May 26, 2026
PRESS OFFICER: Boris Balabanov
Phone: +1 202 623-7100Email: MEDIA@IMF.org
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Vilnius, Lithuania: Lithuania has sustained solid broad-based growth despite recurring global headwinds. Growth is expected to remain steady in 2026 as Pillar II pension withdrawals, investment-related EU funds, and expansionary fiscal policy support domestic demand, while higher energy prices are set to lift inflation. However, these impulses are largely temporary and preserving medium-term growth momentum hinges on shifting towards durable sources of growth. Looking ahead, rising aging-related and social spending pressures, in addition to high defense outlays, will drive debt higher. This underscores the need for a credible medium-term fiscal strategy—anchored primarily on revenue mobilization—to preserve fiscal buffers. Advancing productivity-enhancing structural reforms—especially to reduce labor market imbalances, improve enterprise access to finance to support investment, accelerate technological diffusion, and strengthen energy resilience—alongside deeper integration into the EU Single Market, will be essential to accelerate income convergence and reinforce fiscal sustainability.
Recent Developments, Outlook, and Risks
Economic activity remained robust in 2025. The economy continued to grow steadily at 2.9 percent, driven by domestic demand and supported by wage and pension increases, higher government net spending, and easing financial conditions. The labor market was tight, with high vacancies and rising nominal wages, despite persistently elevated unemployment in part due to skills mismatches. At 3.4 percent, inflation exceeded the euro area average in 2025, driven primarily by services inflation as well as higher excise duties, and has risen further in 2026 following the increase in energy prices.
Despite a smaller‑than‑budgeted deficit, fiscal policy was expansionary in 2025. The deficit reached 1.8 percent of GDP, up from 1.3 percent in 2024, reflecting higher social benefits, a higher public sector wage bill, and increased defense spending. Public debt rose to just under 40 percent of GDP.
The financial system remains sound. The banking sector is well capitalized, liquid, and profitable, with non-performing loan ratios among the lowest in Europe. While profitability has moderated from peak levels as policy rates declined and balance sheets expanded, it remains comfortable.
Financial expansion continued in 2025 as financial conditions eased with momentum carrying into early 2026. Lending rates declined and credit demand strengthened, supporting broad-based loan growth to households and non-financial corporations. Legal changes simplified and reduced the cost of mortgage refinancing, while housing market activity stayed strong and house prices increased markedly.
Growth is projected to remain steady in 2026 as an unusual mix of expansionary policies offsets the adverse energy price shock while adding to inflation. Under the IMF staff’s baseline scenario, which assumes a relatively short‑lived war in the Middle East, growth is projected to remain at 2.9 percent, with inflation increasing to an average of 5.2 percent in 2026. Pillar II pension withdrawals following the 2025 decision to lift restrictions, fiscal expansion through higher social benefits and defense spending, EU funded investment, and continued robust wage growth are expected to support domestic demand, partially offsetting the drag from higher energy prices. Inflation is expected to rise further in 2026 as tax effects and higher energy prices add to strong domestic demand pressures, before moderating over the medium term. The labor market will remain tight amid adverse labor force dynamics. The outlook is subject to considerable uncertainty, notably reflecting risks from the evolving war in the Middle East and its potential impact on energy prices, global confidence, and external demand.
Amid high uncertainty, risks are tilted to the downside for growth and to the upside for inflation. Heightened geopolitical tensions and broader trade disruptions could further raise energy prices, disrupt supply chains, and weaken external demand, amplifying inflation pressures and weighing on activity. Domestically, even stronger‑than‑expected Pillar II pension withdrawals—combined with more buoyant credit and housing market dynamics—could intensify demand pressures and push inflation higher if fiscal and macroprudential policies are not appropriately calibrated. Over the medium term, delays in structural reforms and insufficient measures to address rising defense and aging‑related spending would increase fiscal sustainability risks and slow income convergence.
Fiscal Policy
Fiscal policy is set to remain expansionary in 2026, placing public debt on an upward trajectory over the medium term. Under staff’s baseline scenario, public debt is expected to rise by around 15 percentage points of GDP to 55 percent of GDP by 2030. Defense spending will likely stay elevated in the coming years, while further increases in social benefits and mounting aging‑related pressures will add to spending. At the same time, Pillar II pension withdrawals will weaken long‑term pension adequacy and add to future fiscal pressures. While Lithuania still has some fiscal space and near‑term sovereign stress risks remain low, sustained deficits, alongside rising interest costs and demographic headwinds, will gradually erode buffers and reduce room to respond to shocks.
To safeguard fiscal sustainability, focus should shift to a tighter stance already in 2026 while limiting energy support to targeted and temporary measures. Given strong demand pressures and rising inflation, a tighter fiscal stance would be more appropriate, helping mitigate inflationary risks and preserving fiscal buffers. To support this objective, any revenue overperformance or unused budget allocations should be saved rather than spent. Higher energy prices should be allowed to pass through to end users encouraging energy conservation, while any mitigating measures should be limited to targeted, temporary, and lump-sum support for vulnerable households—and, where warranted, viable firms—containing fiscal costs and preserving price signals.
The medium-term fiscal strategy should aim to offset higher spending with durable tax measures and selective spending reprioritization to anchor debt at a prudent level. Given Lithuania’s relatively low tax revenues compared with European peers and with limited scope for significant spending cuts without affecting core public services, the adjustment should rely primarily on permanent revenue mobilization. This should be complemented by spending reprioritization and efficiency gains while balancing social needs with fiscal sustainability. Specific revenue measures include broadening the property tax base and raising property tax rates—a tax that is efficient, equitable yet currently underused in Lithuania; further reforming the personal income tax to raise revenue and enhance progressivity; limiting inefficient exemptions in corporate income tax and excise duties; and narrowing the value added tax compliance gap. On the expenditure side, efforts should focus on curbing public wage bill growth, greater means-testing of social benefits, and raising spending efficiency, including in the health and education sectors through continued rationalization of the school network and further strengthening preventive care to reduce inpatient treatment. To safeguard fiscal discipline, the fiscal council’s role should be strengthened—including through a separate mandate and legal status outside the National Audit Office—thereby enhancing its independence and effectiveness.
The recent weakening of Pillar II pensions intensifies the need to strengthen the pension system to ensure both long‑term fiscal sustainability and social adequacy. Demographic pressures are expected to significantly raise public pension spending, while changes allowing voluntary participation, early withdrawals, and contribution breaks weaken replacement rates and add future fiscal pressures. Preserving accumulated Pillar I balances would be essential to build buffers against adverse demographic trends and the weakened Pillar II. The near-term focus should be on ensuring the stability and predictability of Pillar II pensions, including through maintaining state contributions to preserve incentives to participate. More fundamentally, a comprehensive reassessment of the pension strategy is needed, including measures to reinforce Pillar II and better align the system with European best practices.
Financial Sector Policies
Financial sector policies should continue to focus on safeguarding financial stability. Lithuania’s financial system remains stable and sound, supported by a well-capitalized, liquid, and profitable banking sector with low non‑performing loans. The non-bank financial sector continues to evolve, with active supervision, enhancing discipline. The implementation of the EU’s Markets in Crypto Assets Regulation (MiCA) has significantly reduced the number of crypto-asset service providers. Withdrawals from Pillar II pensions may reduce savings, constraining the already shallow domestic capital market.
Financial expansion is gaining momentum with cyclical risks rising. Credit growth to both firms and households has accelerated, supporting strong housing market activity and contributing to a moderate but rising house price misalignment. In the commercial real estate sector, pockets of vulnerability persist, but prices have remained broadly stable. Bank surveys and market indicators also indicate emerging pressures in the housing market arising from elevated prices and localized mismatches between supply and demand. However, systemic risks are currently contained, as risks from banks’ sizable real estate exposures are mitigated by low borrower leverage, strong asset quality, ample liquidity, robust capitalization, and the availability of releasable capital buffers.
Macroprudential policy should stand ready to tighten if credit growth and house prices accelerate further. The Bank of Lithuania's intention to ease loan-to-value (LTV) limits for first-time buyers will help improve housing affordability. However, this measure—only partially offset by tighter debt service-to-income limits for all and stricter LTV for those taking second and subsequent housing loan—could add to the already strong growth in credit and house prices, particularly in an environment characterized by robust wage growth, expansionary fiscal policy, and additional liquidity stemming from Pillar II pension withdrawals. Taken together, these factors may reinforce demand-side pressures, increase the risk of further house price misalignment, and contribute to a gradual buildup of vulnerabilities in household balance sheets. Should risks intensify, a tightening of the macroprudential stance would be warranted, for example through an increase in the countercyclical capital buffer (CCyB).
The evolving risk landscape, including cybersecurity and increased global attention for effective mitigation of financial integrity risks associated with fintech and virtual assets, calls for continued supervisory vigilance. Cyber risks remain a key concern for financial institutions, requiring higher investment in IT security that could weigh on profitability, underscoring the importance of continued efforts to strengthen cyber resilience and cross-border incident coordination. Financial integrity risks, related to cross-border payment flows and virtual asset activities warrant sustained efforts to strengthen implementation and risk-based supervision of AML/CFT measures, particularly in higher-risk sectors such as Electronic Money Institutions (EMIs)/Payment Institutions (PIs) and Crypto-Asset Service Providers (CASPs).
Structural Reforms
To accelerate income convergence, growth should transition away from demand stimulus toward more durable drivers, notably productivity gains and investment. A temporary surge in net migration has supported recent growth while Pillar II withdrawals and fiscal expansion are expected to sustain momentum in the near term. Yet, the capital stock is low while the unemployment rate remains persistently high with large regional variations, underscoring long‑standing structural challenges. Population aging, skills mismatches and shortages, and regional labor‑market and productivity disparities continue to weigh on potential growth and the efficient allocation of resources.
Addressing structural labor market challenges will require comprehensive reforms to strengthen skills, improve work incentives, and ease inter-regional mobility constraints. Priorities include strengthening education and training systems to better match labor market needs, scaling up effective reskilling and active labor market policies with stable financing, and further strengthening vocational training. Policies should also aim at recalibrating social benefits to preserve work incentives while ensuring adequacy and better targeting and further refining the unemployment benefit design to avoid repeated returns to unemployment. Ensuring timely and efficient processing of work permit applications for foreign workers alongside stronger migrant integration would help address labor shortages in the most affected sectors. Easing mobility frictions—through improved connectivity, greater supply and quality of affordable dwellings in major cities—would further support employment and productivity across regions.
Raising investment and productivity will also require strengthening both the domestic and EU single capital markets. Firms’ limited access to finance constrains their ability to scale up and invest—particularly in intangible and technology-driven upgrades. Addressing this constraint will be helped by broadening non-bank financing channels—including by mobilizing institutional and retail investors to further deepen domestic capital markets, expanding alternative sources of financing, such as venture capital and crowdfunding, and leveraging EU-funded instruments. While recent efforts to harmonize Baltic capital markets hold the promise of easier funding access, these efforts need to be complemented by further progress toward the EU single financial and product market to achieve the full scale and depth required to sustainably support firm growth and investment. ILTE, a newly transformed national promotional bank, can also help fill financing gaps, and its governance, operational transparency, and supervisory framework should be strengthened to ensure sound risk management, and safeguards against crowding out private finance or undue external influence.
Strengthening productivity and competitiveness hinges on technological diffusion and reduced exposure to external energy shocks. Lithuania can further boost productivity by expanding the adoption of digital technologies and AI, especially by smaller firms, and enhancing firms access to R&D support by streamlining administrative processes. While renewable energy capacity has expanded significantly and bolstered resilience, high import dependence continues to expose the economy to external price shocks. Thus, further accelerating the green transition through additional renewables supply and storage, as well as grid modernization and expansion, would reduce vulnerabilities and support competitiveness over the medium term.
The IMF team is grateful for the warm hospitality of the Lithuanian authorities and would like to thank all its interlocutors in government, the Bank of Lithuania, the European Central Bank, the private sector, unions, and business associations for constructive and fruitful discussions.
