## 1ltuea2024001 ## Source details **Canonical URL:** [1ltuea2024001](https://www.imf.org/-/media/files/publications/cr/2024/english/1ltuea2024001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1ltuea2024001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1ltuea2024001.pdf.json) --- ### 1. Real Sector — context, recent developments, and external position - Convergence and shocks: - Income per capita rose from 40 percent in 2009 to 85 percent of the eurozone average in 2021; stagnation since 2021 due to the negative terms-of-trade shock in 2022 and subsequent high inflation. - Real effective exchange rate (REER) appreciated 12 percent since 2021, contributing to a loss of export market shares in goods. - Labor productivity has fallen while labor utilization increased. - Long-run baseline: real GDP growth will stabilize at around 2.2 percent; a shrinking labor force will slow growth over the longer-term. - 2023 developments: - Mild contraction driven by weak consumption and near-full reversal of wartime/high-inflation inventory accumulation; inventory correction subtracted around 3.5 percentage points of growth (1.5 percent). - Domestic demand (net of inventories) recovered in 2023 supported by: - Restoration of households’ purchasing power (real wage growth turned positive in August 2023). - Strong investment boosted by EU funds. - Exports of services remained strong; some imports were substituted with inventories producing a positive external contribution. - Labor market remained historically tight in 2023: vacancies per unemployed still above 2021 levels; employment growth positive while unemployment increased slightly as labor force expanded. - Net migration—driven by Ukrainian citizens—exceeded 1.5 percent of the total population. - Real estate and external position: - Nominal house price growth: 10 percent in 2023 (down from 19.1 percent in 2022). - Current account surplus: 2.6 percent of GDP in 2023, driven by a substantial decrease in net energy imports and an all-time high services balance. - With partial reversal of the terms-of-trade shock and ongoing inventory run-down, the current account expected to remain broadly in line with fundamentals under the baseline. ### 2. Inflation — recent trajectory and outlook - Recent drivers: - Lithuania recorded around 20 percent inflation in 2022 (twice the eurozone average); inflation more than halved in 2023 supported by lower energy prices and base effects. - Core inflation moderated but remained above headline inflation due to energy pass-through and high nominal wage growth. - Disinflationary momentum persisted into early-2024 with both headline and core inflation below the eurozone average. - Energy subsidy phaseout and tighter monetary/fiscal conditions contributed to disinflation. - Projections: - Headline inflation projected to fall below 2 percent in 2024. - Core inflation expected to show larger persistence; projected to stabilize around 2-2.5 percent over the medium-term, above the eurozone average in line with convergence. - Baltics core inflation projection (statistical): - 2024 core inflation projection: Lithuania: 3 percent; Latvia: 3 percent; Estonia: 5.8 percent (Estonia to fall below 3 percent only in 2025). ### 3. Fiscal and Public Finances — outturns, projections, and stance - 2023 outturn and structure: - Overall budget deficit: 0.8 percent of GDP in 2023 (0.7 percent in 2022). - Structural position: structural deficit of 0.5 percent of potential GDP in 2023; deterioration of 1 percent since 2019, half reflecting permanently higher defense spending. - Debt dynamics: debt-to-GDP continued downward trend, falling 10 percentage points from the pandemic peak. - 2024 projections and staff view: - Staff projection: deficit widens to 1.6 percent of GDP in 2024. - Budget law baseline implies deficit of 2.9 percent of GDP. - Staff estimate the 2024 change represents a structural loosening of around 1 percent of potential GDP excluding additional military spending. - Fiscal stance and staff impulses (percent of potential GDP): - Budget: -0.8 (2023) - Staff baseline: -0.8 (2023), -1.6 (2024), -1.6 (2025) - Structural balance series (selected): -0.1 (2023), -1.1 (2024), -1.4 (2025) - Staff recommendation: fiscal impulses and structural balance recommendations shown as -0.8 (2023), -1.1 (2024), -0.8 (2025); structural balance recommendation: -0.1 (2023), -0.6 (2024), -0.6 (2025). - Fiscal rule and targets: - Fiscal rule targets a structural balance; when output gap negative a deficit not exceeding the medium-term objective (currently at -1 percent of GDP) is allowed. - Recommendation: set targets around current levels; a moderate structural deficit of 1 percent of GDP consistent with steady-state debt below 40 percent of GDP. ### 4. Banking and Financial Sector — indicators, supervision, and risks - Key indicators (end-2023 unless noted): - Liquidity coverage ratio (LCR): 342 percent. - ECB deposits: around 16 percent of banks’ assets in 2023, remunerated at 3.4 percent. - Return on assets (ROA): 1.8. - Return on equity (ROE): 24.6. - Capital adequacy ratio (CAR): 19.5 percent. - Non-performing loan (NPL) ratio: 0.58 percent. - Bank levy: 0.35 percent of GDP. - Systemic developments: - Revolut Bank: ECB assumed direct supervision in early 2024; Revolut became the third largest bank with 18 percent of system-wide assets and a business model based almost exclusively on non-resident EU depositors. - Bank of Lithuania doubled Revolut’s additional capital buffer requirement to 2 percent effective July 1, 2024. - Performance and policy advice: - Despite declining interest margins, profitability will remain elevated above historical levels and higher than eurozone average. - Under BoL’s severe downside scenario (cumulative GDP losses of 9 percent over three years), overall banks’ capital would still exceed minimum requirements. - Liquidity: banks can currently cover around a 36 percent decrease in deposits; loan-to-deposit ratio remains below 60 percent. - Recommendation: let the temporary bank levy expire to avoid perception as a tax on foreign investment and minimize negative efficiency impacts. - Macroprudential stance: neutral; no new measures after 2022; relax capital-based measures if credit supply disruptions occur and use targeted borrower-based measures for disorderly real estate correction. ### 5. Energy, Trade, and Subsidies - Net energy trade balance (percent of GDP): - 2021: -4.9 percent of GDP. - 2022: -10.8 percent of GDP. - 2023: -4.5 percent of GDP. - Policy and substitutions: - Lithuania reduced energy imports from Russia by half in the last year, substituting with LNG at higher cost. - Authorities provided generalized but temporary subsidies to households (and to a much lesser extent businesses) during the energy price spike; energy subsidies were then phased out as energy prices returned near pre-war levels. - Energy subsidy tables in source present electricity and gas tariffs and subsidized parts across 2022H2, 2023H1, 2023H2, and 2024 No Subsidy (values preserved in source tables). ### 6. Outlook, Risks, and Policy Priorities - Outlook summary: - 2024 recovery driven by private consumption and investment: low inflation and high real wage growth sustain domestic demand; public investment financed by EU funds supports activity. - External demand expected to gain momentum during 2024, reinforcing growth thereafter. - Long-term growth stabilization at around 2.2 percent; demographic pressures constrain longer-term growth. - Key risks (selected): - External/geopolitical: heightened geopolitical tensions and political uncertainty ahead of parliamentary elections amplify downside risk. - Domestic structural: failure to implement reforms in pensions, education, and healthcare risks competitiveness and productivity. - Inflation/monetary/fiscal: core inflation persistence due to tight labor market and elevated wage growth remains a watch item. - Policy priorities: - Fiscal: balance higher defense and aging-related expenditures while maintaining spending efficiency, strong fiscal position, and an attractive tax system. - Structural reforms: pensions, education, and healthcare reforms emphasized to preserve competitiveness and accelerate income convergence. - Green transition: introduce economy-wide carbon tax alongside EU ETS to incentivize decarbonization and raise revenues. ### 7. Long-term spending pressures and revenue options (2030–2050 and beyond) - Demographics: - Population decline from 3.7 million in 1991 to below 3 million in 2019; old-age dependency ratio projected above 53 percent in 2050 and 67 percent by 2070. - Aggregate spending pressures over next 25 years could amount to between 5 percent of GDP and 10 percent of GDP relative to 2023 level over 2030-2050. - Sectoral pressure estimates (relative to 2023 baseline): - Defense: 0.5 - 0.7 percent of GDP - Interest payments: 0.4 - 0.8 percent of GDP - Pensions: 3 - 5 percent of GDP - Healthcare and long-term care: 0.7 - 1.7 percent of GDP - Education: -0.4 percent of GDP - Green transition: 1 - 2 percent of GDP - Total: 5.2 - 9.8 percent of GDP - Defense financing: - Defense spending: 0.9 percent of GDP in 2010; 2 percent in 2018; over 2.5 percent in 2023. - Political consensus to raise defense spending further to 3 percent of GDP over the medium-term. - Temporary bank levy used to finance part of additional defense spending; a more comprehensive package of revenue measures approved for long-term funding. - Interest payments: - Interest payments increasing from 0.4 percent of GDP in 2022 to about 1.2 percent by 2029. - Pension projections and reform options: - 2018 reform: benefits indexed to wages and retirement age increased to 65 by 2026. - Accrued total pension entitlements: 217 percent of GDP in 2019 to 275 percent of GDP in 2021. - Pension spending projected to increase by about 3 percent of GDP by 2050 (compared with 1.3 percent of GDP projected in the 2021 Ageing Report). - Possible reforms: link statutory retirement age to longevity; subject pensions to standard personal income tax (PIT); encourage participation in Pillar II (ideally mandatory) and disincentivize early withdrawals. - Revenue mobilization options (estimated fiscal space): - Raise the corporate income tax (CIT) rate and/or eliminate exemptions — Up to 1 percent of GDP. - Reduce tax expenditures — Up to 3 percent of GDP. - Introduce an economy-wide carbon tax of US$75 per metric ton of CO2 — could raise 1.5 percent of GDP. - Modernize property tax regime — current property tax revenue: 0.2 percent of GDP; enhance property taxes — Up to 0.8 percent of GDP. - Increase standard VAT rate — 0.3-0.5 percent of GDP per 1pp increase. - Note: Lithuania collects around 10 percent of GDP less in tax revenue than EU average; labor taxes account for 55 percent of total tax revenue; VAT yields around 8.5 percent of GDP. ### 8. Risk Assessment Matrix — key external and domestic risks and recommended responses - External risks (selected): - Intensification of regional conflict(s): Likelihood High (Short-term). Policy response: use fiscal space for targeted relief and allow automatic stabilizers to work. - Abrupt global slowdown or recession: Likelihood High (Short-term). Policy response: allow automatic stabilizers; provide targeted support to most vulnerable if needed. - Deepening geo-economic fragmentation: Likelihood High (Long-term). Policy response: continue EU trade integration; pursue education and healthcare reform. - Domestic risks (selected): - Failure to implement structural reforms: Likelihood High (Medium-term). Policy response: accelerate structural reforms and elaborate medium-term fiscal plan. - Addressing long-term spending pressures: Likelihood Medium (Medium/Long-term). Policy response: implement pension, healthcare and education reforms and increase revenue collection. - RAM methodology notes: - Likelihood definitions: ‘low’ <10 percent; ‘medium’ 10–30 percent; ‘high’ 30–50 percent. - RAM reflects staff views at time of discussions with authorities; conjunctural shocks ≈ 12–18 months; structural risks longer horizon. ### 9. Selected projections and key indicators (figures preserved exactly as in source) - Real GDP growth (annual percentage change): 2020: 0.1; 2021: 6.2; 2022: 2.4; 2023: -0.3; 2024: 2.4; 2025: 2.6; 2026: 2.4; 2027: 2.2; 2028: 2.2; 2029: 2.2. - Nominal GDP (billions of euro): 2020: 49.8; 2021: 56.5; 2022: 67.5; 2023: 72.0; 2024: 75.9; 2025: 80.3; 2026: 84.5; 2027: 88.5; 2028: 92.7; 2029: 97.0. - Unemployment rate (year average, percent): 2020: 8.5; 2021: 7.1; 2022: 6.0; 2023: 6.9; 2024: 7.3; 2025: 7.1; 2026: 6.5; 2027: 6.1; 2028: 6.0; 2029: 6.0. - HICP, period average (annual percent change): 2020: 1.1; 2021: 4.6; 2022: 18.9; 2023: 8.7; 2024: 1.2; 2025: 2.3; 2026: 2.4; 2027: 2.2; 2028: 2.4; 2029: 2.4. - General government gross debt (percent of GDP): 2020: 46.3; 2021: 43.4; 2022: 38.0; 2023: 38.3; 2024: 38.1; 2025: 38.0; 2026: 37.8; 2027: 37.7; 2028: 37.5; 2029: 37.0. - Current account balance (percent of GDP): 2020: 7.3; 2021: 1.1; 2022: -5.5; 2023: 1.9; 2024: 2.8; 2025: 2.9; 2026: 3.0; 2027: 2.8; 2028: 2.8; 2029: 2.8. - Current account balance (billions of euros): 2020: 3.6; 2021: 0.6; 2022: -3.7; 2023: 1.4; 2024: 2.1; 2025: 2.4; 2026: 2.4; 2027: 2.5; 2028: 2.6; 2029: 2.7. - Net international investment position (percent of GDP): 2020: -15.7; 2021: -7.4; 2022: 0.0; 2023: 0.0; 2024: 7.4; 2025: 13.6; 2026: 19.2; 2027: 22.7; 2028: 26.2; 2029: 29.0. ### 10. Data, surveillance, and AML/CFT developments - Data adequacy: Overall rating A; national accounts, prices, government finance, external sector and monetary statistics assessed with matrix entries in source. - Open data issues: lack of quarterly sectoral non-financial accounts; significant net errors and omissions in the BoP; possible mismeasurement of inventories. - AML/CFT progress: - MONEYVAL assessments: April 2012 and December 2018; 2018 assessment insufficiently effective in ten of eleven pillars. - December 2023: fourth enhanced follow-up report adopted; re-rated from ‘Partially Compliant’ to ‘Largely Compliant’ for Recommendation 2. - Lithuania now ‘Compliant’ or ‘Largely Compliant’ on 36 of the 40 FATF Recommendations. - BoL increased AML Division FTEs by 46% as of Q1 2024 compared to 2022; on-site inspections in 2023 increased by 75% compared to 2022. - Preparations to begin supervising VASPs by end-2024; recommended to strengthen CENTROlink AML/CFT assessment guidelines and broaden supervisory coverage. *Source: IMF Staff Report excerpt: "1. Real Sector" chapter and accompanying annexes (content unit 1ltuea2024001).* ### 1. Real Sector ____________________________________________________________________________________ 25 ### 1. Real Sector ### Context: convergence and recent shocks - Lithuania raised income per capita from 40 percent in 2009 to 85 percent of the eurozone average in 2021; income per capita has stagnated since 2021 due to the negative terms-of-trade shock in 2022 and subsequent high inflation. - The inflation surge contributed to a 12 percent appreciation of the real effective exchange rate (REER) since 2021 and a loss of export market shares in goods. - Labor productivity has fallen while labor utilization increased, reversing patterns observed in previous downturns. - While the terms-of-trade shock has largely reversed, permanently higher prices and input costs pose risks to competitiveness. - Long-run baseline: real GDP growth will stabilize at around 2.2 percent, but a shrinking labor force will slow growth over the longer-term. ### Recent developments: demand, inventories, and labor market - 2023 saw a mild contraction driven by weak consumption and a near-full reversal of the wartime/high-inflation inventory accumulation: - Inventory correction subtracted around 3.5 percentage points of growth (1.5 percent). - Domestic demand (net of inventories) recovered during 2023, supported by: - Restoration of households’ purchasing power (real wage growth turned positive in August 2023). - Strong investment boosted by European Union (EU) funds. - Exports: - Exports of services remained strong despite weak demand from key trading partners; some imports were substituted with inventories, producing a positive external contribution to growth. - Labor market: - Remained historically tight in 2023 with vacancies per unemployed still above 2021 levels. - Employment growth remained positive while the unemployment rate increased slightly as the labor force expanded. - Net migration—driven by Ukrainian citizens—exceeded 1.5 percent of the total population, contributing to labor force growth. ### Real estate and external position - Real estate: - Nominal house price growth slowed to 10 percent in 2023 from 19.1 percent in 2022 as borrowing costs rose and real wages recovered. - Price-to-income and price-to-rent indicators are moving closer to fundamentals. - External position: - Current account surplus increased to 2.6 percent of GDP in 2023, driven by a substantial decrease in net energy imports and an all-time high services balance. - With partial reversal of the terms-of-trade shock and ongoing inventory run-down, the current account is expected to remain broadly in line with fundamentals under the baseline. *Sources: Text figures, labor and GDP trends, and data points within the text.* --- ### 2. Inflation ### Recent trajectory and drivers - Lithuania recorded one of the highest inflation rates in 2022 (around 20 percent, twice the eurozone average); inflation more than halved in 2023 supported by lower energy prices and base effects. - Core inflation moderated but remained above headline inflation due to energy pass-through and high nominal wage growth. - Disinflationary momentum persisted into early-2024 with both headline and core inflation below the eurozone average. - Energy subsidy phaseout and tighter monetary/fiscal conditions contributed to disinflation. ### Projections and medium-term outlook - Headline inflation is projected to fall below 2 percent in 2024. - Core inflation is expected to show larger persistence due to a tight labor market and strong real wage growth. - Inflation is projected to stabilize around 2-2.5 percent over the medium-term, above the eurozone average in line with convergence. *Sources: inflation levels 2022–2024 and projected ranges as reported in the text.* --- ### 3. Fiscal and Public Finances ### 2023 outturn and structural position - Overall budget deficit: 0.8 percent of GDP in 2023 (0.7 percent in 2022). - Fiscal policy stance in 2023 was contractionary despite the deficit, supported by revenue overperformance, the tax on banks, and faster-than-planned phaseout of energy subsidies. - Structural position: a deficit of 0.5 percent of potential GDP in 2023; a deterioration of 1 percent since 2019, half of which reflects permanently higher defense spending. - Debt dynamics: debt-to-GDP continued its downward trend, falling 10 percentage points from the pandemic peak. ### 2024 stance and projection - The deficit is projected to widen to 1.6 percent of GDP in 2024 under staff projections. - The budget law baseline implies a deficit of 2.9 percent of GDP (incorporating spending buffers, conservative revenue assumptions, and worse macro projections than staff). - Staff estimate this 2024 change represents a structural loosening of around 1 percent of potential GDP excluding additional military spending. *Sources: fiscal balances, structural metrics, and projections as stated in the text.* --- ### 4. Banking and Financial Sector ### Key indicators and resilience - Liquidity: liquidity coverage ratio (LCR) of 342 percent by end-2023. - ECB deposits: deposits at the European Central Bank accounted for around 16 percent of banks’ assets in 2023, remunerated at 3.4 percent. - Profitability and capital: - Return on assets (ROA): 1.8. - Return on equity (ROE): 24.6. - Capital adequacy ratio (CAR): 19.5 percent. - Non-performing loan (NPL) ratio: 0.58 percent. - Bank levy: levy on banks amounted to 0.35 percent of GDP. - High profitability in 2023 (doubled over 2022) and sound asset quality provided ample buffers. ### Supervision and systemic developments - The ECB assumed direct supervision of Revolut Bank in early 2024 due to rapid expansion since 2019; Revolut became the third largest bank with 18 percent of system-wide assets and a business model based almost exclusively on non-resident EU depositors. - The Bank of Lithuania doubled Revolut’s additional capital buffer requirement as a systemically important institution to 2 percent effective July 1, 2024. *Sources: banking sector indicators and supervisory actions from the text.* --- ### 5. Energy, Trade, and Subsidies ### Energy trade and policy response - Net energy trade balance: - -4.9 percent of GDP in 2021. - -10.8 percent of GDP in 2022. - Recovered to -4.5 percent of GDP in 2023. - Lithuania reduced energy imports from Russia by half in the last year, substituting with LNG at higher cost. - Authorities provided generalized but temporary subsidies to households (and to a much lesser extent businesses) during the energy price spike; energy subsidies were then phased out as energy prices returned near pre-war levels. ### Energy subsidy metrics (selected) - Tables shown in the chapter display electricity and gas tariffs and subsidized parts across periods 2022H2, 2023H1, 2023H2, and 2024 No Subsidy with explicit tariff and subsidy shares (values reported in source tables). *Sources: energy trade balances and subsidy phaseout descriptions in the text.* --- ### 6. Outlook, Risks, and Policy Priorities ### Outlook summary - 2024 recovery driven by private consumption and investment: - Low inflation and high real wage growth sustain domestic demand. - Public investment financed by EU funds supports activity. - External demand expected to gain momentum during 2024, reinforcing growth thereafter. - Long-term growth stabilization at around 2.2 percent, with demographic pressures (shrinking labor force) constraining longer-term growth. ### Risks - External and geopolitical: - Heightened geopolitical tensions and political uncertainty ahead of parliamentary elections amplify downside risk. - A deterioration in geopolitical conditions could harm growth and investor sentiment. - Domestic structural risks: - Slow progress on politically difficult but needed reforms in pensions, education, and healthcare could weigh on competitiveness and productivity. - Inflation and monetary/fiscal policy: - Upside inflation risks have decreased; low inflation increases fiscal scope to respond to adverse shocks. - Core inflation persistence due to tight labor market and elevated wage growth is a key watch item. ### Policy discussion: preserve stability and support productivity - Fiscal policy: - Must balance higher defense and aging-related expenditures while maintaining spending efficiency, a strong fiscal position, and an attractive tax system. - Fiscal policy has been an important stabilization tool in a small open economy without independent monetary policy. - Structural reforms: - Reforms in pensions, education, and healthcare are emphasized as essential to preserve competitiveness and accelerate income convergence over the medium term. *Sources: outlook, risk assessment, and policy discussion text.* --- *IMF Staff Report excerpt: "1. Real Sector" chapter (content unit 1ltuea2024001).* ### 0.2 percent of GDP). Although low inflation ### A Difficult Balancing Act to Address Mounting Long-term Spending Pressures ### Fiscal stance and short-term outlook - Output gap is small and decreasing; recovery is gaining strength. Hence, a broadly neutral fiscal stance would be more appropriate. - Staff baseline fiscal impulses (percent of potential GDP): Budget -0.8 (2023), Staff baseline -0.8 (2023), -1.6 (2024), -1.6 (2025). Structural balance: -0.1 (2023), -1.1 (2024), -1.4 (2025). Staff recommendation: -0.8 (2023), -1.1 (2024), -0.8 (2025). Structural balance recommendation: -0.1 (2023), -0.6 (2024), -0.6 (2025). - Excluding extra military spending and energy subsidies. ### Banking system performance and risks - Despite declining interest margins, banks’ profitability will remain elevated; profitability will remain above historical levels and higher than the eurozone average. - Under the BoL’s severe downside scenario (cumulative GDP losses of 9 percent over three years), overall banks’ capital would still exceed minimum requirements. - Liquidity: banks can currently cover around a 36 percent decrease in deposits. Loan-to-deposit ratio remains below 60 percent. - Credit demand subdued due to higher interest rates and heightened uncertainty. - Public investment agency INVEGA is taking a more active role in providing financial services including intermediating RRF funds. - Conclusion: banks are well placed to support a credit expansion when demand recovers. ### Bank levy and policy recommendation - The temporary levy on banks has been extended until 2025. - The levy targets net interest income of existing loans only and has had little disincentive effects so far. - As profitability declines, the levy will deliver decreasing amounts of revenue—around a sixth of last year’s revenues. - Recommendation: the levy should be let expire to avoid being perceived as a tax on foreign investment and to minimize potential negative impacts on efficiency; otherwise, increasingly distortionary forms of taxation would be needed to raise meaningful revenues. ### Macroprudential stance and real estate risks - No new systemic risks have emerged; financial cycle is undergoing a soft-landing after robust performance since 2020. - Authorities have adopted an appropriate neutral macroprudential stance with no new measures after those introduced in 2022. - Real estate market has stabilized recently, but some segments of commercial real estate in the Vilnius area could remain overvalued. - Given persistent high interest rates, refinancing non-systemic risks in some pockets could remain. - If risks materialize: relax capital-based measures to address credit supply disruptions; use targeted adjustments to borrower-based measures to address a disorderly correction and support lending to the real economy. ### AML/CFT developments and recommendations - Heightened ML/TF risks driven by large increase in cross-border financial flows since 2020, introduction of BoL’s CENTROlink, and increase in fintech companies (82 in 2016 and 276 in 2023). - Implemented measures include: deepening understanding of non-resident ML/TF risks; increasing BoL’s AML/CFT supervisory resources; increasing on-site and off-site visits; updating ML/FT risk assessment methodology; strengthening VASP market entry controls; strengthening CENTROlink AML/CFT controls. - Outcomes: stabilization in number of EMIs and PIs with access to CENTROlink and revoking of several licenses on AML/CFT grounds. - Recommended next steps: - Continue preparations to begin supervising VASPs by end-2024. - Strengthen CENTROlink AML/CFT assessment guidelines for operational use. - Develop and operationalize understanding of higher-risk countries; broaden AML/CFT supervisory coverage; strengthen BoL’s AML/CFT resources and capacity. - Implementation highlights: - BoL updated ML/TF risk assessment methodology and incorporated Lithuania-specific risk factors. - As of Q1 2024, BoL increased FTEs in AML Division by 46% compared to 2022. - Number of on-site inspections in 2023 increased by 75% compared to 2022. - BoL established a committee making decisions regarding CentroLink participants. ### Long-term spending pressures (2030–2050 and beyond) - Population decline from 3.7 million in 1991 to below 3 million in 2019; rapidly aging population. - Old-age dependency ratio projected to increase above 53 percent in 2050 and 67 percent by 2070. - Aggregate spending pressures over the next 25 years could amount to between 5 percent of GDP and 10 percent of GDP relative to the 2023 level over 2030-2050. - Sectoral pressure estimates (relative to 2023 baseline): - Defense: 0.5 - 0.7 percent of GDP - Interest payments: 0.4 - 0.8 percent of GDP - Pensions: 3 - 5 percent of GDP - Healthcare and long-term care: 0.7 - 1.7 percent of GDP - Education: -0.4 percent of GDP - Green transition: 1 - 2 percent of GDP - Total: 5.2 - 9.8 percent of GDP ### Defense and near-term financing - Defense spending increased from 0.9 percent of GDP in 2010 to 2 percent in 2018 and over 2.5 percent in 2023. - Political consensus to raise defense spending further to 3 percent of GDP over the medium-term. - Temporary bank levy has been used to finance part of additional defense spending so far; a more comprehensive package of revenue measures has been approved to provide long-term funding. ### Interest payments and debt dynamics - Interest payments are gradually increasing from 0.4 percent of GDP in 2022 to about 1.2 percent by 2029. - Low stock of debt with high average maturity will smooth pass-through of tighter financial conditions to effective interest rates, but interest expenditure will gradually increase past the point when policy rates start declining. ### Pensions: fiscal and social sustainability - 2018 reform: benefits indexed to wages and retirement age increased to 65 by 2026. - Accrued total pension entitlements increased from 217 percent of GDP in 2019 to 275 percent of GDP in 2021. - 2018 reform ensures financial sustainability of the system but not social sustainability due to low and decreasing replacement ratios. - Pension spending projected to increase by about 3 percent of GDP by 2050, compared with 1.3 percent of GDP projected in the 2021 Ageing Report. - The pension system balance projected to move into deficit by the end of this decade. - Possible reforms: - Pillar I (pay-as-you-go): Link statutory retirement age to longevity (illustrative example: increasing retirement age to 75 by 2070 could maintain replacement ratio at 40 percent in a budget-neutral way); subject pensions to standard personal income tax (PIT) to provide budgetary resources for non-contributory basic pensions. - Pillar II (defined-contribution personal accounts): Encourage participation (ideally mandatory) and strong disincentives to early withdrawals to stabilize replacement ratio and support diversification. ### Education and healthcare efficiency - Education and healthcare outcomes worse than peers with comparable spending, indicating room to improve spending efficiency. - Education: enrollment high but performance at lower end of EU; extensive school network could be rationalized to redirect savings to quality improvements and address skills mismatches (third largest in EU). - Health: one of the highest levels of preventable and treatable mortality in the EU; improve efficiency by focusing on preventive care, reducing cost of pharmaceuticals, and rationalizing hospitals network. - Long-term care and healthcare pressures could increase by 0.7 percent of GDP per year over next two decades with long-term pressures up to 1.7 percent of GDP. ### Revenue mobilization options - Lithuania collects less tax revenue, around 10 percent of GDP, than the EU average; system heavily tilted towards labor taxes—55 percent of total tax revenue. - Options to increase revenues while preserving competitiveness: - Raise the corporate income tax (CIT) rate and/or eliminate exemptions, including privileged PIT regime for the self-employed. Current CIT yields around 1 percent of GDP less than the EU. - Reduce tax expenditures (around 3 percent of GDP, tend to benefit the wealthy). - Introduce an economy-wide carbon tax of US$75 per metric ton of CO2 emissions — could raise 1.5 percent of GDP in revenues. - Modernize the property tax regime; current property tax revenue amounts to 0.2 percent of GDP. - Consider integrating pensions into the general tax system (limited space to increase social security contributions). - Limited scope to increase VAT further; Lithuania relies on VAT around 8.5 percent of GDP (a fourth of total tax revenues) compared to EU average of 7.5 percent of GDP. ### Fiscal rule and targets - Fiscal rule targets a structural balance of the general government; when output gap is negative, a deficit not exceeding the medium-term objective (currently at -1 percent of GDP) is allowed. - Rule has imposed a counter-cyclical stance and proven effective in securing fiscal discipline (including a surplus in the five years pre-pandemic). - Recommendation: fiscal targets can be set around current levels; targets could be set to a moderate structural deficit of 1 percent of GDP (in line with this year’s projected outcome). - This is consistent with steady state debt below 40 percent of GDP and provides sufficient space to support the economy during downturns without exceeding the 3 percent of GDP deficit reference value in the EU framework. *REPUBLIC OF LITHUANIA INTERNATIONAL MONETARY FUND* ### 28. The authorities emphasize that the supportive fiscal stance this year is appropriate and ### 1ltuea2024001 - 28. The authorities emphasize that the supportive fiscal stance this year is appropriate and ### Fiscal stance, pressures, and reform priorities - Authorities view the supportive fiscal stance this year as appropriate while committed to prudent policies to address long-term spending pressures. - The projected deterioration in the fiscal position this year largely reflects additional defense spending and higher interest payments and supports the recovery underway. - Spending pressures over the medium- and long-term are mounting and will require reforms including in: - pensions; - higher revenue mobilization; and - continuing reforms in healthcare and education. - The authorities remain committed to a strong fiscal position that ensures sustainability and allows fiscal policy to play an active stabilization role key in the context of a common monetary policy. - Staff assessment: - After a strong performance last year, the fiscal position is expected to become moderately expansionary this year but less than the budget would imply. - The structural fiscal position has barely deteriorated compared to the pre-pandemic period. - Given a small and decreasing output gap, a broadly neutral fiscal stance seems appropriate. - Recommendation: any unused spending buffers or revenue overperformance should be saved, particularly if the economy surprises to the upside. - Long-term spending pressure quantification and strategy: - These pressures could add between 5 and 10 percent of GDP to spending. - Four elements of a comprehensive strategy: (i) pension reform; (ii) education and healthcare reforms; (iii) revenue mobilization; and (iv) resetting fiscal targets around current levels while preserving a strong fiscal position. ### Potential revenue and efficiency measures (as presented) - Pension and labor-related measures: - Link retirement age to longevity — Impact: Partially absorbs the impact of demographic changes on pension spending; Impact on economic efficiency: Positive impact on participation rate; Distributional impact: Not clear, it reduces years of retirement but could support higher pensions. - Increase payroll contributions — Impact: Narrows the pension deficit, but payroll taxes are already high; Impact on economic efficiency: Decrease participation and increase non-compliance; Distributional impact: Negative. - Subject pensions to PIT — Impact: Creates additional revenue that can help support low income pensioners; Impact on economic efficiency: Neutral; Distributional impact: Positive if resources are channeled to low income pensioners. - Revenue mobilization and tax policy measures with estimated fiscal space: - Raise the CIT rate — Up to 1 percent of GDP. Note: Corporate income taxes are relatively inefficient; ultimate incidence unclear. - Reduce tax expenditures — Up to 3 percent of GDP. Note: Tend to be inefficient and favor specific groups; tend to disproportionately favor less well off groups. - Introduce carbon tax/environmental taxes — Up to 1.5 percent of GDP. Note: It reduces an externality increasing efficiency and generating revenue; Distributional impact: Positive if resources rechanneled appropriately. - Enhance property taxes — Up to 0.8 percent of GDP. Note: Economically efficient tax; Given large home ownership design should be careful to avoid negative distributional impact. - Increase the standard VAT rate — 0.3-0.5 percent of GDP per 1pp increase. Note: Relatively efficient economically; Tend to disproportionately affect the less better off. - Moderately reduce the fiscal target — Up to 1 percent of GDP in structural terms. Note: None as long as fiscal policy remains counter-cyclical. - Efficiency reforms: - Education reform and Healthcare reform — Would improve human capital and support productivity; Could disproportionately benefit low income households. - Improving expenditure efficiency would partly address spending pressures in these areas. ### Banking sector, financial stability, and macroprudential stance - Authorities highlight ample buffers in the banking sector and significant progress addressing risks and consolidating fintech gains. - Assessment of risks and buffers: - Financial cycle has decelerated and is undergoing a soft landing. - Although declining, higher interest rates continue to represent a risk that could affect the quality of banks’ portfolios. - Banks are considered to have sufficient buffers to withstand shocks. - Macroprudential actions have increased buffers. - Real estate and fintech: - Risks from the real estate market have receded although real estate price growth is gradually recovering. - Levy on banks is temporary and designed to avoid distortions; authorities stress fintech developments show Lithuania’s capacity to attract high tech industries and are determined to continue addressing potential risks. - Supervisory enhancements: - Progress by the Bank of Lithuania (BoL) in building supervisory resources and strengthening the regulatory framework. - Active preparations to supervise VASPs as of the end of 2024. - Staff recommendations and views: - Emphasis should remain on mitigating non-systemic risks to financial stability. - Adopted macroprudential stance is appropriate and neutral; if risks materialize, relaxation of capital-based measures would be appropriate to address credit supply disruptions, while targeted borrower-based measures can address a disorderly real estate correction. - The levy on banks should be phased out; it should be let expire and no other levy introduced to avoid perception as a tax on foreign investment and to minimize negative long-term efficiency impacts. - Despite declining interest margins, banks’ profitability will remain elevated; the system remains liquid and well capitalized. - Public investment agency INVEGA will intermediary RRF loans; recommendation: keep mandate explicit and narrow, ensure effective monitoring and transparency to avoid crowding out private lending. ### Competitiveness, external position, and productivity - Recent performance and shocks: - After strong post-GFC growth and resilience during the pandemic, income convergence has stalled. - Loss in market share of 7 percent, mostly to Russia and Belarus, and higher energy prices translated into a deterioration of the external balance, particularly on goods, despite resilient services exports. - The recent fall in labor productivity—seven consecutive quarters—is largely cyclical. - Terms-of-trade and export dynamics: - Large deterioration in terms-of-trade of goods has largely reversed with a moderate improvement in terms-of-trade of services over 2021-2023. - Exports of services have increased trade surpluses—now exceeding 10 percent of GDP. - The loss in export shares of goods mostly reflects demand developments in trading partners—particularly sanctions on Russia and Belarus—rather than competitiveness factors. - REER and input costs: - Permanently higher input costs, including labor, eliminated the undervaluation of the REER with which Lithuania entered the inflationary shock. - With negative inflation differential with the eurozone, and cyclical factors, no further REER appreciation is expected in the near-term. - Policy implication: - Maintaining competitiveness requires productivity-enhancing structural reforms to support private sector-led growth, promote investment for capital deepening, and mitigate or reverse negative demographic dynamics. - Solid fundamentals allowed absorption of shocks without significant impact on growth potential, but subdued corporate profitability and lack of recent progress on structural reforms could weigh on productivity growth. ### Labor market, education, and structural inefficiencies - Labor market features and challenges: - Labor market remained tight despite weakening activity, resulting in negative labor productivity growth. - Lithuania has one of the highest skill mismatches in Europe: shortage of high-skilled workers and surplus of medium- and low-skilled workers. - The common minimum wage disproportionately affects the young and other low productive workers in rural areas. - Employment reached historical highs while labor utilization has not yet recovered from the pandemic decrease, resulting in low unemployment. - Policy recommendations: - Address persistent structural inefficiencies to reduce mismatches, increase participation, and enhance flexibility. - Increase spending on and responsiveness of active labor market policies to cyclical conditions. - Employment subsidies should concentrate on the most disadvantaged groups. - Education reforms are necessary to foster vocational training; current funding is locked in a large and relatively inefficient tertiary education system that does not produce labor-market demanded skills. - Immigration can play a limited role in expanding the labor force. - Increase enrollment in childcare to further reduce the labor force participation gap between men and women. ### Green transition, climate adaptation, and related fiscal measures - Climate vulnerability and recommended measures: - Lithuania is susceptible to climate change risks and needs to accelerate the green transition, particularly adaptation. - Introducing an economy-wide carbon tax on fossil fuels, alongside the EU’s emission trading system, would: - facilitate faster decarbonization; - incentivize renewable investments; and - provide resources to protect vulnerable households and strengthen physical infrastructure against climate change. - Need to improve climate change adaptation in public financial and investment management. - Fiscal potential of environmental taxes: - Introduce carbon tax/environmental taxes — Up to 1.5 percent of GDP (see Revenue mobilization section). ### Authorities’ views and staff appraisal summary - Authorities’ views: - The recent shock should not reduce growth potential; committed to continuing structural reforms (education, healthcare, innovation, green transition) to unlock growth potential and support productivity. - Highlight resilience of manufacturing and dynamism of services that continue to penetrate world markets. - Determined to promote transition to a more technology-oriented economy and reduce regional disparities through reforms. - Continue preparations for BoL supervision of VASPs as of the end of 2024. - Staff appraisal key points: - The economy is recovering from a shallow recession and high inflation; inflation more than halved last year and is now below the eurozone average. - Core inflation moderated but remains elevated due to high energy pass-through, nominal wage growth and services inflation. - Disinflationary momentum driven by lower commodity prices, tighter monetary conditions, and a contractionary fiscal stance. - Risks have become more balanced. - No new systemic financial risks; real estate market stabilized but pockets of vulnerability in commercial real estate warrant vigilance. - Significant progress in strengthening AML/CFT supervision must continue; measures implemented include deepening understanding of non-resident ML/TF risks; increasing BoL AML/CFT supervisory resources; updating ML/FT risk assessment methodology; strengthening VASPs market entry controls; and strengthening AML/CFT controls to access CENTROlink. - BoL should continue to mitigate ML/TF risks and develop CENTROlink AML/CFT assessment guidelines. - External position broadly in line with fundamentals in 2023; entered shock in 2021 with an undervalued REER that helped absorb higher input costs. - Persistent structural inefficiencies in labor market and education should be addressed to support productivity. *Source: 1ltuea2024001 - 28. The authorities emphasize that the supportive fiscal stance this year is appropriate and* ### 48. The next Article IV consultation with Lithuania is expected to be conducted on the ### 1ltuea2024001 - 48. The next Article IV consultation with Lithuania is expected to be conducted on the ### Real Sector - External shocks of 2022 have eased, with adverse effects concentrated in manufacturing, trade, and transport services. - Domestic demand recovered in the second half of 2023, supported by real wages and strong investment, but inventory corrections kept GDP growth muted since Q2 2023. - Consumer confidence is improving with increasing real wages, supporting private consumption, while weak external demand constrains growth, especially in manufacturing. - Real GDP (log scale) chart references trends: - Average growth rate (y/y): 99Q1-08Q2: 6.5; 10Q1-19Q4: 3.6; 20Q1-21Q4: 3.2; 22Q1-23Q4: 1.1. - Contributions to real GDP growth (year-on-year percentage change; contributions in percentage points) indicate swings across net taxes, ICT, trade/transport/accommodation & food service, construction, manufacturing, other. - Private consumption, public consumption, investment, inventories, net exports shown as contributors to Real GDP growth across Q1-19 to Q1-24. - Manufacturing: Stocks of Finished Products percent-balance series show notable movements May-18 to May-24. - Private consumption indicators: real earnings (yoy), consumer confidence, and "Major purchases at present" series point to strengthening consumption conditions. - Lack of demand remains a key factor limiting production in industrial production, retail trade, and services. ### Inflation - Inflationary pressures described as large but temporary, with energy pass-through to core inflation close to being completed. - Headline inflation series: Apr-15 to Apr-24 shows significant volatility. - Pass-through: Core inflation and Energy inflation (6m lead, rhs) tracked Apr-10 to Apr-24. - Services inflation (4Q lagged), real wage per employee (4Q MA), and total compensation of employees (4Q MA) show services inflation aligned with past episodes and influenced by higher overall costs when real wages were negative. - Inflation moderation occurred partly via corporate profits offsetting higher wages, and falling productivity impacted final prices. - GDP deflator components (unit labor cost, unit profits, unit taxes*) contributions shown for Q1-19 to Q1-24. - Unit labor cost (labor measured as hours worked) and labor cost per hour vs. labor productivity charted Q1-19 to Q1-24. - Services inflation comparisons: peaks at 2008Q2 and 2022Q4 across t-10..t+10 horizons. - Note: Based on quarterly data. ### Labor Market Developments - With negative growth in 2023, unemployment increased over 2023. - Employment growth dynamics: employment contracted for women and picked up for men; series of total/male/female employment growth shown (year-on-year percentage change). - Wage dynamics: - Nominal wage growth: total, private sector, public sector (year-on-year percentage change) indicates moderation in private sector and pickup in public sector. - Real wages rose strongly as inflation declined. - Participation rate at historical highs: Labor Force Participation Rate (percent of working-age population) charted with values near 75 percent in recent observations. - Dependency ratio plateaued given positive net migration: Net Migration (RHS) and Old Age Dependency Ratio series plotted 2002–2022. ### Banking Sector Developments - Credit growth eased but remained positive in 2024. - Pandemic-related deposit accumulation is normalizing in both levels and composition: deposits HH & NFC (share of total assets; percent of GDP) and term vs overnight deposit series plotted Jan-11 to Oct-23. - Banking sector reached record profits in 2023, benefitting from the change in monetary policy stance and strong efficiency. - Banking Sector Profitability: Net interest-to net operating income and Return on Assets series Sep-15 to Sep-23. - Net Interest Income to Net Operating Income (Percent) comparisons across EA countries for 2022 and 2023. - Nonperforming loans: Lithuania among lowest NPL ratios in 2023 (Non Performing Loans, 2023: LTU shown among peers with percent, EOP). - Asset composition shifts: MFIs assets composition across 2016-19, 2020-21, 2022, 2023 show movement toward other items and external assets. - Credit to households and non-financial corporations: year-on-year percent change series Apr-16 to Apr-24 show easing but positive credit growth. ### External Developments - Current account turned positive driven by improving services balance and shrinking trade deficit. - Current Account Balance (percent of GDP) series Jan-02 to Jan-24. - Services: rising exports of financial services and telecom/computer services offset shrinking transport shares; Services Balance (percent of GDP) series 2005–2023. - Energy trade balance deficit rebounded to its 2021 level; Energy Trade Balance (percent of GDP) series 2004–2023. - Net International Investment Position (NIIP) turned positive for the first time in 2024: NIIP series Mar-01 to Mar-24 shows improvement from deeply negative levels to near zero and positive. - Export composition dynamics: - Most decrease in exports since 2021Q3 due to lower exports to Russia and not competitiveness losses. - Contribution to export share decline in goods, 2021Q3-2023Q4: Total export share decline: -7%. - Real exchange rate moved close to equilibrium from previously undervalued position: Actual and TFP-Based REER Differential series. ### Impact of Monetary Tightening on Sovereign Debt - Monetary tightening quickly passed through to sovereign bond markets in both EA and LTU. - Government Debt Securities: Yields at Issuance (Percent) series 2012–2024 (Note: Data as of February, 2024). - Low debt helped LTU maintain relatively low effective interest rate compared to EA peers: Government Debt and Yields scatter (Average yield on debt stock vs Stock of Debt securities as of Feb-2024). - Rollover risks remain low: General Government: Debt Service Due in 2 Years (Percent of GDP; as of Feb-2024) places LTU relative to peers. - Gross issuance and weighted average maturity indicators: - Debt Securities: Gross Issuance (Percent of GDP, 12m accumulated; as of Feb-2024) shows LTU vs peers for 2019 and 2024. - Weighted Average Maturity (Years; as of Febraury-2024) places LTU with other EA countries. - Government Debt Securities Flows (Percent of GDP, 12m accumulated) show net issuance, debt issuance, debt redemptions Apr-12 to Apr-24. - High debt maturity will help smooth interest rate pass-through to interest expenditures; in absence of primary deficits, stock of debt should continue to decline. ### Structural Labor Market - Lithuania exhibits one of the largest skills mismatches in Europe: Skills Mismatch Index, 2023 places LTU among higher values. - Expenditures on active labor market policies (ALMP) remain relatively low: ALMP Expenditure (Percent of GDP) series 2007, 2019, 2022. - Participation in training programs is very low: Participants in Training Programs (Percent, share of total unemployment) for 2013–2021 and country comparisons. - Regional minimum wage variation: Minimum Wage by Region (Percent of average gross monthly wages) time series and Minimum Wage/Average Wage correlation with regional unemployment rates and age-group unemployment rates. - Minimum Wage/Average Wage displays strong correlation with regional unemployment rate and with unemployment across age groups. ### Key Indicators and Projections (Selected figures preserved exactly as presented) - Real GDP growth (annual percentage change): - 2020: 0.1 - 2021: 6.2 - 2022: 2.4 - 2023: -0.3 - 2024: 2.4 - 2025: 2.6 - 2026: 2.4 - 2027: 2.2 - 2028: 2.2 - 2029: 2.2 - Nominal GDP (in billions of euro): - 2020: 49.8 - 2021: 56.5 - 2022: 67.5 - 2023: 72.0 - 2024: 75.9 - 2025: 80.3 - 2026: 84.5 - 2027: 88.5 - 2028: 92.7 - 2029: 97.0 - Unemployment rate (year average, in percent of labor force): - 2020: 8.5 - 2021: 7.1 - 2022: 6.0 - 2023: 6.9 - 2024: 7.3 - 2025: 7.1 - 2026: 6.5 - 2027: 6.1 - 2028: 6.0 - 2029: 6.0 - HICP, period average (annual percentage change): - 2020: 1.1 - 2021: 4.6 - 2022: 18.9 - 2023: 8.7 - 2024: 1.2 - 2025: 2.3 - 2026: 2.4 - 2027: 2.2 - 2028: 2.4 - 2029: 2.4 - General government gross debt (percent of GDP): - 2020: 46.3 - 2021: 43.4 - 2022: 38.0 - 2023: 38.3 - 2024: 38.1 - 2025: 38.0 - 2026: 37.8 - 2027: 37.7 - 2028: 37.5 - 2029: 37.0 - Current account balance (percent of GDP): - 2020: 7.3 - 2021: 1.1 - 2022: -5.5 - 2023: 1.9 - 2024: 2.8 - 2025: 2.9 - 2026: 3.0 - 2027: 2.8 - 2028: 2.8 - 2029: 2.8 - Current account balance (billions of euros): - 2020: 3.6 - 2021: 0.6 - 2022: -3.7 - 2023: 1.4 - 2024: 2.1 - 2025: 2.4 - 2026: 2.4 - 2027: 2.5 - 2028: 2.6 - 2029: 2.7 - Net international investment position: - 2020: -15.7 (percent of GDP) - 2021: -7.4 - 2022: 0.0 - 2023: 0.0 - 2024: 7.4 - 2025: 13.6 - 2026: 19.2 - 2027: 22.7 - 2028: 26.2 - 2029: 29.0 *Sources: Extracted figures and charts from the provided IMF country material on Lithuania.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### External Risks - Intensification of regional conflict(s). - Likelihood and Time Horizon: High (Short-term) - Impact on Lithuania: "The direct trade impact with Russia, Ukraine and Belarus will be small. The main impact will come through rising commodity prices and from a weaker global outlook and confidence effects." - Recommended Policy Response: "Use fiscal space to provide targeted relief to firms and households and let automatic stabilizers work fully provided that both inflation and growth are negatively affected." - Social discontent. - Likelihood and Time Horizon: High (Short-term) - Impact on Lithuania: "The economy has shown resilience to pandemic related shocks, while price increases and shortages linked to the War in Ukraine are unlikely to result in social discontent given broad consensus on support for Ukraine." - Recommended Policy Response: "Provide targeted support to ameliorate the impact of higher food/energy prices on vulnerable households." - Commodity price volatility. - Likelihood and Time Horizon: Medium (Short-term) - Impact on Lithuania: "Further increases in energy and food prices will put additional pressure on consumers and firms. However, their balance sheets are strong, and the government has fiscal space to provide support." - Recommended Policy Response: "Allow price signals to work and provided targeted support to vulnerable groups and those most affected." - Abrupt global slowdown or recession. - Likelihood and Time Horizon: High (Short-term) - Impact on Lithuania: "A marked slowdown in the global economy will impact Lithuania through its impact on the global economy, and to key EU trading partners." - Recommended Policy Response: "Allow automatic stabilizers to work and depending on the magnitude of the slowdown and given weak social safety net, provide targeted support to the most vulnerable." - Monetary policy miscalibration. - Likelihood and Time Horizon: Medium (Short-term) - Impact on Lithuania: "Whereas nominal wage growth remains elevated, both headline and core inflation are below the euro area and inflation expectations are well anchored. Thus, there is limited risk of recurring high inflation." - Recommended Policy Response: "If inflationary pressures reemerge fiscal policy will have to be more proactive and adopt a tighter stance." - Systemic financial instability. - Likelihood and Time Horizon: Medium (Short-term) - Impact on Lithuania: "Banks have enough capital and liquidity buffers to absorb shocks, but there are potential pockets of vulnerability and the risk of a disorderly correction of the real estate market." - Recommended Policy Response: "Risks and vulnerabilities require monitoring. If there are credit supply disruptions or a disorderly correction of the real estate market, macroprudential policies will have to be relaxed." - Deepening geo-economic fragmentation. - Likelihood and Time Horizon: High (Long-term) - Impact on Lithuania: "The slowdown in global growth and trade will affect Lithuania’s overall trade prospects weakening the labor market." - Recommended Policy Response: "Continue EU trade integration to secure access to a large market. Pursue education and healthcare reform to shift the labor force to higher value-added sectors with fast growing labor demand." - Cyberthreats. - Likelihood and Time Horizon: Medium (Short-term) - Impact on Lithuania: "Credit growth and investment could be impaired, though high liquidity in the economy could limit the impact." - Recommended Policy Response: "Step up collaboration with home country supervisors and strengthen crisis preparedness." - Extreme climate events. - Likelihood and Time Horizon: Medium (Long-term) - Impact on Lithuania: "While Lithuania could benefit from higher temperatures, associated increased volatility entails risks to biodiversity, food production, infrastructure, and weather sensitive activities." - Recommended Policy Response: "Continue to strengthen climate-related policies along with energy security, including increasing the share of renewables." ### Domestic Risks - Risks to competitiveness. - Likelihood and Time Horizon: Low/Medium (Long-term) - Impact on Lithuania: "Competitiveness and growth potential would suffer. However, real wages and productivity have traditionally been closely linked and temporary deviations have been self-correcting." - Recommended Policy Response: "Proactively use fiscal policy to reduce inflationary pressures. Redouble efforts to implement structural reform programs. Avoid large minimum wage increases. Accelerate EU funds absorption." - Failure to implement structural reforms. - Likelihood and Time Horizon: High (Medium-term) - Impact on Lithuania: "Lithuania would be vulnerable to a middle-income trap and face continued social demands without commensurate growth and revenue." - Recommended Policy Response: "Accelerate the implementation of elusive structural reforms and elaborate a medium-term fiscal plan that raises potential and meets social needs." - Addressing long-term spending pressures. - Likelihood and Time Horizon: Medium (Medium/Long-term) - Impact on Lithuania: "Higher public debt would increase concerns of debt sustainability and macro-financial stability." - Recommended Policy Response: "Implement pension reform, healthcare and education reforms to improve efficiency and tax policy changes to increase revenue collection." ### Risk Assessment Methodology and Notes - Definition of likelihood categories (staff’s subjective assessment): "‘low’ is meant to indicate a probability below 10 percent, ‘medium’ a probability between 10 and 30 percent, and ‘high’ a probability between 30 and 50 percent." - RAM scope and timing: "The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. The conjunctural shocks and scenarios highlight risks that may materialize over a shorter horizon (between 12 to 18 months) given the current baseline. Structural risks are those that are likely to remain salient over a longer horizon." *Source: Annex I. Risk Assessment Matrix.* ### Annex IV. Figure 2. Lithuania: Debt Coverage and Disclosures ### 1ltuea2024001 - Annex IV. Figure 2. Lithuania: Debt Coverage and Disclosures ### Debt Coverage and Consolidation - Chosen coverage in the DSA: 1/CGGGNFPSCPSOther (as stated). - 1a. If central government, are non-central government entities insignificant? n.a. - Subsectors captured in the baseline (Inclusion): - Budgetary central government: Yes - Extra budgetary funds (EBFs): No - Social security funds (SSFs): Yes - State governments: No - Local governments: Yes - Public nonfinancial corporations: Yes - Central bank: Yes - Other public financial corporations: Yes - Reporting on intra-government debt holdings: table entries show zeros for holder/issuer rows labeled 1–8 and a total of 000000000 (as in source). - Comments: - Basis of recording: Not applicable - Valuation of debt stock: Not applicable ### Public Debt Structure and Holdings (selected highlights) - Commentary: Since the Euro introduction, Lithuania does not hold any foreign-currency denominated debt. - Residual maturity reported: 6. years (as shown). - Marketable versus nonmarketable debt composition shown in figures (percent of GDP) for the general government perimeter (figures present historical series and projections). ### Baseline Scenario — Key Projections and Indicators (Percent of GDP unless indicated otherwise) - Public debt (Actual 2023 and projections): - 2023: 38.3 - 2024: 38.1 - 2025: 38.0 - 2026: 37.8 - 2027-2028: 37.6 - 2029: 37.5 - 2030: 36.9 - 2031: 36.8 - 2032-2033: 36.8, 36.7, 36.7, 36.7, 36.7, 36.7 (table shows a sequence ending at 36.7/36.7) - Change in public debt: - Series: 0.3 -0.2 0.0 -0.3 -0.1 -0.2 -0.5 -0.1 -0.1 -0.1 0.0 (as listed) - Contribution of identified flows (series identical to change labeled): -1.6 -0.2 0.0 -0.3 -0.1 -0.2 -0.5 -0.1 -0.1 -0.1 0.0 - Primary deficit (series): 0.3 0.9 0.7 0.4 0.5 0.4 0.0 0.3 0.3 0.3 0.3 - Noninterest revenues (series): 37.3 39.1 39.0 38.3 37.2 37.1 37.0 37.0 37.0 37.0 37.0 - Noninterest expenditures (series): 37.6 40.0 39.7 38.7 37.7 37.5 37.0 37.4 37.4 37.4 37.4 - Automatic debt dynamics (series): -1.8 -1.4 -1.2 -0.7 -0.4 -0.3 -0.1 -0.3 -0.3 -0.3 -0.3 - Real interest rate and relative inflation combined row shows entries: -1.9 -0.5 -0.2 0.2 0.4 0.5 0.7 0.5 0.5 0.5 0.5 - Real interest rate (separate row): -1.9 -0.5 -0.2 0.2 0.4 0.5 0.7 0.5 0.5 0.5 0.5 - Relative inflation (separate row): 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Real growth rate (series): 0.1 -0.9 -1.0 -0.9 -0.8 -0.8 -0.8 -0.8 -0.8 -0.8 -0.8 - Other identified flows (series): -0.1 0.3 0.4 0.0 -0.2 -0.3 -0.4 -0.1 -0.1 -0.1 -0.1 - Contingent liabilities: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - (minus) Interest Revenues (series): -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 - Other transactions (series): 0.0 0.4 0.5 0.1 -0.1 -0.2 -0.3 0.0 0.0 0.0 0.0 - Contribution of residual: 1.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Gross financing needs (GFN) (series): 4.9 5.7 5.9 6.0 7.5 7.8 8.3 7.3 7.5 8.0 7.8 - of which: debt service (series): 4.7 4.9 5.2 5.7 7.1 7.5 8.3 7.1 7.3 7.8 7.6 - Local currency (series identical to debt service): 4.5 4.9 5.2 5.7 7.1 7.5 8.3 7.1 7.3 7.8 7.6 - Foreign currency (series): 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Memo: - Real GDP growth (percent): -0.3 2.4 2.6 2.4 2.2 2.2 2.2 2.2 2.2 2.2 2.2 - Inflation (GDP deflator; percent): 6.9 3.0 3.0 2.8 2.5 2.4 2.4 2.4 2.4 2.4 2.4 - Nominal GDP growth (percent): 6.6 5.5 5.7 5.2 4.8 4.7 4.6 4.6 4.6 4.6 4.6 - Effective interest rate (percent): 1.2 1.5 2.5 3.2 3.6 3.9 4.2 3.7 3.8 3.8 3.9 - Commentary accompanying projection: "Public debt is projected to decline over the medium term as well as during the extended projection period, reflecting expectations of a narrowing of primary deficits and stable economic conditions." ### Realism and Fiscal Track Record - Commentary: "Realism analysis does not point to major concerns." - Forecast track record and comparator analyses shown in figure panels (public debt to GDP, primary deficit, r - g, exchange rate depreciation). - Distribution and percentile references in figures; examples: - 3-year debt reduction above 75th percentile: (5.9 ppts of GDP) with percentile rank 54.1 - 3-year adjustment above 75th percentile (2 ppts of GDP) with percentile rank 44 ### Medium-Term Risk Assessment — Key Indexes and Probabilities - Debt fanchart module: - Fanchart width: 46.8 0.7 (percent of GDP) (as shown) - Debt fanchart index (DFI): 1.3 - Risk signal: 3/Moderate - Terminal debt-to-GDP x10.8 0.2 (as shown) - Probability of debt non-stabilization (percent): 40.3 0.3 (as shown) - Gross financing needs (GFN) module: - Average baseline GFN6.82.3 (percent of GDP) (as shown) - Initial Banks' claims on the gen. govt: 3.4 1.1 (pct bank assets) (as shown) - Chg. in banks' claims in stress: 8.8 2.9 (pct banks' assets) (as shown) - GFN financeability index (GFI): 6.4 - Risk signal: 4/Low - Medium-term index: assembled from components (Debt fanchart index 1.3; GFI 6.4) with a risk signal: 5/ (final assessment incomplete in figure text) - Probabilities reported: - "Prob. of missed crisis, 2024-2029, if stress not predicted: 9.1 pct." - "Prob. of false alarms, 2024-2029, if stress predicted: 54.5 pct." - Commentary: "Medium-term risk assessment does not piont to major concerns." (text as in source) ### Triggered Modules and Long-Term/Structural Risks - Triggered modules include Pensions and Health among others; figures depict long-term projections for GFN-to-GDP and Amortization-to-GDP ratios under different scenarios. - Commentary on long-term projection outcomes: - "Assuming a continuation of the baseline scenario or an evolution in line with the historical average for the long-term, both debt and gross-financing needs relative to GDP will decrease and remain within reasonable intervals posing no considerable risk. The above indication of risks results from the methodology's assessment of GFN and amortization relative to Lithuania's historical trajectory, which is very low, rather than peers. In any case, in the medium-term GFN increases slightly but remains low and manageable." ### Demographics and Health Long-Run Implications - Commentary: "Including ECG (external, contingent and government) liabilities in health expenditures in line with expected demographic trends, GFN-to-GDP and Debt-to-GDP ratios will rise over the long-term given no change in the system and on the revenue side." - Figures show trajectories for Health (Demographics) and Health (Demographics + ECG) for GFN-to-GDP and Total Public Debt-to-GDP over 2016–2052. ### Data Adequacy for Surveillance - Overall Data Adequacy Assessment Rating: A - Data Adequacy Assessment matrix entries include: - National Accounts: B A A A A A A (presented as a heatmap in source) - Prices: B A A A A - Government Finance Statistics: B A A A - External Sector Statistics: A A - Monetary and Financial Statistics: A A A - Inter-sectoral Consistency: Median Rating (displayed) - Key observations from text: - "The data provided to the Fund is adequate for surveillance." - Open issues cited: - i) Sectoral breakdown of non-financial accounts at quarterly basis are not produced which hampers surveillance, - ii) there are significant net errors and omissions in the BoP, - iii) there seems to be mismeasurement of inventories, as their contributions to growth have been negative for several years now. - Corrective actions and capacity development priorities: "There exists no plan to produce quarterly data for the non-financial accounts. Apart from this item, there are no macro-critical needs for adjustments." ### Pension System — Structure and Key Features - The pension system consists of three pillars: - Pillar I: - Pay-as-you-go, administered by Sodra. - Comprises a base part (fixed benefit for individuals with at least 30 years of contribution expected to increase to 35 years by 2027), a supplementary part linked to income and length of service, and an individual part depending on accrued pension points. - Has a large redistributive component and "has insufficiently addressed old age poverty." - Pillar II: - Defined-contribution pension system based on personal accounts. - 2013 reform applied “2+2+2” to new participants; later changed to equivalent “4+2” after the 2019 tax reform. - Existing participants (more than 60 percent of all participants as of 2017) could opt out to have only 2 percent of their social contributions transferred to private pension funds. - At retirement, entitlements can be converted into annuities or a lump sum; those with accumulated returns lower than a threshold receive only lump sums. - Pillar II does not have redistributive effects; number of participants in 2023: 760,000 or about half of the labor force. - Pillar III: - Voluntary supplementary pension accumulation system with tax benefits. - "Pillar III is considered regressive." *Source: Annex IV. Figure 2–8 and accompanying text, 1ltuea2024001 (IMF staff figures and tables as provided in the content unit).* ### 2. The 2018 reform aimed to ensure financial sustainability but does not ensure a socially ### 2. The 2018 reform aimed to ensure financial sustainability but does not ensure a socially ### Pension reform: design, effects, and sustainability - Reform features: - Pensions indexed to the overall wage bill. - Retirement age gradually increased to 65 by 2026 for both men and women. - If the indexation formula results in a deficit, the law established that pensions would be left unchanged. - Implications and outcomes: - Given demographic dynamics, the indexation/design would result in declining replacement ratios. - Current replacement rate at about 30 percent is already lower than the ILO recommended minimum of 40 percent. - Replacement ratios for workers opting out of Pillar II would decline to slightly above 20 percent by 2050. - Discretionary additional increases in benefits (up to 75 percent of short-term surpluses of the social security) have been approved, at the cost of permanent long-term entitlements. - Accrued total pension entitlements have increased from 217 percent of GDP in 2019 to 275 percent in 2021. ### Annex VI — Education and Healthcare Reforms: key findings on efficiency and composition - Health sector: - Health expenditure in Lithuania is comparable to peers, but composition and outcomes differ. - The share of out-of-pocket spending over total health expenditure is 15 percentage points higher than peers’. - Lithuania invests significantly more in hospital beds: more than 7 beds per 1000 people versus the rest of Europe average of less than 5 beds per 1000 people. - Policy direction: Lithuania has adopted policies to gradually reduce the hospital-bed ratio, focusing more on outpatient care. - Staffing: As of 2017, for every 1000 people, Lithuania employs one additional physician but almost 2 fewer nurses compared to peers. - Trends and implementation: - Over the past 10 years, Lithuania has seen an uptick in physicians per capita, driven mainly by secular population decline since independence. - Large dispersion in medical staff coverage between urban and rural areas; decline in nurses per capita. - The 2019 health reform package identified priorities (excessive capacities in rural areas), but implementation failed in several sensitive areas—particularly network rationalization—due to lack of municipal buy-in and upfront wage increases adopted. - Outcome potential and policy options: - Lithuania is far from the healthy expectancy frontier; scope to improve outcomes within the same spending envelope. - Lithuania ranks lowest in the EU in healthy life expectancy and has higher rates of smoking, alcohol, heart and circulatory system diseases, and suicides; maternal deaths have been reduced relative to EU average. - Stronger focus on primary care and mental health is appropriate; more extensive public health initiatives to improve healthy lifestyles—especially among the elderly—are warranted. - Increases in excise taxes, particularly alcohol and tobacco, can be considered to discourage unhealthy behavior. - These measures can potentially increase healthy life expectancy in Lithuania to that of peer countries (some 7 years higher) even within a similar spending envelope. - Improved health outcomes could support potential growth through a healthier and more productive population. - Education sector: - Spending and composition: - Education spending in Lithuania is about 0.5 percent of GDP lower than the euro area. - Expenditure per student, after adjusting for PPP, is below the EU average. - Government allocates more towards tertiary education compared to peers; share of public spending on primary and secondary education is the seventh lowest among 45 OECD countries while spending on tertiary education is close to the OECD average. - It is not clear that tertiary education has a stronger impact on productivity than other levels of education; its impact on redistribution is the smallest if not negative. - Outcomes: - Quantitative outcomes (accessibility and enrollment) are very high—placing Lithuania at the frontier. - Qualitative outcomes lag: Lithuania is among the bottom 25 percent of EU countries in PISA scores. - Students perform worse in financial literacy controlling for mathematics and reading performance, indicating curricular issues. - Outcomes of tertiary education lag those of other EU countries. - Lithuania has the third highest level of skills mismatch in the labor market. - Reform implications: - The 2019 education reform package focuses on increasing quality and efficiency of the school network; measures are steps in the right direction but not yet ambitious enough to deliver material outcomes. - Rationalization of the extensive school network would provide savings that can be redirected to improving school quality, especially for elementary and secondary education, helping Lithuania catch up with peers and prepare a more productive labor force. ### Annex VII — Potential output in Lithuania: methodology and estimates - Method and assumptions: - Potential output estimated with a multivariate filter (MVF) following Alichi et al. (2015), conditioning on GDP, CPI, and unemployment and augmenting with a Philipps curve and Okun’s law. - Bayesian estimation used for parameters; steady state growth rates set in line with staff estimates of the NAIRU (at around 6 percent) and expectations of somewhat slower income convergence to the EU average going forward (2.3 percent steady state growth). - Judgment applied to account for the pandemic and lockdown shocks that the filter may not fully capture. - Model performance and judgement: - The MVF captures pre-2009 overheating and subsequent negative output gap during the crisis; potential growth increased after the crisis but to levels below pre-GFC period. - Since 2019, the filter captures a downward trend in potential growth reflecting shocks from the pandemic in 2020 and Russia’s invasion of Ukraine in 2022. - The filter’s potential growth estimates for 2020–2021 appear high given lockdowns; staff judgement assesses potential growth to be lower than the filter’s estimates in 2020. - Output Gap and Potential Growth Estimates (selected years; values as presented) - 2019: GDP growth 4.7; Potential Growth (MVF) 4.10; Output Gap (MVF) 1.53; Potential Growth (HP) 2.9; Output Gap (HP) 2.1; Potential Growth (final) 3.7; Output Gap (final) 1.2 - 2020: GDP growth 0.0; Potential Growth (MVF) 3.19; Output Gap (MVF) -1.61; Potential Growth (HP) 2.8; Output Gap (HP) -0.6; Potential Growth (final) 1.9; Output Gap (final) -1.2 - 2021: GDP growth 6.3; Potential Growth (MVF) 3.13; Output Gap (MVF) 1.41; Potential Growth (HP) 2.7; Output Gap (HP) 2.7; Potential Growth (final) 3.2; Output Gap (final) 1.6 - 2022: GDP growth 2.4; Potential Growth (MVF) 2.33; Output Gap (MVF) 1.48; Potential Growth (HP) 2.6; Output Gap (HP) 2.5; Potential Growth (final) 2.3; Output Gap (final) 1.8 - 2023: GDP growth -0.3; Potential Growth (MVF) 2.18; Output Gap (MVF) -0.98; Potential Growth (HP) 2.5; Output Gap (HP) -0.3; Potential Growth (final) 2.2; Output Gap (final) -0.7 - 2024: GDP growth 2.4*; Potential Growth (MVF) 2.14; Output Gap (MVF) -0.92; Potential Growth (HP) 2.4; Output Gap (HP) -0.5; Potential Growth (final) 2.2; Output Gap (final) -0.5 - Notes: MVF = multivariate filter. HP estimates based on a two-sided HP filter with smoothing parameter 100 and an extended sample until 2029 using WEO GDP projections. *refers to the current IMF projection. ### Annex VIII — Inflation in Lithuania and the Baltics: recent trends and drivers - Recent disinflation dynamics: - Disinflation faster than expected at end-2023 and beginning-2024, driven by large fading base effects from 2021–2022 price increases. - The 2021 surge translated into a carry-over of 5.8 percentage points of 2022 inflation. - A second round of energy price increases in 2022 added to 2021 carry-over, resulting in an average inflation rate for 2022 of 19 percent. - Energy price acceleration in 2022 carried over 7 percentage points of inflation into 2023. - Moderation of inflation in 2023 will bring a modest negative carry-over of inflation in 2024 by -0.2 percentage points. - Core inflation followed a similar path but rose more moderately and declined more slowly. - Baltics in 2024: - The disinflationary momentum eased in 2024; inflation converging to euro area peers. - Since January (2024), headline inflation decreased in Lithuania from 1.1 percent to 0.4 percent in April. - Estonia: headline inflation decreased from 5 percent to 3.1 percent. - Latvia: headline inflation remained constant at 1.1 percent. - Among the three economies, only Estonia maintains a positive inflation gap with the euro area, driven by all main components including notably energy prices. - Drivers of inflation Jan–Apr 2024 (cleaning 2023 base effects): - Headline inflation still benefits from negative 2023 carry-over in Lithuania and particularly Latvia. - Processed food inflation remains significant in the Baltics, particularly Estonia, with growth rates above the euro area. - Unprocessed food contribution remains relatively high in Latvia and somewhat in Estonia. - Services inflation is still high overall, particularly in Estonia; services inflation is the key factor explaining the recent acceleration of core inflation in Estonia versus the more moderate profile in Latvia and Lithuania. - Core inflation persistency: - Core inflation has eased compared to previous years, but persistency is heterogeneous across the Baltics. - Accumulated inflation Jan–Apr confirms core inflation dynamics are well below 2022. - For Estonia, the path so far in 2024 is consistent with that of 2023. - For Latvia and particularly Lithuania, core inflation has remained below or around the historical path recorded pre-pandemic (average over 2015–2019). *Source: 1ltuea2024001 — excerpt from the supplied IMF chapter and annexes.* ### 5. From a purely statistical perspective, average core inflation is projected to ease in ### 5. From a purely statistical perspective, average core inflation is projected to ease in ### Core inflation projections (Baltic countries) - Assumption: monthly core inflation follows a seasonal autoregressive path based on the 2015-19 performance (Ribe methodology described in the HICP methodological note). - Projection for 2024 and 2025: - Core inflation is projected to ease in 2024 and to stabilize in 2025. - In 2024: - Latvia: core inflation will fall to 3 percent. - Lithuania: core inflation will fall to 3 percent. - Estonia: core inflation will remain high, averaging 5.8 percent in 2024 and going below 3 percent only in 2025. - Note: In the case of Estonia, current high inflation is partially explained by the VAT increase implemented in January 2024 from 20 to 22 percent. ### Headline inflation composition (April 2024) - Chart components (Year-on-year percentage change; contributions in percentage points) include: - Processed food - NEIG - Services - Unprocessed food + Energy - Carry-over - Headline - Data sources referenced: Haver Analytics; Eurostat; and IMF staff calculations. ### Accumulated core inflation during the year (country-specific monthly patterns) - Lithuania (Accumulated inflation during the year): - Reference series plotted for months January–December for periods: 2021, 2022, 2023, 2014-19, and 2024. - Annotated monthly values shown on chart include: 6.6, 15.0, 3.4, 2.6 (as labeled on the figure). - Data sources: Eurostat; Haver Analytics; and IMF staff calculations. - Latvia (Accumulated inflation during the year): - Reference series plotted for months January–December for periods: 2021, 2022, 2023, 2014-19, and 2024. - Annotated monthly values shown on chart include: 4.7, 14.5, 3.2, 2.1 (as labeled on the figure). - Data sources: Eurostat; Haver Analytics; and IMF staff calculations. - Estonia (Accumulated inflation during the year): - Reference series plotted for months January–December for periods: 2021, 2022, 2023, 2014-19, and 2024. - Annotated monthly values shown on chart include: 5.3, 14.9, 4.2, 2.3 (as labeled on the figure). - Data sources: Eurostat; Haver Analytics; and IMF staff calculations. ### IMF administrative and institutional information (selected items from the annex) - Fund relations (as of May 31, 2024): - Quota: 441.60 SDR Million (100.00 percent of Quota). - Fund holdings of currency (Exchange Rate): 323.92 SDR Million (73.35 percent). - Reserve Tranche Position: 117.70 SDR Million (26.65 percent). - Net cumulative allocation (SDR Department): 560.49 SDR Million (100.00 percent of Allocation). - Holdings (SDR Department): 580.15 SDR Million (103.51 percent). - Outstanding Purchases and Loans: None. - Latest Financial Arrangements (selected historical entries): - Stand-By, Aug 30, 2001–Mar 29, 2003: Amount Approved 86.52 (SDR Million); Amount Drawn 0.00 (SDR Million). - Stand-By, Mar 08, 2000–Jun 07, 2001: Amount Approved 61.80 (SDR Million); Amount Drawn 0.00 (SDR Million). - Stand-By, Oct 24, 1994–Oct 23, 1997: Amount Approved 134.55 (SDR Million); Amount Drawn 134.55 (SDR Million). - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Principal: (no values shown) - Charges/Interest: 2023: -0.27; 2024: -0.60; 2025: -0.80; 2026: -0.80; 2027: -0.80. - Total: 2023: -0.27; 2024: -0.60; 2025: -0.80; 2026: -0.80; 2027: -0.80. - Exchange rate arrangement: - Currency of Lithuania: the euro. - Exchange rate arrangement of the euro area: free floating. - Lithuania participates in EMU with 19 other EU members and has no separate legal tender. - Lithuania has accepted obligations of Article VIII, Sections 2(a), 3 and 4 of the IMF’s Articles of Agreement. - Previous Article IV Consultation: - Lithuania is on the 12-month consultation cycle. - The last Article IV consultation was concluded on July 18, 2023. ### Technical assistance and AML/CFT developments (selected) - Technical Assistance from the Fund, 2001–24: multiple missions across FAD, STA, MCM, LEG covering tax policy, ROSC, treasury operations, external debt statistics, stress testing, public expenditure review, tax administration, banking law, GFS 2001, credit unions, local government finance, fiscal transparency, VAT gap, high wealth individuals management, AML/CFT framework, and compliance gap integration (dates and counterparts listed in table). - Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT): - MONEYVAL assessments: April 2012 and December 2018. - 2018 assessment: Lithuania’s AML/CFT regime assessed as insufficiently effective in ten out of eleven pillars. - Enhanced follow-up: Lithuania was placed in an enhanced follow-up process. - December 2023: Lithuania’s fourth enhanced follow-up report adopted; re-rated from ‘Partially Compliant’ to ‘Largely Compliant’ for Recommendation 2 (National cooperation and coordination). - Current status: Lithuania is now ‘Compliant’ or ‘Largely Compliant’ on 36 of the 40 FATF Recommendations. - Measures implemented: - Establishment of an AML Centre of Excellence. - National Risk Assessment (NRA) completed in 2019; report published in 2020. - Plan for measures to mitigate ML/TF risk for 2021–2023 prepared. - Bank of Lithuania approved new policy for AML/CFT supervision and the ML/TF Risk Scoring Methodology. - Transposition of the 5th Anti Money Laundering and Terrorist Financing Directive on January 10, 2020. - Amendment of the Law on the Prevention of Money Laundering and Terrorist Financing VIII–275 adopted and entered into force on August 1, 2021 (includes virtual currencies and custodian wallet providers in scope). - Further draft amendments under consideration to address remaining risks in the VASP sector and enhance regulation and supervision of designated non-financial businesses and professions. *Source: IMF staff report excerpts and informational annex (figures and calculations based on Eurostat, Haver Analytics, and IMF staff calculations).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1ltuea2024001.pdf_