## _cr16125

## Source details

**Canonical URL:** [_cr16125](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16125.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16125.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16125.pdf.json)

---

### External Sector Assessment — Context and Recent Developments
- Income and macro context:
  - Lithuania’s per capita income reached 75 percent of the EU average in PPP terms.
  - Euro area membership since 2015 reinforced stability.
  - Public debt: 42.7 percent of GDP.
  - Unemployment: 9.1 percent.
  - Core inflation: 1.9 percent.
  - Current account deficit: 1.7 percent of GDP.
- 2015 performance:
  - Real GDP growth: 1.6 percent.
  - Exports to Russia contracted by some 40 percent (shock of over 1½ percent of GDP); partially offset by export reorientation (transport sector).
  - Private consumption growth: 4.9 percent.
  - Investment growth: 10 percent.
  - Real wages growth: 5.5 percent.
  - Headline inflation: -0.7 percent; core inflation: 1.9 percent.
  - Consumer purchasing power improved by an estimated 2 percent due to lower energy and food prices.
  - Net International Investment Position: -45 percent of GDP (improved).
  - Current account moved into moderate deficit in 2015; capital account surplus (inflow of EU-funds) more than covered the current account deficit.
- Fiscal and financial sector:
  - Headline fiscal deficit fell from 0.7 percent of GDP in 2014 to 0.2 percent of GDP in 2015.
  - Structural deficit reached structural balance and undershot the long-advocated level of ½ percent of GDP; correcting for one-off and cyclical effects suggests a negative fiscal impulse of ¾ percent of GDP.
  - Capital Adequacy Ratio (CAR): 24.8 percent.
  - Nonperforming loan (NPL) ratio: 5.5 percent.
  - Loan-to-deposit ratio: 100 percent.
  - Net parent bank funding: less than 4 percent of GDP.
  - Private-sector credit growth: 4.1 percent (first convincing positive growth since 2008/09).
  - Real housing prices: some 30 percent below 2008 peak.
  - Gross external debt: 75 percent of GDP (elevated); Bank of Lithuania external debt increased by about 10 percent of GDP due to euro adoption accounting operations.

### External Sector Assessment — Valuation and Norms
- Appropriate medium-term current account deficit: around 2½ percent of GDP.
- Actual current account in 2015: 1.7 percent of GDP.
- REER assessments:
  - ERER approach: REER marginally overvalued at 3 percent.
  - External Sustainability Approach: exchange rate slightly undervalued by 2.6 percent relative to CA that would stabilize net foreign assets (-3.3 percent of GDP).
  - EBA-lite: indicates a moderate real exchange rate undervaluation; current account norm estimated at -4.3 percent of GDP (interpretation cautioned).

### Outlook and Risks
- Near term projections:
  - Growth projected at 2.7 percent in the year following the report.
  - Consumer inflation projected to rise to 0.6 percent.
  - External current account expected to deteriorate somewhat as imports grow faster than exports.
- Medium term:
  - Growth could climb to some 3½ percent, about 1 percentage point below historical trend—assuming continued structural reform and competitiveness measures.
  - Inflation expected to run at a small premium over the euro area target of 2 percent as Balassa-Samuelson effects materialize.
  - Lithuania expected to run a moderate current account deficit.
- Downside risks (dominate):
  - External shocks: adverse global growth or financial conditions spilling over via trade and foreign-owned banks.
  - Domestic risks: wage growth exceeding productivity gains, undermining competitiveness.
- Upside possibilities:
  - Reverse migration improving labor supply and growth.
  - Faster trade diversification and payoffs from reforms.
- Authorities’ view:
  - Broad agreement with staff on outlook and risks; medium-term growth seen by authorities somewhat above 3 percent.
  - Authorities flag energy prices could cause inflation to undershoot projections.
  - Supervisors and national competent authorities do not see immediate financial stability risks from cross-border bank spillovers.

### Risk Assessment Matrix — Selected Risks and Policy Recommendations
- Tighter or more volatile global financial conditions (Short Term; Low/Medium impact):
  - Impact: reduced access to funding for Nordic parent banks → tighter lending in Lithuania.
  - Policy: Euro area monetary policy as first line of defense; if needed, activate resolution and restructuring plans in coordination with home-country authorities.
- Sharper-than-expected global growth slowdown (Short Term/Medium Term; High/Medium impact):
  - Impact: strong trade channel effects; worse performance in euro area or CIS particularly damaging.
  - Policy: reinforce export diversification; coordinate policy response at European level; allow automatic stabilizers; allow discretionary fiscal easing if shock is large.
- Dislocation in capital and labor flows (Short Term; Low/Medium impact):
  - Impact: prolonged Russia/Ukraine conflict heightens risk aversion and depresses transit trade services with Russia.
  - Policy: allow automatic stabilizers; discretionary fiscal easing if large shock; reassure investors of solid fundamentals.
- Risks to competitiveness (Short to Medium Term; High impact):
  - Sources: wage growth outstripping productivity; emigration and aging creating labor shortages.
  - Policy: pause minimum wage hikes as necessary; boost productivity through structural reforms; improve employability and ease restrictions on non-EU immigration.

---

### Box 2 — Implementation of Past Fund Advice: Fiscal Policy and Priorities
- Fiscal achievements and 2016 budget:
  - Fund advice focused on repairing public finances after 2008/09; authorities successfully reduced the deficit.
  - Headline deficit projected at 1.1 percent of GDP (2016 budget).
  - Structural deficit projected at 0.6 percent of GDP (achieving the staff-recommended ½ percent of GDP).
  - A moderate fiscal stimulus of some ½ percent of GDP provided to help close the output gap.
- Remaining priorities and recommendations:
  - No room for new unfunded tax cuts or spending initiatives.
  - Allow automatic stabilizers to operate freely.
  - Focus on fiscal structural reforms to generate fiscal space: increase spending quality (notably in health and education) and improve tax administration.
  - Use resulting fiscal space for growth promotion and lowering income inequality.
- Revenue and tax structure notes:
  - Lithuania’s overall revenue take relative to GDP is among the lowest in the EU.
  - Calls for rebalancing taxation from labor to capital and improving spending quality have resonated but remain at an early stage.

### Box 2 — Structural Reforms: Labor, Education, Innovation, Business Environment
- Productivity context:
  - Total factor productivity growth averaged 3½ percent per year since 1995, but has been much slower recently.
  - Authorities earmarked EU funds equivalent to over 5 percent of GDP over seven years for corrective policies.
- Labor market and skills:
  - Structural unemployment estimated close to the double digits.
  - Resources devoted to ALMPs are less than half the EU average and seven times less than in Denmark.
  - Lithuania’s tertiary education attainment rate: 56 percent (the highest in the EU), yet skill shortages persist; vocational training is underdeveloped.
  - Tax wedge: personal income tax rate of 15 percent applies to all income above the basic allowance; social security contributions run at some 40 percent and apply from the first euro earned.
  - Suggested reforms: ramp up ALMPs, life-long learning program, review government-paid study places, consider basic allowance for social security contributions phased out as incomes rise.
- Company upgrading and innovation:
  - Lithuania ranks forth from the bottom on the European Innovation Score Board.
  - Recommendations: more cross-border clusters, competence centers, focus on product/process upgrading and market development rather than basic science breakthroughs.
- Business climate and labor code:
  - Lithuania ranks 20 out of 189 countries in the Doing Business Report.
  - New labor code proposed under the “New Social Model” to modernize labor relations; caution against payroll-tax-financed severance fund given high labor tax wedge.
  - Other recommendations: streamline bankruptcy procedures and loosen restrictions on immigration from non-EU countries.
- Authorities’ stance:
  - Strong agreement on diagnoses and reform direction; noted complexity and political sensitivity.
  - Passage of the new labor code is a key priority.

### Box 2 — Securing Competitiveness and Minimum Wage Policy
- Unit labor costs and competitiveness:
  - Fast wage growth and modest productivity gains have pushed ULCs up faster than in the EU.
  - Tradable sector cushions largely exhausted; future price competitiveness at risk unless wage growth decelerates and productivity picks up.
- Demographic and wage considerations:
  - Reduced migration scenario assumes 28,000 net emigrations per year through 2025 (close to historical average of 25,000).
  - Recommendation: pause minimum wage increases following hikes since August 2012 (minimum wage up over 50 percent and now at 47 percent of the average wage); consider depoliticizing the process and giving independent experts a formal role.
- Non-price competitiveness:
  - Export market shares have started to stagnate even excluding the Russian market—signaling stalled catching up in product quality, mix, and sophistication.

### Box 2 — Preserving Fiscal Gains and Tackling Income Inequality
- Fiscal dynamics:
  - Projected structural deficit of 0.6 percent of GDP would ensure gradual decline of public debt and build fiscal buffers.
- Policy priorities:
  - Prioritize spending quality (health, education) and improve tax administration.
  - Use fiscal space to promote growth and lower income inequality.
- Inequality facts:
  - Over 20 percent of the population estimated to be at-risk-of-poverty (around 11 percent higher than the EU average).
  - Lithuania is among the most unequal European societies by Gini coefficient and wage dispersion (top decile vs bottom decile).
  - High inequality concentrated among the unemployed, retired, and unskilled; population characteristics jointly explain only about a third of inequality.
- Redistribution and “New Social Model” considerations:
  - Options: rebalance tax system toward wealth/capital taxation; introduce higher income tax rates for high-income earners; increase social protection spending (unemployment benefits, ALMPs, old-age pensions).
  - New Social Model proposals include extending unemployment insurance from six to nine months, higher benefit caps, social security coverage expansion, new pension formula, linking retirement age to life expectancy, indexing pensions to the wage bill, shifting basic pensions to State Budget, introducing a cap on contributions, and cutting contribution rates.
  - Staff advice: carefully scrutinize social security and pension reforms and consider phased implementation.

---

### Staff Appraisal — Macroeconomic Outlook, Policy Priorities, and Recommendations
- Growth outlook:
  - Growth projected to rebound to 2.7 percent in the near term and to rise to some 3½ percent over the medium-term, conditional on sound macroeconomic policies and structural reforms.
  - Risks tilted to the downside, primarily from the global environment.
- Fiscal policy recommendations:
  - Cap the structural fiscal deficit at ½ percent of GDP going forward to begin reversing the rise in public debt since 2008/09 and rebuild buffers.
  - The 2016 budget essentially achieves this goal; new unfunded spending initiatives or tax cuts should be avoided.
  - Public finances are strong enough to let automatic stabilizers operate freely.
- Productivity and labor market:
  - Frame productivity-enhancing reforms into a coherent package focused on improving employability, addressing labor market mismatches, lowering the tax wedge for low-income earners, and emphasizing company upgrading and innovation.
  - Guard against parliamentary amendments that would weaken the proposed new Labor Code.
- Competitiveness and wages:
  - External competitiveness intact but at risk; productivity gains have fallen short of fast real wage growth.
  - Recommendation: pause minimum wage hikes for now.
  - Monitor non-price competitiveness stagnation.
- Inequality:
  - Pursue dual-purpose measures that boost growth and benefit the disadvantaged; depending on preferences, consider more redistributive fiscal policies to make the tax system more progressive and lift low social protection spending.
- Financial sector:
  - Financial soundness indicators are solid; resumption of credit growth is welcome.
  - No current signs of financial excess; macroprudential toolkit available if needed.
  - Legislation to address weaknesses in the small credit union sector is overdue.

---

### Selected Key Projections and Indicators (Preserved Numerical Series)
- Real GDP growth (annual percent): 2013 3.5; 2014 3.0; 2015 1.6; 2016 2.7; 2017 3.1; 2018 3.4; 2019 3.6; 2020 3.6; 2021 3.3.
- Unemployment rate (year average, percent): 2013 11.8; 2014 10.7; 2015 9.1; 2016 8.6; 2017 8.5; 2018 8.4; 2019 8.2; 2020 8.1; 2021 8.0.
- HICP, end of period (YoY percent): 2013 0.5; 2014 -0.1; 2015 -0.3; 2016 1.4; 2017 2.3; 2018 2.3; 2019 2.3; 2020 2.3; 2021 2.3.
- Current account balance (percent of GDP): 2013 1.5; 2014 3.6; 2015 -1.7; 2016 -2.1; 2017 -2.6; 2018 -2.8; 2019 -2.8; 2020 -2.7; 2021 -2.7.
- Nominal GDP (billions of euro): 2013 35.0; 2014 36.4; 2015 37.2; 2016 38.7; 2017 40.6; 2018 42.9; 2019 45.5; 2020 48.2; 2021 51.0.
- General government gross debt (percent of GDP): 2013 38.8; 2014 40.7; 2015 42.7; 2016 42.3; 2017 41.4; 2018 40.1; 2019 38.5; 2020 36.9; 2021 35.4.
- Gross external debt (percent of GDP): 2013 70.4; 2014 70.7; 2015 75.3; 2016 73.4; 2017 71.6; 2018 69.2; 2019 66.6; 2020 64.1; 2021 62.0.
- Financial soundness highlights (Dec-15):
  - Regulatory capital to risk-weighted assets: 24.8.
  - Nonperforming loans to total (non-interbank) loans: 7.3 (Dec-15 table entry) and NPL ratio noted elsewhere as 5.5 percent.
  - Liquidity coverage ratio: Dec-15 362.0.
  - Customer deposits to total non-interbank loans: Dec-15 113.2.

---

### Debt Sustainability — Public and External Key Metrics (Selected)
- Public gross debt (percent of GDP, selected series): 2014 27.7; 2015 40.7; 2016 42.7; 2017 41.2; 2018 40.4; 2019 38.9; 2020 37.2; 2021 35.8; projection 34.5.
- Public gross financing needs (percent of GDP, selected years): 2014 8.4; 2015 4.5; 2016 6.6; 2017 8.2; 2018 5.6; 2019 10.9; 2020 7.4; 2021 11.3; future 9.2.
- Baseline external debt (percent of GDP): 2010 86.7; 2011 81.3; 2012 78.1; 2013 70.4; 2014 70.7; 2015 75.3; 2016 73.4; 2017 71.6; 2018 69.2; 2019 66.6; 2020 64.1; 2021 62.0.
- Debt-stabilizing non-interest current account (percent of GDP): -4.6.
- Gross external financing need (percent of GDP): 2010 55.1; 2011 49.2; 2012 45.9; 2013 37.0; 2014 31.1; 2015 35.4; 2016 40.5; 2017 40.0; 2018 42.4; 2019 38.9; 2020 39.5; 2021 39.5.

---

*Source: IMF staff report, Republic of Lithuania (PDF content unit _cr16125).*

### 1. External Sector Assessment ______________________________________________________________________ 6

### 1. External Sector Assessment

### Context
- Lithuania’s per capita income reached 75 percent of the EU average in PPP terms.
- After the 2008/09 crisis, recovery driven by fiscal consolidation, financial deleveraging, and policy upgrades.
- Public debt: 42.7 percent of GDP.
- Unemployment: 9.1 percent.
- Core inflation: 1.9 percent.
- Current account deficit: 1.7 percent of GDP.
- Euro area membership since 2015 reinforced stability.
- Main policy challenge: step up advancement of living standards while ensuring broad-based distribution of benefits via supply-side reforms, competitiveness protection, and improved economic opportunities.

### Recent developments
- GDP growth in the previous year: 1.6 percent (temporary hit from external environment).
- Exports to Russia contracted by some 40 percent—shock of over 1½ percent of GDP; partially offset by export reorientation (transport sector).
- Domestic demand drivers:
  - Private consumption growth: 4.9 percent.
  - Investment growth: 10 percent (elevated capacity utilization and spike in EU-funds utilization).
  - Real wages growth: 5.5 percent.
- Inflation:
  - Headline inflation: -0.7 percent.
  - Core inflation: 1.9 percent.
  - Consumer purchasing power improved by an estimated 2 percent due to lower energy and food prices.
- External accounts:
  - Net International Investment Position improved to -45 percent of GDP.
  - Current account moved into moderate deficit in 2015 due to weak exports and strong domestic demand.
  - Capital account surplus (inflow of EU-funds) more than covered the current account deficit.
- Fiscal:
  - Headline fiscal deficit fell from 0.7 percent of GDP in 2014 to 0.2 percent of GDP in 2015.
  - Structural deficit reached structural balance and undershot the long-advocated level of ½ percent of GDP.
  - Correcting for one-off and cyclical effects suggests a negative fiscal impulse of ¾ percent of GDP.
- Financial sector soundness:
  - Capital Adequacy Ratio (CAR): 24.8 percent.
  - Nonperforming loan (NPL) ratio: 5.5 percent.
  - Loan-to-deposit ratio: 100 percent.
  - Net parent bank funding: less than 4 percent of GDP.
  - Private-sector credit growth: 4.1 percent (first convincing positive growth since 2008/09).
  - Real housing prices: some 30 percent below 2008 peak.
  - Gross external debt: 75 percent of GDP (noted elevated); Net International Investment Position: -45 percent of GDP.
  - Bank of Lithuania external debt increased due to euro adoption accounting operations (about 10 percent of GDP).

### External Sector Assessment (summary of findings)
- Appropriate medium-term current account deficit: around 2½ percent of GDP.
- Actual current account in 2015: 1.7 percent of GDP.
- REER assessment:
  - ERER approach: REER marginally overvalued at 3 percent.
  - External Sustainability Approach: exchange rate slightly undervalued by 2.6 percent relative to CA that would stabilize net foreign assets (-3.3 percent of GDP).
  - EBA-lite: indicates a moderate real exchange rate undervaluation; current account norm estimated at -4.3 percent of GDP (caution advised in interpretation because it does not account for recovery from post-crisis low investment and need to save ahead of demographic aging).

### Outlook and risks
- Near term:
  - Growth projected at 2.7 percent this year (domestic demand driven).
  - Consumer inflation projected to rise to 0.6 percent.
  - External current account expected to deteriorate somewhat as imports grow faster than exports.
- Medium term:
  - Growth could climb to some 3½ percent, about 1 percentage point below historical trend due to demographics and narrower income gap to global frontier—assuming continued structural reform and measures to safeguard competitiveness.
  - Inflation expected to run at a small premium over the euro area target of 2 percent as Balassa-Samuelson effects materialize.
  - Lithuania expected to run a moderate current account deficit.
- Downside risks (dominate):
  - External shocks: adverse global growth or financial conditions spilling over via trade and foreign-owned banks.
  - Domestic risks: wage growth exceeding productivity gains, undermining competitiveness.
- Upside possibilities:
  - Reverse migration improving labor supply and growth.
  - Faster trade diversification and payoffs from reforms.
- Authorities’ view:
  - Broad agreement with staff on outlook and risks; somewhat more cautious about quick recovery prospects.
  - Medium-term growth seen by authorities somewhat above 3 percent.
  - Authorities flag energy prices could cause inflation to undershoot projections.
  - Supervisors and national competent authorities do not see immediate financial stability risks from cross-border bank spillovers.

### Risk assessment and policy recommendations (selected items from Risk Assessment Matrix)
- Tighter or more volatile global financial conditions (Short Term; Low/Medium impact):
  - Impact: reduced access to funding for Nordic parent banks → tighter lending in Lithuania.
  - Policy recommendations: Euro area monetary policy as first line of defense; if needed, activate resolution and restructuring plans in coordination with home-country authorities.
- Sharper-than-expected global growth slowdown (Short Term/Medium Term; High/Medium impact):
  - Impact: strong trade channel effects; worse performance in euro area or CIS particularly damaging.
  - Policy recommendations: reinforce export diversification; coordinate policy response at European level; allow automatic stabilizers; allow discretionary fiscal easing if shock is large.
- Dislocation in capital and labor flows (Short Term; Low/Medium impact):
  - Impact: prolonged Russia/Ukraine conflict heightens risk aversion and depresses transit trade services with Russia.
  - Policy recommendations: allow automatic stabilizers; discretionary fiscal easing if large shock; reassure investors of solid fundamentals.
- Risks to competitiveness (Short to Medium Term; High impact):
  - Sources: wage growth outstripping productivity; emigration and aging creating labor shortages.
  - Policy recommendations: pause minimum wage hikes as necessary; boost productivity through structural reforms; improve employability and ease restrictions on non-EU immigration.

### Policy discussions and priorities
- Overriding objective: raise living standards through income convergence with Western Europe.
- Policy focus areas:
  - Raise productivity growth through structural reforms.
  - Secure competitiveness as labor market tightens (manage wage pressures relative to productivity).
  - Reduce income inequality through fiscal measures while maintaining a prudent policy stance.
- Implementation note: many reform elements are underway or under consideration; a comprehensive reform package likely awaits the appointment of a new government after elections.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16125.pdf*

### Box 2. Implementation of Past Fund Advice

### Box 2. Implementation of Past Fund Advice

### Fiscal policy — implementation and remaining priorities
- Fund advice focused on repairing public finances following the setback from the 2008/09 crisis; the authorities successfully reduced the deficit to a level consistent with the gradual restoration of fiscal buffers.
- Authorities are increasingly pushing ahead with recommended tax administration reform.
- Calls for rebalancing taxation from labor to capital and improved spending quality have resonated, but action is still at an early stage due to the complexity of such reforms.
- Based on the 2016 budget:
  - Headline deficit projected at 1.1 percent of GDP.
  - Structural deficit projected at 0.6 percent of GDP, essentially achieving the staff-recommended ½ percent of GDP for the structural deficit.
  - A moderate fiscal stimulus of some ½ percent of GDP is provided to help close the output gap.
- Policy recommendations:
  - No room for new unfunded tax cuts or spending initiatives.
  - Allow automatic stabilizers to operate freely.
  - Focus on fiscal structural reforms to generate fiscal space: increase spending quality (notably in health and education where infrastructure is oversized) and improve tax administration.
  - Use the resulting fiscal space for growth promotion and lowering income inequality.

### Structural reforms — labor, education, innovation, and business environment (A. Raising Productivity through Structural Reforms)
- Context and framing:
  - Boosting productivity is key to sustainably raise living standards; policies should be framed in a coherent package to leverage impact.
  - Total factor productivity growth averaged 3½ percent per year since 1995, but has been much slower recently.
  - The authorities have earmarked a large share of EU funds for corrective policies—equivalent to over 5 percent of GDP over seven years.
  - Reforms fall into three broad categories and should be assembled into a credible reform package to clearly communicate the way forward.
- Labor market and skills (room to improve employability):
  - Structural unemployment was estimated as close to the double digits.
  - Upgrading skills:
    - Resources devoted to active labor market programs (ALMPs) are less than half the EU average and seven times less than in leading Denmark.
    - Scope to ramp up spending while ensuring quality; coverage should be extended to include those at risk of job loss.
    - A program for life-long learning recommended as a preventative complement.
  - Right grading skills:
    - Lithuania’s tertiary education attainment rate is 56 percent (the highest in the EU), yet skill shortages are a key concern.
    - Chosen fields of study do not accord well with labor market needs; vocational training is underdeveloped.
    - Consider mandatory orientation for students provided government-paid study places; review the mix of government-paid study places to ensure value-for-money.
    - Raise the profile of vocational training and make it less school-based.
  - Reducing the tax wedge:
    - Personal income tax rate of 15 percent applies to all income above the basic allowance rather than being phased in.
    - Social security contributions run at some 40 percent and apply from the first euro earned.
    - Incentives for low-wage earners to go informal are accordingly high.
    - Consider a basic allowance for social security contributions, phased out as incomes rise to contain fiscal costs.
- Company upgrading and innovation:
  - Lithuania ranks poorly on innovation indicators, occupying the forth place from the bottom on the European Innovation Score Board.
  - Problems include fragmentation of the innovation system and excessive emphasis on physical infrastructure.
  - Recommend more cross-border clusters and competence centers; focus on promoting more sophisticated products, better processes, branding and marketing, new markets rather than scientific breakthroughs difficult to commercialize.
  - Supporting programs exist but remain limited in size and scope.
- Business climate and labor code:
  - Lithuania ranks 20 out of 189 countries in the Doing Business Report.
  - Key remaining shortcoming: outmoded labor code deterring job creation and FDI.
  - The new labor code proposed as part of the “New Social Model” before parliament would:
    - Modernize labor relations with an up-to-date set of contracts, shorter notice periods and less severance pay, more wage transparency, better labor representation in firms, and more training opportunities.
  - Caution: establishment of a payroll tax financed severance pay fund would be counterproductive given Lithuania’s already high labor tax wedge.
  - Other improvements: streamline bankruptcy procedures (currently lengthy with low recovery rates) and loosen tight restrictions on immigration from non-EU countries; government proposals for accelerated procedures to grant temporary resident permits for applicants with desirable occupations are welcome; consider dropping “labor market tests” for those with pertinent skills.
- Authorities’ stance:
  - Authorities strongly agreed with staff diagnoses and reform thrusts but underscored complexity due to multiple stakeholders.
  - Some reforms in train: new curriculums in vocational training, initiation of apprentice programs, better connected universities and streamlined study programs.
  - Passage of the new labor code is a key priority.
  - Authorities took note of the idea to introduce a basic social security contribution allowance, though a recent constitutional court ruling to make social security more insurance-based complicates matters.
  - Authorities saw merits of streamlined bankruptcy procedures and more liberal immigration rules, but both are politically and socially sensitive.

### Securing continued competitiveness in a tightening labor market (B.)
- Price competitiveness and unit labor costs (ULCs):
  - Fast wage growth and modest productivity gains have pushed ULCs up much faster than in the EU.
  - Post-crisis cushion in tradable sector (wages fell and productivity soared) and windfall company profits from lower input prices have helped offset higher wage costs, but cushions are largely exhausted.
  - Future price competitiveness at risk unless wage growth decelerates and productivity growth picks up substantially.
- Demographic and wage pressures:
  - Reduced migration scenario assumes 28,000 net emigrations per year through 2025 (close to the historical average of 25,000).
  - Wage pressures could persist due to smaller cohorts entering the labor market, competition for suitable workers, and upward pressure on wages.
  - Alternatively, recent fast real wage growth could partly reflect downward inflation surprises; real wages could decelerate when inflation picks up.
  - Lithuania’s labor market has historically aligned wage and productivity developments over longer periods and is self-correcting for transitory deviations.
- Minimum wage policy:
  - Successive hikes since August 2012 have lifted the minimum wage by over 50 percent and it now stands at 47 percent of the average wage; a further increase for mid-2016 was under discussion.
  - Historically, a minimum wage hike of 10 percent has tended to push up overall wages by 3 percent; with higher incidence, pass-through has likely increased.
  - Recommendation: pause minimum wage increases following sharp hikes in past few years so as not to further fuel broader wage growth.
  - Economic considerations should be given greater weight in minimum wage setting; consider depoliticizing the process and giving independent experts a formal role.
- Non-price competitiveness and exports:
  - Despite ULC-based price competitiveness remaining intact thus far, Lithuania’s export market shares have started to stagnate in recent years, even excluding the Russian market.
  - Stagnating market shares suggest prices Lithuania’s exports command are no longer rising faster than competitors’—potential sign of stalled catching up in product quality, mix, and sophistication.
  - Urgency of the productivity-enhancing agenda is underscored.
- Authorities’ view:
  - Authorities agreed competitiveness warranted close monitoring and appreciated emphasis on non-price competitiveness.
  - Minimum wage still lower than in neighboring countries and significant adverse side effects had not yet materialized; authorities agreed it should not decouple from productivity developments and intend to weigh pros and cons before further hikes.
  - Authorities shared concerns about disappointing productivity growth, while noting it could be temporary due to weak external demand.

### Preserving fiscal gains and tackling high income inequality (C.)
- Fiscal stance and debt dynamics:
  - The projected structural deficit of 0.6 percent of GDP would ensure a reliable gradual decline of the public debt ratio, beginning to reverse its sharp increase since the 2008/09 crisis and building fiscal buffers critical for a small open economy in a currency union.
- Fiscal policy priorities:
  - Prioritize quality of spending, notably in health and education where infrastructure is oversized.
  - Further improve tax administration—Lithuania’s overall revenue take relative to GDP is among the lowest in the EU and this is not only due to low income tax rates and limited wealth taxation.
  - Use fiscal space to promote growth and lower income inequality.
- Income inequality:
  - Income inequality in Lithuania is among the highest in the EU and likely weighs on economic performance.
  - Over 20 percent of the population is estimated to be at-risk-of-poverty—a rate around 11 percent higher than the EU average.
  - Lithuania’s Gini coefficient and wages earned in the top decile relative to the bottom decile place it among the most unequal European societies.
  - High inequality can undermine macroeconomic performance by limiting low-income households’ ability to develop potential, increasing vulnerability to shocks, and spurring emigration—this weighs on potential growth and exacerbates output volatility.

*Box 2. Implementation of Past Fund Advice*

### 27.      In addition to dual purpose measures that are also desirable in their own right,

### _cr16125 - 27.      In addition to dual purpose measures that are also desirable in their own right,

### Redistribution-focused fiscal measures and dual-purpose reforms
- Dual purpose measures largely coincide with measures to enhance employability of labor and would disproportionately benefit the less well off (¶15).
- The tax and spending structure:
  - Progressivity of the tax system is relatively low, reflecting strong reliance on indirect taxes and flat income taxes.
  - Social protection spending is modest; its share in total expenditure is relatively small.
  - Fiscal policy thus redresses market inequality by less than in most other countries.
- Policy options to improve income distribution:
  - Rebalance the tax system from indirect and labor taxes toward wealth and capital taxation.
  - Introduce higher income tax rates for high-income earners.
  - Increase social protection spending, especially directed at:
    - Unemployment benefits to allow for proper job search.
    - Active labor market programs.
    - Old-age pensions.
- Fiscal feasibility:
  - Additional outlays could be covered by the space generated by fiscal structural reform and potential revenue gains from tax rebalancing so as not to undermine overall fiscal performance.

### The “New Social Model” proposals and considerations
- Components under discussion in Parliament include Labor Code reform, social benefit reform, and social security reform (¶17).
- Social benefit reform:
  - Principal change: extension of unemployment insurance benefit period from six months to nine.
  - A higher cap on benefits is proposed.
  - Small adjustments to parental benefits, sickness pay, and accident insurance.
  - No changes to social assistance are envisaged.
- Social security reform:
  - Increase coverage to more of the self-employed, small farmers, and heads of micro companies; these groups would become subject to contributions and eligible for benefits.
  - Wide-ranging reorganization of the old-age pension system including:
    - A new pension formula.
    - Linking the statutory retirement age to life expectancy.
    - Indexing pensions to developments in the overall wage bill of the economy rather than relying on discretionary adjustments.
    - Shifting responsibility for basic pensions from the Social Security Fund to the State Budget.
    - Introducing a cap on social security contributions.
    - Cutting contribution rates.
  - The social and financial sustainability and distributional consequences of the original proposal and any parliamentary amendments need careful consideration.
  - Any agreed new arrangement should be subjected to careful scrutiny before it takes effect; social security reform may need to move more slowly than other elements of the package.

### Authorities’ stance and constraints
- Authorities’ views:
  - Agreed more focus on income inequality issues is warranted.
  - Emphasized concern about low absolute income levels at the bottom rather than relative position.
  - Largely subscribed to dual purpose measures but were not ready for a major redistributive overhaul of the tax system.
  - Noted smaller tax changes had already been implemented and saw scope for further strengthening capital and wealth taxation in the medium term.
  - Considered pension indexation beneficial for reducing income equality.
  - Agreed on need for careful analysis of pension reform effects and for phased implementation to contain costs.
- Constraints cited:
  - Further fiscal efforts might still be necessary under EU rules because of different assessments of the business cycle and the structural fiscal balance.
  - Limited scope to expand social protection spending significantly due to limited scope for further expenditure cuts in other areas and for raising additional revenue, other than through better tax administration.

### Box: Income Inequality in Lithuania (summary)
- Transition to a market economy increased income inequality more in Lithuania than in other Central and Eastern European (CEE) countries.
- Pattern and levels:
  - Income inequality rose through the mid-2000s, briefly fell during the economic boom, and the 2008/09 crisis erased gains; inequality has hovered at high levels since then.
  - Today, Lithuania is the fourth most unequal country in the EU, after Bulgaria, Estonia, and Latvia.
  - Upward social mobility is relatively low while downward mobility is higher than elsewhere.
- Sources and contributors to inequality:
  - Income from dependent employment, self-employment income, and earnings from wealth and capital are all more unequally distributed than the EU or CEE average.
  - Income from wealth and capital accounts for a smaller share of total income than elsewhere and contributes relatively less to overall inequality.
- Concentration of inequality:
  - Inequality is concentrated at the tail ends of the distribution and particularly pronounced among the unemployed, retired, and unskilled.
  - The contrast between what the top 20 percent earn relative to the bottom 20 percent is particularly stark in Lithuania.
  - Population characteristics (unemployment status, retirement status, education, gender, age) jointly explain only about a third of Lithuania’s income inequality.

### Staff appraisal — macroeconomic outlook and policy priorities
- Growth outlook:
  - Growth is projected to rebound to 2.7 percent this year as external drag eases and domestic demand expansion remains strong.
  - Assuming maintenance of sound macroeconomic and business conditions and continued structural reforms, growth should rise to some 3½ percent over the medium-term.
  - Risks are tilted to the downside, reflecting primarily the global risk balance.
- Fiscal policy:
  - Multi-year fiscal consolidation produced a structural fiscal deficit reaching balance in 2015.
  - Recommendation: cap the structural fiscal deficit at ½ percent of GDP going forward to begin reversing the sharp rise in the public debt ratio since 2008 and to rebuild fiscal buffers.
  - The 2016 budget essentially achieves this goal; new unfunded spending initiatives or tax cuts should be avoided.
  - Public finances are strong enough to let automatic stabilizers operate freely.
- Productivity and labor market reforms:
  - Productivity-enhancing reforms are the principal vehicle for sustainably raising living standards.
  - Reforms should be framed in a coherent package focused on:
    - Improving employability via training.
    - Addressing labor market mismatches.
    - Lowering the tax wedge for low-income earners.
    - Emphasizing company upgrading in innovation policies.
  - The proposed new Labor Code would address a key shortcoming; authorities should guard against amendments that would weaken it.
- Competitiveness:
  - External competitiveness is intact but could come under pressure.
  - Productivity gains have fallen short of fast real wage growth, unwinding previous competitiveness gains.
  - Buffers in the tradable sector have been all but exhausted.
  - While boosting productivity growth is the priority, wage growth will also have to slow.
  - Recommendation: pause minimum wage hikes for now.
  - Non-price competitiveness stagnation needs monitoring.
- Inequality:
  - Lithuania’s high income inequality needs to be addressed; it is likely to weigh on macroeconomic prospects.
  - Pursue dual purpose measures that boost growth and especially benefit the disadvantaged.
  - Depending on social preferences, consider more redistributive fiscal policies to make the tax system more progressive and lift low social protection spending.
  - Reforms under the “New Social Model” would improve distribution to some extent, but far-reaching old-age pension changes need more scrutiny before becoming law.
  - Minimum wages have a role in income distribution but further increases at current levels risk compromising employment and competitiveness.
- Financial sector:
  - The financial system is sound; resumption of credit growth is welcome.
  - Financial soundness indicators are solid; access to ECB liquidity since euro adoption in 2015 further reduced vulnerabilities.
  - Legislation to address weaknesses in the small credit union sector is overdue.
  - Revival of credit growth supports the outlook; SMEs will continue to require government-sponsored schemes.
  - No current signs of financial excess; a comprehensive macroprudential toolkit is in place if needed.
  - Close cooperation with banks’ home-country authorities increases traction of potential measures.

*Source: IMF staff report, Republic of Lithuania.*

### 36.      It is recommended that the next Article IV Consultation be held on the 12-month

### _cr16125 - 36.      It is recommended that the next Article IV Consultation be held on the 12-month

### Recommendation
- It is recommended that the next Article IV Consultation be held on the 12-month cycle.

### Real Sector Developments
- GDP growth and contributions:
  - Figure caption: "Contributions to GDP Growth and GDP Growth (YoY, percent)"
  - Key messages from figure text:
    - "GDP growth has slowd down somewhat..."
    - "... because of a challenging external environment,..."
    - "...but domestic consumption...... and industrial production remained strong."
    - "Investment is now recovering..."
    - "...and industry confidence is picking up, supported by strong consumer sentiment."
- Trade, retail, and industrial indicators (from figures):
  - "Trade of Goods excluding Mineral Products (YoY percent change, 3-month smoothed) 1/": Exports and Imports series shown (no numeric series values in text).
  - "Retail Sales excluding Autos and Motorcycles (YoY percentage change)"—YoY and 3-month smoothed series shown.
  - "Industrial Producion excluding Refined Petroleum Products (YoY percent change)"—Manufacturing excluding refined petroleum products, YoY and SA 3-month smoothed series shown.
- Investment composition (from figure):
  - "Real Growth in Gross Fixed Capital Formation Components (YoY percent change)": Gross fixed capital formation, Dwellings, Other buildings and structures, Other machinery and equipment series shown.

### Labor Market and Competitiveness Developments
- Labor market headline messages (from figure text):
  - "Unemployment continues to fall..."
  - "...but it remains elevated."
  - "Nominal wages are increasing, especially in the private sector ..."
  - "... and, amid low inflation, real wage growth. has picked up"
  - "The nomnal effective exchange rate remained broadly unchanged in 2015, as movements in currencies broadly offset each other."
  - "Competetivness in manufacturing remains appropriate."
- Specific indicators and labels shown:
  - "Unemployment Rate by Sex and Duration (Percent, NSA, Labor Force Survey)"—Male, Female, Long-term (>1y), Youth (below 25).
  - "Employment and Unemployment Rate (Percent, NSA, Labor Force Survey)"—Unemployment rate and Employment rate (RHS).
  - "Average Monthly Gross Earnings (2008Q1=100, SA)"—Public sector and Private sector series.
  - "Average Monthly Gross Real Earnings Growth Rate (YoY, SA, percent)"—Public sector and Private sector series.
  - Real and nominal effective exchange rates:
    - "Real and Nominal Effective Exchange Rates 1/ (HCPI based, Q1 2004=100)" (REER, NEER).
    - "REER in Selected Countries 2/ (ULC manufacturing based, Q1 2004 = 100)"—Lithuania, Estonia, Latvia, Germany.

### Banking Sector Developments
- Headline messages (from figure text):
  - "External funding has continued to decline..."
  - "...while deposits have continued to increase robustly."
  - "Credit may be staging a tepid recovery."
  - "Rising interest rates margins ..."
  - "...and declining NPLs..."
  - "...are supporting profitability."
- Key banking indicators shown:
  - "Banks' External liabilities1/ (Billions of Euro)" series (note 1/: "From January 2015 onwards, banks' external liabilities are redefined as those towards non-euro area countries.")
  - "Total Deposits of Corporations and Households (Billions of Euro)"
  - "Credit Stock (YoY percent change)"—Private sector credit to corporations; Private sector credit to households. Annotation: "Effect of Snoras bankcrupcy."
  - "Interest Margins (Percent)"—Margin and Interest rates: new loans (RHS)
  - "Return on Assets (Percent)" series (2006–2015)
  - "Non-performing Loans (Percent of corresponding portfolio)"—Total loans, Business loans, Consumer loans (non-housing)

### Fiscal Sector Developments
- Headline messages (from figure text):
  - "...as somewhat higher spending,..."
  - "...was more than offset by strong revenues."
  - "Taxes performed reasonably well..."
  - "...but the Social Security (Sodra) deficit ended up slightly higher."
  - "The central government cash deficit continued to improve slightly in 2015..."
- Fiscal time-series and labels shown:
  - "Cumulative Central Government Cash Balance (Percent of Annual GDP)"—series for 2011–2016.
  - "Cumulative Sodra Deficit (Percent of annual GDP)"—series for 2012–2016; shows -1.8 to 0.0 scale in figure axis.
  - "Revenues (Billions of Euros)"—series for 2011–2016.
  - "Taxes (Billions of Euros)"—series for 2011–2016.
  - "Total Primary Expenditures (Billions of Euros)"—series for 2011–2016.
  - Source: Ministry of Finance.

### Selected Economic Indicators, 2013–21 (Table 1) — Key projected series and values (preserve numeric precision)
- Output:
  - Real GDP growth (annual percentage change): 2013 3.5, 2014 3.0, 2015 1.6, 2016 2.7, 2017 3.1, 2018 3.4, 2019 3.6, 2020 3.6, 2021 3.3
  - Domestic demand growth (year-on-year, in percent): 2013 3.3, 2014 3.0, 2015 6.1, 2016 4.6, 2017 4.0, 2018 3.9, 2019 3.7, 2020 3.6, 2021 3.2
  - Private consumption growth: 2013 4.3, 2014 4.1, 2015 4.9, 2016 4.7, 2017 4.0, 2018 3.7, 2019 3.5, 2020 3.2, 2021 3.0
  - Domestic fixed investment growth: 2013 8.3, 2014 5.4, 2015 10.3, 2016 6.0, 2017 5.1, 2018 5.2, 2019 5.3, 2020 5.3, 2021 4.5
  - Net external demand (contribution to growth): 2013 0.5, 2014 0.2, 2015 -4.6, 2016 -2.0, 2017 -1.0, 2018 -0.6, 2019 -0.3, 2020 -0.2, 2021 -0.1
  - Nominal GDP (in billions of euro): 2013 35.0, 2014 36.4, 2015 37.2, 2016 38.7, 2017 40.6, 2018 42.9, 2019 45.5, 2020 48.2, 2021 51.0
  - Output gap (percent of potential GDP): 2013 -1.0, 2014 -0.4, 2015 -1.4, 2016 -1.4, 2017 -1.0, 2018 -0.4, 2019 0.0, 2020 0.0, 2021 0.0
- Employment:
  - Unemployment rate (year average, in percent of labor force): 2013 11.8, 2014 10.7, 2015 9.1, 2016 8.6, 2017 8.5, 2018 8.4, 2019 8.2, 2020 8.1, 2021 8.0
  - Average monthly gross earnings (annual percentage change): 2013 5.0, 2014 4.5, 2015 4.8, 2016 5.9, 2017 5.5, 2018 5.9, 2019 6.1, 2020 6.0, 2021 5.8
  - Average monthly gross earnings, real (CPI-deflated, annual percent a): 2013 3.8, 2014 4.3, 2015 5.5, 2016 5.2, 2017 3.5, 2018 3.5, 2019 3.7, 2020 3.6, 2021 3.4
- Prices:
  - HICP, end of period (year-on-year percentage change): 2013 0.5, 2014 -0.1, 2015 -0.3, 2016 1.4, 2017 2.3, 2018 2.3, 2019 2.3, 2020 2.3, 2021 2.3
  - GDP deflator (year-on-year percentage change): 2013 1.3, 2014 1.2, 2015 0.4, 2016 1.4, 2017 1.5, 2018 2.2, 2019 2.3, 2020 2.4, 2021 2.4
- General government finances:
  - Revenue (percent of GDP): 2013 32.8, 2014 34.1, 2015 34.9, 2016 34.6, 2017 34.7, 2018 34.9, 2019 35.0, 2020 35.0, 2021 35.1
  - Expenditure (percent of GDP): 2013 35.5, 2014 34.8, 2015 35.1, 2016 35.7, 2017 35.7, 2018 35.6, 2019 35.6, 2020 35.6, 2021 35.6
  - Fiscal balance (percent of GDP) 3/: 2013 -2.6, 2014 -0.7, 2015 -0.2, 2016 -1.1, 2017 -0.9, 2018 -0.7, 2019 -0.6, 2020 -0.6, 2021 -0.6
  - General government gross debt (percent of GDP): 2013 38.8, 2014 40.7, 2015 42.7, 2016 42.3, 2017 41.4, 2018 40.1, 2019 38.5, 2020 36.9, 2021 35.4
- Balance of payments / external:
  - Current account balance (in percent of GDP): 2013 1.5, 2014 3.6, 2015 -1.7, 2016 -2.1, 2017 -2.6, 2018 -2.8, 2019 -2.8, 2020 -2.7, 2021 -2.7
  - Exports of goods and services (volume change, in percent): 2013 9.6, 2014 3.0, 2015 1.2, 2016 3.4, 2017 3.6, 2018 4.2, 2019 4.4, 2020 3.7, 2021 3.4
  - Imports of goods and services (volume change, in percent): 2013 9.3, 2014 2.9, 2015 7.0, 2016 5.7, 2017 4.6, 2018 4.8, 2019 4.5, 2020 3.6, 2021 3.3
  - Gross external debt (percent of GDP) 5/: 2013 70.4, 2014 70.7, 2015 75.3, 2016 73.4, 2017 71.6, 2018 69.2, 2019 66.6, 2020 64.1, 2021 62.0
- Notes from table:
  - "5/ Government external debt includes guaranteed loans."
  - "Passive projections from 2016 onward; incorporate only announced budgetary measures; budgetary impact of further defense spending, wage compensation and their potential offsetting measures are not included."

### General Government Operations (Table 2) — Key fiscal projections (percent of GDP)
- Revenue: 2013 32.8, 2014 34.1, 2015 34.9, 2016 34.6, 2017 34.7, 2018 34.9, 2019 35.0, 2020 35.0, 2021 35.1
- Revenue excluding EU grants: 2013 30.9, 2014 31.4, 2015 33.0, 2016 32.6, 2017 32.8, 2018 32.8, 2019 33.0, 2020 33.1, 2021 33.1
- Tax revenue: 2013 16.1, 2014 16.4, 2015 17.3, 2016 17.1, 2017 17.3, 2018 17.3, 2019 17.5, 2020 17.6, 2021 17.6
  - Direct taxes: 2013 5.0, 2014 5.1, 2015 5.5, 2016 5.5, 2017 5.5, 2018 5.6, 2019 5.6, 2020 5.7, 2021 5.7
    - Personal income tax: 2013 3.6, 2014 3.6, 2015 3.9, 2016 3.9, 2017 3.9, 2018 3.9, 2019 4.0, 2020 4.0, 2021 4.0
    - Corporate income tax: 2013 1.4, 2014 1.4, 2015 1.5, 2016 1.5, 2017 1.6, 2018 1.6, 2019 1.6, 2020 1.6, 2021 1.6
  - Indirect taxes: 2013 11.1, 2014 11.3, 2015 11.8, 2016 11.6, 2017 11.7, 2018 11.7, 2019 11.8, 2020 11.9, 2021 11.9
    - VAT: 2013 7.5, 2014 7.6, 2015 7.8, 2016 7.8, 2017 7.8, 2018 7.9, 2019 8.0, 2020 8.0, 2021 8.0
    - Excises: 2013 2.8, 2014 2.9, 2015 3.1, 2016 3.1, 2017 3.1, 2018 3.1, 2019 3.1, 2020 3.1, 2021 3.1
- Total expenditure: 2013 35.5, 2014 34.8, 2015 35.1, 2016 35.7, 2017 35.7, 2018 35.6, 2019 35.6, 2020 35.6, 2021 35.6
  - Current spending: 2013 32.1, 2014 31.5, 2015 31.5, 2016 32.3, 2017 32.3, 2018 32.3, 2019 32.3, 2020 32.3, 2021 32.3
    - Compensation of employees: 2013 9.5, 2014 9.5, 2015 9.7, 2016 10.0, 2017 10.0, 2018 10.0, 2019 10.0, 2020 10.0, 2021 10.0
    - Social benefits: 2013 12.9, 2014 12.5, 2015 12.6, 2016 12.7, 2017 12.7, 2018 12.7, 2019 12.7, 2020 12.7, 2021 12.7
  - Capital spending: 2013 3.3, 2014 3.3, 2015 3.6, 2016 3.4, 2017 3.4, 2018 3.3, 2019 3.3, 2020 3.3, 2021 3.3
- Net lending (+) / borrowing (-): 2013 -2.6, 2014 -0.7, 2015 -0.2, 2016 -1.1, 2017 -0.9, 2018 -0.7, 2019 -0.6, 2020 -0.6, 2021 -0.6
- Memorandum GDP (in millions of euros): 2013 34,962; 2014 36,444; 2015 37,190; 2016 38,736; 2017 40,568; 2018 42,888; 2019 45,482; 2020 48,224; 2021 51,022

### Balance of Payments (Table 3) — Key projections (BPM6, Billions of Euros and percent of GDP)
- Current account balance (billions): 2013 0.5, 2014 1.3, 2015 -0.6, 2016 -0.8, 2017 -1.1, 2018 -1.2, 2019 -1.3, 2020 -1.3, 2021 -1.4
- Merchandise trade balance (billions): 2013 -0.9, 2014 -0.9, 2015 -1.9, 2016 -2.1, 2017 -2.7, 2018 -3.1, 2019 -3.3, 2020 -3.4, 2021 -3.5
- Exports (f.o.b., billions): 2013 24.0, 2014 23.7, 2015 22.4, 2016 22.2, 2017 24.0, 2018 25.7, 2019 27.4, 2020 28.6, 2021 30.0
- Imports (f.o.b., billions): 2013 24.9, 2014 24.7, 2015 24.3, 2016 24.3, 2017 26.7, 2018 28.7, 2019 30.7, 2020 32.1, 2021 33.5
- Services balance (billions): 2013 1.4, 2014 1.6, 2015 1.8, 2016 1.8, 2017 1.9, 2018 2.0, 2019 2.1, 2020 2.2, 2021 2.3
- Capital and financial account balance (billions): 2013 -0.6, 2014 1.6, 2015 -0.8, 2016 0.3, 2017 0.5, 2018 0.6, 2019 0.7, 2020 0.7, 2021 0.7
- Overall balance (billions): 2013 -0.4, 2014 1.3, 2015 -1.3, 2016 -0.5, 2017 -0.5, 2018 -0.6, 2019 -0.6, 2020 -0.7, 2021 -0.7
- Gross external debt (billions and percent of GNFS exports): see Table 3 entries; gross external debt (billions of euros) and percent series provided (e.g., Gross external debt 1/70.4 70.7 75.3 73.4 71.6 69.2 66.6 64.1 62.0).

### Summary of Monetary Accounts (Table 4)
- Monetary authority (billions of euro):
  - Gross foreign assets: 2010 5.2, 2011 6.4, 2012 6.4, 2013 6.0, 2014 7.9
  - Net foreign assets: 2010 5.0, 2011 6.1, 2012 6.4, 2013 6.0, 2014 7.8
  - Reserve money: 2010 3.6, 2011 5.0, 2012 4.7, 2013 4.9, 2014 5.9
- Banking survey and broad money:
  - Net foreign assets (banks): 2010 0.4, 2011 1.6, 2012 2.8, 2013 2.9, 2014 4.5
  - Credit to private sector (billions): 2010 16.3, 2011 15.4, 2012 15.3, 2013 14.9, 2014 14.8, 2015 17.1
  - Broad money (yearly percent change): 2010 8.9, 2011 5.0, 2012 7.2, 2013 4.4, 2014 1.2
  - Private sector credit (yearly percent change): 2010 -7.9, 2011 -5.9, 2012 -0.8, 2013 -2.3, 2014 -0.9, 2015 4.1
- Memorandum items:
  - Gross official reserves (billions of euros) 3/: 2010 5.2, 2011 6.4, 2012 6.4, 2013 6.0, 2014 7.9
  - GDP: 2010 28.0, 2011 31.3, 2012 33.3, 2013 35.0, 2014 36.4, 2015 37.2

### Financial Soundness Indicators (Table 5) — Selected entries (Dec-year)
- Capital adequacy:
  - Regulatory capital to risk-weighted assets: Dec-08 11.6, Dec-09 12.9, Dec-10 14.8, Dec-11 14.2, Dec-12 15.7, Dec-13 17.6, Dec-14 21.3, Dec-15 24.8
  - Regulatory Tier 1 capital to risk-weighted assets: Dec-08 9.1, Dec-09 9.3, Dec-10 10.8, Dec-11 12.0, Dec-12 14.6, Dec-13 17.1, Dec-14 20.9, Dec-15 24.3
- Asset quality:
  - Nonperforming loans to total (non-interbank) loans: Dec-08 4.7, Dec-09 19.7, Dec-10 19.9, Dec-11 16.6, Dec-12 13.6, Dec-13 11.0, Dec-14 8.8, Dec-15 7.3
  - Impairment losses to total (non-interbank) loans: Dec-08 1.3, Dec-09 6.7, Dec-10 8.0, Dec-11 7.0, Dec-12 5.6, Dec-13 4.2, Dec-14 3.2, Dec-15 2.5
- Earnings and profitability:
  - RoE 1/ 2/: Dec-08 11.8, Dec-09 -50.8, Dec-10 -3.9, Dec-11 15.8, Dec-12 7.7, Dec-13 8.9, Dec-14 8.1, Dec-15 9.0
  - RoA 2/: Dec-08 0.8, Dec-09 -3.8, Dec-10 -0.3, Dec-11 1.4, Dec-12 0.9, Dec-13 1.0, Dec-14 0.9, Dec-15 0.9
  - Interest margin to gross income: Dec-08 64.4, Dec-09 50.6, Dec-10 49.0, Dec-11 58.7, Dec-12 53.7, Dec-13 49.9, Dec-14 50.7, Dec-15 52.6
- Liquidity:
  - Liquidity coverage ratio: Dec-14 252.0, Dec-15 362.0
  - Liquid assets to total assets: Dec-08 18.6, Dec-09 23.7, Dec-10 23.8, Dec-11 23.7, Dec-12 25.1, Dec-13 27.0, Dec-14 31.9
- Other:
  - Customer deposits to total non-interbank loans: Dec-08 56.8, Dec-09 68.6, Dec-10 82.2, Dec-11 80.6, Dec-12 85.8, Dec-13 93.3, Dec-14 110.4, Dec-15 113.2
  - Provisioning (in percent of NPLs) (memo): Dec-08 25.9, Dec-09 33.0, Dec-10 39.3, Dec-11 26.3, Dec-12 21.3, Dec-13 16.5

*Source: Republic of Lithuania — International Monetary Fund staff report and associated figures and tables.*

### Annex I. Debt Sustainability Analysis (DSA)

### Annex I. Debt Sustainability Analysis (DSA)

### Baseline public sector DSA — key projections and indicators (Republic of Lithuania)
- Nominal gross public debt: 2014: 27.7; 2015: 40.7; 2016: 42.7; 2017: 41.2; 2018: 40.4; 2019: 38.9; 2020: 37.2; 2021: 35.8; projection (label): 34.5 (in percent of GDP).
- Public gross financing needs: 2014: 8.4; 2015: 4.5; 2016: 6.6; 2017: 8.2; 2018: 5.6; 2019: 10.9; 2020: 7.4; 2021: 11.3; future: 9.2; 5-year? (in percent of GDP).
- Real GDP growth (in percent): 2014: 3.2; 2015: 3.0; 2016: 1.6; 2017: 2.7; 2018: 3.1; 2019: 3.4; 2020: 3.6; 2021: 3.6; later: 3.3.
- Inflation (GDP deflator, in percent): 2014: 4.5; 2015: 1.2; 2016: 0.4; 2017: 1.4; 2018: 1.5; 2019: 2.2; 2020: 2.3; 2021: 2.4.
- Nominal GDP growth (in percent): 2014: 8.1; 2015: 4.2; 2016: 2.0; 2017: 4.2; 2018: 4.7; 2019: 5.7; 2020: 6.0; 2021: 6.0; later: 5.8.
- Effective interest rate (in percent): 2014: 5.3; 2015: 4.2; 2016: 3.8; 2017: 2.9; 2018: 3.8; 2019: 4.0; 2020: 4.0; 2021: 4.1; later: 4.2.
- Sovereign spreads: EMBIG (bp) reported as 34; Y CDS (bp) 71.
- Ratings: Moody's A3/A3 (Foreign/Local); S&P A-/A-; Fitch A-/A-.

### Debt dynamics (identified flows and contributions)
- Cumulative change in gross public sector debt (2014–2021): 2.2; 1.9; 2.0; -1.5; -0.9; -1.4; -1.8; -1.4; -1.3; cumulative -8.2 (in percent of GDP).
- Identified debt-creating flows (annual): 3.3; -3.4; 3.7; -0.5; -0.6; -1.2; -1.5; -1.4; -1.3; cumulative -6.4.
- Primary deficit (annual): 2.9; -0.8; -1.1; -0.2; -0.4; -0.6; -0.9; -0.8; -0.8; cumulative -3.7.
- Primary (noninterest) revenue and grants (in percent of GDP): 33.9; 34.0; 34.7; 34.4; 34.5; 34.7; 34.8; 34.9; 34.9; cumulative 208.2.
- Primary (noninterest) expenditure (in percent of GDP): 36.8; 33.2; 33.6; 34.2; 34.1; 34.0; 34.0; 34.0; 34.1; cumulative 204.5.

### Automatic debt dynamics and components
- Automatic debt dynamics (annual): 0.3; -2.6; 4.8; -0.5; -0.3; -0.7; -0.8; -0.7; -0.5; cumulative -3.5.
- Interest rate / growth differential (annual): -0.5; 0.0; 0.7; -0.5; -0.3; -0.7; -0.8; -0.7; -0.5; cumulative -3.5.
  - Real interest rate contribution (annual): 0.3; 1.1; 1.3; 0.6; 0.9; 0.6; 0.6; 0.6; 0.6; cumulative 3.9.
  - Real GDP growth contribution (annual): -0.8; -1.1; -0.6; -1.1; -1.2; -1.3; -1.3; -1.3; -1.1; cumulative -7.4.
- Exchange rate depreciation contribution (annual): 0.8; -2.6; 4.1; (no further values shown).
- Other identified debt-creating flows (annual): 0.0; 0.0; 0.0; 0.2; 0.2; 0.2; 0.1; 0.1; 0.0; cumulative 0.8.
- Residual, including asset changes (annual): -1.1; 5.3; -1.7; -1.0; -0.3; -0.3; -0.3; 0.0; 0.1; cumulative -1.8.

### Alternative public debt scenarios and assumptions
- Baseline underlying assumptions (selected):
  - Real GDP growth (2016–2021): 2.7; 3.1; 3.4; 3.6; 3.6; 3.3 (in percent).
  - Inflation (2016–2021): 1.4; 1.5; 2.2; 2.3; 2.4; 2.4 (in percent).
  - Primary Balance (2016–2021): 0.2; 0.4; 0.6; 0.9; 0.8; 0.8 (in percent of GDP).
  - Effective interest rate (2016–2021): 2.9; 3.8; 4.0; 4.0; 4.1; 4.2 (in percent).
- Historical scenario assumptions (selected):
  - Real GDP growth (2016–2021): 2.7; 2.6; 2.6; 2.6; 2.6; 2.6.
  - Inflation (2016–2021): 1.4; 1.5; 2.2; 2.3; 2.4; 2.4.
  - Primary Balance (2016–2021): 0.2; -2.4; -2.4; -2.4; -2.4; -2.4.
  - Effective interest rate (2016–2021): 2.9; 3.8; 3.9; 3.8; 3.8; 4.0.
- Constant Primary Balance Scenario:
  - Primary Balance (2016–2021): 0.2; 0.2; 0.2; 0.2; 0.2; 0.2.

### Composition of public debt (labels and categories shown)
- By maturity: medium and long-term versus short-term (historical and projection series shown).
- By currency: local currency-denominated versus foreign currency-denominated (historical and projection series shown).
- Charts indicate gross nominal public debt and public gross financing needs in percent of GDP across 2005–2021 (data visualizations present in source).

### External debt sustainability framework (2010–2021) — baseline
- Baseline: External debt (in percent of GDP): 2010: 86.7; 2011: 81.3; 2012: 78.1; 2013: 70.4; 2014: 70.7; 2015: 75.3; 2016: 73.4; 2017: 71.6; 2018: 69.2; 2019: 66.6; 2020: 64.1; 2021: 62.0.
- Debt-stabilizing non-interest current account (percent of GDP): -4.6.
- Change in external debt (annual): 0.0; -5.5; -3.1; -7.8; 0.3; 4.6; -1.9; -1.8; -2.4; -2.6; -2.5; -2.1.
- Identified external debt-creating flows (sum of components): -3.8; -8.1; -4.0; -5.5; -6.9; -1.3; -2.2; -1.7; -1.4; -1.4; -1.4; -1.1.
  - Current account deficit, excluding interest payments: -2.3; 1.2; -1.4; -3.7; -5.6; 0.0; 0.5; 1.7; 2.0; 2.2; 2.2; 2.1.
  - Deficit in balance of goods and services: 1.9; 2.6; -0.9; -1.3; -1.9; 0.3; 0.8; 2.1; 2.5; 2.6; 2.6; 2.4.
  - Net non-debt creating capital inflows (negative): -0.8; -3.0; -0.1; -0.4; -0.5; -1.9; -2.3; -2.2; -1.9; -1.9; -1.9; -1.7.
  - Automatic debt dynamics (1/): -0.7; -6.3; -2.4; -1.5; -0.9; 0.6; -0.3; -1.3; -1.5; -1.8; -1.7; -1.5.
    - Contribution from nominal interest rate: 2.7; 2.7; 2.6; 2.1; 2.0; 1.7; 1.6; 0.9; 0.8; 0.6; 0.5; 0.5.
    - Contribution from real GDP growth: -1.4; -4.7; -2.9; -2.6; -2.0; -1.1; -2.0; -2.2; -2.3; -2.4; -2.2; -2.0.
    - Contribution from price and exchange rate changes: -2.0; -4.3; -2.1; -1.0; -0.8; ... (ellipsis in source).
- Residual, including change in gross foreign assets (2-3): 3.9; 2.6; 0.8; -2.2; 7.3; 5.9; 0.4; -0.1; -1.1; -1.2; -1.1; -1.0.
- External debt-to-exports ratio (in percent): 2010: 132.8; 2011: 108.3; 2012: 95.7; 2013: 83.7; 2014: 87.0; 2015: 98.7; 2016: 100.0; 2017: 94.5; 2018: 90.1; 2019: 86.2; 2020: 84.1; 2021: 82.3.
- Gross external financing need (in billions of Euro): 2010: 15.4; 2011: 15.4; 2012: 15.3; 2013: 12.9; 2014: 11.3; 2015: 13.2; 2016: 15.7; 2017: 16.2; 2018: 18.2; 2019: 17.7; 2020: 19.0; 2021: 20.2.
- Gross external financing need (in percent of GDP): 55.1; 49.2; 45.9; 37.0; 31.1; 35.4; 40.5; 40.0; 42.4; 38.9; 39.5; 39.5.
- Scenario with key variables at their historical averages: 75.3; 74.8; 73.9; 72.6; 71.3; 70.0; 68.8; change -3.7.

### External debt baseline macro assumptions (selected)
- Real GDP growth (percent): 2010: 1.6; 2011: 6.0; 2012: 3.8; 2013: 3.5; 2014: 3.0; 2015: 1.6; 2016: 2.7; 2017: 3.1; 2018: 3.4; 2019: 3.6; 2020: 3.6; 2021: 3.3.
- GDP deflator in Euro (change in percent): 2010: 2.4; 2011: 5.2; 2012: 2.7; 2013: 1.3; 2014: 1.2; 2015: 0.4; 2016: 1.4; 2017: 1.5; 2018: 2.2; 2019: 2.3; 2020: 2.4; 2021: 2.4.
- Nominal external interest rate (in percent): 2010: 3.2; 2011: 3.4; 2012: 3.4; 2013: 2.9; 2014: 2.9; 2015: 2.5; 2016: 2.3; 2017: 1.3; 2018: 1.2; 2019: 0.9; 2020: 0.8; 2021: 0.9.
- Growth of exports (Euro terms, in percent): 2010: 30.9; 2011: 28.1; 2012: 16.1; 2013: 8.0; 2014: 0.7; 2015: -4.1; 2016: 0.3; 2017: 8.1; 2018: 7.1; 2019: 6.6; 2020: 4.7; 2021: 4.6.
- Growth of imports (Euro terms, in percent): 2010: 30.5; 2011: 28.7; 2012: 11.1; 2013: 7.5; 2014: -0.2; 2015: -1.4; 2016: 1.0; 2017: 9.8; 2018: 7.7; 2019: 6.7; 2020: 4.6; 2021: 4.4.
- Current account balance, excluding interest payments (percent of GDP): 2010: 2.3; 2011: -1.2; 2012: 1.4; 2013: 3.7; 2014: 5.6; 2015: 0.0; 2016: -0.5; 2017: -1.7; 2018: -2.0; 2019: -2.2; 2020: -2.2; 2021: -2.1.
- Net non-debt creating capital inflows (percent of GDP): 2010: 0.8; 2011: 3.0; 2012: 0.1; 2013: 0.4; 2014: 0.5; 2015: 1.9; 2016: 2.3; 2017: 2.2; 2018: 1.9; 2019: 1.9; 2020: 1.9; 2021: 1.7.

### External debt bound tests and stress scenarios (high-level)
- Interest rate shock, current account shock, growth shock, combined shock, and real depreciation shock were simulated (figures presented as time series 2011–2021).
- Representative average projections and ten-year historical averages are presented in boxed values on charts.
- Notes: Individual shocks are permanent one-half standard deviation shocks; combined shock includes permanent 1/4 standard deviation shocks to real interest rate, growth rate, and current account balance; a one-time real depreciation of 30 percent occurs in 2015 in one scenario.

### Statistical and data quality notes (coverage and reporting)
- Public sector defined as general government.
- Data based on available data as of April 27, 2016.
- Data sources and methodological notes referenced: IMF staff, Lithuanian authorities; definitions of effective interest rate, automatic debt dynamics formulae, and external debt dynamics formulae are provided in accompanying footnotes.
- Data dissemination and statistics: Lithuania subscribes to SDDS (since May 1996) and posts metadata on DSBB. National accounts compiled in ESA 2010 (from 2005); CPI base period 2010; HICP base period 2005. Government finance statistics converted to GFSM 2014 format back to 2010.

*Source: IMF staff (Annex I. Debt Sustainability Analysis, as of April 27, 2016).*

### 1.6 percent in 2015, though it is expected to improve going forward. Low energy prices had

### 1.6 percent in 2015, though it is expected to improve going forward.

### Economic performance and external sector
- Real GDP growth was 1.6 percent in 2015.
- Low energy prices had an overall positive effect on the economy, but:
  - Recessional environment in the CIS region and sanctions by the Russian Federation reduced export performance.
  - Merchandise exports to the CIS region contracted by almost a third in 2015.
  - Services exports shrunk by a fourth in 2015.
- Successful export reorientation partially mitigated the external demand shock; real exports of goods and services were higher than a year ago.
- Domestic demand remained the principal driver of the economy.

### Labor market, wages, and inflation
- Wages increased by 5.1 percent in 2015, driven by a higher minimum wage and sectoral wage pressures.
- The unemployment rate declined to 9.1 percent in 2015.
- The unemployment rate is projected to improve by further 0.6 percentage points in 2016.
- Inflation forecast revised downwards due to stronger-than-anticipated decline in energy prices; a 0.5 percent increase in prices is expected in the year (2016).

### Outlook and risks
- As external drag softens, economic growth is expected to reach 2.5 percent in 2016, narrowing the output gap.
- Risks—tilted to the downside—mainly relate to external developments:
  - Possible increase in commodity prices and developments in key export markets.
  - Entrenchment of low inflation in the euro area.
  - Higher volatility in global financial markets.
  - Renewed pressures in the Schengen area and political instability in the EU.
- Upside considerations:
  - Possible depreciation of the euro would support exports.
  - External demand may turn out generally stronger.
- Structural challenge: shrinking labour force.
- Authorities contemplate measures to raise economic growth potential, strengthen long-term fiscal sustainability, and alleviate demographic effects.

### Fiscal outturn and public finances
- The fiscal outturn over-performed the 2015 budget plan as key tax bases grew faster than GDP.
- Headline deficit declined to 0.2 percent of GDP in 2015.
- Headline deficit is expected to increase to around 0.8 percent of GDP in 2016.
- 2016 budget measures supporting low income earners include:
  - Increase in the minimum wage.
  - Increase in the basic income tax allowance.
  - Increases in pensions and public sector wages.
  - Accelerated increase in defence expenditure (broad political agreement reached).
- Revenue-side measures included increases in excise taxes, adjustments in capital taxation, and progress in tax administration.
- Lithuania maintains one of the lowest levels of tax revenue to GDP in the EU; some public functions are underfinanced and income inequality is high.
- From 2016 onwards, half of the state budget revenue generated from assets-related transactions will be transferred to the Reserve Fund (accelerated accumulation of fiscal buffer based on amended State Treasury Law and parliamentary resolution).

### Structural reform priorities
- Smart fiscal structural reform emphasis:
  - Reallocate resources toward more productive uses.
  - Address oversized infrastructure in health care and education.
- Authorities focus on labour market, education, and social security reforms to:
  - Improve labour market flexibility.
  - Improve non-price competitiveness.
  - Develop higher productivity sectors.
  - Address skill mismatches.
  - Increase social inclusion.
- 2016 stability program and national reform agenda recognize need to gradually increase environmental taxation.
- New Social Model (Government-approved legislative reforms of social sector, June 2015):
  - Proposed amendments to Labour Code, Employment Law, Unemployment Social Insurance Law, State Social Insurance Pensions Law, and other laws.
  - Objectives: increase adequacy of social safety nets, enhance labour market flexibility, facilitate labour market integration via active labour market policies, and reduce incentives for informal work.
  - Pension reforms aim to:
    - Introduce well-defined pension indexation.
    - Strengthen link between benefits and contributions.
    - Separate basic pension from social insurance and transfer it to the state budget.
  - Authorities estimate envisaged reform measures should allow securing a long-term balance in the pension system.

### Financial sector soundness and policies
- Lithuanian banking sector is well capitalized and liquid; profitability remains stable and prudential requirements are met with comfortable margins.
- Statutory liquidity requirement is exceeded by nearly a third.
- Capital adequacy ratio is 24.8 percent, more than twice the regulatory requirement.
- Even under severe shock scenario the banking sector would stay above the capital requirement.
- Banks’ capital quality is high, consisting almost entirely of core tier one capital.
- Banks have limited external exposures and are predominantly funded through domestic deposits; loan-to-deposit ratio is 100 percent.
- Since joining the euro area, banks gained access to Eurosystem liquidity.
- Banking-sector profitability supported by cost optimization, offsetting changeover-related losses in commission income and falling net interest income; net interest rate margins remained stable despite low interest rates.
- Credit developments:
  - Private sector loan portfolio shrunk by 25 percentage points over five years of deleveraging to 41 percent of GDP (lowest in the euro area).
  - Non-performing loans (NPLs) reduced almost fourfold from peak in 2010 and currently stand at 5.5 percent.
  - Credit to private sector increased by 4.1 percent in 2015.
  - Housing sector: average prices increased by 3.4 percent on an annual basis; situation viewed as balanced.
  - Most housing transactions financed from own funds; less than a third of transactions require credit financing.
- Macro‑prudential measures by Bank of Lithuania (BoL):
  - Approved macro-prudential policy strategy clarifying objectives and decision processes.
  - Amended Responsible Lending Regulations:
    - Maximum loan maturity shortened from 40 to 30 years.
    - Interest rate sensitivity of DSTI requirement reduced, with limited flexibility to apply a higher DSTI ratio under specific circumstances.
  - After transposing CRD IV into national law, BoL activated a 2.5 percent capital conservation buffer and set the countercyclical capital buffer at 0 percent (absence of cyclical imbalances).
  - Calibrated O-SII buffers for 4 systemically important banks (to come into force in December 2016).
- Credit union sector:
  - Comprehensive systemic reform prepared and awaiting final parliamentary approval.
  - BoL introduced capital requirement for credit unions highly exposed to corporate sector, strengthened liquidity requirements for fast-growing entities, and adopted regulation limiting market risk associated with investment in debt securities.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16125.pdf_