about 7 percent). - The composition of the loan portfolio has increasingly shifted towards mortgages. - The loan portfolio is less than 50 percent of GDP and significantly below the pre-crisis peak of 64 percent. ### Competition indicators and profitability - The traditional H-Statistic is about 0.87, among the highest in Europe, which suggests strong competition. - Net interest margin of Lithuanian banks is broadly in line with the European average. - The share of non-interest income is relatively high, likely reflecting large reliance on customer deposits as a source of funding post-crisis relative to the rest of Europe. - Return on assets was slightly above one percent in 2018. - Return on equity was around 12 percent in 2018. - Cost-to-income ratios are among the most efficient in Europe, suggesting high operating efficiency. ### Financial soundness, risks, and recent trends - Financial soundness indicators are strong; capital adequacy ratios continue to exceed requirements. - Non-performing loans remain below the EU average. - High profitability appears to reflect high efficiency rather than weak competition. - Spillovers from real-estate related vulnerabilities in the Nordic parent banks remain a potential risk. - These vulnerabilities ameliorated in 2018 as the Swedish authorities implemented new mortgage-related macroprudential policies and increased the countercyclical capital buffer (CCyB), and housing prices stabilized. - Recent market developments that may have reduced competition: the exit of a medium-size bank and the ongoing restructuring of the third-largest bank (which seeks to increase reliance on deposits rather than parent funding). - The modest increase in interest margins for mortgages may reflect increased maturities; the impact on margins for non-financial corporate credit is hard to assess given higher volatility and other factors such as the switch to capital markets by some strong corporates. ### Policy implications and recommended responses (implicit in analysis) - Monitor concentration effects despite high measured competition (H-Statistic ≈ 0.87) because market exits and restructuring can ease competition, especially on the lending side. - Maintain oversight of cross-border spillovers, particularly from Nordic parent banks, and coordinate with home-country supervisors to address real-estate related vulnerabilities. - Continue assessing macroprudential settings (for example, mortgage-related measures and CCyB) as a tool to mitigate spillovers and housing market risks. - Track funding composition shifts (increased deposit reliance) and loan portfolio evolution (mortgage share, loan-to-GDP levels) to assess implications for credit supply and resilience. *Source: 1ltuea2019002 - 1. Bank Competition* ### 13. The authorities broadly agreed with staff’s assessment of the outlook and risks. They ### 13. The authorities broadly agreed with staff’s assessment of the outlook and risks. They ### Authorities' assessment and outlook - The authorities broadly agreed with staff’s assessment of the outlook and risks. - Domestic demand, supported by a tight labor market, will continue to drive growth while external demand will weaken in key European partners. - Limited progress on key aspects of the reform agenda is expected given the timing of the election cycle and the uncertain external environment, but Lithuania is better prepared to weather a downturn. ### Policy discussions: sustained productivity growth to increase living standards - Lithuania needs sustained productivity gains to ensure higher living standards and convergence with Western Europe. - High wage growth must be attainable without harming competitiveness to address negative demographics and social disparities. - As a small open economy in a currency union, Lithuania needs substantial buffers to withstand shocks and detach from increasing external volatility. - Critical policy levers to preserve stability: prudent fiscal policy, a flexible labor market, and active macroprudential policies. - Decisive implementation of the structural reform agenda is necessary to boost productivity and address social disparities. ### A. Preserve macroeconomic stability and avoid imbalances - Lithuania is in a more advanced cyclical position than the euro area; the ECB’s monetary policy stance is looser than would be warranted for Lithuania alone. - Over the past decade, the real interest rate gap between real and natural interest rates has been persistently negative, translating into looser domestic financial conditions. - In the absence of an independent monetary policy, fiscal and macroprudential policy levers need to be proactive to maintain macroeconomic stability. Findings and risks: - The 2019 budget stance is procyclical, partially undoing previous consolidation efforts. - Staff recommends a neutral stance and projects a fiscal impulse of 0.6 percent of GDP with a slightly increasing output gap. - The authorities estimate a substantially higher rate of potential growth and consider the fiscal stance to involve a very modest tightening over the next two years. - Lithuania has substantial fiscal space given low borrowing costs and moderate (though above pre-crisis level) debt. - Fiscal buffers and a flexible labor market are the most effective shock absorbers, as evidenced during the 2009–10 crisis. Downside fiscal risks: - Procyclical stance could be exacerbated by downside risks to budget revenues and rising non-discretionary spending. - Combined impact of tax and pension reforms increases uncertainty of fiscal outcomes this year. - Compliance gains are projected by the authorities to yield almost half percent of GDP. - The negative revenue impact of the tax reform could be larger than expected. - Largest increase in 2019 budget expenditure is social spending (universal child benefits, housing for low-income renters and young families) — expected to have positive impact on reducing poverty. - Public sector wage bill projected to increase given planned salary increases in health and educational sectors; further slippages cannot be ruled out. - Recommendation: prevent slippages and increase effectiveness of fiscal policy by closer monitoring of fiscal risks in a transparent and comprehensive framework that analyzes economic impact and interactions. Macroeconomic and Fiscal Projections (Macroeconomic and Fiscal projections — Source: The Authorities and IMF Staff Estimates) - Real GDP growth - Ministry of Finance: 2017 4.1; 2018 3.5; 2019 2.6; 2020 2.4 - IMF: 2017 4.1; 2018 3.5; 2019 3.2; 2020 2.6 - Potential growth - Ministry of Finance: 2017 2.5; 2018 3.1; 2019 3.5; 2020 3.5 - IMF: 2017 2.6; 2018 3.0; 2019 2.9; 2020 2.7 - Output gap - Ministry of Finance: 2017 1.7; 2018 2.9; 2019 2.0; 2020 0.9 - IMF: 2017 0; 2018 0.5; 2019 0.7; 2020 0.6 - Overall balance - Ministry of Finance: 2017 0.5; 2018 0.7; 2019 0.4; 2020 0.2 - IMF recommendations: 2019 0.8; 2020 0.6 - IMF projections: 2017 0.5; 2018 0.7; 2019 0.3; 2020 0.2 - Structural balance - Ministry of Finance: 2017 -0.7; 2018 -0.5; 2019 -0.4; 2020 -0.3 - IMF recommendations: 2019 0.7; 2020 0.6 - IMF projections: 2017 0.7; 2018 0.8; 2019 0.2; 2020 0.1 - Fiscal impulse 1/ - Ministry of Finance: 2017 -0.2; 2018 -0.2; 2019 -0.1; 2020 -0.1 - IMF recommendations: 2019 0.1; 2020 0.1 - IMF projections: 2017 0.1; 2018 -0.1; 2019 0.6; 2020 0.1 - Note: 1/ A positive fiscal impulse signifies a loosening of fiscal stance. ### B. Macroprudential policy and financial resilience - Macroprudential policy is used proactively to address systemic risks; the Bank of Lithuania (BoL) has sole responsibility and a broad set of instruments. - Emerging moderate cyclical systemic risks: relatively high pace of credit growth and housing prices rising faster than income. - BoL raised the CCyB to 0.5 percent at end-2017 and to 1 percent in mid-2018. - Most banks were already above the new capital requirement and have large and rising liquidity buffers given high deposit growth. - Since the CCyB increases, corporate loan growth has moderated but mortgage growth remains relatively high. - Nordic-Baltic Stability Group cooperation, including a joint financial crisis management exercise, is strengthening crisis preparedness. - Lithuania’s recovery has built buffers and increased resilience without re-emergence of pre-crisis imbalances. - Elimination of the pre-crisis current account deficit and a strong external position have reduced financing risks. - Banks, households, and non-financial corporates have deleveraged and become less vulnerable. - Cross-sectoral exposures have decreased, reducing contagion risks. - Public sector net-worth position worsened in part due to balance sheet transfers from private sector and increased exposure to the rest of the world, but risks ameliorated by euro area membership and elimination of redenomination risks. Authorities’ views: - Authorities committed to preserving macroeconomic and financial stability. - Ministry of Finance viewed medium-term fiscal impulse as broadly neutral and appropriate; BoL viewed the fiscal stance as procyclical. - Both acknowledged high uncertainty around potential growth estimates. - Authorities expect revenue gains from combating the shadow economy but recognize spending pressures from social demands. - Authorities agreed Lithuania has fiscal space but needs to rebuild buffers further to face long-term fiscal pressures from demographic trends. - Banking system is viewed as sound and efficient; concern remains about insufficient competition, which may explain growth in profitability and net interest margins. ### C. Increasing living standards with sustained wage and productivity growth Findings: - Having addressed flow and stock imbalances, Lithuania needs to accelerate structural reforms in the currently benign macro and fiscal environments to sustain wage growth without harming competitiveness. - Reforms tend to entail short-term costs and face opposition; fiscal support can help implementation and sustainability. Lithuania has enough fiscal space to provide such support if needed. - Education and healthcare are top priorities given demographic challenges and shortcomings in health outturns—among the most severe in the EU—and education and training quality shortfalls. - Reform proposals focused on key issues but initial steps failed to deliver; lack of buy-in from municipalities (who own and operate many schools and hospitals) has impeded progress. - Upfront wage increases, while needed, have risked implementation of other critical reform elements such as rationalization and consolidation of networks. Tax, pensions, and labor market: - Pension and tax reform are steps in the right direction; scope remains to improve tax efficiency. - Tax reform made the system more progressive and marginally reduced the labor tax wedge. - Lithuania collects less revenue than peers from capital, wealth, real estate and environmental taxes. - Success of pension reform depends on participation in the second pillar where contributions are higher on average. - Current and projected low replacement ratios ensure fiscal sustainability but raise questions about social sustainability. - Lithuania’s flexible labor market helped weather cyclical factors: - Wages are very sensitive to unemployment; wage setting largely happens at the firm level. - 2017 labor code amendments increased flexibility (reduced dismissal costs and restrictions on hiring based on fixed-term contracts) and increased unemployment insurance benefits and duration. - Persistent structural inefficiencies: - Structural unemployment is relatively high and labor productivity lags peers. - Skills mismatch at job level slightly above OECD averages; aggregate share of unskilled labor is significantly above what the economy demands. - Example: construction sector (6 percent of employment) accounted for three-fourths of employment created in the boom, half of employment destroyed in the bust, and one-tenth of employment created in the subsequent recovery. - Skill-intensive sectors (e.g., information technology and finance) experience labor shortages. Active labor market policies (ALMPs): - ALMP spending is low, heavily reliant on EU funds (two-thirds of total), and composition inadequately reflects labor market needs. - Employment subsidies have become the main component; training spending focused on curricula for low-skilled tasks but has only recently increased. - International evidence: employment subsidies should focus on most disadvantaged groups; well-designed training programs are the most cost-effective way to upskill the labor force. Demographics and social policy: - Boosting labor supply is critical given emigration and aging; the demographic drag is one of the largest in the EU. - Measures to increase labor force participation: lower cost of childcare, tighten early retirement schemes, reform immigration to attract more high-skilled workers. - Lithuania faces a tradeoff between maintaining low and competitive taxes and strengthening the social safety net. - Reducing high poverty rates and social disparities, especially in rural areas, will likely require more and better social programs. - Social protection spending is well below the EU average; discretionary spending already low so further increases cannot be financed without increasing revenues. - Combating informality can provide some resources but gains are unreliable; broadening the tax base and increasing some taxes may be inevitable. ### Box 5. Structural reforms: diagnostic, recommendations and actions (summary) - Education - Issue: Oversized system not aligned with demographics; high spending and poor outcomes; mismatch of education and occupational choices. - Recommendations: Address overcapacities (reduce number of teachers and consolidate school and university infrastructure). Review nexus between universities, financial incentives and quality standards. - Authorities’ actions: Parliament approved reform in 2018 in line with past recommendations. With wage increases preceding other sensitive reform aspects and without buy-in from municipalities, implementation has not meaningfully progressed. - Healthcare - Issue: System remains hospital-care centered; out-patient and long-term care for elderly lag. - Recommendations: Reorganize and rationalize hospital sector, improve out-patient and long-term care, expand role of primary care, develop copayments system, strengthen accountability at municipal level. - Authorities’ actions: Healthcare reform was vetoed by the President. Some reforms (rationalizing the hospital network) can be undertaken, but progress has failed to materialize. - Tax Policy - Issue: Low overall tax collection with high labor tax wedge and low wealth and environmental-related taxes. Limited redistributive impact. - Recommendations: Reduce social security contributions for low wage earners. Rebalance tax system from indirect and labor taxes towards wealth and capital (e.g., environmental and property). Continue tax administration reform. - Authorities’ actions: Tax reform slightly reduced labor tax wedge by raising PIT rates, lowering social contributions and increasing the non-taxable income threshold. Flat PIT replaced by two brackets. No major shift to wealth, environmental or capital taxes. - Labor Market - Issue: Flexible labor market with high skill-mismatches and labor shortages in high-skill industries. - Recommendations: Reduce the tax wedge. Strengthen ALMPs (life-long learning and apprenticeships) and increase its funding. Assess impact of labor code and make adjustments as needed. Reduce barriers to non-EU migration and increase retirement age. Pause minimum wage increase. - Authorities’ actions: Enhanced ALMPs (introduced internships, mobility support, recognition of self-education). Moderated the increase in minimum wage below Tripartite Council’s target range of 45-50 percent of average wage. Restrictions on immigration were eased. - Pensions - Issue: Low and falling replacement ratios for a rapidly aging population. Highly redistributive but not targeted at the poor. - Recommendations: Link retirement age to life expectancy and tighten early retirement. Raise gross pensions (to at least preserve replacement ratios) and subject them to progressive PIT. Strengthen multi-pillar system by funding non-contributory basic pensions through general revenues and by making payments to second pillar compulsory. Scale back incidence of disability pensions. - Authorities’ actions: Basic pensions and commensurate social contributions were transferred to the state budget. Participation in Pillar II became mandatory with limited opting-out. A ceiling on social contributions was established and a new PIT bracket introduced. A ceiling on private pension fund fees was introduced and the minimum amount to purchase an annuity reduced. The retirement age was not increased. - Innovation - Issue: Innovation remains weak with limited interaction between businesses and public sector. - Recommendations: Consolidate a highly fragmented system and improve coordination. - Authorities’ actions: Established a coordinating committee on innovation. *Source: REPUBLIC OF LITHUANIA — INTERNATIONAL MONETARY FUND.* ### 28. Targeted spending on social protection should be the main tool to reduce poverty. ### 28. Targeted spending on social protection should be the main tool to reduce poverty. ### Social protection and labor-market activation - Given limited resources, social protection should increase its reliance on carefully designed means-tested programs. - Designs should avoid welfare dependency and disincentives to work. - In-work benefits can simultaneously reduce inequality and increase employment. - ALMP should be strengthened to effectively address skill mismatches and increase labor force participation: - Current funding is low and relies excessively on EU funds. - Composition inadequately reflects cyclical conditions or the needs of the labor market. - Reliance on employment subsidies should decrease and focus on the most disadvantaged groups only. - The emphasis should shift to well-designed training curricula to upskill the labor force. - Lithuania faces a difficult tradeoff between maintaining a low and competitive tax system and strengthening the social safety net: - With discretionary spending already low, further increases in social spending will likely require higher revenues. - To ensure the most efficient use of limited resources, targeted social spending should be the main tool used. - The design and generosity of child benefits should balance their positive impact on reducing child poverty against the potential disincentives to work, particularly for women. ### Fintech development, incentives, and infrastructure - The authorities have been proactive in developing a fintech industry (Annex III). - Lithuania is promoting the country as a gateway to Europe for non-European financial companies and as a Nordic-Baltic regional fintech hub. - With an innovation-friendly business environment, good and improving ease-of-doing-business and technological infrastructure, Lithuania is positioning itself as an attractive host of fintech platforms. - Fintech market figures and composition: - In 2018, there were 170 fintech companies operating in Lithuania, of which, 74 were payment service providers, 45 lending and banking, and 18 blockchain. - The value of transactions in Lithuania’s market was forecasted at around EUR 1.1 billion in 2017. - Steps taken to facilitate fintech development: - Providing licenses to fintech companies, including e-money and payment services licenses and introducing the concept of a “specialized bank” in 2017 with lower initial capital requirements. - Supporting creation of advisory and investment services through the 2016 law on crowdfunding. - Supporting the infrastructure for payment services: BoL provides low-service-fees access to the Single Euro Payments Area. - Fostering innovation through a regulatory sandbox to test financial innovations in a real environment for a limited time; BoL is creating a blockchain sandbox and promoting open banking. - Reducing red tape through simplified procedures for establishing fintech companies (“newcomer program”). ### Competition, market structure, and strategic implications - There will be increased competition in the financial sector going forward, particularly from fintech platforms. - The completion of the ongoing restructuring of the third largest bank—with 24 percent of system assets—should increase competition in a highly concentrated market. - Competition is expected to increase from fintech companies, particularly on payment services, with activity also on lending and advisory services. - The BoL has issued four specialized banking licenses over the last year. - Profitability seems to reflect high efficiency (Box 1), but innovative solutions could improve services for customers and drive down margins and costs. - Lithuanian banks are increasingly concentrating their business on traditional banking for residents while fintech companies are likely to focus on non-residents given access to the whole EU market and the small size of the Lithuanian market. ### Financial stability, AML/CFT risks, and supervisory challenges - Fintech provides big opportunities but also brings challenges, particularly regarding AML/CFT and supervision. - The BoL’s 2017 Financial Stability Report identifies risks related to fintech including regulatory, cyber, and the impact on financial stability from changes in (untested) business models. - Lithuania’s national ML/TF risk assessment identifies the use of technology in money transfers as a high-risk area. - The likely focus of most entrants in the banking system on non-residents, marginally important at 3 percent of total deposits now, could represent a shift in the business model of Lithuania’s banking system and bring new challenges for supervision, including for AML/CFT. - There is scope to improve the AML/CFT regime to mitigate risks emanating from new technologies, with a particular focus on ensuring the effectiveness of AML/CFT supervision at addressing the rising number of fintech entities and the increased complexity of their operations. - Actions to strengthen the AML/CFT framework: - Lithuania underwent a mutual evaluation by MONEYVAL in 2018, which assessed the level of effectiveness of most aspects of its AML/CFT regime as moderate (second lowest out of four effectiveness ratings). - The report recommended that the BoL should enhance its existing risk-based approach to AML/CFT supervision, further develop its ML/FT risk assessment and intensify its use of sanctions for AML/CFT violations. - The authorities’ efforts to implement the 2018 MONEYVAL recommendations and enhance inter-agency coordination should be complemented by adequate resources across all agencies involved. ### Staff appraisal: macroeconomic context and reform priorities - The Lithuanian economy has continued to enjoy a strong macroeconomic and fiscal performance, but long-term challenges remain largely unaddressed. - Prudent fiscal policy, a flexible labor market, and proactive macroprudential policies have been critical to preserve stability and should be maintained. - The recovery has avoided the emergence of the large imbalances of the past and better positioned Lithuania to face external shocks and future economic downturns. - Lithuania still confronts severe demographic pressures, large social disparities, and external uncertainty that can only be addressed with structural reforms. - Fiscal stance and risks: - The continued strong economic performance suggests that a neutral fiscal stance would have been preferable this year. - Going forward there are heightened risks to revenues and increased spending pressures from social needs that are partly countered by conservative economic projections. - Gains from combating informality are difficult to predict while the revenue impact of recent reforms is uncertain; revenue buoyancy may largely reflect cyclical factors. - Without commensurate increases in revenues, spending pressures are increasing budget rigidities. - Macroprudential policy: - Macroprudential policy is being used proactively to prevent systemic risks. - Signs that moderate cyclical systemic risks are emerging led the Bank of Lithuania to raise the countercyclical buffer to one percent in mid-2018. - The financial system remains sound, liquid, and profitable. - Structural reforms and public services: - Despite growing urgency, education and healthcare reforms have failed to deliver. - Maintaining large and inefficient networks comes at the cost of quality and opportunities. - Only comprehensive reform will allow Lithuania to produce the competitive and well-paid workforce needed to tackle income and social disparities. - Planned wage increases in these sectors should be made conditional on progress in network optimization. - Pensions and tax policy: - Pension and tax reforms go in the right direction, but remaining challenges will require future compromises. - Tax reform could have been more ambitious in shifting taxes away from labor. - The reduction of tax exemptions and privileged regimes is also needed. - On pensions, reform has ensured the financial, but not social, sustainability of the system. - Low and declining pensions will increase pressures to boost basic pensions, which have been transferred to the budget this year; this represents a fiscal risk over the medium-term. - Authorities’ commitments: - The authorities agreed with staff on the need to increase productivity growth through reform implementation, particularly in the areas of education, healthcare and innovation. - They highlighted early successes but recognized some bottlenecks in key areas and potential future delays given next year’s elections. - They recognized the need to match higher future social spending with revenues but pointed out a lack of broad political consensus. - They agreed that promoting fintech should help develop capital markets, as well as spur innovation and competition in the financial sector, while noting the need to provide adequate resources to all agencies involved and to increase supervisory efforts further via a new enhanced multi-agency collaboration framework. *International Monetary Fund — excerpt from PDF chapter "28. Targeted spending on social protection should be the main tool to reduce poverty."* ### 44. The next Article IV Consultation is expected to be completed on the standard ### The next Article IV Consultation is expected to be completed on the standard 12-month cycle. ### Macroeconomic sector developments - Growth has remained strong exceeding expectations. - Real GDP growth (annual percentage change): - 2015: 2.0 - 2016: 2.4 - 2017: 4.1 - 2018: 3.5 - 2019: 3.2 - 2020: 2.6 - 2021: 2.5 - 2022: 2.4 - 2023: 2.3 - 2024: 2.3 - Domestic demand growth (year-on-year, in percent): - 2015: 6.4 - 2016: 2.3 - 2017: 2.9 - 2018: 2.9 - 2019: 3.8 - 2020: 3.5 - 2021: 3.3 - 2022: 3.1 - 2023: 3.1 - 2024: 3.1 - Nominal GDP (in billions of euro): - 2015: 37.4 - 2016: 38.8 - 2017: 42.2 - 2018: 45.1 - 2019: 47.7 - 2020: 50.2 - 2021: 52.6 - 2022: 55.1 - 2023: 57.6 - 2024: 60.2 - Output gap (percent of potential GDP): - 2015: -1.1 - 2016: -1.4 - 2017: 0.0 - 2018: 0.5 - 2019: 0.7 - 2020: 0.6 - 2021: 0.4 - 2022: 0.2 - 2023: 0.1 - 2024: 0.0 - Current account balance (percent of GDP): - 2015: -2.8 - 2016: -0.8 - 2017: 0.9 - 2018: 1.6 - 2019: 1.2 - 2020: 1.1 - 2021: 0.6 - 2022: 0.1 - 2023: -0.4 - 2024: -0.8 - Commentary in figures: "Inflation moderated but remained above the euro area"; "While investment is firming up... the current account remains strong." ### Labor market and competitiveness - Unemployment rate (year average, in percent of labor force): - 2015: 9.1 - 2016: 7.9 - 2017: 7.1 - 2018: 6.1 - 2019: 5.9 - 2020: 5.8 - 2021: 5.7 - 2022: 5.6 - 2023: 5.5 - 2024: 5.5 - Employment (annual percentage change): - 2015: 1.2 - 2016: 2.0 - 2017: -0.5 - 2018: 1.5 - 2019: 0.6 - 2020: 0.2 - 2021: 0.0 - 2022: -0.1 - 2023: -0.1 - 2024: -0.1 - Average monthly gross earnings (annual percentage change): - 2015: 5.1 - 2016: 7.9 - 2017: 8.2 - 2018: 9.9 - 2019: 8.0 - 2020: 6.5 - 2021: 5.4 - 2022: 4.9 - 2023: 4.7 - 2024: 4.6 - Labor productivity (annual percentage change): - 2015: 0.8 - 2016: 0.4 - 2017: 4.6 - 2018: 2.0 - 2019: 2.6 - 2020: 2.4 - 2021: 2.4 - 2022: 2.4 - 2023: 2.4 - 2024: 2.4 - Figure captions and notes: - "Unemployment has fallen below NAIRU supported by better-than-projected employment growth." - "High wage growth continues... With productivity recently picking up......real unit costs relative to the post-crisis period rose but have stabilized in recent years.. contributing to the appreciation of the effective exchange rates that has not prevented a positive export performance...." ### Banking sector developments - Credit and deposits: - Total deposits of corporations and households (Billions of Euro) show an upward trend from 2010 to 2019 in charts. - Household and Non-financial Corporation Debt (percent of GDP) series plotted. - Credit growth (year-on-year percent change) shows credit remains strong; caption: "Credit remains strong, with banks raising their share of household loans... funded by the continued increase in household deposits." - Real house prices (Index, 2015=100) rose since 2006; caption: "Household and corporate balance sheet are stronger than pre-crisis levels... supporting higher housing prices." - Profitability and rates: - Return on Assets (Percent) series positive in recent years; caption: "Despite low interest rates... bank profitability remains strong." - Household lending rates series shown for Consumer Credit and Mortgages. ### Fiscal developments - General government finances (percent of GDP): - Revenue: - 2015: 34.7 - 2016: 34.4 - 2017: 33.6 - 2018: 34.7 - 2019: 35.7 - 2020: 35.8 - 2021: 35.8 - 2022: 35.8 - 2023: 35.7 - 2024: 35.7 - Expenditure: - 2015: 34.9 - 2016: 34.1 - 2017: 33.1 - 2018: 34.0 - 2019: 35.4 - 2020: 35.5 - 2021: 35.7 - 2022: 35.7 - 2023: 35.6 - 2024: 35.6 - Fiscal balance (percent of GDP): - 2015: -0.2 - 2016: 0.3 - 2017: 0.5 - 2018: 0.7 - 2019: 0.3 - 2020: 0.2 - 2021: 0.1 - 2022: 0.1 - 2023: 0.1 - 2024: 0.1 - Structural fiscal balance (percent of potential GDP): - 2015: -0.1 - 2016: 0.8 - 2017: 0.7 - 2018: 0.8 - 2019: 0.2 - 2020: 0.1 - 2021: 0.1 - 2022: 0.1 - 2023: 0.1 - 2024: 0.1 - General government gross debt (percent of GDP): - 2015: 42.6 - 2016: 39.9 - 2017: 39.4 - 2018: 34.2 - 2019: 32.0 - 2020: 30.2 - 2021: 28.7 - 2022: 27.3 - 2023: 26.0 - 2024: 24.7 - Fiscal commentary: - "Fiscal surpluses continued... contributing to declining debt ratios." - "Strong wage growth contributed to higher income taxes and social contributions ... but also higher compensation for employees, along with expanding social benefit programs." - Policy levers noted: "There is room for revenue gains by expanding capital and wealth taxes... as well as reducing tax expenditures." ### Adverse demographic trends - Key demographic drivers highlighted: - "Due to relatively low fertility rates, ... increasing life expectancy, ... large emigration although with a recent decline, ... and aging, old dependency ratio is one of the worst in the EU." - "However, the latest data shows some improvement in net migration supported by an increase in Lithuanians returning home." - Charts and projections included for: - Fertility Rate (series plotted against LTU LVA EST EU-28). - Economic Old-Age Dependency Ratio (15-74) (series plotted). - Net Migration (Thousands of Persons) showing large emigration with recent decline. - Working-Age Population Projections (15-64) (Index, 2017=100). - Total Population - Baseline Projections (Millions of Persons). ### Stock and flow adjustment, sectoral balances - Main messages: - "The large pre-crisis private sector imbalances, were rapidly corrected and have not re-emerged." - "A very sharp reduction in the wage share during the crisis has been largely undone in the recovery." - "There has been significant deleveraging of the private sector supported by higher public sector debt." - "Non-financial corporate (NFC) debt is now a third lower than in 2008." - "Contagion and systemic risks from NFCs and banks have decreased during the recovery." - Figures show sectoral debt and changes in debt (percent of GDP) across households, NFCs, government, and financial sector. ### Key balance of payments and external statistics - Current account balance (billions of euros): - 2015: -1.0 - 2016: -0.3 - 2017: 0.4 - 2018: 0.7 - 2019: 0.6 - 2020: 0.6 - 2021: 0.3 - 2022: 0.1 - 2023: -0.2 - 2024: -0.5 - Gross external debt (percent of GDP): - 2015: 75.7 - 2016: 85.2 - 2017: 83.6 - 2018: 78.5 - 2019: 73.2 - 2020: 69.6 - 2021: 66.8 - 2022: 63.7 - 2023: 61.0 - 2024: 58.5 - Net international investment position: - 2015: -43.7 - 2016: -42.7 - 2017: -35.9 - 2018: -29.5 - 2019: -26.3 - 2020: -23.6 - 2021: -21.5 - 2022: -20.0 - 2023: -19.2 - 2024: -18.8 - Merchandise trade balance (billions of euros): - 2015: -2.0 - 2016: -1.8 - 2017: -1.9 - 2018: -2.6 - 2019: -3.0 - 2020: -3.4 - 2021: -3.8 - 2022: -4.2 - 2023: -4.7 - 2024: -5.2 ### Monetary and financial sector summary - Monetary authority and banking aggregates (selected): - Reserve money (billions of euro): - 2011: 5.0 - 2012: 4.7 - 2013: 4.9 - 2014: 5.9 - 2015: 9.1 - 2016: 12.6 - 2017: 15.7 - 2018: 18.8 - Broad money (yearly percent change): - 2011: 5.0 - 2012: 7.2 - 2013: 4.4 - 2014: 1.2 - 2015: 32.9 - 2016: 7.2 - 2017: 5.8 - 2018: 11.4 - Private sector credit (yearly percent change): - 2011: -5.9 - 2012: -0.8 - 2013: -2.3 - 2014: -0.9 - 2015: 4.1 - 2016: 7.1 - 2017: 4.5 - 2018: 6.0 - Financial soundness indicators (banking system): - Regulatory capital to risk-weighted assets: - Dec-12: 15.7 - Dec-13: 17.6 - Dec-14: 21.3 - Dec-15: 24.9 - Dec-16: 19.4 - Dec-17: 19.1 - Dec-18: 18.8 - Return on Equity (RoE, total profits after tax): - Dec-12: 7.7 - Dec-13: 8.9 - Dec-14: 8.9 - Dec-15: 8.1 - Dec-16: 9.0 - Dec-17: 14.0 - Dec-18: 12.5 ### Policy implications and recommendations (as stated) - Fiscal: - There is room for revenue gains by expanding capital and wealth taxes. - There is room for revenue gains by reducing tax expenditures. - Structural/demographic: - Address adverse demographic trends (low fertility, aging, emigration) given "old dependency ratio is one of the worst in the EU." - Financial sector: - Continued monitoring given strong credit and housing price dynamics; acknowledgement that "contagion and systemic risks from NFCs and banks have decreased during the recovery." *Source: Republic of Lithuania — IMF staff report content (figures, tables, and captions) as provided.* ### Annex I. Public Sector Debt and External Sustainability Analysis ### 1ltuea2019002 - Annex I. Public Sector Debt and External Sustainability Analysis ### Public Sector Debt Sustainability Analysis (DSA) — Baseline Scenario (key indicators and dynamics) - As of July 10, 2019 (public sector = general government). - Nominal gross public debt (in percent of GDP): 2017: 35.4; 2018: 39.4; 2019: 34.2; 2020: 32.0; 2021: 30.2; 2022: 28.7; 2023: 27.3; 2024: 26.0; 2024 (final column) 24.7. - Public gross financing needs (in percent of GDP): 2017: 9.0; 2018: 4.1; 2019: 5.9; 2020: 1.6; 2021: 3.9; 2022: 3.2; 2023: 2.2; 2024: 1.1; 2024 (final) 1.2; Y CDS (bp) 60; EMBIG (bp) 87 (long-term bond spread over German bonds). - Real GDP growth (in percent): 2017: 1.2; 2018: 4.1; 2019: 3.5; 2020: 3.2; 2021: 2.6; 2022: 2.5; 2023: 2.4; 2024: 2.3; 2024 (final): 2.3. - Inflation (GDP deflator, in percent): 2017: 2.3; 2018: 4.3; 2019: 3.3; 2020: 2.5; 2021: 2.5; 2022: 2.3; 2023: 2.3; 2024: 2.2; 2024 (final): 2.2. - Nominal GDP growth (in percent): 2017: 3.6; 2018: 8.6; 2019: 6.9; 2020: 5.8; 2021: 5.1; 2022: 4.8; 2023: 4.7; 2024: 4.6; 2024 (final): 4.6. - Effective interest rate (in percent): 2017: 5.1; 2018: 3.0; 2019: 2.4; 2020: 1.9; 2021: 1.6; 2022: 1.5; 2023: 1.7; 2024: 1.8; 2024 (final): 1.9. - Ratings (Foreign / Local): Moody's A3 / A- ; S&P's A3 / A ; Fitch A- / A-. - Cumulative change in gross public sector debt (2017–2024): 2.7; -0.5; -5.2; -2.2; -1.8; -1.5; -1.4; -1.3; -1.2; cumulative -9.4. - Identified debt-creating flows (2017–2024): 4.5; -4.0; -1.7; -1.4; -1.0; -0.6; -0.4; -0.2; -0.2; cumulative -4.0. - Primary deficit (percent of GDP): 2017: 2.9; 2018: -0.8; 2019: -0.5; 2020: -0.2; 2021: 0.1; 2022: 0.3; 2023: 0.4; 2024: 0.5; 2024 (final): 0.4; cumulative 1.5. - Primary (noninterest) revenue and grants (percent of GDP): 2017: 33.7; 2018: 32.7; 2019: 33.6; 2020: 34.7; 2021: 34.8; 2022: 34.9; 2023: 34.9; 2024: 34.9; 2024 (final): 34.9; cumulative 208.9. - Primary (noninterest) expenditure (percent of GDP): 2017: 36.6; 2018: 32.0; 2019: 33.1; 2020: 34.5; 2021: 34.8; 2022: 35.2; 2023: 35.3; 2024: 35.3; 2024 (final): 35.3; cumulative 210.5. - Automatic debt dynamics (percent of GDP) (2017–2024): 1.3; -3.2; -1.2; -1.3; -1.1; -1.0; -0.8; -0.7; -0.7; cumulative -5.5. - Interest rate/growth differential (2017–2024): 0.2; -2.0; -1.7; -1.3; -1.1; -1.0; -0.8; -0.7; -0.7; cumulative -5.5. - Of which: real interest rate: 0.9; -0.5; -0.4; -0.2; -0.3; -0.2; -0.2; -0.1; -0.1; cumulative -1.1. - Of which: real GDP growth: -0.7; -1.5; -1.3; -1.0; -0.8; -0.7; -0.7; -0.6; -0.6; cumulative -4.4. - Exchange rate depreciation (2017–2019): 1.0; -1.2; 0.4; later years: not shown. - Other identified debt-creating flows and privatization receipts: 0.3 in 2017; 0.0 thereafter. - Residual, including asset changes (2017–2024): -1.8; 3.5; -3.5; -0.8; -0.8; -0.9; -1.0; -1.0; -1.0; cumulative -5.5. - Debt-stabilizing balance assumption for projections: key variables remain at last projection year level (real GDP growth, real interest rate, other identified flows). ### Composition of Public Debt and Alternative Fiscal Scenarios (assumptions and scenario summary) - Underlying macro assumptions (selected lines, in percent): - Baseline Real GDP growth (2019–2024): 2019: 3.2; 2020: 2.6; 2021: 2.5; 2022: 2.4; 2023: 2.3; 2024: 2.3. - Baseline Inflation (2019–2024): 2019: 2.5; 2020: 2.5; 2021: 2.3; 2022: 2.3; 2023: 2.2; 2024: 2.2. - Baseline Primary Balance (2019–2024): 2019: 0.2; 2020: -0.1; 2021: -0.3; 2022: -0.4; 2023: -0.5; 2024: -0.4. - Baseline Effective interest rate (2019–2024): 2019: 1.9; 2020: 1.6; 2021: 1.5; 2022: 1.7; 2023: 1.8; 2024: 1.9. - Historical Scenario (alternative): Primary Balance 2019: 0.2; 2020–2024: -2.3 each year; Real GDP growth under Historical: 2019: 3.2; 2020–2024: 1.6 each year; Effective interest rate rises in later years (2019: 1.9; 2020: 1.6; 2021: 2.3; 2022: 3.1; 2023: 3.7; 2024: 4.0). - Constant Primary Balance Scenario: Primary Balance held at 0.2 (2019–2024); Effective interest rate similar to baseline with small differences (2019: 1.9; 2020: 1.6; 2021: 1.5; 2022: 1.7; 2023: 1.7; 2024: 1.7/1.8). - Graphical indicators included: Net debt (percent of GDP), Gross Nominal Public Debt (percent of GDP) projection, Public Gross Financing Needs (percent of GDP) projection, By Maturity (Medium and long-term / Short-term), By Currency (Local / Foreign). ### External Debt Sustainability Framework (2014–24) — Baseline and dynamics - Baseline external debt-to-GDP (in percent): 2014: 64.8; 2015: 74.2; 2016: 81.1; 2017: 87.6; 2018: 74.9; 2019: 74.9; 2020: 72.2; 2021: 70.4; 2022: 68.3; 2023: 66.6; 2024: 65.2; debt-stabilizing non-interest current account: -5.2. - Change in external debt (2014–2024): -7.8; 9.4; 7.0; 6.5; -12.7; 0.0; -2.7; -1.8; -2.1; -1.6; -1.4. - Identified external debt-creating flows (sum of 4+8+9) (2014–2024): -8.7; 11.6; -4.2; -11.2; -13.0; -5.2; -4.4; -4.1; -3.5; -3.0; -2.4. - Current account deficit, excluding interest payments (2014–2024): -5.2; 1.0; -0.7; -2.2; -1.9; -1.5; -0.9; -0.6; -0.1; 0.3; 0.9. - Deficit in balance of goods and services (2014–2024): -1.9; 0.6; -1.2; -2.8; -2.5; -2.3; -1.7; -1.3; -0.7; -0.1; 0.6. - Net non-debt creating capital inflows (negative) (2014–2024): -2.3; -2.2; -2.5; -2.4; -2.3; -2.0; -1.9; -2.0; -2.2; -2.3; -2.6. - Automatic debt dynamics 1/ (2014–2024): -1.2; 12.9; -1.0; -6.6; -8.8; -1.7; -1.5; -1.5; -1.2; -1.0; -0.6. - Contribution from nominal interest rate (2014–2024): 2.1; 1.8; 1.5; 1.3; 0.5; 0.4; 0.3; 0.3; 0.3; 0.5; 0.6. - Contribution from real GDP growth (2014–2024): -2.5; -1.5; -1.7; -3.0; -2.7; -2.1; -1.9; -1.8; -1.5; -1.4; -1.3. - Contribution from price and exchange rate changes 2/ (2014–2018 shown): -0.8; 12.6; -0.8; -4.9; -6.6; later years: not shown. - Residual, including change in gross foreign assets (2-3) (2014–2024): 0.9; -2.2; 11.1; 17.7; 0.2; 5.2; 1.7; 2.3; 1.4; 1.3; 0.9. - External debt-to-exports ratio (in percent) (2014–2024): 80.1; 98.1; 109.6; 108.3; 91.1; 90.9; 88.0; 87.8; 84.9; 83.2; 81.7. - Gross external financing need (in billions of US dollars) 4/ (2014–2024): 15.0; 14.7; 13.4; 18.5; 22.6; 19.9; 21.6; 21.6; 22.5; 21.9; 23.4. - In percent of GDP (select horizons): 30.9; 35.3; 31.2; 38.8; 42.5; 10-Year: 36.7; 10-Year: 37.4; ranges shown for projections. - Scenario with key variables at their historical averages 5/: external debt path 74.9; 76.0; 77.5; 78.3; 78.9; 79.3; deviation -1.5. - Key macro assumptions (selected historical averages and projection behavior): - Real GDP growth (historical / baseline): 2014–2018 sequence includes 3.5; 2.0; 2.4; 4.1; 3.4; 1.6; 5.9; 2.9; 2.6; 2.6; 2.2; 2.2; 2.0. - GDP deflator in US dollars (change in percent) (historical / baseline): 1.2; -16.3; 1.1; 6.4; 8.2; 0.0; 8.2; -1.2; 3.5; 3.0; 3.2; 2.9; 3.2. - Nominal external interest rate (in percent) (historical / baseline): 3.0; 2.4; 2.1; 1.8; 0.7; 2.6; 0.9; 0.6; 0.4; 0.4; 0.4; 0.7; 1.0. - Growth of exports (US dollar terms, in percent) (historical / baseline): 0.8; -20.1; 1.3; 21.1; 13.8; 6.5; 19.5; 1.9; 4.9; 5.1; 4.8; 4.7; 4.8. - Growth of imports (US dollar terms, in percent) (historical / baseline): -0.1; -17.5; -1.2; 18.9; 14.2; 4.8; 21.4; 2.3; 5.6; 5.5; 5.7; 5.4; 5.8. - Current account balance, excluding interest payments (percent of GDP) (historical / baseline): 5.2; -1.0; 0.7; 2.2; 1.9; 1.7; 2.2; 1.5; 0.9; 0.6; 0.1; -0.3; -0.9. - Net non-debt creating capital inflows (percent of GDP) (historical / baseline): 2.3; 2.2; 2.5; 2.4; 2.3; 2.3; 0.3; 2.0; 1.9; 2.0; 2.2; 2.3; 2.6. - Definitions and methodological notes are provided for automatic debt dynamics and contributions (footnotes 1–6). ### Annex II — Stock-Flow Analysis of the Boom, Bust, and Recovery (summary findings and key sectoral numbers) - Purpose: Analyze stock and flow flow-of-funds data for the Baltics since 2004 to assess readiness of the Lithuanian economy to a changing economic cycle or severe shock, exploiting cross-sectoral exposures of financial assets and liabilities (data through 2018Q3). - Main findings (flow and stock perspectives): - Flows: "no imbalances have reemerged during the recovery that would require a sudden and dramatic adjustment in a potential economic downturn." - Stocks: "significant deleverage of banks, households and, particularly, non-financial corporates (NFCs) that make them less vulnerable." - NFCs: Still the largest and weakest balance sheet, but exposures to banks and households have declined significantly; systemic and contagion risks associated with NFCs have declined. - Government: Net worth has deteriorated (partly reflecting balance sheet transfer from the private sector) with new debt mostly held by non-residents; exposure of households, banks and NFCs to government remains minimal; external risk-appetite risk increased but euro area membership eliminates redenomination risk. - Key historical flow magnitudes and dynamics: - Pre-crisis boom (2003–08): Real per capita GDP growth around 10 percent over 2003–08; current account deficits exceeded 15 percent of GDP in the Baltics by 2008. - Nominal wage growth: exceeded 30 percent in Latvia and reached 20 percent in Lithuania (pre-crisis). - Sectoral balances: NFCs dissaving large in all Baltics; household dissaving significant in Latvia and Estonia, but less so in Lithuania. - In 2008, capital flows dried and private sector large net lending imbalances forced sharp adjustment. - Bust dynamics: - NFCs reduced liabilities by 50 percent of GDP three quarters into the crisis; of this reduction 34 percentage points was through equity. - Households: the reduction in NFC equity holdings transferred to households — households’ net financial position fell by the same amount tied to NFC losses; revaluation changes explain only half of households’ equity decrease. - Recovery (2008–18) key stock changes: - NFCs deleveraged by 38 percent of GDP; with constant assets in percent of GDP (though higher exposure to the rest of the world), their net worth improved by 38 percent of GDP. - NFC exposures to households and banks fell by 11 and 16 percent of GDP respectively. - Households: maintained largely unchanged net financial position; size of households’ balance sheet remained constant, retaining a strong net worth. - Banks: reduced balance sheet size by almost 20 percent (reduced parent funding and loans to NFCs) and maintained a largely balanced net financial position. - Public sector: General government net financial position deteriorated by 23 percent of GDP through an increase in debt held overwhelmingly by non-residents; Bank of Lithuania’s balance sheet increased considerably reflecting QE operations. - Cross-sectoral exposure and network observations: - During the boom (2004–08): NFCs' net financial position deteriorated and their exposure to banks (loans) and to households (equity) increased; households’ liabilities to banks increased by 10 percent of GDP while equity from NFCs to households rose by about three times that amount; banks’ balance sheet doubled while net-financial position barely changed; limited exposure of private sector to general government prior to crisis. - Network maps and flow-of-funds matrices (2004Q1–2018Q3) illustrate that NFCs were the largest vulnerability in size and contagion potential pre-crisis; post-crisis deleveraging reduced direct and indirect contagion risks. - Figures and tables referenced: Figure 1 (Current Account and Sectoral Savings-Investment Balances); Figure 2 (Network Map of Sectoral Linkages); Figure 3 (Equity cumulative changes); Table 1 (Institutional Units); Table 2 (Sectoral Financial Asset Exposures, percent of GDP); Table 3 (Net Financial Asset Position by Sector and Instrument, percent of GDP) — data series span 2004 Q1, 2008 Q2, and 2018 Q3 with detailed cross-sector numbers and instruments (currency, debt, loans, equity, investment, pens/ins, other). *Source: IMF staff.* ### Annex III. Fintech in Lithuania ### Annex III. Fintech in Lithuania ### Purpose and strategic goals - Authorities support fintech with the goal to increase high-skill jobs and retain human capital. - Demographic constraints: birth rate halved between 1991 and 2004; migration has led to the loss of about a fifth of the population since 1990. - Policy implication: creating high-wage opportunities for young talented workers is key. ### Prospects and drivers for fintech development - Three main drivers identified: - Technology and business environment (entice firms to operate in the country). - Consumers’ attitudes (influence domestic impact on competition and financial services). - Policies and regulation (especially those targeted to fintech companies). - Note: Size of the domestic market may be a limiting factor, but access to the euro area mitigates this constraint. ### Technology and business environment - Lithuania has a supportive business environment and a high ease-of-doing-business ranking among European economies. - Digitization: Lithuania seems average relative to the rest of Europe in terms of digitization of the economy (DESI-based). - Innovation performance: - Assessed as a moderate innovator but catching up to the EU average. - Strengths: innovation-friendly environment, strong access to broadband, strong linkages among SMEs and public-private collaboration. - Weaknesses: low level of high-medium tech and knowledge intensive exports; lower attractiveness of the research system. - Specific indicators: "The share of employment in high and medium-high tech is about a third of the EU average, while the share of employment in knowledge intensive services is about two-thirds the EU average." ### Consumer attitudes and fintech-related indicators - Consumers show readiness to adopt fintech solutions: - Surveys suggest Lithuanians’ attitudes toward digital technologies and self-reported skills are broadly similar to the rest of Europe despite lower income per capita. - Fintech-linked usage indicators: - Large share of the population uses financial services, though below the near-full coverage typical in most EU countries. - Use of internet is high by European standards. - Online shopping is yet to catch on, but a large share of internet users rely on online banking. ### Policies, regulatory framework, and infrastructure - Licensing and supervisory measures: - Bank of Lithuania (BoL) has granted more than 110 licenses to fintech companies. - Licensing menu includes electronic money and payment institutions, registry of crowdfunding and peer-to-peer lending operators, and specialized banking (introduced in 2017) with lower capital requirements but able to provide most services of a full bank (excluding investment services, clearing, services related to securities emissions or managed investment, pension funds or other services related to security emissions). - Newcomer program and e-licensing: - Newcomer program established in 2017 as a one stop shop providing meetings, consultations with market participants, basic licensing information, and advice on legal and licensing requirements. - BoL introduced a smart e-licensing tool enabling remote license applications. - BoL seeks to issue licenses within 90 days, albeit some market participants claim the process takes longer. - Sandboxes: - A regulatory sandbox exists; a blockchain sandbox is being implemented. - Application process: lasts up to 4 months (BoL and applicant agree on testing period, consumer protection, and other testing conditions). - Testing period: envisaged for 6 months. - Payments infrastructure and strategy: - National payment strategy aims to make innovative payments available by 2020, entailing: (i) developing infrastructure for contactless and instant payments, (ii) increasing user involvement, and (iii) building trust and encouraging electronic payments. - CENTROlink: BoL provides a gateway to SEPA through CENTROlink with a direct link to RT1 and, since last November, interlink with TIPS. SCT Inst was introduced in November 2017. - Through CENTROlink, payment service providers have access to SCT Inst and instant payments in euros at low fees. - Fee ranges: €0.02–0.04 for instant SCT Inst and €0.05-0.07 for SEPA direct debit (SDD). - PSD2 and open banking: - Authorities are implementing PSD2 to have ASPSPs develop open interfaces (API) to permit—with customer consent—payments initiated by third parties and to make account transaction data available to third parties. - BoL supports development by licensing third-party providers (TPP), maintaining a national list of payment service providers (PSP), and promptly notifying of revocations of TPP licenses. - Public consultation launched to introduce open banking; plan to establish an API register by end-2019. ### State of play and metrics of sector growth - Growth statistics: - 2018: about 170 fintech companies (compared with 117 in 2017 and more than triple the number in 2014). - Authorities estimate fintech employment at 2,600 persons, with 700 jobs added in 2018. - Licensing and sector composition as of end-2018: - 47 e-money licenses (second only to the U.K. at that time). - 33 licenses for payment institutions. - Company focus distribution: payments services about 44 percent; lending 15 percent; banking 11 percent; Blockchain 11 percent. - Funding and bank relationships: - More than half of fintech companies are revenue funded. - Many companies seek relationships with banks as a distribution channel or for partnership rather than for funding. ### Risks, challenges, and supervisory implications - Identified risks: - AML/CFT risks and supervision challenges are significant. - BoL’s 2017 Financial Stability Report highlights regulatory, cyber, and financial stability risks from changes in untested business models. - Lithuania’s national ML/TF risk assessment identifies the use of technology in money transfer as a high-risk area within the financial sector. - Supervisory and systemic considerations: - Focus of many new entrants on cross-border transactions could shift Lithuania’s banking business model and bring new supervisory challenges, including for AML/CFT. - Scope exists to improve the AML/CFT regime to mitigate risks from new technologies, with particular focus on ensuring the effectiveness of AML/CFT supervision to address the rising number of fintech entities and increased complexity of their operations. *Source: Annex III. Fintech in Lithuania (IMF).* ### 17. The authorities are taking actions to strengthen the AML/CFT framework to mitigate ### 17. The authorities are taking actions to strengthen the AML/CFT framework to mitigate ### Evaluation findings and effectiveness ratings - Lithuania underwent a mutual evaluation by MONEYVAL in 2018, which assessed the level of effectiveness of most aspects of its AML/CFT regime as moderate (second lowest of the four effectiveness ratings). - The December 2018 5th round mutual evaluation was adopted with all moderate effectiveness ratings except one (substantial). - Earlier assessments: - MONEYVAL assessments in April 2012 and December 2018. - Lithuania was rated partially compliant on nineteen FATF Recommendations in the 2012 assessment, which led to the application of the first stage of the Compliance Enhancing Procedure (CEP). - MONEYVAL procedural history: - CEP ended at step 1 in April 2015 in recognition of progress. - At the 50th Plenary meeting in April 2016, the MONEYVAL Secretariat acknowledged progress but noted further progress needed with respect to R.5, R.13/SR.IV and SR.III; Lithuania remained subject to regular follow-up at that time. - At the MONEYVAL Plenary in September 2017, the Plenary agreed that Lithuania had taken sufficient steps to remedy deficiencies on key and core FATF recommendations and Lithuania was removed from the regular follow-up process. - MONEYVAL recommended that the BoL should: - enhance its existing risk-based approach to AML/CFT supervision, - further develop its ML/FT risk assessment, - intensify its use of sanctions for AML/CFT violations. - The December 2018 mutual evaluation included a set of recommendations to be addressed by the 2020 plenary session, including an update of the National Risk Assessment. ### Legislative and regulatory actions taken - Lithuania transposed the 4th Anti Money Laundering and Terrorist Financing Directive (4th AMLD). - The new AML/CFT law came into force on July 13, 2017. - Following changes in primary legislation, a number of secondary legal acts governing AML/CFT prevention were amended during 2017. - Key improvements introduced by legislation: - improves the identification process of beneficial owners, - broadens the definition of politically exposed persons, - strengthens the sanctions regime, - extends the scope of anti-money laundering legislation to providers of all gambling and lottery services, and to agents involved in the purchase or sale of real estate properties and crowdfunding platforms. - EU requirement: - EU Member States are obliged to create central registers containing information on the beneficial ownership of corporate and other legal entities, including trust structures; this is currently in the process in Lithuania. - Planned transposition: - Lithuania is expected to transpose the 5th AMLD by January 2020. - The 5th AMLD will, among other things: - make public the registers of beneficial owners of companies (and under some conditions trusts) operating within the EU, - improve interconnectedness of member countries’ national registers, - include virtual currencies and custodian wallet providers into the scope of the Directive. ### Institutional and implementation issues - In response to the 2012 CEP, authorities amended the Criminal Code and the AML/CFT Law and implemented secondary legislation and guidelines to: - extend the list of punishable activities, - criminalize financing of terrorism, - reorganize the suspicious transactions reporting system, - strengthen customer due diligence, - extend record keeping requirements. - Lithuania has submitted three compliance reports under the CEP procedure. - A recommendation from the December 2018 mutual evaluation was to update the National Risk Assessment (to be addressed by the 2020 plenary). ### Key dates and numeric items (preserved exactly) - December 2018: 5th round mutual evaluation adopted (all moderate effectiveness ratings except one substantial). - July 13, 2017: new AML/CFT law came into force. - April 2012 and December 2018: MONEYVAL assessments. - April 2015: MONEYVAL ended the CEP at step 1. - April 2016: 50th Plenary meeting noted further progress needed on R.5, R.13/SR.IV and SR.III. - September 2017: MONEYVAL Plenary removed Lithuania from regular follow-up process. - January 2020: expected transposition date for the 5th AMLD. - Nineteen FATF Recommendations: number of Recommendations on which Lithuania was rated partially compliant in 2012. *Source: Republic of Lithuania—Staff Report for the 2019 Article IV Consultation (Informational Annex), July 12, 2019.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1ltuea2019002.pdf_