{ "title": "Republic of Lithuania: Staff Concluding Statement of the 2025 Article IV Mission", "publication": "IMF News, June 6, 2025", "sourceUrl": "https://www.imf.org/en/news/articles/2025/06/06/mcs662025-lithuania-staff-concluding-statement-2025-article-iv-mission", "canonical": "https://www.imf.org/en/news/articles/2025/06/06/mcs662025-lithuania-staff-concluding-statement-2025-article-iv-mission", "overlayPath": "/en/news/articles/2025/06/06/mcs662025-lithuania-staff-concluding-statement-2025-article-iv-mission/index.md", "summary": "Lithuania has proved resilient to multiple shocks in recent years. However, new challenges are emerging—including further increases in defense expenditure adding to the existing long-term spending pressures—while long-standing structural issues still require attention.", "publishDate": "2025-06-06", "sections": [ { "heading": "Key takeaways and overall assessment", "content": "- Lithuania proved resilient to multiple shocks in recent years, but new challenges are emerging, including further increases in defense expenditure adding to existing long-term spending pressures.\n- Lithuania needs to reignite reform momentum to boost productivity while addressing fiscal and structural challenges.\n- A comprehensive strategy is recommended to preserve fiscal space through revenue mobilization, enhanced spending efficiency, and limiting further spending pressures by strengthening the multi-pillar pension system.\n- Structural reforms should focus on facilitating investments and accelerating adoption of new technologies to boost productivity growth, supplemented by labor market policies, including reducing skills mismatches.\n- Financial sector policies should continue to safeguard financial stability and integrity." }, { "heading": "Recent developments, outlook, and risks", "content": "- Growth and inflation\n - The economy grew 2.7 percent in 2024.\n - Inflation has risen since late 2024, driven by higher energy prices and excise duties.\n - The economy is expected to grow 2.8 percent in 2025.\n - Inflation is expected to increase to 3.1 percent in 2025.\n- Fiscal and public debt developments\n - The general government deficit widened from 0.7 percent of GDP in 2023 to 1.3 percent of GDP in 2024.\n - The debt-to-GDP ratio increased from 37.3 percent in 2023 to 38.2 percent in 2024.\n- Financial sector and credit\n - Banking sector remains financially sound with high capitalization, ample liquidity buffers, and low non-performing loan (NPL) ratios.\n - Bank profitability eased in 2024 compared to record highs in the previous year, amid lower interest rates.\n - Loan growth to non-financial corporations and households recovered in 2024 and early 2025; credit-to-GDP ratios increased moderately.\n - House price growth stabilized in 2024 and affordability has improved; house prices are likely not significantly above fundamentals given robust demand and increasing supply.\n- Labor market and external demand\n - Growth in 2024 was driven by private consumption supported by significant real income gains.\n - External demand is expected to remain subdued; ICT and professional activities outlook is positive.\n - Labor market will tighten reflecting negative labor force dynamics affected by the normalization of migration flows.\n- Risks\n - Risks are tilted to the downside: exposure to trade policy uncertainty and geopolitical risks.\n - Demographics pose medium-term risks to labor supply and competitiveness if productivity growth fails to accelerate.\n - Fiscal position faces considerable medium-term risk without sufficient measures, notably if defense spending rises." }, { "heading": "Fiscal policy findings and recommendations", "content": "- Short-term stance\n - A moderately less expansionary fiscal stance in 2025 would be helpful; strategy should shift to preserving fiscal space.\n - The deficit is projected to rise to 2.8 percent of GDP in 2025 due to significant increases in pension spending and higher public sector wages.\n - With a small and decreasing negative output gap under staff projections, a moderately tighter fiscal stance to reduce deficits and stabilize the debt-to-GDP ratio would be appropriate.\n - Any unused spending or revenue overperformance in 2025 should be saved to limit the deficit increase.\n- Defense spending and medium-term fiscal risks\n - Envisaged increase in defense spending to 5-6 percent of GDP in 2026-30 from the current level of 3 percent would raise financing needs significantly.\n - In the absence of additional fiscal measures, debt could reach 60 percent of GDP by 2030.\n - An average annual adjustment of about 0.5 percentage points of GDP in the general government balance over 2026-30, with the majority of additional defense spending financed by front-loaded increases in tax revenues, would help stabilize debt at around 50 percent of GDP by 2030.\n- Revenue mobilization and tax policy\n - Financing options for additional defense spending should be anchored by revenue mobilization.\n - Proposed tax policy changes are welcome but revenue yield is estimated to be modest.\n - Further scope identified to raise revenues while improving the system:\n - Make the personal income tax (PIT) system more progressive and streamline tax schedules.\n - Limit exemptions in corporate income taxes (CIT) and property taxes.\n - Reduce the value added tax (VAT) compliance gap while improving VAT efficiency.\n- Spending efficiency and pension policy\n - Fiscal savings could be generated by improving spending efficiency in healthcare and education (e.g., hospital network rationalization; rationalizing school network and teacher-student ratios for secondary education).\n - Strengthening the multi-pillar pension system will limit some additional spending pressures in the medium term.\n - The current pension system implies significant increases in public pension expenditure over the next two decades and low replacement ratios.\n - The Pillar II reform proposal (making participation voluntary and increasing opt-out/suspend options) is likely to further reduce the replacement rate and could materially impact the pension system and public finances.\n - Staff urges authorities to allow sufficient time for careful consideration, including further thorough analysis of social and fiscal sustainability." }, { "heading": "Financial sector policies and recommendations", "content": "- Stability and resilience\n - Bank profitability is expected to moderate further but remain high in 2025.\n - Solvency and liquidity stress tests by the Bank of Lithuania suggest banks can withstand adverse macroeconomic scenarios and unexpected liquidity shocks.\n - Some smaller banks require enhanced capitalization and closer oversight.\n - Cyber resilience should continue to be strengthened, including full implementation of the Digital Operational Resilience Act (DORA) regulation.\n- Macroprudential stance and market risks\n - Current macroprudential stance is broadly appropriate, but continued vigilance is warranted.\n - Financial cycles have shown no major overheating signs, but sustained expansion requires close monitoring and readiness to act if excessive expansion emerges.\n - Commercial real estate market requires attention due to risks of price corrections from persistent supply-demand imbalances.\n - In a significant adverse financial shock, relaxation of capital-based measures would be appropriate to minimize credit supply disruptions and support lending.\n- AML/CFT\n - AML/CFT framework has been strengthened significantly; continued effective implementation is essential.\n - The third national risk assessment identified virtual asset service providers (VASPs), electronic money institutions (EMI), and payment institutions (PI) as posing significant ML/TF risks.\n - Authorities should continue AML/CFT efforts, including Bank of Lithuania oversight and market controls for newly licensed VASPs under the MiCAR regime, supervision of payment service institutions, and AML/CFT measures for CENTROlink members." }, { "heading": "Structural reforms and medium-term growth policies", "content": "- Productivity and investment\n - Recent recovery has been driven by higher labor accumulation from temporary net migration; contributions from capital and total factor productivity (TFP) growth were smaller than earlier convergence periods.\n - Low capital intensity is a key barrier to productivity growth and transition to higher value-added economy.\n - Policy measures to increase investment:\n - Develop risk capital, co-financing, and risk-sharing mechanisms to enhance credit flow to SMEs.\n - Targeted credit guarantee schemes and integrating digital solutions to alleviate access-to-finance constraints.\n - Expanded role of state-owned ILTE (previously INVEGA) to complement private banking in supporting investment in high value-added sectors, innovation, energy efficiency, and strategic infrastructures—ensure effective monitoring and transparency of ILTE operations.\n - Deepen the EU single market and strengthen incentives to develop domestic capital markets.\n- Education, skills, and labor market\n - Lithuania is one of the countries with the highest skills mismatches in Europe.\n - Critical shortages persist in nursing, engineering, and scientific fields.\n - Reforms needed to align education and training with market demands; integrate migrants effectively into the labor market to sustain labor force.\n - Recent immigrants have been successfully absorbed; legislative amendments enabled easier migration for high-skilled workers despite reduction of non-EU workers quota in 2025.\n - Policies should integrate migrants in productivity-enhancing ways and facilitate foreign professionals in sectors with largest shortages.\n- Digitalization, AI, and climate/energy\n - Lithuania has invested significantly in digitalizing its economy and is a main fintech hub in Europe, but digital infrastructure remains close to EU average.\n - Policies should facilitate technological diffusion, job transition, and AI adoption among firms while mitigating risks of job displacement and inequality.\n - START plan initiatives aim to promote digitalization and AI deployment in private sector and public administration.\n - Energy security reinforced: Baltic countries joined the European electricity grid in 2025, fully disconnecting from the Russian electricity system.\n - Diversification and increased domestic renewable electricity production have lowered import dependency.\n - Lithuania remains susceptible to climate change risks and needs to accelerate the green transition, particularly adaptation; future investment in new technologies and defense should not thwart economy-wide emissions reduction efforts, consistent with the updated National Energy and Climate Action Plan (NECP) for the period 2021–2030." }, { "heading": "Concluding remarks", "content": "- Preserve fiscal space via revenue mobilization, spending efficiency, and pension system strengthening.\n- Reignite reform momentum to boost productivity through investment, digitalization/AI adoption, and education/labor market alignment.\n- Continue policies to safeguard financial stability and strengthen AML/CFT implementation.\n- The IMF team thanks Lithuanian authorities, Bank of Lithuania, ECB, private sector, unions, and business associations for constructive discussions.\n\nRepublic of Lithuania: Staff Concluding Statement of the 2025 Article IV Mission\n\n---\n\n\n References\n\n- Republic of Lithuania and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2025/06/06/mcs662025-lithuania-staff-concluding-statement-2025-article-iv-mission" } ], "bullets": [ "[Markdown version](/en/news/articles/2025/06/06/mcs662025-lithuania-staff-concluding-statement-2025-article-iv-mission/index.md)", "[Structured JSON version](/en/news/articles/2025/06/06/mcs662025-lithuania-staff-concluding-statement-2025-article-iv-mission/index.json)", "[Bundle manifest](/en/news/articles/2025/06/06/mcs662025-lithuania-staff-concluding-statement-2025-article-iv-mission/bundle-manifest.json)", "Published: June 6, 2025", "Lithuania proved resilient to multiple shocks in recent years, but new challenges are emerging, including further increases in defense expenditure adding to existing long-term spending pressures.", "Lithuania needs to reignite reform momentum to boost productivity while addressing fiscal and structural challenges.", "A comprehensive strategy is recommended to preserve fiscal space through revenue mobilization, enhanced spending efficiency, and limiting further spending pressures by strengthening the multi-pillar pension system.", "Structural reforms should focus on facilitating investments and accelerating adoption of new technologies to boost productivity growth, supplemented by labor market policies, including reducing skills mismatches.", "Financial sector policies should continue to safeguard financial stability and integrity.", "Growth and inflation", "Fiscal and public debt developments", "Financial sector and credit", "Labor market and external demand", "Risks", "Short-term stance", "Defense spending and medium-term fiscal risks", "Revenue mobilization and tax policy", "Spending efficiency and pension policy", "Stability and resilience", "Macroprudential stance and market risks", "AML/CFT", "Productivity and investment", "Education, skills, and labor market", "Digitalization, AI, and climate/energy", "Preserve fiscal space via revenue mobilization, spending efficiency, and pension system strengthening.", "Reignite reform momentum to boost productivity through investment, digitalization/AI adoption, and education/labor market alignment.", "Continue policies to safeguard financial stability and strengthen AML/CFT implementation.", "The IMF team thanks Lithuanian authorities, Bank of Lithuania, ECB, private sector, unions, and business associations for constructive discussions.", "[Republic of Lithuania and the IMF](http://www.imf.org/external/country/LTU/index.htm)", "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)", "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)", "[PRESS CENTER](http://presscenter.imf.org/)", "[https://www.imf.org/en/home](https://www.imf.org/en/home)" ], "alternates": { "markdown": "/en/news/articles/2025/06/06/mcs662025-lithuania-staff-concluding-statement-2025-article-iv-mission/index.md", "json": "/en/news/articles/2025/06/06/mcs662025-lithuania-staff-concluding-statement-2025-article-iv-mission/index.json", "bundleManifest": "/en/news/articles/2025/06/06/mcs662025-lithuania-staff-concluding-statement-2025-article-iv-mission/bundle-manifest.json" }, "generatedAtUtc": "2026-09-26T03:55:10.776Z" }