## Republic of Lithuania: Staff Concluding Statement of the 2025 Article IV Mission _IMF News, June 6, 2025_ ## Source details **Canonical URL:** [Republic of Lithuania: Staff Concluding Statement of the 2025 Article IV Mission](https://www.imf.org/en/news/articles/2025/06/06/mcs662025-lithuania-staff-concluding-statement-2025-article-iv-mission) ## Other formats - [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) ## Bibliographic details - Published: June 6, 2025 --- ### Key takeaways and overall assessment - 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. ### Recent developments, outlook, and risks - Growth and inflation - The economy grew 2.7 percent in 2024. - Inflation has risen since late 2024, driven by higher energy prices and excise duties. - The economy is expected to grow 2.8 percent in 2025. - Inflation is expected to increase to 3.1 percent in 2025. - Fiscal and public debt developments - The general government deficit widened from 0.7 percent of GDP in 2023 to 1.3 percent of GDP in 2024. - The debt-to-GDP ratio increased from 37.3 percent in 2023 to 38.2 percent in 2024. - Financial sector and credit - Banking sector remains financially sound with high capitalization, ample liquidity buffers, and low non-performing loan (NPL) ratios. - Bank profitability eased in 2024 compared to record highs in the previous year, amid lower interest rates. - Loan growth to non-financial corporations and households recovered in 2024 and early 2025; credit-to-GDP ratios increased moderately. - House price growth stabilized in 2024 and affordability has improved; house prices are likely not significantly above fundamentals given robust demand and increasing supply. - Labor market and external demand - Growth in 2024 was driven by private consumption supported by significant real income gains. - External demand is expected to remain subdued; ICT and professional activities outlook is positive. - Labor market will tighten reflecting negative labor force dynamics affected by the normalization of migration flows. - Risks - Risks are tilted to the downside: exposure to trade policy uncertainty and geopolitical risks. - Demographics pose medium-term risks to labor supply and competitiveness if productivity growth fails to accelerate. - Fiscal position faces considerable medium-term risk without sufficient measures, notably if defense spending rises. ### Fiscal policy findings and recommendations - Short-term stance - A moderately less expansionary fiscal stance in 2025 would be helpful; strategy should shift to preserving fiscal space. - 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. - 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. - Any unused spending or revenue overperformance in 2025 should be saved to limit the deficit increase. - Defense spending and medium-term fiscal risks - 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. - In the absence of additional fiscal measures, debt could reach 60 percent of GDP by 2030. - 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. - Revenue mobilization and tax policy - Financing options for additional defense spending should be anchored by revenue mobilization. - Proposed tax policy changes are welcome but revenue yield is estimated to be modest. - Further scope identified to raise revenues while improving the system: - Make the personal income tax (PIT) system more progressive and streamline tax schedules. - Limit exemptions in corporate income taxes (CIT) and property taxes. - Reduce the value added tax (VAT) compliance gap while improving VAT efficiency. - Spending efficiency and pension policy - 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). - Strengthening the multi-pillar pension system will limit some additional spending pressures in the medium term. - The current pension system implies significant increases in public pension expenditure over the next two decades and low replacement ratios. - 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. - Staff urges authorities to allow sufficient time for careful consideration, including further thorough analysis of social and fiscal sustainability. ### Financial sector policies and recommendations - Stability and resilience - Bank profitability is expected to moderate further but remain high in 2025. - Solvency and liquidity stress tests by the Bank of Lithuania suggest banks can withstand adverse macroeconomic scenarios and unexpected liquidity shocks. - Some smaller banks require enhanced capitalization and closer oversight. - Cyber resilience should continue to be strengthened, including full implementation of the Digital Operational Resilience Act (DORA) regulation. - Macroprudential stance and market risks - Current macroprudential stance is broadly appropriate, but continued vigilance is warranted. - Financial cycles have shown no major overheating signs, but sustained expansion requires close monitoring and readiness to act if excessive expansion emerges. - Commercial real estate market requires attention due to risks of price corrections from persistent supply-demand imbalances. - In a significant adverse financial shock, relaxation of capital-based measures would be appropriate to minimize credit supply disruptions and support lending. - AML/CFT - AML/CFT framework has been strengthened significantly; continued effective implementation is essential. - 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. - 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. ### Structural reforms and medium-term growth policies - Productivity and investment - 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. - Low capital intensity is a key barrier to productivity growth and transition to higher value-added economy. - Policy measures to increase investment: - Develop risk capital, co-financing, and risk-sharing mechanisms 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 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. - Deepen the EU single market and strengthen incentives to develop domestic capital markets. - Education, skills, and labor market - Lithuania is one of the countries with the highest skills mismatches in Europe. - Critical shortages persist in nursing, engineering, and scientific fields. - Reforms needed to align education and training with market demands; integrate migrants effectively into the labor market to sustain labor force. - Recent immigrants have been successfully absorbed; legislative amendments enabled easier migration for high-skilled workers despite reduction of non-EU workers quota in 2025. - Policies should integrate migrants in productivity-enhancing ways and facilitate foreign professionals in sectors with largest shortages. - Digitalization, AI, and climate/energy - Lithuania has invested significantly in digitalizing its economy and is a main fintech hub in Europe, but digital infrastructure remains close to EU average. - Policies should facilitate technological diffusion, job transition, and AI adoption among firms while mitigating risks of job displacement and inequality. - START plan initiatives aim to promote digitalization and AI deployment in private sector and public administration. - Energy security reinforced: Baltic countries joined the European electricity grid in 2025, fully disconnecting from the Russian electricity system. - Diversification and increased domestic renewable electricity production have lowered import dependency. - 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. ### Concluding remarks - 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: Staff Concluding Statement of the 2025 Article IV Mission* --- ## References - [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) _Source: https://www.imf.org/en/news/articles/2025/06/06/mcs662025-lithuania-staff-concluding-statement-2025-article-iv-mission_