## 1ltuea2021001 ## Source details **Canonical URL:** [1ltuea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1ltuea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1ltuea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1ltuea2021001.pdf.json) --- ### Recent developments and impact of COVID-19 - Growth and contraction: - Growth fell by 5.1 percentage points from 2019 to -0.8 percent in 2020. - Lithuania experienced the mildest contraction in Europe in 2020 among comparator countries. - Growth recovered strongly in the third quarter of 2020; momentum picked up in Q1 2021 despite renewed containment restrictions. - Sectoral and labor market effects: - Trade, transport and accommodation sectors—around one third of output and over one quarter of employment in 2019—were the hardest hit. - Hours worked absorbed most of the labor market shock; employment adjusted less due in part to government support and job support schemes. - Some service sectors with higher shares of teleworkable jobs expanded, including professional, science, and technology services. - Unemployment rate rose in 2020; wage growth accelerated driven by private sector wages and previously planned public sector wage increases. - The total population grew for the first time in 2020, led by non-Lithuanian migrants and net return of Lithuanian citizens. - Policy response: - For the first time during a large shock, Lithuania implemented countercyclical policies supported by large buffers and euro area membership. - Fiscal support relied largely on budget measures rather than off-budget or off-balance-sheet instruments. - The Bank of Lithuania proactively eased countercyclical capital requirements; the country benefited from accommodative ECB policies. ### Outlook, projections, and key macro indicators - Output and demand (annual percent changes / levels): - Real GDP growth (annual percentage change): -0.8 (2020); 4.4 (2021); 4.1 (2022); 3.1 (2023); 2.9 (2024); 2.6 (2025); 2.4 (2026) - Domestic demand growth (year-on-year, in percent): -5.2 (2020); 7.0 (2021); 6.8 (2022); 4.9 (2023); 4.0 (2024); 4.0 (2025); 3.7 (2026) - Private consumption growth (year-on-year, in percent): -2.0 (2020); 6.4 (2021); 5.9 (2022); 4.4 (2023); 3.6 (2024); 3.4 (2025); 3.4 (2026) - Domestic fixed investment growth (year-on-year, in percent): -0.2 (2020); 10.8 (2021); 10.6 (2022); 7.0 (2023); 5.8 (2024); 5.9 (2025); 5.0 (2026) - Inventories (contribution to growth): -3.8 (2020); 0.0 (2021–2026) - Net external demand (contribution to growth): 4.2 (2020); -2.0 (2021); -2.3 (2022); -1.6 (2023); -1.1 (2024); -1.4 (2025); -1.3 (2026) - Nominal GDP (in billions of euro): 48.9 (2020); 52.4 (2021); 56.0 (2022); 59.2 (2023); 62.3 (2024); 65.3 (2025); 68.2 (2026) - Output gap (percent of potential GDP): -0.9 (2020); 0.3 (2021); 0.9 (2022); 0.6 (2023); 0.4 (2024); 0.2 (2025); 0.0 (2026) - Employment and labor: - Unemployment rate (year average, in percent of labor force): 8.5 (2020); 6.7 (2021); 6.1 (2022); 6.0 (2023); 5.9 (2024); 5.8 (2025); 5.7 (2026) - Average monthly gross earnings (annual percentage change): 10.1 (2020); 7.4 (2021); 6.9 (2022); 6.2 (2023); 5.7 (2024); 5.5 (2025); 5.2 (2026) - Labor productivity (annual percentage change): 0.6 (2020); 2.7 (2021); 3.8 (2022); 3.1 (2023); 3.0 (2024); 2.8 (2025); 2.6 (2026) - Prices: - HICP, period average (annual percentage change): 1.1 (2020); 3.2 (2021); 2.8 (2022); 2.7 (2023); 2.5 (2024); 2.3 (2025); 2.2 (2026) - HICP, end of period (year-on-year percentage change): -0.1 (2020); 3.4 (2021); 2.8 (2022); 2.6 (2023); 2.5 (2024); 2.3 (2025); 2.2 (2026) - GDP deflator (year-on-year percentage change): 1.1 (2020); 2.6 (2021); 2.7 (2022); 2.6 (2023); 2.2 (2024); 2.1 (2025); 2.1 (2026) - General government finances: - Fiscal balance (percent of GDP): -7.4 (2020); -5.5 (2021); -2.9 (2022); -1.5 (2023); -1.1 (2024); -0.5 (2025); -0.4 (2026) - Revenue (percent of GDP): 36.0 (2020); 36.7 (2021); 37.0 (2022); 36.6 (2023); 35.7 (2024); 36.0 (2025); 35.5 (2026) - Of which EU grants: 0.8 (2020); 1.4 (2021); 1.6 (2022); 1.2 (2023); 0.6 (2024); 0.9 (2025); 0.7 (2026) - Expenditure (percent of GDP): 43.4 (2020); 42.2 (2021); 39.9 (2022); 38.2 (2023); 36.8 (2024); 36.5 (2025); 36.0 (2026) - General government gross debt (percent of GDP): 47.1 (2020); 47.8 (2021); 45.9 (2022); 44.3 (2023); 42.5 (2024); 40.5 (2025); 38.6 (2026) - Balance of payments: - Current account balance (percent of GDP): 8.3 (2020); 6.7 (2021); 4.8 (2022); 3.4 (2023); 2.2 (2024); 1.0 (2025); -0.3 (2026) - Current account balance (billions of euros): 4.1 (2020); 3.5 (2021); 2.7 (2022); 2.0 (2023); 1.4 (2024); 0.6 (2025); -0.2 (2026) ### External position, trade performance, and RRF - External position: - The current account strengthened by 5 percent of GDP in 2020, driven by a sharp decline in fuel-related imports and in investment despite buoyant national savings reflecting temporary factors. - Staff notes the current account improvement reflects largely temporary factors rather than a long-term misalignment. - Trade strengths: - Exports resilient due to modest reliance on tourism; strong agricultural and pandemic-related pharmaceutical exports; freight on road transport exports increased by ¼ percent of GDP to 8.5 percent of GDP. - Exports of financial and IT services increased, fostered by the growth of Fintech in the wake of Brexit. - Recovery and Resilience Facility: - Lithuania is set to receive 2.2 billion euros (4.5 percent of 2020 GDP) over 2021–26 from the RRF. - RRF allocation (Millions euros / Percent of total): Green Transformation: 823.1 — 37%; Digitalization: 448.3 — 20%; Education and Lifelong Learning: 311.5 — 14%; Health Care System: 268.0 — 12%; Higher Education and Innovation: 200.2 — 9%; Social Protection and Employment: 109.2 — 5%; Public Sector Restructuring: 64.4 — 3%; Total: 2,224.7 ### Financial system, macroprudential easing, and moratoria - Macroprudential and ECB measures: - Countercyclical capital buffer (CCyB) lowered from 1% to 0%, to remain at 0% until at least April 1, 2022. - Bank of Lithuania temporarily released the P2G requirement and provided flexibility in LCR requirement and combined buffer (CCB + O-SII). - LTRO and TLTRO III conditions temporarily eased; PSPP expanded under ECB easing. - Private debt moratoria and restructurings: - EBA-compliant debt moratoria applied April 20–Sep 30, 2020; renewed Jan 19–Mar 30, 2021. - Corporate borrowers: postpone repayments up to 6 months; Individuals: postpone leasing and consumer credits up to 6 months and mortgages up to 12 months. - Loans under moratoria: around 2.2 percent of household and 3.1 percent of NFC loan portfolios. - 0.4 percent of households and 3.8 percent of NFC loans have been restructured due to the pandemic following standard processes. - Banking sector liquidity and balance-sheet effects: - Banking sector liquidity-coverage-ratio increased by about 300 percent from already high levels in 2019. - Loan-to-deposit ratio reached an all-time low. - Households and NFC deposits surged by nearly 15 percent of GDP. - Household net worth increased by 26 percent of GDP in 2020; corporates reduced leverage and improved liquidity. - Fintech and AML/CFT: - Over 230 Fintech companies as of end-2020. - Authorities strengthened AML/CFT framework; established Centre of Excellence in Anti-Money Laundering. - Five-year inter-agency fintech plan under development. ### Fiscal outlook, debt dynamics, and timing of withdrawal - Fiscal stance and projections: - 2020 fiscal response timely and largely targeted; wage subsidies reached over 15 percent of the working age population in 2020. - Text Table 5 (Key Discretionary Fiscal Support Measures, percent of 2020 GDP): Spending Measures total: 3.6 (2020 implemented) and 4.6 (2021 planned); Jobs and Income support: 3.0 / 3.2; Business liquidity support: 0.3 / 0.4; Health measures: 0.3 / 1.0; Revenue Measures: 2.2 / 0.2; Off-budget Liquidity Support: 0.6 / 1.4. - Debt projected to increase from about 36 percent of GDP in 2019 to nearly 48 percent of GDP in 2021 before declining over the medium-term absent additional policies. - Model-based assessment of withdrawal: - Fournier’s buffer-stock model suggests the envisaged pace of stimulus withdrawal under the baseline is broadly adequate: slightly faster withdrawal in 2021 and more gradual pace in 2022–23 would reduce fiscal cliff risk. - Withdrawal pace should depend on strength of recovery; as slack declines, rebuilding buffers should accelerate. ### Risks, policy recommendations, and priorities - Key risks: - External: unexpected shifts in COVID-19 pandemic; sharp rise in global risk premia. - Regional: EU mobility package market restructuring (impact on road freight/export services and operator costs). - Domestic: significantly stronger-than-expected recovery (risk of imbalances); risks to competitiveness if wage growth exceeds productivity growth; failure to implement structural reforms (middle-income trap). - Recommended policy responses (selected): - Maintain targeted policy support in the short term and proactively manage risks by maintaining countercyclical fiscal and macroprudential policies as recovery strengthens. - Support pockets of vulnerability with highly targeted measures while facilitating a market-led reallocation of resources. - Push strongly on implementation of key structural reforms, including in education and healthcare; utilize EU funds efficiently to enhance private sector productivity. - Develop a credible medium-term fiscal plan that reflects the authorities’ reform agenda to reduce social disparities and rebuild buffers. - Continue proactive financial policies; consider reactivating CCyB or targeted macroprudential tools if signs of elevated risks emerge, particularly in residential real estate. - Strengthen supervisory capacity and the AML/CFT framework given a maturing Fintech sector. ### Structural, social, and climate priorities - Structural challenges and reform priorities: - Education: spending on primary and secondary education is the second lowest among OECD countries; PISA scores among bottom 25 percent of EU countries; tertiary outcomes lag and skills mismatch is high. - Health: out-of-pocket spending 15 percentage points higher than peers; lowest life expectancy in the EU; scope to improve outcomes within same spending envelope by focusing on primary care and mental health. - Pensions and social spending: keeping replacement ratio constant at 35 percent will cost an additional 7.5 percent of GDP between 2020 and 2025; raising replacement ratio to 40 percent would require about 2 percent of GDP per year. - Climate and energy: - Draft Recovery and Resilience Plan aligned with EU goals; implementation will be challenging. - Road transport is the leading driver of emissions; no carbon pricing in non-ETS sectors envisaged until fuel-related tax exemptions phased out. - Energy affordability: household electricity prices among the lowest in the EU, but high share of households unable to keep homes warm. - Use of RRF/NGEU: - RRF funds should be used to drive public investments that support private sector productivity and to provide impetus for politically difficult structural reforms. *Source: REPUBLIC OF LITHUANIA — STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION (INTERNATIONAL MONETARY FUND).* ### 0.8 percent in 2020 compared to an average decline of 6.7 percent in the euro area. Growth ### 1ltuea2021001 - 0.8 percent in 2020 compared to an average decline of 6.7 percent in the euro area. Growth ### Recent developments and impact of COVID-19 - Growth and contraction - Growth fell by 5.1 percentage points from 2019 to -0.8 percent in 2020. - Lithuania experienced the mildest contraction in Europe in 2020 among comparator countries. - Growth recovered strongly in the third quarter of 2020 as containment measures eased; momentum picked up in Q1 2021 despite renewed containment restrictions. - Sectoral and labor market effects - Trade, transport and accommodation sectors—around one third of output and over one quarter of employment in 2019—were the hardest hit. - Hours worked absorbed most of the labor market shock; employment adjusted less due in part to government support and job support schemes. - Some service sectors with higher shares of teleworkable jobs expanded, including professional, science, and technology services. - Unemployment rate rose in 2020 (see Key statistics), but wage growth accelerated driven by private sector wages and previously planned public sector wage increases. - The total population grew for the first time in 2020, led by non-Lithuanian migrants and net return of Lithuanian citizens. - Policy response - For the first time during a large shock, Lithuania implemented countercyclical policies supported by large buffers and euro area membership. - Fiscal support relied largely on budget measures rather than off-budget or off-balance-sheet instruments. - The Bank of Lithuania proactively eased countercyclical capital requirements; the country benefited from accommodative ECB policies. ### Outlook, projections, and macro indicators (selected) - Output and demand (annual percent changes / levels) - Real GDP growth (annual percentage change): -0.8 (2020); 4.4 (2021); 4.1 (2022); 3.1 (2023); 2.9 (2024); 2.6 (2025); 2.4 (2026) - Domestic demand growth (year-on-year, in percent): -5.2 (2020); 7.0 (2021); 6.8 (2022); 4.9 (2023); 4.0 (2024); 4.0 (2025); 3.7 (2026) - Private consumption growth (year-on-year, in percent): -2.0 (2020); 6.4 (2021); 5.9 (2022); 4.4 (2023); 3.6 (2024); 3.4 (2025); 3.4 (2026) - Domestic fixed investment growth (year-on-year, in percent): -0.2 (2020); 10.8 (2021); 10.6 (2022); 7.0 (2023); 5.8 (2024); 5.9 (2025); 5.0 (2026) - Inventories (contribution to growth): -3.8 (2020); 0.0 (2021–2026) - Net external demand (contribution to growth): 4.2 (2020); -2.0 (2021); -2.3 (2022); -1.6 (2023); -1.1 (2024); -1.4 (2025); -1.3 (2026) - Nominal GDP (in billions of euro): 48.9 (2020); 52.4 (2021); 56.0 (2022); 59.2 (2023); 62.3 (2024); 65.3 (2025); 68.2 (2026) - Output gap (percent of potential GDP): -0.9 (2020); 0.3 (2021); 0.9 (2022); 0.6 (2023); 0.4 (2024); 0.2 (2025); 0.0 (2026) - Employment and labor - Unemployment rate (year average, in percent of labor force): 8.5 (2020); 6.7 (2021); 6.1 (2022); 6.0 (2023); 5.9 (2024); 5.8 (2025); 5.7 (2026) - Average monthly gross earnings (annual percentage change): 10.1 (2020); 7.4 (2021); 6.9 (2022); 6.2 (2023); 5.7 (2024); 5.5 (2025); 5.2 (2026) - Average monthly gross earnings, real (CPI-deflated, annual percentage change): 9.0 (2020); 4.0 (2021); 4.1 (2022); 3.5 (2023); 3.2 (2024); 3.2 (2025); 3.0 (2026) - Labor productivity (annual percentage change): 0.6 (2020); 2.7 (2021); 3.8 (2022); 3.1 (2023); 3.0 (2024); 2.8 (2025); 2.6 (2026) - Prices - HICP, period average (annual percentage change): 1.1 (2020); 3.2 (2021); 2.8 (2022); 2.7 (2023); 2.5 (2024); 2.3 (2025); 2.2 (2026) - HICP core, period average (annual percentage change): 2.6 (2020); 2.8 (2021); 3.0 (2022); 2.6 (2023); 2.4 (2024); 2.3 (2025); 2.2 (2026) - HICP, end of period (year-on-year percentage change): -0.1 (2020); 3.4 (2021); 2.8 (2022); 2.6 (2023); 2.5 (2024); 2.3 (2025); 2.2 (2026) - GDP deflator (year-on-year percentage change): 1.1 (2020); 2.6 (2021); 2.7 (2022); 2.6 (2023); 2.2 (2024); 2.1 (2025); 2.1 (2026) - General government finances - Fiscal balance (percent of GDP): -7.4 (2020); -5.5 (2021); -2.9 (2022); -1.5 (2023); -1.1 (2024); -0.5 (2025); -0.4 (2026) - Fiscal balance excl. one-offs (percent of GDP): -7.4 (2020); -5.5 (2021); -2.9 (2022); -1.5 (2023); -1.1 (2024); -0.5 (2025); -0.4 (2026) - Structural fiscal balance (percent of potential GDP) 1/: -6.3 (2020); -5.0 (2021); -2.8 (2022); -1.4 (2023); -0.9 (2024); -0.4 (2025); -0.3 (2026) - Revenue (percent of GDP): 36.0 (2020); 36.7 (2021); 37.0 (2022); 36.6 (2023); 35.7 (2024); 36.0 (2025); 35.5 (2026) - Of which EU grants: 0.8 (2020); 1.4 (2021); 1.6 (2022); 1.2 (2023); 0.6 (2024); 0.9 (2025); 0.7 (2026) - Expenditure (percent of GDP): 43.4 (2020); 42.2 (2021); 39.9 (2022); 38.2 (2023); 36.8 (2024); 36.5 (2025); 36.0 (2026) - Of which: Non-interest: 42.7 (2020); 41.6 (2021); 39.3 (2022); 37.6 (2023); 36.2 (2024); 36.0 (2025); 35.5 (2026) - Interest: 0.7 (2020); 0.7 (2021); 0.6 (2022); 0.6 (2023); 0.5 (2024); 0.5 (2025); 0.5 (2026) - General government gross debt (percent of GDP): 47.1 (2020); 47.8 (2021); 45.9 (2022); 44.3 (2023); 42.5 (2024); 40.5 (2025); 38.6 (2026) - Of which: Foreign currency-denominated: 6.6 (2020); 3.4 (2021); 1.6 (2022); 0.8 (2023); 0.4 (2024); 0.2 (2025); 0.1 (2026) - Balance of payments - Current account balance (percent of GDP): 8.3 (2020); 6.7 (2021); 4.8 (2022); 3.4 (2023); 2.2 (2024); 1.0 (2025); -0.3 (2026) - Current account balance (billions of euros): 4.1 (2020); 3.5 (2021); 2.7 (2022); 2.0 (2023); 1.4 (2024); 0.6 (2025); -0.2 (2026) Note: Data are presented on ESA2010, and BPM6 manuals basis. 1/ Calculation takes into account standard cyclical adjustments as well as absorption gap. ### Key policy recommendations and priorities - Support the recovery and preserve macroeconomic and financial stability - Maintain targeted policy support in the short term and proactively manage risks by maintaining countercyclical fiscal and macroprudential policies as the recovery strengthens. - Ensure policies remain countercyclical, particularly if growth exceeds expectations, within the existing policy framework. - Target pockets of medium-term vulnerability - Support pockets of vulnerability with highly targeted measures while facilitating a market-led reallocation of resources. - Implement structural reforms to support productivity growth - Push strongly on implementation of key structural reforms, including in education and healthcare. - Utilize EU funds efficiently to enhance private sector productivity. - Reduce social disparities while raising potential output - Develop a credible medium-term fiscal plan that reflects the authorities’ reform agenda to reduce social disparities, meet social demands, and improve outcomes. - Financial sector vigilance - Continue proactive financial policies that balance supporting the recovery with safeguarding financial system resilience. - Consider further macroprudential actions if signs of elevated risks emerge, particularly in the residential real estate sector. - Strengthen supervisory capacity and the AML/CFT framework in light of a maturing Fintech sector. ### Contextual conclusions - Lithuania entered the COVID-19 crisis with ample buffers, stronger non-financial corporate and household balance sheets, a well-capitalized banking system, and significant fiscal space. - Euro area membership provided lower borrowing costs and access to ECB facilities during the pandemic. - The mild 2020 contraction and decisive policy response create an opportunity to advance politically difficult but necessary structural reforms to sustain productivity, support high wage growth, address demographic strains, and continue convergence with euro area income levels. *Source: REPUBLIC OF LITHUANIA — STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION (INTERNATIONAL MONETARY FUND).* ### 7. The external position was significantly stronger than fundamentals in 2020. The current ### 1ltuea2021001 - 7. The external position was significantly stronger than fundamentals in 2020. The current ### External position and trade performance - The current account strengthened by 5 percent of GDP in 2020, driven by a sharp decline in fuel-related imports and in investment despite buoyant national savings reflecting temporary factors. - Exports proved resilient to the pandemic due to: - modest reliance on tourism; - strong agricultural and pandemic-related pharmaceutical exports; - freight on road transport exports increasing by ¼ percent of GDP to 8.5 percent of GDP. - Exports of financial and IT services increased, fostered by the growth of Fintech in the wake of Brexit. - Staff notes the current account improvement reflects largely temporary factors rather than a long-term misalignment. ### Box 1 — Lithuania: Mobility Package - The European Commission adopted Mobility Package I end-May 2017; strengthened rules on driving times, breaks, and rest periods were approved mid-2020. - Two additional requirements adopted (not part of original Commission proposal): - compulsory return of vehicles to the companies’ country of incorporation every eight weeks; - application of cabotage quotas on international combined transport operations. - These requirements are set to become effective by February 2022. - EC impact assessment (mid-February) suggests: - return obligation could potentially increase international EU road freight emissions by up to 2.9 million tons in 2023; - cabotage quotas could lead to an additional 0.4 million tons. - Lithuania and other countries challenged the rules in the EU Court of Justice. - Road freight export services amounted to about €3.9 bn in 2020. - Staff estimate: the increase in costs due to additional journeys will be about 2¼ percent for Lithuanian operators once measures are implemented. ### Financial system and real estate - The financial system remains profitable, well capitalized and liquid. - Banking sector features: - capital adequacy ratios well above the required minimum and ample buffers; - profitability and net interest income have declined compared to pre-pandemic levels but remain above peers in the euro area; - competition improved as the third largest bank completed restructuring; - Fintech competition rising, particularly on payments; two more specialized bank licenses granted since 2020. - AML/CFT framework has been strengthened to minimize risks. - Asset quality: - NPLs to the non-financial corporate (NFC) sector increased slightly but stayed below 2018 levels; - NPLs to households continued to decline. - Housing market developments positive since the second half of 2020, with house prices estimated to be in line with fundamentals. ### Government priorities and Recovery and Resilience Facility (RRF) - Government seven priority areas: education, healthcare, public sector reforms, innovation and science, social security, digitalization, and climate. - Lithuania is set to receive 2.2 billion euros (4.5 percent of 2020 GDP) over 2021–26 from the RRF. - Text Table 2 — Recovery and Resilience Funds 2021–2026 (Millions euros / Percent of total) - Green Transformation: 823.1 — 37% - Digitalization: 448.3 — 20% - Education and Lifelong Learning: 311.5 — 14% - Health Care System: 268.0 — 12% - Higher Education and Innovation: 200.2 — 9% - Social Protection and Employment: 109.2 — 5% - Public Sector Restructuring: 64.4 — 3% - Total: 2,224.7 ### Outlook and risks — short-term uncertainty and lack of structural reforms - Output projections and drivers: - Output expected to exceed pre-pandemic levels in 2021 and surpass pre-pandemic trend in 2022; - Domestic demand expected to drive recovery (pent-up demand, large build-up in deposits, and RRF funds); - Rebound in imports will result in a negative contribution to growth from net exports. - Demographics and potential output: - Recent positive migration trends expected to partially continue as overall wage growth remains high; - Modest improvement in demographics and RRF-supported investment to help push actual and potential output above pre-pandemic trends over the medium-term. - Risks assessment: - Limited or no scarring from the pandemic per staff assessment; - Upside: rapid draw-down in deposits could spur rapid growth; stronger external demand could raise inflation and weaken the current account; - Downside: asynchronous recoveries among trading partners, geopolitical tensions, disruptions in vaccination programs, and delays in RRF absorption could weigh on growth. - Text Table 3 — Macroeconomic Outlook (Projections begin in 2021; Source: IMF staff calculations) - 2020 / 2021 / 2022 / 2023 - GDP growth: -0.8 / 4.4 / 4.1 / 3.1 - Domestic demand: -5.0 / 6.4 / 6.4 / 4.7 - External demand: 4.2 / -2.0 / -2.3 / -1.6 - Percent of 2019 GDP: 99.1 / 103.5 / 107.7 / 111.1 - Inflation: 1.1 / 3.2 / 2.8 / 2.7 ### Risk Assessment Matrix — selected risks and recommended policy responses - External risks (medium likelihood, short-term) — Unexpected shifts in COVID-19 pandemic: - Impact: prolonged decline in consumption and firm revenues; possible increases in structural unemployment. - Policy response: continue fiscal and financial support until recovery is entrenched and virus risks are controlled; leverage EU funds. - External risks (medium, short-term) — Sharp rise in global risk premia: - Impact: financing difficulties for leveraged firms and households; potential wave of bankruptcies. - Policy response: maintain prudent lending standards and proactive macroprudential policy; establish credible medium-term fiscal strategy including plans for risk scenarios. - Regional risk (medium, short- to medium-term) — EU mobility package market restructuring: - Impact: freight cross-trade and cabotage operations decline significantly; tax revenue effects. - Policy response: strengthen safety nets and active labor market policies; gradually tighten fiscal policy to regain fiscal space. - Domestic risks: - High/Medium (short-term) — Significantly stronger than expected recovery: - Impact: GDP exceeding pre-pandemic trends sooner; potential re-emergence of imbalances. - Policy response: maintain decisively counter-cyclical policy stance; gradually tighten fiscal and financial policies while keeping highly targeted support to vulnerable pockets. - Low (medium-term) — Risks to competitiveness if wage growth exceeds productivity growth: - Policy response: re-double structural reform efforts; avoid large minimum wage increases; minimize public-private wage gap; reduce skills mismatch. - High (medium-term) — Failure to implement structural reforms: - Impact: vulnerability to a middle-income trap; continued social demands without commensurate growth and revenue. - Policy response: implement critical structural reforms and a comprehensive medium-term fiscal plan to raise potential and meet social spending needs. ### Policy discussions — safeguard stability and implement structural reforms - Policy objective: support recovery until firmly entrenched within a strong and credible policy framework; rebuild buffers; support potential growth; target pockets of vulnerability. - A decisive implementation of critical structural reforms is necessary to achieve sustained productivity gains and support high wage growth; failure risks jeopardizing competitiveness gains and convergence. - Monetary and macro framework: - ECB monetary stance supportive but expected to be looser than warranted for Lithuania alone going forward; - In absence of independent monetary policy, fiscal and macroprudential levers should be used proactively to preserve stability. - Fiscal policy and response to the pandemic: - 2020 fiscal response: timely, appropriate, and largely targeted; measures included wage subsidies, benefits for self-employed, job search allowances, deferral of social security contributions, business liquidity support (tax deferrals, grants, subsidized direct loans, guarantees). - Wage subsidies reached over 15 percent of the working age population in 2020. - 2021 budget: modestly tighter stance but allows continued fiscal support with many discretionary measures set to expire as recovery takes hold. - Fiscal trajectory and medium-term strategy: - Debt projected to increase from about 36 percent of GDP in 2019 to nearly 48 percent of GDP in 2021 before declining over the medium-term without additional policies, underpinned by low interest rates and stable growth. - Fiscal space remains substantial given low borrowing costs, moderate debt levels and enhanced market access. - Recommendation: develop a comprehensive medium-term fiscal strategy addressing government priorities, setting an adequate fiscal path, and rebuilding buffers while adhering to national and EU fiscal rules. - Text Table 5 — Key Discretionary Fiscal Support Measures (Percent of 2020 GDP) — selected items (implemented and planned) - Spending Measures total: 3.6 (2020 implemented) and 4.6 (2021 planned) - Jobs and Income support: 3.0 / 3.2 (implemented/planned) - Wage subsidies: 1.7 / 0.5 - Child, sickness and other benefits: 0.4 / 0.2 - One-off transfers to pensioners: 0.4 - Self-employment benefits: 0.3 / 0.2 - Job search allowance: 0.3 / 0.1 - Business liquidity support: 0.3 / 0.4 (implemented/planned) - Interest compensation: 0.05 - Lease fee compensation: 0.1 - Micro-firm grants: 0.2 - Health measures: 0.3 / 1.0 - Revenue Measures: 2.2 / 0.2 - Tax deferrals (VAT, PIT, CIT): 1.9 / 0.2 - Tax arrears: 1.6 / 0.2 - Tax loans: 0.3 - Social contribution deferrals: 0.3 - - Off-budget Liquidity Support: 0.6 / 1.4 - Lending (on balance sheet): 0.5 / 0.5 - Loans to affected businesses: 0.4 - Guarantees (off balance sheet): Portfolio COVID 0.2 / Pre-existing schemes 0.3 - Note: *Includes 581 million euros in spending measures set to be approved after June 1. - Note: **Limits on all new and pre-existing guarantee schemes increased to 1 billion euros for 2020. *Source: REPUBLIC OF LITHUANIA, INTERNATIONAL MONETARY FUND (1ltuea2021001).* ### 18. Financial, macroprudential and ECB monetary easing have appropriately supported ### 18. Financial, macroprudential and ECB monetary easing have appropriately supported ### Financial and macroprudential easing - The countercyclical capital buffer (CCyB) requirement was lowered from 1% to 0%, and will remain at 0% until at least April 1, 2022. - Following ECB recommendations, the Bank of Lithuania (BoL) temporarily released the P2G requirement and provided flexibility in LCR requirement, the combined buffer (CCB + O-SII), as well as NPL strategies. - Temporarily eased conditions for LTRO and TLTRO III; expanded public sector purchasing program (PSPP) under ECB monetary easing. ### Private debt moratoria and loan restructurings - Private credit institutions applied EBA-compliant debt moratoria for loan principal payments from April 20 to Sep 30, 2020; moratorium renewed from January 19 to March 30, 2021. - Moratorium terms: - Corporate borrowers: postpone repayments up to 6 months. - Individuals: postpone leasing and consumer credits up to 6 months and mortgages up to 12 months. - Key statistics on moratoria and restructurings: - Loans under EBA-compliant moratoria accounted for around 2.2 percent of household and 3.1 percent of NFC loan portfolios. - More than 80 percent of these loans have exited the moratorium and were reclassified based on their underlying conditions. - 0.4 percent of households and 3.8 percent of NFC loans have been restructured due to the pandemic following loan-by-loan standard processes, including proper classification and provisioning. - Text Table 7 (selected figures): - Total Loans (2021 Q1): 11,424 - NFC total loans (implied): 7,544 - Loan classification shares shown (as presented): 23% 1% 52% 39% and 34% 3% 78% 15% (preserve original presentation) ### Banking sector resilience, liquidity, and loan dynamics - Loan-loss provisions increased significantly when the economic impact was expected to be much larger but have returned to more normal levels recently. - Banking sector liquidity-coverage-ratio has increased by about 300 percent from already high levels in 2019 to become the highest among euro area countries. - Banking sector loan-to-deposit ratio has reached an all-time low. - Households and NFC deposits surged by nearly 15 percent of GDP in large part due to ample liquidity support from the government. - Resulting behavior: - Lack of business opportunities led to a significant decrease in corporate borrowing. - As economic uncertainty dissipates and loan demand resumes, the banking sector has the liquidity and capital position to support a strong economic recovery, even if the recent surge in liquidity proves temporary. ### Policy assessment and recommendations for financial sector - Financial sector policies should balance short-term credit support with maintaining longer-term resilience given potential financial stability risks. - Given near-term uncertainty, standard risk-management and asset valuation processes should be followed rather than broad-based moratoria, except where restrictions persist. - Rebuild macroprudential buffers (targeted macroprudential tools or the CCyB) if signs of elevated risks in particular sectors start to emerge or upside macroeconomic risks materialize. - Authorities should take into account that the effectiveness of these tools could be limited given high liquidity and capital levels well above current requirements. - Continue monitoring potential risks: overheating in the housing market (particularly residential real estate), credit risk exposure to the most vulnerable borrowers, operational risks including cyber risks. ### Fintech sector developments and supervisory implications - The Fintech industry quickly regained momentum during the pandemic. - As of end-2020, there were over 230 companies covering digital banking, crypto currency, payment systems, etc. - Associated challenges: AML/CFT, cyber risks, and supervision capacity—especially with expansion of online banks with a non-resident business model. - Authorities’ actions and plans: - Proactively improving AML/CFT framework and established the Centre of Excellence in Anti-Money Laundering in collaboration with the private sector. - Successful issuance of the digital collector coin LBCOIN to strengthen regulator’s understanding. - Favor quality over quantity in licensing and will continue rigorous supervisory and enforcement approach. - A five-year inter-agency plan for the sector is currently being developed. ### Macroeconomic and distributional context; balance-sheet effects - Aggregate household and corporate liquidity and solvency have not deteriorated during the pandemic, in contrast to the GFC. - Household net worth increased by 26 percent of GDP in 2020. - Corporates reduced their leverage and improved liquidity and solvency compared to 2019. - Box 4: Fiscal policy support shifted losses from private to public sector balance sheets: - Corporates’ total net assets declined by 15 percent of GDP due to higher equity liabilities which reduced leverage. - Policy support to NFCs amounted to almost 4 percent of GDP. - Households and NFCs increased deposits by over 15 percent of GDP. - Non-equity flows had a positive impact on corporates’ net assets by over 5 percent of GDP. - Staff analysis: announced policy support resulted in better solvency and liquidity positions of corporates than would have occurred absent the pandemic. ### Structural risks, reform priorities, and use of RRF/NGEU funds - Risks and scarring: - Potential structural changes and pockets of vulnerability among firms in hard-hit sectors could produce long-term losses. - Sectoral shifts may require resource reallocation; improvements in insolvency regime and preserving labor market flexibility will facilitate market-driven transformation. - Authorities’ stance: - Need to maintain countercyclical policies; cautious withdrawal of support given heightened uncertainty. - Ministry of Finance’s fiscal path reflects a greater estimated output gap that will only close next year, resulting in larger fiscal support than staff projected. - Authorities recognize high medium-term spending pressures and the need to rebuild fiscal buffers; analyzing tax policy reforms. - BoL plans proactive macroprudential stance and may use targeted tools such as the sectoral systemic buffer to address sector-specific risks (lower social impact than adjusting borrower-based tools such as loan-to-value or debt-service-to-income ratios). - Broader tools such as systemic risks buffers or the CCyB could be employed for broader macroeconomic risks. - Role of RRF and Next Generation EU funds: - RRF plans can provide impetus for difficult structural reforms, particularly in education and healthcare, and drive public investments that support private sector productivity. - Public investment should strengthen physical infrastructure and support growth in high-productivity professional services and information communications sectors. ### Social spending, education, and health reform needs - Growing spending pressures to reduce high poverty rates and regional disparities have increased budget rigidities. - Replacement ratio declines will exert pressure on pensions, the most important redistributive tool. - Further increases in social spending will likely require more and better social programs and increased revenues given low discretionary spending. - Education and health outcomes are poor relative to peers: - Out-of-pocket spending in healthcare is 15 percentage points higher than peers, while Lithuania faces the lowest life expectancy in the EU. - Spending on primary and secondary education is the second lowest among OECD countries. - Lithuania is among the bottom 25 percent of EU countries in international PISA scores. - Tertiary education outcomes lag and many fields are not well aligned with labor market needs, contributing to the third highest level of skills mismatch in the labor market. - The 2019 reform package had measures to address these challenges, but implementation fell short due to lack of municipal buy-in. *Source: IMF staff report chapter on Lithuania financial and macroprudential response and policy assessment.* ### 33. The government’s climate and energy plans reflected in the draft Recovery and ### 33. The government’s climate and energy plans reflected in the draft Recovery and ### Climate and energy plans and implementation challenges - The government’s climate and energy plans reflected in the draft Recovery and Resilience Plan are in line with EU goals, but their implementation will be challenging. - Meeting national targets will require ambitious implementation plans that are currently being developed. - Since 2005, greenhouse gas emissions have grown in line with GDP growth. - Road transport is the leading driver of emissions and the dominant source of connectivity in the country. - No carbon pricing in this and other non-ETS (Emissions Trading System) sectors is envisaged until other fuel-related tax exemptions are gradually phased out. - Plans in this area will require consistency with other priorities, including reducing already high social disparities. ### Energy affordability and social disparities - Household electricity prices are among the lowest in the EU. - Lithuania has one of the highest shares of households unable to keep homes adequately warm, particularly among the elderly population. - The source includes a comparative chart titled "Share of Households Unable to Keep Home Adequately Warm (Percent of households)" that lists countries including Slovenia, Estonia, Czechia, Poland, Hungary, Croatia, EU, Slovakia, Latvia, Romania, Serbia, Montenegro, Turkey, Lithuania, Bulgaria, N. Macedonia, with series for "All households" and "Households with one adult 65 years or over." ### Structural reforms, fiscal space, and revenue policy - The authorities see the implementation of structural reforms as critical to increasing productivity growth and to creating the fiscal space needed to meet social demands. - Rising spending pressures over the medium-term—including from social benefits and pensions in the context of a rapidly aging population—will require higher revenues. - Authorities are reviewing their tax system to reduce loopholes and exemptions and improve its efficiency. - In the areas of climate and digitalization, authorities acknowledge plans to meet national and EU targets are ambitious and will require significant resources, but highlight that the long-term benefits far exceed these costs. - In the areas of education and health, authorities recognize political challenges but are hopeful that reforms will be possible over the next few years. - Authorities highlighted the benefit of RRF funds to help drive public investments that support private sector-led growth. ### Staff appraisal — macroeconomic policy and recovery management - Prudent pre-pandemic policies, a strong starting position and a decisive policy response have helped mitigate the economic impact of the pandemic. - The stage is set for a robust recovery that will allow policymakers to refocus their attention on long-standing social and economic challenges. - Lithuania should maintain the proactive policy framework that has served the country well in the past. ### Fiscal policy stance and sequencing - The pace of withdrawal of fiscal policy support should depend on the strength of the recovery already underway. - Fiscal support remains appropriate this year, but given better-than-expected economic developments, under staff’s baseline a large share of support measures embedded in this year’s budget may not be fully utilized. - As the recovery becomes firmly entrenched, buffers should be rebuilt to secure Lithuania’s capacity to respond to future shocks. - If growth is stronger than expected, buffers should be rebuilt at a faster pace. ### Targeting support and dealing with sectoral impacts - With minimal permanent economic losses expected, support should focus on specific pockets of vulnerability and facilitate a market-led reallocation of resources. - Some individual, viable firms in sectors hardest-hit by the pandemic may need continued support for longer; reaching them will require increasingly targeted measures. - The temporary reduction of VAT is poorly targeted and may complicate revenue collection efforts. ### Financial sector resilience and macroprudential policy - Financial sector policies should continue to support the recovery while maintaining the resilience of the system against potential risks. - The banking sector has ample liquidity and capital buffers to support a strong recovery. - Positive developments in the housing market so far are estimated to be in line with fundamentals. - If signs of elevated risks in particular sectors or overheating of the economy start to emerge, targeted macroprudential tools or reactivation of the CCyB will be necessary. ### External position - The external position was significantly stronger than implied by fundamentals in 2020. - As the current account balance is projected to decline towards its norm, there is no concern of long-term misalignment. ### Fintech sector and AML/CFT priorities - With a maturing Fintech sector, the focus continues to be on enhancing supervisory capacity and the AML/CFT framework. - As the sector becomes larger and increasingly sophisticated, the authorities need to address new challenges to realize its full potential and to reassure markets that risks remain contained. - Progress in this area will require close multi-agency coordination and more resources but will help cement Lithuania’s position as a European Fintech hub. ### Social spending, fiscal strategy, and reform opportunity - Given rising budget rigidities and age-related spending pressures, further increases in social spending cannot be financed without higher revenues. - Reducing social disparities and poverty will require larger and more effective social programs. - A comprehensive fiscal strategy that incorporates a combination of revenue and high-quality expenditure measures should complement structural reforms. - The combination of a strong recovery, new EU funds, and low funding costs provides a unique opportunity to galvanize consensus around politically difficult reforms. - Public investment should aim to strengthen physical and human capital and support social cohesion. - Realizing the full benefits of reforms will require progress in all main areas simultaneously given their complementarity, particularly education and healthcare. *Source: IMF staff report excerpts.* ### 43. The next Article IV Consultation is expected to be completed on the standard 12-month cycle. ### 1ltuea2021001 - 43. The next Article IV Consultation is expected to be completed on the standard 12-month cycle. ### Macroeconomic sector developments - The shock to growth from the pandemic was mild and the rebound was faster and stronger than peers. - Real GDP growth and components (year-on-year percent change): charted contributions from private consumption, government consumption, gross fixed capital formation, changes in inventory, net exports, and GDP. - Quarterly Real GDP (Index 2019Q4=100): Lithuania, Latvia, Estonia, Euro area series shown for 2019Q4–2021Q1. - Contributions to GDP growth by industry (year-on-year percent change): contact-intensive services, tradeable services, manufacturing & mining, other. ### Pandemic-related developments - Lithuania was hit hard in the second wave of the virus; containment measures were less stringent in mid-2020, facilitating a V-shaped recovery in mobility in 2020 that correlated with higher GDP growth. - Daily hospitalizations occupancy (patients per 1 million people): Lithuania compared with peers (series Feb-20 to May-21). - Cumulative deaths, as of June 10, 2021 (Per 100k people): Lithuania and peer comparisons. - Stringency index and mobility (percent change from baseline): series Feb-20 to May-21 for Lithuania, Latvia, Estonia, Italy. - Vaccinations, as of June 10, 2021 (Percent of total population): People with two shots, People with one shot, Total (LTU, LVA, EST, AE, EE, EU series). ### Labor market developments - The rise in unemployment was milder than the GFC. - Employment (annual percentage change) historical series: Total, Male, Female (2005–2020). - Unemployment rate (year average, in percent of labor force): 6.1 (2018), 6.3 (2019), 8.5 (2020), 6.7 (2021), 6.1 (2022), 6.0 (2023), 5.9 (2024), 5.8 (2025), 5.7 (2026). - Nominal wage growth (year-on-year percent change): Total, Private sector, Public sector series (2005–2021). - Labor force participation rate (Percent): Total, Male, Female (2005–2020). - Labor force size (Thousand) and numbers of unemployed/employed plotted 2004–2020. - Old Age Dependency Ratio: series (2006–2020). ### Banking sector developments - Credit to corporates has contracted significantly while household and corporate deposits surged. - Non-performing loans (Percent of total loans) series and noted as manageable. - Capital adequacy (Percent): Capital to risk-weighted assets series; banking sector capital described as adequate. - Credit stock (Year-on-year percent change): Credit to corporations and Credit to households series. - Corporations and Households Deposit Growth (Year-on-year percent change) series 2010–2020. - House Price-to-income Ratios (2012Q1=100): Lithuania, Latvia, Finland, Denmark, Sweden series. - Banking profitability has declined due to the pandemic but remains at a healthy level. ### Non-financial corporate and household financial balance sheets - NFCs built up cash and equity buffers in 2020, in stark contrast to borrowing during the GFC. - Households built up cash and deposits in 2020, also contrasting with the GFC. - Changes in net financial wealth driven by deposits and equity, which increased household net worth and reduced NFC leverage throughout 2020. ### Competitiveness developments - Wages have been growing faster than productivity, with unit labor costs rising. - Productivity and wages in manufacturing and services (Index 2000Q1=100) show manufacturing productivity remains above wages and has supported wage growth in services. - World export shares (Percent of world goods exports) show persistent increases in export shares for Lithuania, Estonia, Latvia. - Wage shares (Percent of gross value added) for Lithuania, Estonia, Latvia plotted 2000–2019. - Real wage, labor productivity, and real unit labor costs growth series and Real Unit Labor Costs Index (2010=100) for Lithuania, Latvia, Estonia, Germany. ### Fiscal developments and projections - The fiscal balance deteriorated in response to the crisis and public debt rose above 45 percent for the first time; debt is expected to decline with low interest expenses and without an increase in borrowing costs. - Public wage growth has begun to increase the wage bill; public wages are now over 10 percent higher than private sector wages. - 1-year and 10-year Spread over Germany (Percent) series. - Nominal wage growth vs. wage bill (Percent) series and Public-private sector wage gap (In percent and euros) series. - General Government Total Revenue and Expenditure (Percent of GDP) series and Overall Balance. - General Government Debt (Percent of GDP): series showing increase above 45 percent. - Debt and Interest Expenditure (Percent of GDP) projections 2008–2026. ### Key projections and indicators (selected from tables) - Real GDP growth (annual percentage change): 3.9 (2018), 4.3 (2019), -0.8 (2020), 4.4 (2021), 4.1 (2022), 3.1 (2023), 2.9 (2024), 2.6 (2025), 2.4 (2026). - Private consumption growth (year-on-year, in percent): 3.7 (2018), 3.4 (2019), -2.0 (2020), 6.4 (2021), 5.9 (2022), 4.4 (2023), 3.6 (2024), 3.4 (2025), 3.4 (2026). - Domestic fixed investment growth (year-on-year, in percent): 10.0 (2018), 6.2 (2019), -0.2 (2020), 10.8 (2021), 10.6 (2022), 7.0 (2023), 5.8 (2024), 5.9 (2025), 5.0 (2026). - Nominal GDP (in billions of euro): 45.5 (2018), 48.8 (2019), 48.9 (2020), 52.4 (2021), 56.0 (2022), 59.2 (2023), 62.3 (2024), 65.3 (2025), 68.2 (2026). - Output gap (percent of potential GDP): 0.4 (2018), 0.8 (2019), -0.9 (2020), 0.3 (2021), 0.9 (2022), 0.6 (2023), 0.4 (2024), 0.2 (2025), 0.0 (2026). - Unemployment rate (year average, percent): 6.1 (2018), 6.3 (2019), 8.5 (2020), 6.7 (2021), 6.1 (2022), 6.0 (2023), 5.9 (2024), 5.8 (2025), 5.7 (2026). - HICP, period average (annual percentage change): 2.5 (2018), 2.2 (2019), 1.1 (2020), 3.2 (2021), 2.8 (2022), 2.7 (2023), 2.5 (2024), 2.3 (2025), 2.2 (2026). - Fiscal balance (percent of GDP): 0.6 (2018), 0.5 (2019), -7.4 (2020), -5.5 (2021), -2.9 (2022), -1.5 (2023), -1.1 (2024), -0.5 (2025), -0.4 (2026). - General government gross debt (percent of GDP): 33.7 (2018), 35.9 (2019), 47.1 (2020), 47.7 (2021), 45.9 (2022), 44.3 (2023), 42.5 (2024), 40.5 (2025), 38.6 (2026). - Current account balance (billions of euros): 0.1 (2018), 1.6 (2019), 4.1 (2020), 3.5 (2021), 2.7 (2022), 2.0 (2023), 1.4 (2024), 0.6 (2025), -0.2 (2026). - Current account balance (percent of GDP): 0.3 (2018), 3.3 (2019), 8.3 (2020), 6.7 (2021), 4.7 (2022), 3.4 (2023), 2.2 (2024), 1.0 (2025), -0.3 (2026). ### Balance of payments and external sector (selected) - Merchandise trade balance (billions of euros): -2.8 (2018), -2.3 (2019), -0.3 (2020), -1.7 (2021), -2.6 (2022), -3.4 (2023), -4.1 (2024), -4.9 (2025), -5.8 (2026). - Exports (f.o.b., billions of euros): 24.6 (2018), 26.0 (2019), 25.5 (2020), 28.0 (2021), 29.4 (2022), 30.9 (2023), 32.4 (2024), 34.0 (2025), 35.6 (2026). - Imports (f.o.b., billions of euros): 27.3 (2018), 28.3 (2019), 25.8 (2020), 29.8 (2021), 32.1 (2022), 34.2 (2023), 36.5 (2024), 38.9 (2025), 41.3 (2026). - Gross external debt (percent of GDP): 78.1 (2018), 66.4 (2019), 66.9 (2020), 62.1 (2021), 57.6 (2022), 54.1 (2023), 50.9 (2024), 47.9 (2025), 45.2 (2026). - Net international investment position: -30.4 (2018), -24.1 (2019), -15.3 (2020), -4.0 (2021), 4.1 (2022), 10.5 (2023), 14.8 (2024), 18.2 (2025), 20.1 (2026). ### Monetary and financial indicators (selected) - Reserve money (billions of euros): 4.7 (2012), 4.9 (2013), 5.9 (2014), 9.1 (2015), 12.6 (2016), 15.7 (2017), 18.8 (2018), 20.1 (2019), 20.1 (2020). - Broad money (yearly percent change): 7.2 (2012), 4.4 (2013), 1.2 (2014), 32.9 (2015), 7.2 (2016), 5.8 (2017), 11.4 (2018), 7.3 (2019), 0.0 (2020). - Private sector credit (yearly percent change): -0.8 (2012), -2.3 (2013), -0.9 (2014), 4.1 (2015), 7.1 (2016), 4.5 (2017), 6.0 (2018), 2.7 (2019), 179.9 (2020) — as presented in the table. - Gross official reserves (billions of euros, BoP basis): 6.4 (2012), 6.0 (2013), 7.9 (2014), 2.9 (2015), 3.0 (2016), 4.2 (2017), 5.7 (2018), 5.1 (2019), 4.7 (2020). ### Financial soundness (banking system) highlights - Regulatory capital to risk-weighted assets: 15.7 (Dec-12), 17.6 (Dec-13), 21.3 (Dec-14), 24.9 (Dec-15), 19.4 (Dec-16), 19.1 (Dec-17), 18.6 (Dec-18), 23.7 (Dec-19), 23.1 (Jun-20). - Nonperforming loans to total (non-interbank) loans: 14.8 (Dec-12), 11.6 (Dec-13), 7.0 (Dec-14), 5.7 (Dec-15), 4.1 (Dec-16), 3.1 (Dec-17), 2.5 (Dec-18), 1.5 (Dec-19), 1.4 (Jun-20). - RoE (Return on Equity): 7.7 (Dec-12), 8.9 (Dec-13), 8.1 (Dec-14), 9.0 (Dec-15), 14.0 (Dec-16), 12.5 (Dec-17), 16.8 (Dec-18), 17.3 (Dec-19), 14.1 (Jun-20). - Loan to deposit ratio in the banking sector: 127.9 (Dec-12), 121.5 (Dec-13), 101.6 (Dec-14), 98.6 (Dec-15), 99.0 (Dec-16), 94.6 (Dec-17), 89.3 (Dec-18), 81.9 (Dec-19), 73.1 (Jun-20). *Source: Republic of Lithuania — International Monetary Fund staff report chapter and statistical tables (figures and tables as provided in the source content).* ### Annex I. Implementation of Past IMF Recommendations ### Annex I. Implementation of Past IMF Recommendations ### Fiscal Policy - Issue identified: Budget slippages due to procyclical stance and increasing budget rigidities and spending pressures; recommendation to closely monitor fiscal risks in a transparent and comprehensive framework that analyzes economic impacts and interactions. - Policy action: In November 2020, the Ministry of Finance published its first Fiscal Risks Report, in line with IMF technical assistance recommendations. ### Financial Sector Policy - Issue identified: AML/CFT—complement recommendations from the 2018 MONEYVAL report and strengthen inter-agency coordination with adequate resources for all agencies involved. - Policy action: The authorities approved the establishment of the Centre of Excellence in Anti-Money Laundering in collaboration with private sector. ### Structural Reforms — Education - Recommendation: Address overcapacities (reduce number of teachers and consolidate school and university infrastructure); review nexus between universities, financial incentives and quality standards; make planned wage increases conditional on progress in network optimization. - Policy action/status: Since approved reforms in 2018 in line with past recommendations, implementation has not meaningfully progressed yet planned wage increases have continued. COVID-19 has delayed reforms, but the government is preparing its plan to resume implementation efforts. ### Structural Reforms — Health - Recommendation: Reorganize and rationalize hospital sector, improve out-patient and long-term care, expand role of primary care; develop a copayments system to incentivize cost efficiency; strengthen accountability, particularly at municipal level; make planned wage increases conditional on network optimization. - Policy action/status: Authorities diverted more financial resources, including wage increases, to the health sector in response to COVID-19. Consultations with the European Commission on best practices in inter-hospital communication and coordination occurred in 2020. The government is preparing its plan to renew implementation efforts, including by introducing legal changes to allow for joint ownership of hospitals with municipalities. ### Tax Policy - Recommendation: Reduce social security contributions for low wage earners; rebalance tax system from labor taxes towards wealth and capital (e.g. environmental and property); continue tax administration reform; reduce tax exemptions and privileged regimes. - Policy action/status: Tax reform in 2019 slightly reduced labor tax wedge by raising PIT rates, lowering social contributions and increasing the non-taxable income threshold. The flat PIT was replaced by two brackets. The government is undergoing an evaluation of the tax system with specific proposals expected in the Fall. ### Social Assistance - Recommendation: Increase reliance on means-tested programs given limited resources; design to avoid welfare dependency and disincentives to work (e.g. in-work benefits). - Policy action/status: In response to COVID-19, large temporary increases in social assistance were provided in 2020 and into 2021, including both targeted and universal measures. ### Labor Market - Recommendation: Reduce reliance on employment subsidies and focus on most disadvantaged groups only; emphasize well-designed training curricula to upskill workforce; strengthen ALMPs, including life-long learning and apprenticeships, and increase its funding. - Policy action/status: In response to COVID-19, large temporary wage subsidies were provided to firms to support employment and incomes. The government plans to resume focus on pre-existing issues including skills gaps and ALMPs. ### Pensions - Recommendation: Link retirement age to life expectancy and tighten early retirement; raise gross pensions (to at least preserve replacement ratios); scale back incidence of disability pensions. - Policy action/status: One-off increases in pension benefits outside of the indexation formula were introduced. In response to COVID-19, temporary deferrals of social security contributions were introduced but did not affect the systems fiscal sustainability. ### Innovation - Recommendation: Consolidate a highly fragmented system and improve coordination. - Policy action/status: The government plans to advance its promotion of innovation in its new program. *Source: IMF staff* --- ### Annex II. External Sector Assessment ### Overall Assessment and Medium-Term Outlook - Overall Assessment: The external position of Lithuania in 2020 was substantially stronger than the level implied by fundamentals and desirable policies. - Projection: Over the medium term and under baseline policies, Lithuania’s current account balance is expected to decline towards the norm as investment returns to pre-pandemic levels, private sector savings decline, and global fiscal policies normalize. - Policy response: The envisaged increase in public investment should support a return to pre-pandemic domestic investment and a reduction in the fiscal policy gap relative to other countries. ### Foreign Assets and Liabilities: Position and Trajectory - Background facts: - Since 2015, the NIIP has strengthened by about 28 percent of GDP. - NIIP reached -15.6 of GDP in 2020 from -24.1 percent in 2019. - In 2020, gross assets increased to 98.7 percent of GPD, while liabilities reached 114.3 percent of GDP. - Gross external debt increased by about 6.5 percent of GDP. - Net debt declined by 11.1 percent of GDP to -1.9 percent of GDP, as deposits increased by almost 15 percent of GDP. - Assessment: The current NIIP and its projected path does not imply risks to external sustainability. ### Current Account - Background facts: - 2020 current account surplus reached 8.4 percent of GDP, up from 3.3 percent of GDP in 2019. - Oil-related balance deteriorated some 2.8 percent of GDP. - Net tourism declined by over 40 percent, accounting for 0.1 percent of GDP given its relatively small size. - Investment declined by 4.6 percent of GDP. - Gross capital formation was 12.8 percent of GDP in 2020, compared with a five-year average of 19.5 percent of GDP. - EBA-lite model estimates and assessments: - The EBA-lite CA model estimates the current account gap is 6.8 percent of GDP. - The cyclically adjusted CA was 8.6 percent in 2020. - CA norm envisages a surplus of 1.8 percent of GDP. - Policies account for about 4.3 percent of GDP, with main contributors being fiscal policy (supportive but modest relative to other countries) and relatively low health spending. ### Model Estimates for 2020 (percent of GDP) - CA-Actual: 8.4 - Cyclical contributions (from model) (-): -0.3 - COVID-19 adjustor (+) 1/: -1.1 - Natural disasters and conflicts (-): -0.1 - Adjusted CA: 7.7 - CA Norm (from model) 2/: 1.8 - Adjusted CA Norm: 1.8 - CA Gap: 5.9 (CA model) and 6.1 (REER model) - o/w Relative policy gap: 4.3 - Elasticity: -0.52 - REER Gap (in percent): -11.4 (CA model) and -11.7 (REER model) Notes: - 1/ Additional cyclical adjustment to account for the temporary impact of the pandemic on oil trade balances (-1.19 percent of GDP) and on tourism (0.06 percent of GDP). - 2/ Cyclically adjusted, including multilateral consistency adjustments. ### Real Exchange Rate - Background: Exchange rate appreciated about 2 percent in 2020, and about 4 percent during the last five years. As of May, exchange rate has appreciated by 2.3 percent relative to the 2020 average level. - Assessment: REER model estimates a REER gap of -11.7 percent, consistent with a CA gap of 6.1 percent. ### Capital and Financial Accounts: Flows and Policy Measures - Background facts (2020): - Outflows amounted to 16.3 percent of GDP. - Inflows reached 7.9 percent of GDP. - Outflow largely reflects acquisition of currency and deposits assets (14.7 percent of GDP), mainly by the Bank of Lithuania. - Direct and portfolio flows continued to show net inflows, albeit slightly more modest. - Assessment: While gross debt remains high, most of it is held by the public sector; risks are ameliorated by holding significant assets, including increased holdings of currency and deposits by the central bank. - Tabular flow highlights (2020 values where shown): - Net acquisition: 16.3 - Direct: 2.7 - Portfolio: 3.0 - Derivatives: -0.3 (or 0.00/0.0 in parts of table) - Other: 2.7 / 11.8 / 14.0 (table shows components) - o.w. currency and deposits: 14.7 / 15.5 - o.w. Bank of Lithuania: 11.7 / 12.2 - Reserves: -0.8 ### FX Intervention and Reserves Level - Background: The euro has the status of a global reserve currency. - Assessment: Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. --- ### Annex III. Public Sector Debt and External Sustainability Analysis ### Public Sector Debt—Baseline Scenario (Table 1 highlights) - Data reference date: As of June 14, 2021. - Nominal gross public debt (percent of GDP): - 2019: 38.6 - 2020: 35.9 - 2021: 47.1 - 2022: 47.8 - 2023: 45.9 - 2024: 44.3 - 2025: 42.5 - 2026: 40.5 - 203?: 38.6 (table continues to 49 in header—preserve only shown years) - Public gross financing needs (percent of GDP): - 2019: 7.3 - 2020: 5.8 - 2021: 12.6 - 2022: 9.9 - 2023: 7.1 - 2024: 5.3 - 2025: 4.3 - 2026: 4.5 - 20??: 3.4 / 5 (table shows continued values) - Real GDP growth (percent): - 2019: 3.5 - 2020: 4.3 - 2021: -0.9 - 2022: 4.4 - 2023: 4.1 - 2024: 3.1 - 2025: 2.9 - 2026: 2.6 - 2027: 2.4 - Inflation (GDP deflator, percent): - 2019: 2.5 - 2020: 2.8 - 2021: 1.1 - 2022: 2.6 - 2023: 2.7 - 2024: 2.6 - 2025: 2.2 - 2026: 2.1 - 2027: 2.1 - Nominal GDP growth (percent): - 2019: 6.0 - 2020: 7.3 - 2021: 0.2 - 2022: 7.1 - 2023: 6.9 - 2024: 5.8 - 2025: 5.1 - 2026: 4.8 - 2027: 4.5 - Effective interest rate (percent): - 2019: 4.4 - 2020: 2.8 - 2021: 1.9 - 2022: 0.8 - 2023: 0.7 - 2024: 0.7 - 2025: 0.6 - 2026: 0.6 - 2027: 0.7 - Sovereign spread (Y CDS (bp)): 59 - Ratings: - Moody's: A2 (Foreign), A2 (Local) - S&Ps: A+ (Foreign), A+ (Local) - Fitch: AA ### Contribution to Changes in Public Debt (selected projections) - Change in gross public sector debt: 0.6 (2019), 2.2 (2020), 11.2 (2021), 1.2 (2022), 0.7 (2023), -2.0 (2024), -1.6 (2025), -1.8 (2026), -2.1 (2027), -1.9 (later), cumulative -8.6. - Identified debt-creating flows: 1.4 (2019), -2.3 (2020), 6.6 (2021), 2.5 (2022), -0.1 (2023), -0.9 (2024), -1.0 (2025), -1.3 (2026), -1.1 (2027), cumulative -2.0. - Primary deficit (percent of GDP): 1.0 (2019), -1.1 (2020), 6.9 (2021), 5.3 (2022), 2.6 (2023), 1.3 (2024), 0.9 (2025), 0.4 (2026), 0.3 (2027), cumulative 10.8. - Automatic debt dynamics: 0.4 (2019), -1.2 (2020), -0.3 (2021), -2.8 (2022), -2.7 (2023), -2.2 (2024), -1.9 (2025), -1.7 (2026), -1.4 (2027), cumulative -12.8. - Interest rate/growth differential: -0.6 (2019), -1.4 (2020), 0.6 (2021), -2.8 (2022), -2.7 (2023), -2.2 (2024), -1.9 (2025), -1.7 (2026), -1.4 (2027), cumulative -12.8. - Of which: real interest rate: 0.6 (2019), -0.1 (2020), 0.3 (2021), -0.8 (2022), -0.9 (2023), -0.9 (2024), -0.7 (2025), -0.6 (2026), -0.5 (2027), cumulative -4.5. - Of which: real GDP growth: -1.2 (2019), -1.4 (2020), 0.3 (2021), -1.9 (2022), -1.8 (2023), -1.4 (2024), -1.2 (2025), -1.1 (2026), -0.9 (2027), cumulative -8.3. - Residual, including asset changes: -0.8 (2019), 4.5 (2020), 4.7 (2021), -1.8 (2022), -1.9 (2023), -0.7 (2024), -0.7 (2025), -0.7 (2026), -0.8 (2027), cumulative -6.6. ### Alternative Scenarios and Figures - Figures show baseline and alternative scenarios (Historical, Constant Primary Balance, Contingent Liability Shock) with underlying assumptions: - Baseline real GDP growth: 4.4 (2021), 4.1 (2022), 3.1 (2023), 2.9 (2024), 2.6 (2025), 2.4 (2026). - Baseline inflation: 2.6, 2.7, 2.6, 2.2, 2.1, 2.1 (2021–2026). - Baseline primary balance: -5.3 (2021), -2.6 (2022), -1.3 (2023), -0.9 (2024), -0.4 (2025), -0.3 (2026). - Constant Primary Balance scenario primary balance: -5.3 across 2021–2026. - Contingent Liability Shock primary balance: -5.3 (2021), -9.2 (2022), -1.3 (2023), -0.9 (2024), -0.4 (2025), -0.3 (2026). - Effective interest rate varies by scenario (e.g., Baseline 0.8, 0.7, 0.7, 0.6, 0.6, 0.7; Historical and other scenarios show higher spikes). --- ### Annex III (continued). External Debt Sustainability Framework (Table 2 highlights) ### Baseline External Debt Dynamics (selected figures, percent of GDP) - External debt (baseline): 2016: 81.1; 2017: 87.9; 2018: 75.3; 2019: 65.9; 2020: 71.3; 2021: 62.9; 2022: 58.0; 2023: 54.3; 2024: 51.0; 2025: 48.0; 2026: 45.3; debt-stabilizing non-interest current account: -0.6. - Change in external debt: 6.7 (2016), 6.8 (2017), -12.6 (2018), -9.4 (2019), 5.4 (2020), -8.5 (2021), -4.9 (2022), -3.7 (2023), -3.3 (2024), -3.0 (2025), -2.8 (2026). - Identified external debt-creating flows (4+8+9): -2.6 (2016), -11.9 (2017), -11.4 (2018), -8.7 (2019), -12.5 (2020), -12.0 (2021), -9.8 (2022), -7.8 (2023), -6.5 (2024), -4.9 (2025), -3.6 (2026). - Current account deficit, excluding interest payments: -4.3 (2016), -5.2 (2017), -4.2 (2018), -7.2 (2019), -11.5 (2020), -9.2 (2021), -7.6 (2022), -6.6 (2023), -5.9 (2024), -5.2 (2025), -4.3 (2026). - Exports (percent of GDP): 2016: 74.0; 2017: 75.0; 2018: 75.2; 2019: 77.4; 2020: 74.1; 2021: 77.6; 2022: 67.2; 2023: 75.6; 2024: 75.3; 2025: 75.3; 2026: 75.5. - Imports (percent of GDP): 2016: 72.7; 2017: 72.6; 2018: 73.4; 2019: 72.2; 2020: 64.4; 2021: 70.2; 2022: 70.7; 2023: 71.4; 2024: 72.3; 2025: 73.5; 2026: 74.7. - Net non-debt creating capital inflows (negative): -0.7 (2016), -3.3 (2017), -1.3 (2018), -4.1 (2019), -2.8 (2020), -2.6 (2021), -2.6 (2022), -2.7 (2023), -2.8 (2024), -2.7 (2025), -2.8 (2026). - Automatic debt dynamics contribution: 2.4 (2016), -3.4 (2017), -5.9 (2018), 2.6 (2019), 1.8 (2020), -0.2 (2021), 0.4 (2022), 1.4 (2023), 2.2 (2024), 3.0 (2025), 3.5 (2026). - External debt-to-exports ratio (percent): 109.6 (2016), 117.1 (2017), 100.1 (2018), 85.1 (2019), 96.3 (2020), 81.0 (2021), 76.1 (2022), 71.9 (2023), 67.7 (2024), 63.8 (2025), 60.0 (2026). - Gross external financing need (in billions of US dollars): 13.4 (2016), 18.9 (2017), 23.9 (2018), 23.2 (2019), 12.2 (2020), 13.0 (2021), 14.2 (2022), 14.5 (2023), 15.1 (2024), 16.5 (2025), 16.6 (2026). - in percent of GDP: 31.2 (2016), 39.6 (2017), 44.4 (2018), 42.5 (2019), 21.8 (2020), 21.8/20.4/19.4/19.0/19.7/18.9 (table shows series). ### Key Macroeconomic Assumptions Underlying Baseline (selected) - Real GDP growth (percent): 2.5 (2016), 4.3 (2017), 3.9 (2018), 4.3 (2019), -0.9 (2020), 3.3 (average), 1.8 (deviation), 4.4 (2021), 4.1 (2022), 3.1 (2023), 2.9 (2024), 2.6 (2025), 2.4 (2026). - GDP deflator in US dollars (change in percent): 1.3 (2016), 6.4 (2017), 8.3 (2018), -2.6 (2019), 3.1 (2020), 1.1 (average), 7.8 (deviation), 9.3 (2021), 5.1 (2022), 4.0 (2023), 3.1 (2024), 2.8 (2025), 2.5 (2026). - Nominal external interest rate (percent): 7.2 (2016), 6.3 (2017), 5.1 (2018), 5.2 (2019), 5.0 (2020), 8.1 (2021), 2.8 (2022), 4.0 (2023), 4.8 (2024), 5.8 (2025), 7.1 (2026), 8.7 (longer). - Growth of exports (US dollar terms, percent): 1.3 (2016), 12.6 (2017), 12.9 (2018), 4.6 (2019), -2.2 (2020), 6.3 (2021), 13.8 (2022), 19.6 (2023), 7.4 (2024), 6.3 (2025), 5.7 (2026), 5.5 (2027). - Growth of imports (US dollar terms, percent): -1.2 (2016), 10.7 (2017), 13.8 (2018), 0.1 (2019), -8.9 (2020), 4.6 (2021), 14.3 (2022), 24.3 (2023), 10.1 (2024), 8.2 (2025), 7.5 (2026), 7.1 (2027). --- ### Annex IV. Timing of Fiscal Stimulus Withdrawal ### Key Messages - Priority: Supporting the recovery remains the priority until growth is on firm grounds; in the medium term, support should be gradually withdrawn and made more targeted to start rebuilding fiscal buffers. - Tradeoff: The large fiscal response highlights the tradeoff between economic stability (short run) and debt sustainability/borrowing costs (medium term). Balancing these is challenging after a large shock like the COVID-19 pandemic. - Withdrawal pace: Significant support is envisaged for 2021 until recovery is on firm ground. Withdrawal of support is envisaged to accelerate in 2022 as measures are temporary in nature, with the fiscal balance moving back to pre-crisis levels in the medium term. ### Analytical Approach - Methodology: Used Fournier’s buffer-stock model calibrated to Lithuania’s economy to assess trade-offs. - Model specifics: Fournier’s (2019) model seeks to balance need to stabilize the economy through fiscal policy with increasing borrowing cost and market access risk. - Calibration choices: Model calibrated to reflect Lithuania’s characteristics and emerging market status, including: - larger shock size given larger volatility of the economy, - a lower threshold for the risk of losing market access, - a smaller hysteresis effect. *Source: IMF staff* ### 4. The model suggests that the envisaged pace of stimulus withdrawal under the baseline ### 4. The model suggests that the envisaged pace of stimulus withdrawal under the baseline ### Model assessment of the envisaged stimulus withdrawal - The model suggests that the envisaged pace of stimulus withdrawal under the baseline—based on the authorities plans and macroeconomic conditions—is broadly adequate. - The model indicates a somewhat smoother pace of adjustment than the authorities’ plans: - a slightly faster withdrawal in 2021 - a more gradual pace in 2022-23 - this smoother profile reduces the risk of a fiscal cliff - The authorities’ Stability Plan (published last March) is based on worse macroeconomic projections and a larger output gap and envisages a much slower adjustment and higher debt; the authorities are updating their fiscal and macroeconomic plans. - Reference to methodology: See Fournier, Jean Marc (2019), “A Buffer Stock Model for the Government: Balancing Stability and Sustainability”, IMF Working Paper 19/159. ### Counter-cyclical stance and sensitivity of results - The model highlights the importance of maintaining a counter-cyclical stance, particularly for small open economies with higher volatility like Lithuania. - Results are sensitive to assumptions about shock incidence and persistence: - Adding (subtracting) scaring to the model would result in a stronger need to protect the economy which would entail a more (less) gradual pace for stimulus withdrawal and a slower (faster) pace for rebuilding buffers. - If shocks become more recurrent and result in higher economic volatility, the model suggests a faster stimulus withdrawal to rebuild buffers for future shocks. - Constraints on discretionary countercyclical policy: - Scope for discretionary policy—on top of automatic stabilizers—is limited by the increasing cost of debt, including the possibility of losing market access. - When there is significant slack, the stabilization role of fiscal policy should have more prominence. - As slack declines and the economy overheats, the relevance of regaining fiscal space and building up buffers increases. ### Annex V — Non-financial Corporate (NFC) sector: pre-crisis position and resilience - NFC sector deleveraging and liquidity build-up: - After increasing by over 20 percentage points prior to the GFC, NFC leverage (debt in percent of equity liabilities) has consistently declined since then and remains one of the lowest in Europe. - Deleveraging driven by both a decline in debt and an increase in equity liabilities (shift toward equity as financing). - NFCs in Lithuania built liquidity buffers at a slightly faster rate compared to peers in other European countries. - Comparative resilience during COVID-19 vs GFC: - During the GFC NFCs raised leverage ratios; during COVID-19 NFCs continued to deleverage by reducing debt and increasing equity liabilities. - Lithuania experienced the largest decline in NFC leverage compared to other countries in the region. ### Simulated impact of COVID-19 on NFC balance sheets and employment - Simulated balance sheet stress (firm-level): - In the absence of government support programs, the COVID-19 shock would have led shares of illiquid and insolvent firms to increase by 3 and 2.4 percent, respectively, in Lithuania. - Comparable increases in other European countries would have been between 12 and 22 percent. - The simulation uses firm-level data from Statistics Lithuania; illiquidity defined as liquid assets insufficient to cover operational net cash outflows and debt repayments; insolvency defined as book value of debt exceeding value of assets (negative equity). - For the post-COVID liquidity scenario, “post COVID, w/ rollover,” both trade credit market and banks are assumed to rollover short-term debts; solvency position does not depend on rollover decisions. - Expected insolvency prevalence: - The number of insolvent firms is expected to remain large in 2021 at about 25.3 percent of the total number of firms. - Most of these firms already had negative equity before the pandemic and concentrate in micro- and small-sized companies in entertainment, hotels and restaurants, and other service industries. - These firms account for roughly 2 percent of total assets in the entire NFC sector. - Jobs-at-risk metric: - Staff calculation: COVID-19 shock could increase the share of jobs at illiquid NFCs from 5.8 percent to 9 percent. - Share of jobs at insolvent NFCs could increase from 10 percent to 12.4 percent. ### Sectoral heterogeneity and effects without policy support - Sectors most vulnerable: hotels and restaurants, entertainment, transportation, other services. - These sectors represent 12.5 percent of total employment. - In the absence of government support, the COVID-19 shock could have led an additional 7 to 17 percent of firms in these sectors to become illiquid, and 5 to 10 percent to become insolvent. - Shares of jobs-at-risk in these sectors could have increased from 7 to 20 percent (illiquidity) and 7 to 14 percent (insolvency). - Transportation sector: - Accounts for 15 percent of total employment. - In the absence of policy support, could have had 6 percent more jobs at risk due to illiquidity, and 3 percent more due to insolvency. ### Nature of employment impact and structural considerations - Given the transitory nature of the COVID shock and sector characteristics, the impact on employment is expected to be largely temporary: - In an economy undergoing structural transformation (such as Lithuania), transitory demand shocks cause permanent employment losses mainly in sectors with downward employment trends. - COVID shock mostly affected sectors with positive employment trends (e.g., high-skilled services) which are unlikely to see permanent scarring. - Certain low-skilled service sectors have had employment losses, but these are likely temporary provided the COVID shock is short-lived and these sectors have little firm-specific human capital. - Conclusion on employment: short-term employment losses can be sizeable, but long-term labor market impact is likely limited compared to the GFC. ### Effectiveness of authorities’ policy response for NFCs - Policy measures implemented for NFCs include wage subsidies, interest and rent compensation, grants, tax and social contribution deferrals, and off-budgetary guarantees for bank loans. - Lithuania provided more grant-like supports to the corporate sector compared to the median level in Europe. - Reliance on grant-like measures (wage subsidies and sectoral grants) supported liquidity and preserved equity simultaneously. - Given the more limited impact of the COVID shock on Lithuania, without policy support the corporate sector would already have faced one of the smallest increases in liquidity or equity shortfalls among European countries. - Policy support further exceeded these shortfalls, resulting in equity and liquidity positions stronger than the counterfactual without the COVID-19 shock: - This outcome holds for every sector regarding liquidity and for most sectors regarding equity, with the exception of manufacturing (which received smaller support). ### Annex V — Key summary conclusions - The NFC sector is unlikely to turn the COVID-19 shock into a persistent output loss. - The COVID-19 shock has a milder aggregate impact on Lithuania’s NFC sector compared to other European countries and compared to the GFC. - Impact mostly concentrates in contact-intensive sectors (services). - Timely policy responses and years of NFC deleveraging preserved corporate balance sheets; firms’ liquidity and solvency conditions appear slightly better compared to the scenario without COVID-19. - Employment and human capital impacts are likely transitory; hardest-hit sectors include high-skill services (likely to benefit from long-term structural changes) and low-skill services (with little firm-specific human capital). ### Annex VI — Structural elements of a medium-term fiscal strategy (overview) - Objective: safeguard a strong and credible fiscal position and accelerate convergence by adopting a credible medium-term fiscal strategy that supports potential growth. - Strategy elements: - Include both revenue and high-quality expenditure measures - Have a medium-term perspective - Analyze potential risks and policy responses ### Expenditure-side considerations and pressures - Public sector wages and social spending: - Public sector wages have been growing faster than the private sector and were over 10 percent larger in 2020. - Strengthening the targeted portion of child-care benefits can help reduce child poverty rates. - Pension system pressures: - Reforms in 2015 ensured financial sustainability, but low and declining replacement ratios risk social sustainability: 40 percent of pensioners are at risk of poverty. - The pension system is described as the most important redistributive social tool in Lithuania. - Keeping the replacement ratio constant at 35 percent will cost the budget an additional 7.5 percent of GDP between 2020 and 2025. - Raising the replacement ratio to 40 percent (ILO recommendation) would require public spending for the PAYG system to increase by around 2 percent of GDP per year. - Likely requirement: combination of increased revenues and some parametric reform (e.g., link retirement age to life expectancy). - Education efficiency and outcomes: - Improvements in spending efficiency and qualitative reforms needed; Lithuania has high enrollment but poor qualitative outcomes (PISA among bottom 25 percent of EU countries). - Third-highest level of skills mismatch in the labor market. - Rationalization of the extensive school network could provide savings to improve school quality. - Health outcomes and spending efficiency: - Lithuania is far from the health efficiency frontier; scope to improve outcomes within same spending envelope. - Lithuania ranks lowest in the EU in healthy life expectancy and has higher rates of smoking, alcohol, heart and circulatory diseases, and suicides. - Stronger focus on primary care and mental health is appropriate. - Increases in excise taxes—particularly on alcohol and tobacco—can be considered to discourage unhealthy behavior and could potentially increase healthy life expectancy by some seven years to match peer countries within a similar spending envelope. - Public investment: - Public investment has been around 3 percent per year for the past five years, resulting in no growth in the capital stock. - To close the infrastructure gap, Lithuania could consider increasing its investment rate over the medium-term or front-loading investment. - Cautions: excessive front-loading may exceed absorptive capacity, cause crowding-out, investment inefficiencies, and higher debt accumulation. - Lithuania should take advantage of low interest rates, EU structural funds and new RRF resources. ### Revenue-side considerations - Tax revenue performance: - Tax revenue as a percentage of GDP is below most peers in the EU and the OECD. - Structural revenue declined by almost 3 percent of GDP between 2005 and 2018. - Factors explaining low tax revenues include weak VAT compliance (VAT gap of 2.5 percent of GDP), relatively low tax rates, greater reliance on indirect taxes, and low capital and wealth taxes. - Competitiveness and tax changes: - Changes to tax system should account for business environment and other determinants of FDI. - FDI flows to Lithuania as a share of GDP are lower than Estonia and just slightly higher than Latvia. - Institutional quality matters for FDI; sensitivity of FDI to tax rates varies with institutional quality. - Example noted: Estonia has higher perceived institutional quality while having both higher CIT and FDI. *Source: IMF staff analysis and annexes contained in the provided content.* ### 8. The current tax system continues to lean heavily on indirect taxes, and with an ### 1ltuea2021001 - 8. The current tax system continues to lean heavily on indirect taxes, and with an ### Tax structure and revenue performance - The current tax system leans heavily on indirect taxes, with an emphasis on labor taxes among direct taxes. - Past recommendations: shift the tax burden away from labor taxes into wealth and environmental-related taxes to increase efficiency and potentially raise revenues. - Consideration: change the distortionary two-rate CIT to a single rate and review tax incentives in free economic zones with multi-year CIT exemptions. - Closing the VAT gap closer to the level in Latvia or Estonia could get Lithuania more than 1 percent of GDP. - Tax expenditures in Lithuania are at 3 percent of GDP; this is not an outlier compared to other EU countries. ### Comparative tax revenue figures (Lithuania versus EU-28), 2018 (In percent of GDP) - Total tax revenues: Lithuania 29.9; EU-28 39.0; Difference -9.1 - Personal income tax: Lithuania 4.1; EU-28 9.5; Difference -5.4 - Corporate income tax: Lithuania 1.5; EU-28 2.7; Difference -1.2 - VAT: Lithuania 7.8; EU-28 7.1; Difference 0.6 - Excises and consumption taxes: Lithuania 3.2; EU-28 2.2; Difference 0.9 - Taxes on land, buildings, and other structures: Lithuania 0.2; EU-28 1.1; Difference -0.9 - Social security contributions: Lithuania 13.0; EU-28 13.3; Difference -0.3 - Other: Lithuania 0.1; EU-28 3.0; Difference -2.8 ### Current taxes on income and wealth, 2018 (In percent of GDP) — cross-country snapshot - Current taxes on income, wealth, etc.: Lithuania 5.7; Estonia 7.4; Latvia 7.4; Sweden 18.6; UK 13.9; EU-28 13.2 - Personal income tax: Lithuania 4.1; Estonia 5.4; Latvia 6.0; Sweden 15.0; UK 8.7; EU-28 9.5 - Corporate income tax: Lithuania 1.5; Estonia 0.3; Latvia 1.1; Sweden 3.1; UK 2.6; EU-28 2.7 - Current taxes on capital: Lithuania 0.0; Estonia 0.0; Latvia ...; Sweden 0.0; UK 0.2; EU-28 0.3 - Payments by household for licenses: Lithuania 0.0; Estonia ...; Latvia ...; Sweden 0.2; UK 0.4; EU-28 0.2 - Other: Lithuania 0.0; Estonia 1.7; Latvia 0.0; Sweden 0.1; UK 2.0; EU-28 0.5 ### Tax administration and VAT gap - Improvements in tax administration alone will not meaningfully raise revenue. - Closing the VAT gap closer to Latvia or Estonia could raise revenue by more than 1 percent of GDP. - Authorities plan to develop an action plan to reduce the shadow economy and the VAT gap. ### Fiscal policy stance and projections - 2020 GDP contraction: -0.8 percent. - GDP growth in Q1 and Q2 2021: 1.4 and 8.6 percent year-on-year, SA. - Ministry of Finance projects a 7.9 % annual growth in average monthly gross wages in 2021. - Unemployment: decline by 1.1 percentage points year-on-year to 7.4 percent in Q2, 2021. - Ministry of Finance revised budget: earmarked around EUR 1.8 bn for mitigation of the effects of the pandemic and unexpected shocks. - Revised budget projections: general government deficit -6.7 % of GDP in 2021; general government debt 49.3 % of GDP. - Staff forecast (for comparison): deficit -5.5 % of GDP; debt 47.7 % of GDP. ### Policy measures and reforms - Pandemic support in 2020 focused on liquidity and solvency support; 2021 support more targeted. - Proposed temporary VAT rate reduction for affected sectors (catering services, sports, cultural, recreation) with a sunset clause. - Fiscal withdrawal pace will be dictated by recovery strength and virus developments; public debt expected to stabilize over the medium-term, remaining higher than pre-pandemic. - Authorities revisiting tax system structure and social benefits to reduce income inequality and plan actions against the shadow economy. ### Financial sector and AML/CFT - Bank of Lithuania actions: fully released the countercyclical capital buffer in March 2020. - Relaxation of microprudential and macroprudential requirements increased lending potential; moratoria encouraged. - Banking sector has ample liquidity and capital buffers. - Macroprudential tools (LTV and DSTI) remain in place; sectoral systemic risk buffer on housing loan portfolios may be considered if overheating emerges. - Fintech: authorities prioritize quality; preparing a new five-year fintech development strategy. - AML/CFT: Lithuania adopted the 5th Anti Money Laundering and Terrorist Financing Directive on January 10, 2020. - Centre of Excellence in Anti-Money Laundering started activities in May 2021. - Amendments to the Law on the Prevention of Money Laundering and Terrorist Financing VIII-275 adopted by the Seimas and should enter into force on August 1, 2021. ### Structural reforms and EU support - Structural challenges: social and regional disparities, sub-optimal quality of public services, unfavorable demographic trends (ageing, shrinking working-age population). - Authorities committed to an ambitious reform agenda: Government program, action plan, and “Next Generation Lithuania”. - “Next Generation Lithuania” financed by the EU Recovery and Resilience Facility (RRF): RRF funds amount to EUR 2.23 bn of the total EUR 17.1 bn earmarked investments for social-economic development in the 2021-2030 National Development Plan. - Authorities’ macro-modelling: real GDP over 2022-2026 is expected to be 1.7 % higher per year on average as a result of the planned reform and investment package. _Italic: Prepared by European Department — STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (content as provided)._ --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1ltuea2021001.pdf_