## 2024. Wage growth remained above 10 percent in 2024, boosted by increased public wages,

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### Recent developments and context
- Real GDP growth: 2.7 percent in 2024.
- Wage growth: remained above 10 percent in 2024, boosted by increased public wages; markedly eased in Q1 2025.
- Budget and debt:
  - Budget deficit: increased to 1.3 percent of GDP in 2024 (lower than originally planned).
  - Public debt: rose to 38.2 percent of GDP in 2024.
- Defense spending:
  - Defense expenditure: 2.8 percent of GDP in 2024.
  - Expected defense spending: rise to 3-3.5 percent of GDP for 2025-30 (Defense Fund package); further rise to 5 percent of GDP for 2026-30 in line with NATO commitments.
- Pension policy: Parliament approved a tax policy package and proposed changes to Pillar II pension including removing automatic enrollment and introducing options to withdraw funds before retirement age.

### Outlook and key projections
- Growth:
  - 2025: 2.9 percent.
  - 2026: 3.4 percent (largely reflecting increased private consumption driven by anticipated withdrawals from the Pillar II pension).
  - Medium-term convergence: 2.5 percent.
- Inflation:
  - 2025: expected to temporarily rise to 3.2 percent, before gradually moderating.
- Risks:
  - Tilted to the downside: potential economic slowdown in trade partners, heightened geopolitical tensions, demographic pressures.
  - Delays in structural reforms would limit productivity growth and undermine potential growth in the medium term.

### Executive Board assessment — key messages
- Commended the economy’s resilience and strong fundamentals but noted downside risks and long-standing structural issues.
- Emphasized safeguarding macroeconomic stability while advancing reforms to boost sustainable, inclusive growth.
- Need for a comprehensive fiscal strategy to address pressures from increased defense spending and long-term needs related to aging and the green transition.
- Additional revenue mobilization measures and spending efficiency gains needed to stabilize debt and preserve fiscal space; measures to address high inequality recommended.
- Caution on Pillar II reform: could lower replacement rates and raise future public liabilities; called for reforms ensuring financial and social sustainability.
- Welcomed banking system strength (solid capitalization, ample liquidity, low NPL ratios); reinforced need for close oversight and readiness to adjust capital-based measures.
- Encouraged sustained implementation of AML/CFT measures, supervision of fintech and virtual asset service providers, and development of domestic capital markets.
- Called for continued structural reforms: raise productivity, address skills mismatches, deepen SME financing, accelerate technological diffusion and AI adoption, improve vocational training and migrant labor integration, and continue decarbonization and climate adaptation efforts.

### Key policy recommendations
- Fiscal policy:
  - Preserve fiscal space through revenue mobilization and improve spending efficiency while ensuring long-run debt sustainability.
  - Enhance financial and social sustainability of the multi-pillar pension system given adverse demographic trends.
- Financial sector:
  - Continue calibrated macroprudential policies to address financial stability risks.
  - Ensure effective oversight and implementation of AML/CFT measures.
- Structural policies:
  - Deepen capital markets and improve financial access to facilitate investment.
  - Accelerate adaptation of new technologies and address skills mismatches in the labor market.

### Fiscal outturn and 2024 budget performance
- 2024 deficit: 1.3 percent of GDP (significantly lower than originally planned 3 percent of GDP).
- Outturn drivers:
  - Higher surplus of social security funds.
  - Stronger than expected tax revenues given high wage growth.
  - Lower expenditure on goods and services offsetting greater expenditure on public sector wages.
- Text Table 1: Difference: Budgeted versus Outturn in % of GDP 2024 — Total improvement in 2024 GG balance: 1.5
  - Revenues (in % of GDP): Direct Taxes 0.4; Indirect Taxes 0.3; Social security 0.7; Other -0.2; Total 1.2
  - Expenditure (in % of GDP): Compensation of employees 1.0; Goods and services -0.9; Interest 0.2; Subsidies 0.0; Social benefits 0.1; Capital transfers -0.4; Other -0.1; Capital expenditure 0.0; Total -0.2

### Defense spending: plans and fiscal implications
- 2024 defense expenditure: 2.8 percent of GDP.
- Defense Fund (approved 2024): aims to increase defense spending to 3-3.5 percent of GDP for 2025-30 financed by:
  - Increased borrowing through defense bond issuance.
  - Higher revenue, including a rise in CIT rates and excise duties.
  - Extension of the bank levy by one more year.
- From 2026: defense spending targeted at 5 percent of GDP (new NATO commitment).
- Staff baseline estimates: defense spending at around 5 percent of GDP would increase the deficit to 4.1 percent of GDP in 2026, with deficits remaining elevated at around 4 percent in the medium-term.
- Public debt projections: rise to 55 percent of GDP by 2030, reaching 60 percent of GDP by 2033.
- Financing options identified for 2026-30:
  - EIB loan of EUR 540 million for construction of a military base.
  - Nordic Investment Bank loan of EUR 400 million for other defense investments.
  - Some additional defense needs financed by approved tax measures.
  - Potential application to the EU Security Action for Europe facility (SAFE; up to EUR 150 billion available; Lithuania is planning to apply and is currently evaluating the proposal).

### Discretionary measures and near-term fiscal impact
- Text Table 3: Impact of Discretionary Measures on the Deficit (in % of GDP)
  - Revenue changes 2024 vs 2025: Total 0.2 (2024) and 0.1 (2025)
    - Direct Taxes: -0.3 (2024) and -0.3 (2025)
      - o/w Corporate Income Tax 0.0 (2024) 0.0 (2025)
      - o/w Solidarity Contribution 0.0 (2024) -0.2 (2025)
      - o/w Other -0.3 (2024) -0.1 (2025)
    - Indirect Taxes 0.4 (2024) 0.4 (2025)
      - o/w Excise Taxes 0.2 (2024) 0.3 (2025)
      - o/w 2023 VAT Changes 0.2 (2024) 0.0 (2025)
    - Other 0.0 (both years)
  - Expenditure changes 2024 vs 2025: Total -1.1 (2024) -0.7 (2025)
    - Compensation of Employees -0.8 (2024) -0.9 (2025)
    - Subsidies 0.4 (2024) 0.0 (2025)
    - Social Benefits -0.1 (2024) 0.1 (2025)
    - Other -0.2 (2024) -0.0 (2025)
    - Capital Expenditure -0.4 (2024) -0.1 (2025)
  - Net Additional Impact: -0.9 (2024) -0.6 (2025)
- 2025 budget projection: deficit expected to rise to 2.8 percent of GDP from 1.3 percent in 2024, driven by pension indexation and discretionary measures including higher public sector wages.
- Defense spending on accrual basis: estimated 3.3 percent of GDP in 2025.
- Activation of the National Escape Clause from 2026 enables accommodation of additional defense spending within the EU fiscal framework but will adversely impact medium-term debt dynamics.

### Tax policy changes and revenue implications
- Planned tax measures estimated to increase revenues by 0.6 percent of GDP in 2026-7. Detailed impacts (in percent of GDP):
  - PIT: Introduce a new intermediary rate of 25% for a threshold of 36-60 average wages; Maintain tax credit for low-income earners. 0.23% of GDP
  - CIT: Increase the standard rate to 17% (also on dividend income) and reduce rate to 7%; introduction of instant depreciation of certain fixed assets, limitations on the deductions of tax losses. 0.05% of GDP
  - Real estate: Broadening the tax base for secondary residential real estate with EUR 50,000 non-taxable threshold and progressive tax rates ranging from 0.2% to1%. For primary residential real estate, non-taxable threshold and the rates from 0.1 to 1% will be determined by municipalities. 0.08% of GDP
  - VAT: Increase reduced rates of 9% to 12%, lower rate for books to 5%; remove VAT relief for heating, hot water and firewood. 0.09% of GDP
  - Sugar tax: Excise duty in EUR/hl differentiating by sugar content per 100 ml. 0.03% of GDP
  - Insurance tax: 10% tax for non-life insurance premia with some exceptions. 0.12% of GDP
  - Total Revenue Impact for 2026-27: 0.6% of GDP
- Staff view: revenue yield of planned changes is modest relative to potential; scope exists for greater revenue mobilization given a relatively low tax revenue ratio to GDP compared with EU peers.

### Banking sector, credit, housing, and external sector
- Banking sector (end-2024):
  - Capital adequacy (CAR): 21.4 percent.
  - Liquidity coverage ratio: 347 percent.
  - NPL ratio: among the lowest in Europe (NPL ratio 0.6 at Dec-24).
- Credit and housing:
  - Loan growth to NFCs and households recovered in 2024 and early 2025; credit-to-GDP ratios increased only moderately.
  - House prices: grew just below 10 percent on average in 2024 and early 2025.
- External position:
  - Current account balance: surplus of 2.5 percent of GDP in 2024.
  - Services balance: around 11 percent of GDP in 2024, supported by ICT and financial services exports.
  - ESA indicates external position in 2024 was moderately stronger than the level implied by fundamentals and desirable policies with a current account norm of 1.3 percent.

### Outlook, projections, and risks (selected projections)
- Real GDP: 2.5 (2022), 0.4 (2023), 2.7 (2024), 2.9 (2025), 3.4 (2026), 2.2 (2027)
- Nominal GDP (Bn EUR): 67.4 (2022), 73.8 (2023), 78.4 (2024), 83.9 (2025), 88.9 (2026)
- Output gap (percent of potential GDP): 1.4 (2022), -0.7 (2023), -0.5 (2024), 0.0 (2025), 0.8 (2026)
- Unemployment rate (year average, percent): 6.0 (2022), 6.9 (2023), 7.1 (2024), 6.6 (2025), 6.1 (2026)
- Average monthly gross earnings (annual % change): 13.3 (2022), 12.2 (2023), 10.4 (2024), 8.1 (2025), 5.8 (2026)
- HICP, period average: 18.9 (2022), 8.7 (2023), 0.9 (2024), 3.2 (2025), 2.7 (2026)
- Fiscal balance (percent of GDP): -0.7 (2022), -0.7 (2023), -1.3 (2024), -2.8 (2025), -4.1 (2026)
- General government gross debt (percent of GDP): 38.1 (2022), 37.3 (2023), 38.2 (2024), 42.1 (2025), 46.5 (2026)
- Current account balance (percent of GDP): -6.1 (2022), 1.1 (2023), 2.5 (2024), 2.0 (2025), 1.9 (2026)

### Macroprudential stance and AML/CFT
- Borrower-based measures:
  - Maximum LTV: 85 percent for first loan; 70 percent for second and subsequent loans.
  - Maximum DSTI: 40 percent; 50 percent under 5 percent interest rate scenario.
  - Maximum loan maturity: 30 years.
- Bank-based measures:
  - O-SII buffer: SEB 2 percent; Swedbank 2 percent; Artea (former Šiaulių) 1 percent; Revolut 2 percent (as of July 2024).
  - Counter-cyclical capital buffer: 1 percent.
- AML/CFT:
  - Framework significantly strengthened; continued effective implementation urged.
  - Staff recommendations:
    - Continue effective AML/CFT efforts to mitigate ML/TF risks from non-resident activity.
    - BoL to bolster oversight of crypto asset service providers and ensure risk tolerance alignment.
    - Strengthen cyber resilience and monitor expanding credit cycles and house price upswing.

### Structural reforms and productivity agenda
- Key constraints: low capital intensity, subdued productivity growth, skills mismatches.
- Policy priorities:
  - Improve SME financing: develop risk capital, co-financing, risk-sharing, targeted credit guarantees, expand role of ILTE with transparency and monitoring.
  - Education and skills: address inefficiencies, reform vocational training, promote reskilling and digital/AI skills.
  - Migration: integrate migrants productively; legislative amendments to ease migration for high-skilled workers despite reduced non-EU quotas in 2025.
  - Digitalization and AI: facilitate technological diffusion, job transition, and AI adoption while mitigating job displacement and inequality.
  - Energy and climate: accelerate green transition and adaptation; Baltic countries joined European electricity grid in February 2025.

### Pension system reforms and implications
- Pillar II major changes:
  - Voluntary participation; automatic enrolment discontinued.
  - Opt-out window: January 1, 2026 – December 31, 2027.
  - Standard contribution: 3 percent; government incentive contribution: 1.5% of the national average gross earnings of the year before last.
  - Withdrawal options: once-in-a-lifetime 25% withdrawal (subject to 3% fixed deduction); full-balance withdrawal if saved up to half required for mandatory annuity within five years of retirement; tax-free withdrawals and 30-day payment in disability/serious illness/palliative cases.
- Likely impacts:
  - Reform likely to weaken pension adequacy and reduce replacement rates, increasing future public spending pressures.
  - Bank of Lithuania simulation: if 40% of Pillar II participants withdrew funds primarily for consumption, short-term business cycle volatility would increase and medium- to long-term replacement rates would decline further.
- Policy considerations:
  - Strengthen Pillar I accounting and communication, consider targeted safeguards for low-income workers, monitor macro effects of large withdrawals, and draw lessons from international experience (e.g., Estonia: one third opted out by mid-2023).

### Fiscal strategy and recommended adjustments
- Near-term: given a closing output gap and mounting long-term needs, a tighter fiscal stance than currently expected is desirable; any unused spending or revenue overperformance should be saved to safeguard buffers.
- Medium-term: fiscal adjustments totaling about 2 percent of GDP during 2026-30 would bring the deficit closer to 2 percent in 2030 and anchor debt closer to 50 percent.
- Recommended composition:
  - Predominantly additional tax measures potentially yielding around 3 percent of GDP.
  - Options: make PIT more progressive, limit CIT exemptions, broaden property tax base (including primary residential properties), reduce VAT compliance gap, improve tax administration efficiency.
- Box 1 findings:
  - Lithuania’s tax-to-GDP ratio: 22.3 percent in 2023 versus EU average 26.1 percent.
  - Additional tax revenue potential estimated around 9 percent of GDP; staff feasible measures could yield 1.2 percent to 3.9 percent of GDP.

### Risk Assessment Matrix — selected risks and policy responses
- External risks:
  - Trade policy and investment shocks — Likelihood: High (Short-term). Policy response: diversify trade and energy supplies; accelerate structural reforms.
  - Regional conflicts — Likelihood: Medium (Short-term). Policy response: use fiscal space for targeted relief; rely on automatic stabilizers.
  - Deepening geo-economic fragmentation — Likelihood: High (Long-term). Policy response: continue EU trade integration; pursue education and healthcare reform.
  - Cyberthreats — Likelihood: Medium (Short-term). Policy response: strengthen collaboration with supervisors and crisis preparedness.
- Domestic risks:
  - Failure to implement structural reforms — Likelihood: High (Medium-term). Policy response: accelerate reforms and elaborate medium-term fiscal plan.
  - Uncertainty about net migration inflows — Likelihood: Medium (Short/Medium-term). Policy response: support migrant integration and increase labor participation.
  - Addressing spending pressures — Likelihood: Medium (Medium/Long-term). Policy response: implement pension, healthcare and education reforms; increase revenue collection.

*Italic: Content derived from the IMF staff report pages and tables provided in the source PDF.*

### 2024. Wage growth remained above 10 percent in 2024, boosted by increased public wages,

### 1ltuea2025001-source-pdf - 2024. Wage growth remained above 10 percent in 2024, boosted by increased public wages,

### Recent developments and context
- Lithuania grew strongly in 2024, with Real GDP growth of 2.7 percent in 2024.
- Wage growth remained above 10 percent in 2024, boosted by increased public wages, but markedly eased in the first quarter of 2025.
- The budget deficit increased to 1.3 percent of GDP in 2024 but was lower than originally planned, largely due to the higher surplus of social security funds and stronger than expected tax revenues, as well as lower expenditure on goods and services.
- Public debt rose to 38.2 percent of GDP in 2024.
- Defense expenditure reached 2.8 percent of GDP in 2024 and is expected to rise to 5 percent of GDP for 2026-30 in line with new NATO commitments.
- Parliament recently approved a tax policy package and proposed changes in the Pillar II pension including removing automatic enrollment and introducing options to withdraw funds before retirement age.

### Outlook and key projections
- Growth projections:
  - Growth is expected to reach 2.9 percent in 2025, supported by private consumption and investment.
  - Growth is projected to accelerate to 3.4 percent in 2026, largely reflecting increased private consumption driven by anticipated withdrawals from the Pillar II pension.
  - Growth is projected to converge to 2.5 percent in the medium-term.
- Inflation:
  - Inflation is expected to temporarily rise to 3.2 percent in 2025, before gradually moderating.
- Risks:
  - Risks are tilted to the downside, including from a potential economic slowdown in trade partners, heightened geopolitical tensions, and demographic pressures.
  - Delays in structural reforms would limit productivity growth and undermine potential growth in the medium term.

### Executive Board assessment — key messages
- Directors commended the economy’s resilience and strong fundamentals but noted downside risks and long-standing structural issues.
- Emphasis on safeguarding macroeconomic stability while advancing reforms to boost sustainable, inclusive growth.
- Need for a comprehensive fiscal strategy to address pressures from increased defense spending and long-term needs related to aging and the green transition.
- Additional revenue mobilization measures and spending efficiency gains are needed to stabilize debt and preserve fiscal space, coupled with measures to address high inequality.
- Caution that the recent Pillar II reform could lower replacement rates and raise future public liabilities; encouraged reforms that ensure both financial and social sustainability of the pension system.
- Welcomed banking system strength (solid capitalization, ample liquidity, low NPL ratios) and reinforced the need for close oversight and readiness to adjust capital-based measures as needed.
- Encouraged sustained implementation of AML/CFT measures, including supervision of fintech and virtual asset service providers, and development of domestic capital markets.
- Called for continued structural reforms to raise productivity and alleviate skills mismatches, deepen SME financing, accelerate technological diffusion and AI adoption, improve vocational training and migrant labor integration, and continue decarbonization and climate adaptation efforts.

### Key policy recommendations
- Fiscal policy
  - Preserve fiscal space through revenue mobilization and improve spending efficiency while ensuring long-run debt sustainability.
  - Enhance financial and social sustainability of the multi-pillar pension system given adverse demographic trends.
- Financial sector
  - Continue calibrated macroprudential policies to address financial stability risks.
  - Ensure effective oversight and implementation of AML/CFT measures.
- Structural policies
  - Deepen capital markets and improve financial access to facilitate investment.
  - Accelerate adaptation of new technologies and address skills mismatches in the labor market.

### Selected economic indicators (highlights from table)
- Output
  - Real GDP: 2.5 (2022), 0.4 (2023), 2.7 (2024), 2.9 (2025), 3.4 (2026), 2.2 (2027)
  - Nominal GDP (in billions of euros): 67.4 (2022), 73.8 (2023), 78.4 (2024), 83.9 (2025), 88.9 (2026)
  - Output gap (percent of potential GDP): 1.4 (2022), -0.7 (2023), -0.5 (2024), 0.0 (2025), 0.8 (2026)
- Employment and wages
  - Unemployment rate (year average, in percent of labor force): 6.0 (2022), 6.9 (2023), 7.1 (2024), 6.6 (2025), 6.1 (2026)
  - Average monthly gross earnings: 13.3 (2022), 12.2 (2023), 10.4 (2024), 8.1 (2025), 5.8 (2026)
  - Average monthly gross earnings, real (CPI-deflated): -4.6 (2022), 3.5 (2023), 9.6 (2024), 4.9 (2025), 3.1 (2026)
  - Labor productivity: -1.3 (2022), -1.0 (2023), 1.1 (2024), 2.4 (2025), 3.6 (2026)
- Prices
  - HICP, period average: 18.9 (2022), 8.7 (2023), 0.9 (2024), 3.2 (2025), 2.7 (2026)
  - HICP core, period average: 13.6 (2022), 10.7 (2023), 2.6 (2024), 3.6 (2025), 3.0 (2026)
  - HICP, end of period: 20.0 (2022), 1.6 (2023), 1.9 (2024), 3.0 (2025), 2.8 (2026)
- General government finances (percent of GDP)
  - Fiscal balance: -0.7 (2022), -0.7 (2023), -1.3 (2024), -2.8 (2025), -4.1 (2026)
  - Revenue: 35.5 (2022), 36.7 (2023), 38.2 (2024), 38.3 (2025), 38.1 (2026)
  - Expenditure: 36.3 (2022), 37.4 (2023), 39.5 (2024), 41.1 (2025), 42.2 (2026)
  - General government gross debt: 38.1 (2022), 37.3 (2023), 38.2 (2024), 42.1 (2025), 46.5 (2026)
- Balance of payments
  - Current account balance (percent of GDP): -6.1 (2022), 1.1 (2023), 2.5 (2024), 2.0 (2025), 1.9 (2026)
  - Current account balance (billions of euros): -4.1 (2022), 0.8 (2023), 1.9 (2024), 1.7 (2025), 1.7 (2026)

*Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1ltuea2025001-source-pdf.pdf*

### 8.      The fiscal outturn was

### 8.      The fiscal outturn was 

### Fiscal outturn and 2024 budget performance
- The deficit rose to 1.3 percent of GDP in 2024 but was significantly lower than the originally planned 3 percent of GDP.
- Overperformance drivers:
  - Higher surplus of social security funds.
  - Stronger than expected tax revenues given high wage growth.
  - Lower expenditure on goods and services, offsetting greater expenditure on public sector wages.
- Public debt rose to 38.2 percent of GDP in 2024.
- Text Table 1: Difference: Budgeted versus Outturn in % of GDP 2024 — Total improvement in 2024 GG balance: 1.5
  - Revenues (in % of GDP): Direct Taxes 0.4; Indirect Taxes 0.3; Social security 0.7; Other -0.2; Total 1.2
  - Expenditure (in % of GDP): Compensation of employees 1.0; Goods and services -0.9; Interest 0.2; Subsidies 0.0; Social benefits 0.1; Capital transfers -0.4; Other -0.1; Capital expenditure 0.0; Total -0.2

### Defense spending: levels, plans, and fiscal implications
- Defense expenditure reached 2.8 percent of GDP in 2024.
- Defense Fund package (approved in 2024) aims to increase defense spending to 3-3.5 percent of GDP for 2025-30, financed by:
  - Increased borrowing through defense bond issuance.
  - Higher revenue, including a rise in CIT rates and excise duties.
  - Extension of the bank levy by one more year.
- Defense spending will further rise to 5 percent of GDP for 2026-30 in line with the new NATO commitment.
- Lithuania’s national fiscal rule—stricter than the EU rule—has been suspended and is currently under review.
- Staff baseline estimates: higher defense spending at around 5 percent of GDP would increase the deficit to 4.1 percent of GDP in 2026, with deficits remaining elevated at around 4 percent in the medium-term.
- Public debt projections: rise to 55 percent of GDP by 2030, reaching 60 percent of GDP by 2033 (see Annex VII DSA).
- Financing options identified by authorities for 2026-30:
  - EIB loan of EUR 540 million for construction of a military base.
  - Nordic Investment Bank loan of EUR 400 million for other defense investments.
  - Some additional defense needs financed by approved tax measures.
  - Potential use of the EU Security Action for Europe facility (SAFE) — up to EUR 150 billion available; Lithuania is planning to apply and is currently evaluating the proposal.

### Discretionary measures and near-term fiscal impact
- Text Table 3: Impact of Discretionary Measures on the Deficit (in % of GDP)
  - Revenue changes 2024 vs 2025: Total 0.2 (2024) and 0.1 (2025)
    - Direct Taxes: -0.3 (2024) and -0.3 (2025)
      - o/w Corporate Income Tax 0.0 (2024) 0.0 (2025)
      - o/w Solidarity Contribution 0.0 (2024) -0.2 (2025)
      - o/w Other -0.3 (2024) -0.1 (2025)
    - Indirect Taxes 0.4 (2024) 0.4 (2025)
      - o/w Excise Taxes 0.2 (2024) 0.3 (2025)
      - o/w 2023 VAT Changes 0.2 (2024) 0.0 (2025)
    - Other 0.0 (both years)
  - Expenditure changes 2024 vs 2025: Total -1.1 (2024) -0.7 (2025)
    - Compensation of Employees -0.8 (2024) -0.9 (2025)
    - Subsidies 0.4 (2024) 0.0 (2025)
    - Social Benefits -0.1 (2024) 0.1 (2025)
    - Other -0.2 (2024) -0.0 (2025)
    - Capital Expenditure -0.4 (2024) -0.1 (2025)
  - Net Additional Impact: -0.9 (2024) -0.6 (2025)
- Budget projection for 2025: deficit expected to rise to 2.8 percent of GDP from 1.3 percent in 2024, driven by pension indexation and discretionary measures including higher public sector wages.
- Defense spending in 2025 estimated to raise to 3.3 percent of GDP from 2.8 percent in 2024 on an accrual basis.
- Activation of the National Escape Clause from 2026 enables accommodation of additional defense spending within the EU fiscal framework but will adversely impact medium-term debt dynamics.

### Tax policy changes and revenue implications
- Planned tax measures (Text Table 4) estimated to increase revenues by 0.6 percent of GDP in 2026-7. Detailed revenue impacts (in percent of GDP):
  - PIT: Introduce a new intermediary rate of 25% for a threshold of 36-60 average wages; Maintain tax credit for low-income earners. 0.23% of GDP
  - CIT: Increase the standard rate to 17% (also on dividend income) and reduce rate to 7%; introduction of instant depreciation of certain fixed assets, limitations on the deductions of tax losses. 0.05% of GDP
  - Real estate: Broadening the tax base for secondary residential real estate with EUR 50,000 non-taxable threshold and progressive tax rates ranging from 0.2% to1%. For primary residential real estate, non-taxable threshold and the rates from 0.1 to 1% will be determined by municipalities. 0.08% of GDP
  - VAT: Increase reduced rates of 9% to 12%, lower rate for books to 5%; remove VAT relief for heating, hot water and firewood. 0.09% of GDP
  - Sugar tax: Excise duty in EUR/hl differentiating by sugar content per 100 ml. 0.03% of GDP
  - Insurance tax: 10% tax for non-life insurance premia with some exceptions. 0.12% of GDP
  - Total Revenue Impact for 2026-27: 0.6% of GDP
- Staff view: the revenue yield of planned changes is modest relative to potential; scope exists for greater revenue mobilization given a relatively low tax revenue ratio to GDP compared with EU peers.

### Banking sector, credit, housing, and external sector
- Banking sector (end-2024):
  - Capital adequacy: 21.4 percent CAR.
  - Liquidity coverage ratio: 347 percent.
  - NPL ratio: among the lowest in Europe.
- Credit developments:
  - Loan growth to both NFCs and households recovered in 2024 and early 2025; credit-to-GDP ratios increased only moderately over the last year.
  - Moderating mortgage rates invigorated real estate markets in 2024 and early 2025, with house prices growing just below 10 percent on average.
- Current account and external position:
  - Current account surplus of 2.5 percent of GDP in 2024.
  - Services balance around 11 percent of GDP in 2024, supported by ICT and financial services exports.
  - ESA indicates external position in 2024 was moderately stronger than the level implied by fundamentals and desirable policies with a current account norm of 1.3 percent.
  - Lithuania’s direct exposure to the US exports is limited, but vulnerable to trade barriers and supply chain disruptions through indirect exposure vis-à-vis EU trading partners.

### Outlook, projections, and risks
- Growth and inflation projections (Text Table 2):
  - Real GDP growth: 2024: 2.7; 2025: 2.9; 2026: 3.4; 2027: 2.2; 2028: 2.5; 2029: 2.5; 2030: 2.5 (percent)
  - Private consumption growth (yoy, in percent): 2024: 3.6; 2025: 2.9; 2026: 3.7; 2027: 1.4; 2028: 2.0; 2029: 2.2; 2030: 2.2
  - Inflation (percent): 2024: 0.9; 2025: 3.2; 2026: 2.7; 2027: 2.5; 2028: 2.5; 2029: 2.5; 2030: 2.5
  - Employment (annual percentage change): 2024: 1.6; 2025: 0.5; 2026: -0.2; 2027: -0.2; 2028: -0.2; 2029: -0.2; 2030: -0.2
  - Unemployment rate (percent): 2024: 7.1; 2025: 6.6; 2026: 6.1; 2027: 6.0; 2028: 5.9; 2029: 5.9; 2030: 5.9
- Short- and medium-term outlook:
  - Economy expected to grow steadily at 2.9 percent in 2025 while inflation will accelerate in 2025.
  - Growth projected to accelerate to 3.4 percent in 2026, largely reflecting increased private consumption driven by anticipated withdrawals from the Pillar II pension.
  - Medium-term GDP growth expected to slow to around 2.5 percent after Pillar II pension withdrawals wear off.
- Key risks (tilted to the downside):
  - High uncertainty around trade policies and geopolitical risks; a severe downturn in main trade partners would worsen external performance and domestic activity.
  - Weaker demographics pose risks to labor supply and could pressure wages and competitiveness if productivity growth fails to accelerate.
  - Fiscal risks: in the absence of additional measures, higher defense spending and existing long-term expenditure needs create considerable medium-term fiscal risk; further reductions in the Pillar II replacement rate could increase public spending pressures.

### Policy recommendations and fiscal strategy
- Near- and long-term fiscal challenges require a comprehensive strategy to preserve fiscal space through revenue mobilization and enhanced spending efficiency while ensuring pension system sustainability.
- For 2025:
  - Given a closing output gap and mounting long-term needs, a tighter fiscal stance than currently expected would be desirable.
  - Any unused spending or revenue overperformance should be saved to safeguard fiscal buffers and reduce the need for larger adjustments in later years.
- Medium-term fiscal strategy:
  - Fiscal adjustments totaling about 2 percent of GDP during 2026-30 would bring the deficit closer to 2 percent in 2030 and anchor debt closer to 50 percent to preserve fiscal space.
  - Temporary measures and productivity-enhancing capital expenditure could be deficit-financed, but much of additional defense spending is likely permanent and may require higher revenue or lower spending elsewhere.
- Recommended adjustment composition:
  - Predominantly additional tax measures that could yield further revenues of around 3 percent of GDP (Box 1).
  - Options include: making PIT more progressive, limiting CIT exemptions, broadening property tax base (including primary residential properties), reducing the VAT compliance gap, and improving tax administration efficiency.
- Box 1 findings:
  - Lithuania’s tax-to-GDP ratio reached 22.3 percent in 2023 versus EU average 26.1 percent.
  - Lithuania’s additional tax revenue potential estimated at around 9 percent of GDP; staff estimates additional feasible measures could yield tax revenues in the range of 1.2 percent to 3.9 percent of GDP.

*Source: Ministry of Finance; Ministry of Defense; Eurostat; Stockholm International Peace Research Institute; Bank of Lithuania; European Central Bank; Haver Analytics; IMF staff calculations and estimates.*

### Box 1. Tax Policy Options for Lithuania (concluded)

### Box 1. Tax Policy Options for Lithuania (concluded)

### Benchmarking taxes and tax potential
- Tax revenue and tax gap comparisons indicate room to mobilize additional revenue relative to some peers.  
- Notes on projections and assumptions:
  - Baseline deficit and debt projections assume defense spending is around 3 percent in 2025, and 5 percent from 2026-30.
  - The baseline deficit incorporates tax changes of 0.3 percent and 0.6 percent of GDP in 2026 and 2027, respectively.
  - The EUR 800 million that was paid in cash for defense equipment in 2025 directly affects the stock flow adjustment and debt in 2025.
  - Deficit projections are on an accrual basis and do not make assumptions on the cash paid versus timing of delivery of defense equipment from 2026-30.
  - Recommended deficit and debt paths are based on additional measures recommended by staff as discussed in ¶20 and ¶21 of the main text.

### Baseline and recommended fiscal paths (key statistics)
- Text Table 5. Lithuania: Baseline and Recommended Fiscal Paths (In percent of GDP)
  - Fiscal balance
    - Baseline: 2025 -2.8; 2026 -4.1; 2027 -3.9-4.0; 2028 -4.0; 2029 -4.0; 2030 -4.0
    - Recommended: 2025 -2.8; 2026 -3.4; 2027 -2.7-2.4; 2028 -2.2; 2029 -2.1
  - Public debt
    - Baseline: 2025 42.1; 2026 46.5; 2027 50.2; 2028 52.3; 2029 54.2; 2030 55.9
    - Recommended: 2025 42.1; 2026 45.9; 2027 48.4; 2028 49.0; 2029 49.2; 2030 49.2
- Text Table 6. Lithuania: Recommended Fiscal Adjustment from 2026-2030 (In percent of GDP)
  - Baseline fiscal impulse: 2026 1.3; 2027 -0.2 0.1; 2028 0.0; 2029 0.0; 2030 0.0
  - Recommended adjustment: 2026 -0.7; 2027 -0.5 -0.4 -0.2 -0.1
  - Fiscal impulse under adjustment scenario: 2026 0.6; 2027 -0.7 -0.3 -0.2 -0.1
- Projection framing:
  - Recommended deficit and debt paths reflect additional measures described in the main text (¶20 and ¶21).

### Revenue mobilization and spending efficiency (policy findings)
- Revenue mobilization should be complemented by other measures including improving spending efficiency.
- Spending context and areas for efficiency gains:
  - Levels of government spending remain below EU peers, but savings are possible from increased spending efficiency including in health care and education.
  - Hospital network rationalization could improve quality of service while reducing costs.
  - The teacher-student ratio is relatively high for secondary education; there is room to rationalize the school network while improving quality.
  - Government employment is relatively high for EU standards, suggesting scope for efficiency gains.
- Recommendation: combine revenue measures with spending-efficiency improvements to limit the need for higher taxes or deeper cuts elsewhere.

### Pension system: sustainability and adequacy
- The multi-pillar pension system needs strengthening to ensure financial and social sustainability while avoiding excessive pressures on future public finances.
- Key points:
  - Public pension expenditure is expected to rise over the next two decades linked to adverse demographic trends while replacement ratios remain low.
  - Recent reform to Pillar II—removing automatic enrollment and introducing options to opt out, withdraw funds and interrupt contributions from early 2026 onwards—will likely weaken the pension system’s spending adequacy and could further add fiscal pressures in the future.
  - A broader reform of the pension system is needed to ensure financial sustainability and increase adequacy, ideally by introducing strong incentives to contribute to the funding of the system, including ideally making participation compulsory.
- Views:
  - The central bank views the reform as likely to reduce the replacement rate over the long-term, implying increased pressure on public spending in the future.
  - Authorities view the Pillar II reform as enhancing attractiveness and flexibility of Pillar II, expecting limited impact on the replacement rate and a temporary boost to economic growth.

### Fiscal stance in adverse scenarios and fiscal rules
- In the event of adverse shocks, automatic stabilizers should be the main fiscal response.
  - Given mounting spending pressures, safeguarding fiscal space should continue to anchor fiscal policy objectives even in downside scenarios.
  - Temporary support to the most vulnerable households and firms could be considered, but it needs to be well-targeted and time bound.
- National fiscal rule recalibration:
  - The national fiscal rule is a structural balance rule with a debt anchor in the form of an expenditure correction mechanism covered by two laws and is tighter than EU rules.
  - The rule has ensured fiscal discipline, reducing debt-to-GDP after past downturns.
  - The current review—with a draft proposal envisaged to be discussed at Parliament in the fall—should aim at reducing complexity while recalibrating the rule to meet new priority spending within debt-stabilizing limits (IMF 18/186).
  - Any modification should preserve strong countercyclicality needed in a small open economy without independent monetary policy.

### Authorities’ views on revenue and spending
- Authorities broadly agreed on the need to mobilize additional revenues to preserve fiscal space.
- They recognize additional defense expenditure compounds long-term spending pressures.
- Authorities noted:
  - Approved tax changes aim to raise additional revenues starting from 2026 while improving progressivity and efficiency.
  - The tax base for non-primary residential real estate will be broadened.
  - Scope for generating higher primary residential real estate tax revenues is limited due to political constraints.
  - Further fiscal savings could be gained by improving spending efficiency, but potential savings are relatively limited compared to pressures from increasing defense spending.

### Financial sector policies: safeguarding stability and integrity
- Financial sector overview:
  - Lithuania’s financial markets have grown but remain highly bank-based.
  - Financial assets of financial institutions increased in 2024, including pension funds, insurance corporations and investment funds.
  - Capital markets remain shallow despite recent increase in corporate bond issuance.
  - Banking sector dominated by a small number of banks; non-bank fintech companies increasing but mostly focused on European markets.
- Profitability and resilience:
  - Bank profitability is expected to moderate but remain high as financial conditions ease in 2025 due to declining ECB policy rates and increased competition.
  - Despite likely declines, remunerations in the ECB’s deposit facility and net interest margins are expected to remain sufficiently high to allow banks to retain relatively high profitability.
  - Lithuanian banking system remains one of the most cost-efficient in Europe (cost-to-income ratio remains well below the EU median).
  - Recent regulatory changes (removal of mortgage refinancing fees) and the levy on banks (extended to 2025) increase costs but remain absorbable.
- Stress testing and risks:
  - Solvency and liquidity stress tests by the Bank of Lithuania in 2024 suggest banks would withstand adverse macro scenarios and unexpected liquidity shocks.
  - Some smaller banks require enhanced capitalization and closer oversight.
  - Cyberattacks have increased in frequency; cyber resilience should be strengthened, including through full implementation of the Digital Operational Resilience Act (DORA).
- Macroprudential stance:
  - Current stance is broadly appropriate, but vigilance is warranted given residential real estate and private sector credit developments.
  - Commercial real estate needs close oversight due to high risk of significant price corrections from persistent imbalance between supply and demand.
  - In the event of a significant adverse financial shock with potential widespread banking losses, relaxing capital-based measures would be appropriate to minimize credit supply disruptions and support lending.
- AML/CFT:
  - The AML/CFT framework has been strengthened significantly; continued effective implementation should focus on ML/TF risks from non-resident activity.

### Macroprudential measures (Text Table 7)
- Borrower-Based Measures:
  - Maximum loan-to-value (LTV) ratio: 85 percent for the first loan; 70 percent for second and subsequent loans
  - Maximum debt-service-to-income (DSTI) ratio: 40 percent; 50 percent under 5 percent interest rate scenario
  - Maximum loan maturity: 30 years
- Bank-Based Measures:
  - Systemically Important Institution (O-SII) buffer:
    - SEB: 2 percent
    - Swedbank: 2 percent
    - Artea (former Šiaulių): 1 percent
    - Revolut: 2 percent (as of July 2024)
  - Counter-cyclical capital buffer: 1 percent
  - Capital conservation buffer: (value reported in table header but not specified in the excerpt)

*Source: IMF staff calculations; content from Box 1 and associated text in the Lithuania report.*

### 2.5 percent

### 2.5 percent

### Financial stability, AML/CFT, and macroprudential stance
- Sectoral systemic risk buffer: 2 percent for the housing loan portfolio.
- Authorities' assessment:
  - Banking sector: banks generally remain highly profitable and well capitalized, with ample liquidity buffers and low non-performing loan ratios; a few smaller banks may need to increase capital ratios.
  - Financial cycles, including housing markets and private sector credit, are recovering but not overheating.
  - Main financial stability risks: elevated trade policy uncertainty, possible price corrections in commercial real estate markets, and an increased frequency of cyberattacks on financial intermediaries.
  - Lithuania’s AML/CFT framework has been significantly strengthened and the implementation of AML/CFT measures are well underway, including the operationalization of the MiCA regime.
- Staff recommendations:
  - Continue effective AML/CFT efforts to mitigate ML/TF risks from non-resident payments, including developing further AML/CFT measures for CENTROlink members.
  - Bank of Lithuania (BoL) to bolster oversight as it prepares for the transfer of supervision and market entry controls for crypto asset service providers from the Financial Crime Investigation Service in 2025 and to ensure risk tolerance alignment with other supervised sectors.
  - Continue close oversight and vigilance of the banking sector, including strengthening cyber resilience.
  - The current macroprudential stance is broadly appropriate, but monitor expanding credit cycles and house price upswing and be ready to act if early signs of excessive financial expansion emerge.
  - If a significant adverse financial shock materializes, loosening capital-based measures would support lending to the economy.

### Structural policies to unlock productivity and sustained growth
- Growth and productivity context:
  - Recent recovery largely driven by higher labor accumulation from a temporary surge in net migrants; capital played a limited role and TFP growth has been stagnant.
  - Given expected population declines, structural reforms to facilitate greater capital deepening and higher productivity growth are essential; migration can help mitigate negative effects from aging.
- Investment and finance:
  - Low capital intensity is a key barrier to productivity growth and the transition to a higher value-added economy.
  - Firms report difficulties in accessing finance as a major barrier to investment (Text Figure 10).
  - Policy options to raise investment:
    - Development of risk capital, co-financing and mechanisms for risk sharing to enhance credit flow to SMEs.
    - Targeted credit guarantee schemes and integrating digital solutions to alleviate access-to-finance constraints.
    - Expanded role of state-owned institution ILTE (previously INVEGA) to support investment in high value-added sectors, innovation, energy efficiency, and strategic infrastructures.
    - Ensure effective monitoring and transparency of ILTE operations to consolidate its role as a national development bank.
    - Deepening the EU’s single market combined with stronger incentives to develop domestic capital markets to support corporate financing.
- Education, skills, and labor:
  - Inefficiencies in the education system contribute to persistent skills mismatches; Lithuania is among the countries with the highest skills mismatches in Europe.
  - Critical shortages persist in nursing, engineering, and scientific fields.
  - Reforms and measures:
    - 2024 higher education reform restructuring the state college system to align study programs with labor market needs.
    - Incentives to enhance reskilling and retraining of workers to improve digital skills.
    - Reform the vocational training system and promote specialized training in new technologies including AI.
- Migration and labor force:
  - Ensuring effective integration of migrants into the labor market is crucial to sustain the labor force.
  - Legislative amendments enabled easier migration for high-skilled workers despite the reduction of non-EU workers quota in 2025.
  - Staff’s scenario analysis suggests migration flows can significantly affect labor force dynamics and potential growth over the medium-term.
  - Policies should focus on integrating migrants in the most productivity-enhancing way while allowing participation of foreign professionals in sectors with the largest shortages.
- Digitalization and AI:
  - Lithuania has invested significantly in digitalizing its economy and is one of the main Fintech Hubs in Europe; digital infrastructure remains close to the EU average.
  - Policies should facilitate technological diffusion, job transition, and AI adoption among firms, while mitigating risks of job replacement and inequality.
  - Further progress in e-government services to reduce administrative burden on businesses would support corporates and foreign investment and positively impact TFP.
- Energy and climate:
  - Energy security reinforced: the Baltic countries joined the European electricity grid in February 2025, completely disconnecting from the Russian electricity system.
  - Diversification of energy sources and increased domestic renewable electricity production lowered import dependency.
  - Lithuania remains susceptible to climate change risks and needs to accelerate the green transition, particularly adaptation.
  - Future investment in new technologies to support potential growth and defense initiatives should not thwart efforts to reduce economy-wide emissions; policies align with the updated National Energy and Climate Action Plan (NECP) for 2021–2030.

### Staff appraisal, fiscal risks, and public finances
- Macroeconomic performance and risks:
  - The economy has performed well despite shocks in recent years; recovery supported by rising real income, a relatively good external sector performance amid weak foreign demand, shift toward high value-added activities, and above normal net migration flows.
  - New challenges include additional defense spending and longstanding structural issues.
  - Risks are tilted to the downside: potential slowdown in trade partners, increased geopolitical risks, and rising fiscal risks from higher defense spending and from the pension system if replacement rates continue to decline.
- Fiscal outlook and recommendations:
  - Planned increase in defense spending to around 5 percent of GDP from the current 3 percent will raise financing needs significantly.
  - Approved tax policy changes are helpful but revenue yield is estimated to be modest.
  - Staff baseline: debt reaching over 60 percent of GDP by 2033.
  - To stabilize debt at a still-low level, any unused spending or revenue overperformance in the current fiscal year should be saved.
  - Additional fiscal adjustment needed, including additional revenue and spending efficiency measures, to preserve fiscal space to absorb future shocks.
- Pension system:
  - Significant increases in public pension expenditure are expected; replacement ratios projected to remain low over the next two decades.
  - Recently approved Pillar II reform is likely to weaken pension system adequacy, increasing pressures on future public finances.
  - Any future pension reform should aim to ensure financial and social sustainability of the whole system, including strong incentives for workers to contribute ideally through compulsory participation.

### External position, potential growth, and policy priorities
- External position:
  - External position is moderately stronger than the level implied by fundamentals and desirable policies.
  - Current account surplus records moderately stronger than the norm; there is scope to further expand investment, especially through structural reforms; expected to converge to the norm under the baseline scenario.
- Potential growth constraints and policy priorities:
  - Constraints: low capital intensity, subdued productivity growth, and skills mismatches.
  - Policy measures to raise potential growth:
    - Improve SME financing by developing risk capital and risk-sharing mechanisms.
    - Use ILTE to complement private banks by filling funding gaps for strategic investments in innovation and energy efficiency.
    - Accelerate policies to facilitate technological diffusion, job transition, and AI adoption among firms to boost productivity growth in the business sector.
    - Reforms to address skills mismatches, promote vocational training, and better integrate migrants into the labor market in a productivity-enhancing way.

*Source: Republic of Lithuania — IMF staff report excerpts.*

### 47.      The next Article IV consultation with Lithuania is expected to be conducted on the

### The next Article IV consultation with Lithuania is expected to be conducted on the standard 12-month cycle.

### Real sector: growth, demand, and sentiment
- The economy "has restored a solid growth path in 2024" with "broad-based recovery across sectors."
- Private consumption supported the recovery on the back of real income gains.
- Inventories: "The inventory cycle has normalized."
- Early indicators in 2025 show some decline in consumer confidence and weakened economic sentiment likely reflecting trade and geopolitical uncertainty in 2025.
- Real GDP and growth (Table 1 projections):
  - Real GDP growth: 2022 = 2.5; 2023 = 0.4; 2024 = 2.7; 2025 = 2.9; 2026 = 3.4; 2027 = 2.2; 2028 = 2.5; 2029 = 2.5; 2030 = 2.5 (annual percentage change).
  - Domestic demand (contribution to growth): 2022 = 2.2; 2023 = -1.0; 2024 = 2.9; 2025 = 3.1; 2026 = 3.5; 2027 = 2.0; 2028 = 2.4; 2029 = 2.5; 2030 = 2.5.
  - Nominal GDP (Bn EUR): 2022 = 67.4; 2023 = 73.8; 2024 = 78.4; 2025 = 83.9; 2026 = 88.9; 2027 = 92.8; 2028 = 97.4; 2029 = 102.4; 2030 = 107.5.
  - Potential GDP growth: 2022–2030 = 2.8, 2.6, 2.5, 2.5, 2.5, 2.5, 2.5, 2.5, 2.4 (respectively).
  - Output gap (percent of potential GDP): 2022 = 1.4; 2023 = -0.7; 2024 = -0.5; 2025 = 0.0; 2026 = 0.8; 2027 = 0.4; 2028 = 0.1; 2029 = 0.0; 2030 = 0.0.
- External demand contributions and trade: export growth and import growth (Table 1):
  - Export growth (year-on-year, percent): 2022 = 12.4; 2023 = -3.4; 2024 = 2.1; 2025 = 2.0; 2026 = 2.6; 2027 = 2.9; 2028 = 3.2; 2029 = 3.1; 2030 = 3.1.
  - Import growth (year-on-year, percent): 2022 = 12.7; 2023 = -5.3; 2024 = 2.4; 2025 = 2.5; 2026 = 2.9; 2027 = 2.9; 2028 = 3.3; 2029 = 3.4; 2030 = 3.4.

### Inflation dynamics and drivers
- Inflation "has risen in recent months due to higher excise duties" while energy prices have stabilized.
- Inflation expectations are rising to a three-year high.
- Services inflation stabilized at high rates in 2024, supported by "strong wage growth without productivity" and on the back of declining corporate profits.
- HICP and core inflation (Table 1 projections):
  - HICP, period average: 2022 = 18.9; 2023 = 8.7; 2024 = 0.9; 2025 = 3.2; 2026 = 2.7; 2027 = 2.5; 2028 = 2.5; 2029 = 2.5; 2030 = 2.5 (annual percentage change).
  - HICP core, period average (excluding unprocessed food and energy): 2022 = 13.6; 2023 = 10.7; 2024 = 2.6; 2025 = 3.6; 2026 = 3.0; 2027 = 2.7; 2028 = 2.4; 2029 = 2.4; 2030 = 2.4.
  - HICP, end of period (yoy): 2022 = 20.0; 2023 = 1.6; 2024 = 1.9; 2025 = 3.0; 2026 = 2.8; 2027 = 2.8; 2028 = 2.5; 2029 = 2.5; 2030 = 2.5.
  - GDP deflator (yoy): 2022 = 16.1; 2023 = 9.0; 2024 = 3.4; 2025 = 3.9; 2026 = 2.5; 2027 = 2.2; 2028 = 2.4; 2029 = 2.6; 2030 = 2.5.

### Labor market: employment, wages, participation, migration
- "Strong economic activity kept unemployment low" and employment gains for females have recently picked up.
- Wage growth remained strong, "especially in the public sector."
- Participation rate is at historical highs and strong migration has narrowed old age dependency.
- Labor market projections and indicators (Table 1):
  - Employment (annual % change): 2022 = 3.8; 2023 = 1.4; 2024 = 1.6; 2025 = 0.5; 2026–2030 = -0.2 (each year).
  - Unemployment rate (year average, percent of labor force): 2022 = 6.0; 2023 = 6.9; 2024 = 7.1; 2025 = 6.6; 2026 = 6.1; 2027 = 6.0; 2028 = 5.9; 2029 = 5.9; 2030 = 5.9.
  - Average monthly gross earnings (annual % change): 2022 = 13.3; 2023 = 12.2; 2024 = 10.4; 2025 = 8.1; 2026 = 5.8; 2027 = 5.2; 2028 = 5.4; 2029 = 5.2; 2030 = 5.2.
  - Average monthly gross earnings, real (annual % change): 2022 = -4.6; 2023 = 3.5; 2024 = 9.6; 2025 = 4.9; 2026 = 3.1; 2027 = 2.7; 2028 = 2.8; 2029 = 2.7; 2030 = 2.8.

### External sector: current account, NIIP, trade composition, REER
- Current account: "continued to improve in 2024, driven by a higher trade balance, especially for services" with transport and other services driving much of the improvement in 2024.
- NIIP turned positive for the first time in 2024, driven by improvements in the current account balance.
- Exposure of Lithuanian exports: higher exposure to the U.S. than the EU average mainly due to indirect exposure.
- Key balance of payments figures (Table 3, Bil. Euros / percent of GDP):
  - Current account balance (Bil. Euros): 2022 = -4.1; 2023 = 0.8; 2024 = 1.9; 2025 = 1.7; 2026 = 1.7; 2027 = 1.7; 2028 = 1.8; 2029 = 1.9; 2030 = 1.9.
  - Current Account Balance (percent of GDP): 2022 = -6.1; 2023 = 1.1; 2024 = 2.5; 2025 = 2.0; 2026 = 1.9; 2027 = 1.8; 2028 = 1.8; 2029 = 1.9; 2030 = 1.8.
  - Services balance (percent of GDP): 2022 = 5.9; 2023 = 7.4; 2024 = 8.8; 2025 = 8.6; 2026 = 8.6; 2027 = 8.9; 2028 = 9.3; 2029 = 9.7; 2030 = 10.1.
  - Net international investment position (percent of GDP): 2022 = -12.0; 2023 = -4.6; 2024 = -2.1; 2025 = 2.3; 2026 = 5.9; 2027 = 8.2; 2028 = 10.5; 2029 = 12.5; 2030 = 14.4.
  - Gross external debt (percent of GDP): 2022 = 67.0; 2023 = 69.4; 2024 = 77.7; 2025 = 81.2; 2026 = 84.7; 2027 = 88.1; 2028 = 89.8; 2029 = 91.0; 2030 = 92.1.

### Fiscal developments: deficit, debt, and interest pressures
- The deficit rose in 2024, "largely driven by higher central government borrowing."
- Government debt increased by 0.9 pp of GDP to 38.4 percent of GDP in 2024.
- Interest expenditure is expected to rise over time, putting pressure on the debt level as bond yields have increased in recent years and are only slowly declining.
- Government financial position and projections (Table 1 and Table 2):
  - General government gross debt (percent of GDP): 2022 = 38.1; 2023 = 37.3; 2024 = 38.2; 2025 = 42.1; 2026 = 46.5; 2027 = 50.2; 2028 = 52.3; 2029 = 54.2; 2030 = 55.9.
  - Overall fiscal balance (percent of GDP): 2022 = -0.7; 2023 = -0.7; 2024 = -1.3; 2025 = -2.8; 2026 = -4.1; 2027 = -3.9; 2028 = -4.0; 2029 = -4.0; 2030 = -4.0.
  - Interest payments (percent of GDP): 2022 = 0.3; 2023 = 0.6; 2024 = 0.8; 2025 = 1.0; 2026 = 1.1; 2027 = 1.3; 2028 = 1.4; 2029 = 1.4; 2030 = 1.5.
  - Revenue (percent of GDP): steady at 35.5–38.3 across 2022–2030; Expenditure (percent of GDP): rising from 36.3 in 2022 to 42.2 in 2026 and remaining around 42.3–42.4 thereafter.
  - Net acquisition of financial assets (percent of GDP): 2022 = 0.6; 2023 = 2.7; 2024 = 1.8; 2025 = 3.6; 2026 = 2.8; 2027 = 1.8; 2028 = 0.5; 2029 = 0.4; 2030 = 0.3.
  - Net incurrence of liabilities (percent of GDP): 2022 = 1.4; 2023 = 3.3; 2024 = 3.1; 2025 = 6.3; 2026 = 6.8; 2027 = 5.7; 2028 = 4.5; 2029 = 4.4; 2030 = 4.3.

### Banking sector: credit, profitability, liquidity, and risks
- Credit growth expanded gradually in 2024 and early 2025; lending rates moderated more than deposit rates.
- Banking profitability "remained high in 2024" benefitting from a strong net interest income ratio and one of the lowest NPL ratios, alongside large amounts at the central bank deposit facility.
- Key banking indicators (figures and Table 5):
  - Credit to Households and Non-Financial Corporations: positive year-on-year growth through 2024–May-25 (chart series shown).
  - Net interest-to-net operating income and Return on Assets: banking sector profitability indicators were high in 2024 (charts and Table 5).
  - Nonperforming loans, 2024Q4: LTU among the lowest in comparator list; NPL ratio 2024 (Table 5): Nonperforming loans to total (non-interbank) loans = 0.6 (Dec-24).
  - Deposits at the central bank: large holdings despite DFR rates moderating since mid-2024 (chart).
- Financial soundness (Table 5, selected items, Dec-24):
  - Regulatory capital to risk-weighted assets: 21.4 (Dec-24).
  - Return on Equity (RoE): 20.2 (Dec-24).
  - Liquidity coverage ratio: 346.7 (Dec-24).
  - Loan to deposit ratio in the banking sector: 51.8 (Dec-24).
  - Provisioning (in percent of NPLs, memo): 47.8 (Dec-24).

### Inequality, poverty, and social indicators
- Income inequality in Lithuania is "among the highest in EU" and has somewhat increased between 2013 and 2023; redistribution reduces inequality by about 30 percent on average.
- Almost 25 percent of the population is at risk of poverty or social exclusion (Persons at Risk of Poverty or Social Exclusion, 2024: Lithuania ranked among higher rates in the sample).
- Poverty risk is especially high among the elderly population and in rural areas; differences in jobless rates across major cities persist.
- Selected inequality metrics:
  - Within-country income inequality (Gini index, disposable income): Lithuania in higher range among EU countries (Gini values shown in charts for 2013 and 2023).
  - Evolution of income inequality in Lithuania (Gini index): Post-tax and pre-tax series between 1995 and 2023 show rise in post-tax Gini to the mid-40s (chart series).
  - Persons at risk of poverty or social exclusion (2024): Lithuania appears among higher percentiles in chart comparisons.

### Monetary and reserve positions
- Monetary authority balance sheet (Table 4, selected levels, Bil. Euros):
  - Gross foreign assets: 2014 = 7.9; 2015 = 2.9; 2016 = 3.0; 2017 = 4.2; 2018 = 5.7; 2019 = 5.3; 2020 = 4.7; 2021 = 5.9; 2022 = 5.5; 2023 = 5.8; 2024 = 6.0.
  - Reserve money: 2014 = 5.9; 2015 = 9.1; 2016 = 12.6; 2017 = 15.7; 2018 = 18.8; 2019 = 15.5; 2020 = 20.6; 2021 = 24.8; 2022 = 20.9; 2023 = 22.8; 2024 = 24.2.
  - Broad money (yearly percent change, memo): 2014 = 1.2; 2015 = 32.9; 2016 = 7.2; 2017 = 5.8; 2018 = 11.4; 2019 = 10.4; 2020 = 32.1; 2021 = 13.5; 2022 = 9.8; 2023 = 9.4; 2024 = 6.2.
- Gross official reserves (billions of euros, BOP basis, memo): 2014 = 7.9; 2015 = 2.9; 2016 = 3.0; 2017 = 4.2; 2018 = 5.7; 2019 = 5.3; 2020 = 4.7; 2021 = 5.9; 2022 = 5.5; 2023 = 5.8; 2024 = 6.0.

*Italic: Content derived from the IMF staff report pages and tables provided in the source PDF.*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Overview
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. The relative likelihood is staff’s subjective assessment (“low” = below 10 percent, “medium” = between 10 and 30 percent, and “high” = between 30 and 50 percent). The RAM reflects staff views as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. 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 likely to remain salient over a longer horizon.

### External Risks
- Trade policy and investment shocks
  - Likelihood / Time horizon: High (Short-term)
  - Impact on Lithuania: Lithuania is vulnerable to higher trade barriers and disruptions to FDI flows and to global value chains, which could increase the prices of critical imported inputs, reduce market access to exports, and limit FDI flows, with near- and medium-term negative effects on investment, inflation and GDP.
  - Recommended policy response: Diversify further trade, financial flows, and sources of energy supplies. Accelerate structural reforms to strengthen competitiveness and build resilience.

- Regional conflicts
  - Likelihood / Time horizon: Medium (Short-term)
  - Impact on Lithuania: The direct trade impact with Russia, Ukraine and Belarus will be small. The main impact could 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 vulnerable firms and households and let automatic stabilizers work fully if both inflation and growth are negatively affected.

- Social discontent
  - Likelihood / Time horizon: Medium (Short-term)
  - Impact on Lithuania: High rates of inequality and of persons at risk of poverty or social exclusion could increase further government spending pressures and create resistance to necessary structural reforms with short-term costs.
  - Recommended policy response: Prioritize fiscal reforms to improve social safety nets, including through targeted spending, and ensure that structural reforms are sequenced, well packaged and reflect social consensus, with complementary and compensatory measures that consider the potential distributional effects.

- Commodity price volatility
  - Likelihood / 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 provide targeted support to vulnerable groups and those most affected.

- Tighter financial conditions and systemic instability
  - Likelihood / 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 / 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 / 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.

- Climate change
  - Likelihood / 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
- Uncertainty about net migration inflows
  - Likelihood / Time horizon: Medium (Short/Medium-term)
  - Impact on Lithuania: Higher than expected net migration can further support employment growth and mitigate the impact of declining labor force and alleviate skills mismatches. On the other hand, a large decline in net migration will reduce labor supply and further limit employment growth.
  - Recommended policy response: Continue to support the integration of immigrants into the labor market. Encourage further labor market participation by women and older workers.

- Failure to implement structural reforms
  - Likelihood / Time horizon: High (Medium-term)
  - Impact on Lithuania: Income convergence would be further delayed while social demands continue to rise without commensurate growth and revenue.
  - Recommended policy response: Accelerate the implementation of structural reforms and elaborate a medium-term fiscal plan that raises potential and meets social needs.

- Addressing near- and long-term spending pressures
  - Likelihood / 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.

*Annex I. Risk Assessment Matrix (Republic of Lithuania, International Monetary Fund).*

### 1. Lithuania’s Current Pension System). IMF (2024b): 2024 Article IV Staff Report (Annex V. Lithuania’s Pension System),

### 1. Lithuania’s Current Pension System

### Major changes to Pillar II (policy design)
- Voluntary participation: Participation in the Pillar II scheme will become voluntary, and automatic enrolment will be discontinued.
- Option to opt out: Current participants will have a two-year window (January 1, 2026 – December 31, 2027) to exit Pillar II and withdraw their accumulated funds, specifically their contributions and any investment returns made with their own funds associated to the scheme.
- Conversion of state-paid contributions on exit: If a participant withdraws under the opt-out window, contributions made on their behalf by the Lithuania’s State Social Insurance Fund Board (Sodra) or the state budget will be converted into additional pension accounting units in the Sodra pension system (Pillar I).
- Contribution choices for remaining participants:
  - Standard contribution: 3 percent.
  - Government incentive contribution: 1.5 percent of the national average gross earnings of the year before last (continues to be paid to members who remain).
  - Participants may increase the contribution above 3 percent or suspend contributions.
  - Contributions may be interrupted for up to one year, with the option to extend this period repeatedly without limit, formally remaining in the scheme but in practice without participating.
- Enhanced access to accumulated funds:
  - Once-in-a-lifetime option to withdraw 25 percent of the accumulated funds (up to a maximum of the amount contributed by the participant himself) by the retirement pension age, subject to a fixed withdrawal deduction of 3 percent of the amount withdrawn.
  - Participants who have saved up to half the amount required for a mandatory annuity will be allowed to withdraw their entire balance within five years of retirement or less.
  - The 3 percent deduction on withdrawals of 25 percent will not apply if this right is exercised by an individual who has reached retirement age.
  - In specific cases of disability, serious illness and palliative care needs, participants will be able to cease accumulating funds and withdraw all accumulated funds, without paying taxes on these amounts and with payment to be made within 30 days.

### Likely impacts on pension adequacy and fiscal outcomes (findings)
- The reform of Pillar II is likely to weaken the pension system’s spending adequacy by allowing reduced accumulation of pension benefits, thereby most likely implying a decline in the replacement rate and further undermining the adequacy of the pension system.
- International experience illustrative example:
  - Estonia: a 2021 reform making the statutory funded scheme voluntary led to one third of participants in the pension insurance fund opting out of the scheme and withdrawing the money by mid-2023.
- Bank of Lithuania ex-ante assessment (model simulation results and risks):
  - If 40% of Pillar II participants withdrew their funds primarily for consumption purposes:
    - Short-term: the business cycle would become more volatile.
    - Medium to long term: average replacement rates would decline further, with low-income individuals disproportionately affected.

### Key statistics and contextual figures (preserved as presented)
- Pillar II policy window to exit: January 1, 2026 – December 31, 2027.
- Standard contribution rate (Pillar II): 3%.
- Government incentive contribution: 1.5% of the national average gross earnings of the year before last.
- One-time withdrawal allowance: 25% of accumulated funds (subject to conditions); fixed withdrawal deduction: 3% of the amount withdrawn.
- Full-balance withdrawal eligibility if saved up to half required for mandatory annuity: within five years of retirement or less.
- Payment timing for disability/serious illness/palliative cases: within 30 days; withdrawals in these cases are tax-free.
- ICT and Pillar II contextual growth figures referenced in the same section:
  - ICT sector growth: approximately 10 percent annual rate over the last 10 years.
  - ICT share of GDP: from 3 percent in 2015 to 5.3 percent at the end of 2024.
  - ICT exports: 0.5 percent of GDP in 2015 to 3.1 percent of GDP in 2024.
- Estonia opt-out outcome referenced: one third of participants opted out by mid-2023.
- Bank of Lithuania modeling hypothetical withdrawal rate used in simulation: 40% of Pillar II participants.

### Policy implications and considerations (recommendations implied by analysis)
- The design shift to voluntary Pillar II with broad withdrawal options increases risks to retirement income adequacy, particularly for low-income individuals; policymakers should consider complementary measures to protect adequacy.
- Potential complementary measures (consistent with the risks highlighted):
  - Strengthen Pillar I (Sodra) accounting and communication about conversion of state-paid contributions for opt-outs to preserve retirement entitlements.
  - Consider targeted safeguards for low-income workers to prevent disproportionate declines in replacement rates.
  - Monitor short-term macroeconomic impacts of large-scale withdrawals to manage volatility in the business cycle.
  - Use experiences from comparable reforms (e.g., Estonia) to inform implementation, communication, and mitigation strategies.

*Source: IMF (2024b): 2024 Article IV Staff Report (Annex V. Lithuania’s Pension System), July 2024.*

### Annex VII. Table 6. L ithuania: Realism of Baseline Assumptions

### Annex VII. Table 6. Lithuania: Realism of Baseline Assumptions

### Realism analysis — headline
- Commentary: Realism analysis does not point to major concerns.
- Forecast Track Record: Projections made in the October and April WEO vintage.

### Comparator and color-code indicators
- Comparator Group: Advanced Economies, Non-Commodity Exporter, Surveillance.
- Color Code percentile bands shown: > 75th percentile; 50-75th percentile; 25-50th percentile; < 25th percentile.
- Specific indicators referenced: Public debt to GDP; Primary deficit; r - g; Exchange rate depreciation; SFA; real-time; Historical Output Gap Revisions.

### Historical distribution and extreme percentiles
- 3-year debt reduction above 75th percentile: (5.9 ppts of GDP).
- Max. 3-year reduction percentile rank: 15.4.
- 3-year adjustment above 75th percentile (2 ppts of GDP) — percentile rank: 22.

### Time series and chart references (preserve labels/years as shown)
- Time spans and labels appearing in figures: 2020 2021 2022 2023 2024 2025 2026 2027; 2014 2016 2018 2020 2022 2024 2026 2028 2030; 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053.
- Fiscal Adjustment (rhs) and Baseline paths shown with Multipliers: Multiplier = 0.5; Multiplier = 1.
- Fiscal adjustment axis labels preserved: -3 -2 -1 0 1 2 (percentage points of GDP); -9 -6 -3 0 3 6 (in percent).

### Public-debt creating flows and debt issuance structure
- Debt issuance term buckets shown: 5+ yr term; 1-5 yr term; <1 yr term.
- Spread vs 10-yr USTreas. and Implied spread, Laubach rule noted.
- Laubach rule note: The Laubach (2009) rule is a linear rule assuming bond spreads increase by about 4 bps in response to a 1 ppt increase in th[read cut-off in source].

### Public Debt, Financing Needs, and Long-Term Risks (Triggered Modules)

### Triggered modules summary (Annex VII. Table 7)
- Triggered modules listed: Pensions; Health.
- Lithuania: Long-Term Risk Assessment: Large Amortization — Projection Variable Risk Indication includes GFN-to-GDP ratio; Amortization-to-GDP ratio; Amortization; Overall Risk Indication; Total Public Debt-to-GDP Ratio.
- Risk assessment approaches referenced: Medium-term extrapolation; Medium-term extrapolation with debt stabilizing primary balance; Historical average assumptions.

### Commentary on long-term GFN and amortization
- Commentary: 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.
- Further note: 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.

### Long-run projection variants shown
- Projection variants included in charts: Long run projection; Projection; Baseline with t+5; Baseline with t+5 and DSPB; Historical 10-year average.

### Demographics: Health (Annex VII. Table 8)

### Health-related fiscal projections and scenarios
- 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.
- Chart scenario labels preserved:
  - Baseline: Extension of fifth projection year
  - Health (Demographics)
  - Health (Demographics + ECG)

### Time series labels for health projections
- Years shown in health charts: 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053.

### Data Adequacy Assessment for Surveillance (Annex VIII. Table 1)

### Overall assessment
- The data provided to the Fund is adequate for surveillance.
- Median Rating cell summary line: BAAAAAA (as shown in the table header area).
- Data Adequacy Assessment Rating: A.

### Sectoral assessments and dimensions (table headings preserved)
- Sectors and dimensions referenced: National Accounts; Prices; Government Finance Statistics; External Sector Statistics; Monetary and Financial Statistics; Inter-sectoral Consistency.
- Assessment labels visible: Coverage; Consistency; Frequency and Timeliness; Granularity; Data Quality Characteristics.

### Key data issues and recommendations
- Identified open issues:
  - Sectoral breakdown of non-financial accounts at quarterly basis are not produced which hampers surveillance.
  - Significant net errors and omissions in the BoP.
  - Large volatility of the inventories component in National Accounts, signaling potential measurement issues between supply and demand estimations of GDP.
- Changes since the last Article IV consultation: No changes.
- Corrective actions and capacity development priorities: There are currently no plans to produce quarterly data for the non-financial accounts, nor to enhance the estimation of Errors and Omissions and inventories. Apart from this item, there are no macro-critical needs for adjustments.

*Source: IMF Staff.*

### Annex VIII. Table 3. Lithuania: Table of Common Indicators Required for Surveillance

### Annex VIII. Table 3. Lithuania: Table of Common Indicators Required for Surveillance

### Data Dissemination and SDDS Plus
- Lithuania adheres to the Special Data Dissemination Standard (SDDS) Plus since July 2018 and publishes the data on its National Summary Data Page.
- The latest SDDS Plus Annual Observance Report is available on the Dissemination Standards Bulletin Board.
- Frequency and timeliness coding used:
  - (“D”) daily; (“W”) weekly or with a lag of no more than one week after the reference date; (“M”) monthly or with lag of no more than one month after the reference date; (“Q”) quarterly or with lag of no more than one quarter after the reference date; (“A”) annual.; ("I") irregular; and (" NA") not available.
- Selected indicator observation and reporting examples (preserve source formatting):
  - 9-Jul-25 9-Jul-25 DDD.........
  - May-25 Jun-25 MMM301W10
  - May-25 Jun-25 MMM302W14
  - May-25 Jun-25 MMM301M30
  - 2025Q1 Jun-25 QQA/ Q902Q/12M120
  - 2025Q1 Jun-25 QQM301M30
  - 2025Q1 Jun-25 QQQ301Q30
  - 2025Q1 Jun-25 QQQ901Q84
  - May-25 Jun-25 MMM308W40
  - 2025Q1 May-25 QQQ901Q60
  - 2025Q1 May-25 QQQ901Q90
  - 2025Q1 May-25 QQQ901Q84
- Footnotes and scope notes included in the table:
  - Includes reserve assets pledged or otherwise encumbered, as well as net derivative positions.
  - Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
  - Foreign, domestic bank, and domestic nonbank financing.
  - The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
  - Including currency and maturity composition.
  - Encouraged frequency of data and timeliness of reporting under the e-GDDS and required frequency of data and timeliness of reporting under the SDDS and SDDS Plus.

### Fund Relations and Membership Status (as of June 30, 2025)
- Membership Status: Joined: April 29, 1992; Article VIII.
- General Resources Account (SDR Million / Percent of Quota):
  - Quota 441.60 100.00
  - Fund holdings of currency (Exchange Rate) 321.34 72.77
  - Reserve Tranche Position 120.27 27.24
- SDR Department (SDR Million / Percent of Allocation):
  - Net cumulative allocation 560.49 100.00
  - Holdings 574.39 102.48
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements (concluded):
  - Stand-By Aug 30, 2001 Mar 29, 2003 Amount Approved (SDR Million) 86.52 Amount Drawn (SDR Million) 0.00
  - Stand-By Mar 08, 2000 Jun 07, 2001 Amount Approved (SDR Million) 61.80 Amount Drawn (SDR Million) 0.00
  - Stand-By Oct 24, 1994 Oct 23, 1997 Amount Approved (SDR Million) 134.55 Amount Drawn (SDR Million) 134.55
- Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Forthcoming Principal: (no values provided)
  - Charges/Interest 2026 0.00; 2027 0.00; 2028 0.00; 2029 0.00
  - Total 2026 0.00; 2027 0.00; 2028 0.00; 2029 0.00
- Implementation statuses:
  - HIPC Initiative: Not applicable.
  - MDRI Assistance: Not applicable.
  - Catastrophe Containment and Relief (CCR): Not applicable.

### Safeguards, FSAP, and Technical Assistance
- Safeguards Assessment:
  - Bank of Lithuania (BoL) completed a safeguards assessment on December 10, 2001, related to the Stand-By Arrangement (approved Aug 30, 2001; expired Mar 29, 2003). The assessment identified weaknesses and proposed recommendations; the BoL has implemented these recommendations.
- FSAP Participation and ROSCs:
  - FSAP Update mission completed on November 19, 2007.
  - Fiscal and statistics ROSCs completed in November 2002 and December 2002, respectively.
- Technical Assistance from the Fund (selected entries, 2001–2025):
  - FAD Tax policy issues Mission Jun. 3–26, 2001 — Ministry of Finance
  - STA ROSC Mission May 8–22, 2002 — Department of Statistics, Ministry of Finance, and Bank of Lithuania
  - MCM Stress testing Mission Jun. 11–21, 2007 — Bank of Lithuania
  - STA External debt statistics Mission Aug. 2–4, 2006 — Bank of Lithuania
  - FAD Fiscal Transparency Mission Nov. 28–Dec. 11, 2018 — Ministry of Finance
  - FAD Value Added Tax Gap Mission Oct. 23–Nov. 6, 2019; Feb. 27–Mar. 5, 2020; May 3–Nov. 26, 2021 — State Tax Inspectorate
  - LEG AML/CFT Framework Mission May 2–6, 2022; May 25–Jun. 2, 2022 — Bank of Lithuania/Financial Intelligence Unit
  - FAD Compliance Gap Integration Mission Mar. 1 – Apr. 28, 2023 — State Tax Inspectorate
  - FAD Advancing Spending Reviews Mission Sep 2025 – Nov 2025 (TBD) — Ministry of Finance
  - FAD VAT Gap, Tax Administration, Shadow Economy Virtual/Mission Sep 2025 – Dec 2026 (TBD) — State Tax Inspectorate, State Data Agency, Financial Crime Investigation Service, Ministry of Finance
- Resident Representative: None.

### Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT)
- MONEYVAL assessments:
  - Lithuania’s compliance assessed in April 2012 and December 2018.
  - The 2018 MONEYVAL assessment rated Lithuania’s AML/CFT regime as insufficiently effective in ten out of eleven pillars.
  - Lithuania was placed in an enhanced follow-up process after the assessment.
- Progress and recent outcomes:
  - In December 2024 Lithuania’s fifth enhanced follow-up report and the first compliance enhancing procedures report (CEP) were adopted, concluding sufficient progress for Recommendation 6 (Targeted financial sanctions related to terrorism and terrorist financing). Lithuania was removed from CEPs.
  - Lithuania has only 4 FATF Recommendations remaining rated as ‘Partially Compliant’, and is considered as either ‘Compliant’ or ‘Largely Compliant’ with 36 FATF Recommendations.
- Institutional and legal actions:
  - The government established an AML Centre of Excellence to facilitate information sharing and strengthen collaboration.
  - National Risk Assessment (NRA) completed in 2019; report published in 2020. A plan for measures to mitigate ML/TF risk for 2021–2023 was prepared.
  - Bank of Lithuania approved a new policy for AML/CFT supervision and the ML/TF Risk Scoring Methodology.
  - Lithuania transposed 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 entered into force on August 1, 2021; virtual currencies and custodian wallet providers included in scope.
  - Further amendments implemented to address remaining risks in the VASP sector and enhance regulation and supervision of designated non-financial businesses and professions.
- Supervisory enhancements:
  - Enhanced supervision of payment institutions and CENTROlink payment system participants.
  - Oversight of newly licensed crypto‑asset service providers under MiCAR.
  - BoL has increased AML supervision capacity and intensified on-site inspections of higher-risk financial institutions.

### Recent Economic Developments, Outlook, and Risks
- Growth and inflation:
  - 2024 output expanded by 2.7 percent.
  - Inflation fell sharply through 2024 before picking up modestly to 1.9 percent by year-end.
  - Real GDP growth (QoQ) amounted to 0.6 percent in Q1 2025 before slowing to 0.2 percent in Q2 2025.
  - Labor productivity: between Q3 of 2024 and Q2 2025, the average quarterly productivity growth reached 0.9 percent.
  - Economy expected to grow by around 2.8 percent in 2025.
  - Average inflation projected to rise to around 3.3 percent in 2025.
- Drivers and composition:
  - Domestic demand anchors growth; investment supported by EU funding; household consumption strengthened by robust financial positions and rising purchasing power (wage growth averaged 8.4 percent during the first half of 2025).
  - Structural factors: sustained high investment (investment-to -GDP remaining about 5 percentage points above the pre-Covid levels), rising share of high‑value‑added manufacturing, and a fast‑growing ICT sector.
  - Exports: diversified across products and markets; exports of high technology goods have increased by 50 percent over the last five years.
  - IMD World Competitiveness Ranking: Lithuania climbed nine positions to reach 21st place.
- Risks and scenarios:
  - External risks are tilted to the downside; slower growth among key euro area trading partners or deterioration in global trade sentiment could weigh on exports and investment.
  - Upside: increased defense spending can boost productivity and growth if a sufficient share of funds is directed to R&D, infrastructure, and domestic industries.
  - Policy change effect: Pillar II pension changes, once implemented, would temporarily boost consumption and output growth as some participants withdraw accumulated funds; output would gradually return to pre-policy trends in the medium term.
  - U.S. tariffs: BoL projects cumulative effect of various U.S. tariff scenarios on GDP growth to range between -0.25 and -0.82 percentage points over 2025–27.
  - Authorities estimate effective U.S. tariffs on Lithuania’s goods and services currently amounts to around 13 percent, as around a third of Lithuanian exports to the U.S. are exempted from tariffs.

### Fiscal Policy: Recent Measures and Outlook
- Policy stance:
  - Authorities commit to prudent and sustainable fiscal policy while accommodating additional spending pressures.
  - Additional revenue mobilization warranted over the medium term to preserve fiscal space.
  - Planned significant increase in defense spending: rising to about 3.3 percent of GDP in 2025 and to 5-6 percent of GDP in 2026-30.
  - Long-term expenditure pressures from adverse demographics, social needs, and the green transition noted.
- Tax and revenue measures:
  - Approved tax changes expected to yield up to 0.6 percent of GDP in additional annual revenue by 2027.
  - Personal income tax reform: pooling virtually all annual personal income with targeted exceptions, applying a three‑bracket tax schedule (20/25/32 percent) by income bands.
  - Social security contribution rules for the self-employed tightened.
  - Corporate Income Tax (CIT) standard rate to increase from 16 to 17 percent; reduced CIT rate for small businesses adjusted from 6 to 7 percent.
  - Property taxation: tax base for non-primary residential real estate broadened; municipalities set rates for primary residences valued above €450,000 within a 0.1–1 percent range.
  - VAT: reduced VAT rates will be raised; several VAT exemptions (for residential heating, hot water, and fuelwood) will be abolished.
  - Part of revenue income will be directly attributed to the Defense Fund newly established last year.
  - Authorities estimate limited effect on economic output of the new revenue measures, up to 0.3-0.4 percent of GDP over a five-year horizon (not accounting for effect of increased domestic spending).
- Pension reform:
  - Pillar II amendments end automatic enrollment, make participation voluntary, and allow opt-outs, partial withdrawals, and tailored contribution options while preserving the top-up from the budget for those who continue saving.
  - Government sees limited impact on the replacement rate; the central bank views changes as likely to reduce the replacement rate over the long-term, implying increased pressure on public spending in the future.
- Policy recommendations and technical assistance:
  - Authorities concur with staff on importance of enhancing efficiency on revenue and expenditure sides.
  - Authorities acknowledge IMF technical assistance, including upcoming TA on reducing Lithuania’s VAT compliance gap.

### Financial Sector Policies and Macroprudential Framework
- Banking sector health:
  - Banking sector described as well-capitalized, highly profitable, and liquid.
  - Non-performing loans (NPLs) remain at historically low levels (around 0.5 percent of total loans).
  - Sector’s return on equity and assets are among the strongest in Europe.
  - BoL stress testing indicates sector resilience to deterioration in economic developments or unexpected liquidity shocks.
- Credit and housing:
  - Gradual financial expansion due to falling interest rates and strengthening credit demand.
  - Housing market activity recovering; housing price growth has picked up and remains broadly consistent with fundamentals.
  - Housing affordability improved over the past two years as personal incomes have risen faster than house prices.
  - Volume of bank credit to non-financial corporations remains low compared to economic growth; businesses face challenges accessing finance—need to further develop domestic capital markets.
- Macroprudential stance and regulatory changes:
  - Positive neutral counter cyclical buffer (CCyB) of 1 percent.
  - Prudent borrower-based limits maintained.
  - Regulatory changes aim to increase mortgage market competition and enhance consumer protection:
    - Streamlined mortgage refinancing: faster and, in most cases, free for borrowers—led to increase in lower‑margin refinancings and renegotiations.
    - Lenders must offer each potential borrower at least two interest rate options: a variable rate and a fixed rate for no less than five years.
  - BoL consultation on targeted changes to borrowing regulations:
    - Slightly higher maximum loan-to value ratio (90 percent instead of 85 percent currently) for first-home mortgages.
    - Stricter requirements for second and subsequent mortgages.
    - Adjusted design of debt service-to-income requirement to ensure a more stable effect across the interest rate cycle.
- Main financial stability risks:
  - Elevated trade policy uncertainty.
  - Possible price corrections in commercial real estate markets.
  - Increased frequency of cyberattacks on financial intermediaries.
- AML/CFT supervision enhancements (see AML/CFT subsection above):
  - Enhanced supervision of payment institutions and CENTROlink participants.
  - Oversight of newly licensed crypto‑asset service providers under MiCAR.
  - BoL increased AML supervision capacity and intensified on-site inspections.

### Structural Policies and Growth Potential
- Structural strengths:
  - Remarkable income convergence with the EU over the past decade.
  - Economic structure evolving: manufacturing expansion in modern chemical products, optical equipment, automotive electronics, components for computers and electronic devices.
  - Services: information and ICT services doubled their share of GDP over the past decade and are increasingly integrated into global value chains.
  - Exports of high technology goods increased by 50 percent over the last five years.
- Structural challenges and priorities:
  - Need to sustain robust productivity growth and reduce sensitivity to rising labor costs to continue rapid convergence.
  - Authorities’ reform priorities:
    - Facilitate higher private investment and faster technology adoption.
    - Efficient use of EU funds and incentives for innovation.
    - Invest in infrastructure and human capital.
    - Implement labor market policies to reduce skills mismatches (expand vocational training and re-skilling programs).
    - Deepen local capital market; increase corporate bond issuance.
    - Newly consolidated national promotional institution ILTE to facilitate risk-sharing and fill financing gaps.

*Source: Annex VIII. Table 3. Lithuania: Table of Common Indicators Required for Surveillance; Staff Report material for the 2025 Article IV Consultation, as contained in the provided content unit.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1ltuea2025001-source-pdf.pdf_