Republic of Lithuania: Staff Concluding Statement of the 2026 Article IV Mission
IMF News, May 26, 2026
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- Published: May 26, 2026
Key takeaways
- Lithuania sustained solid broad-based growth despite recurring global headwinds.
- Growth is expected to remain steady in 2026 supported by Pillar II pension withdrawals, investment-related EU funds, and expansionary fiscal policy, while higher energy prices are set to lift inflation.
- Medium-term growth hinges on shifting toward durable sources of growth; rising aging-related and social spending pressures plus high defense outlays will drive debt higher.
- A credible medium-term fiscal strategy—anchored primarily on revenue mobilization—and productivity-enhancing structural reforms are emphasized to preserve fiscal buffers and accelerate income convergence.
Recent developments, outlook, and risks
- 2025 performance:
- Economic growth: 2.9 percent in 2025.
- Inflation: 3.4 percent in 2025, exceeding the euro area average; services inflation and higher excise duties were primary drivers.
- Labor market: Tight labor market with high vacancies and rising nominal wages; persistently elevated unemployment partly due to skills mismatches.
- Fiscal stance: Expansionary in 2025 despite a smaller‑than‑budgeted deficit; deficit reached 1.8 percent of GDP (up from 1.3 percent in 2024).
- Public debt: Rose to just under 40 percent of GDP.
- Financial sector: Well capitalized, liquid, and profitable banking sector; non-performing loan ratios among the lowest in Europe.
- Housing: Housing market activity strong and house prices increased markedly; legal changes simplified and reduced the cost of mortgage refinancing.
- 2026 baseline projection and assumptions:
- Baseline growth: projected to remain at 2.9 percent in 2026 under staff’s baseline scenario assuming a relatively short‑lived war in the Middle East.
- Inflation: projected to increase to an average of 5.2 percent in 2026.
- Demand drivers: Pillar II pension withdrawals, fiscal expansion (higher social benefits and defense spending), EU funded investment, and robust wage growth expected to support domestic demand.
- Risks: Outlook subject to considerable uncertainty—key risks include the evolving war in the Middle East, potential higher energy prices, global confidence shocks, and weaker external demand.
- Risk tilt:
- Downside risks to growth and upside risks to inflation.
- Domestic risks include stronger‑than‑expected Pillar II withdrawals and buoyant credit and housing market dynamics amplifying demand pressures.
- Medium-term risks: Delays in structural reforms and inadequate measures to address defense and aging‑related spending would increase fiscal sustainability risks and slow income convergence.
Fiscal policy — findings and recommendations
- Fiscal trajectory:
- 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; further increases in social benefits and aging‑related pressures expected.
- Pillar II pension withdrawals will weaken long‑term pension adequacy and add to future fiscal pressures.
- Near-term recommendation:
- Shift to a tighter fiscal stance already in 2026 while limiting energy support to targeted and temporary measures.
- Save any revenue overperformance or unused budget allocations rather than spend them.
- Allow higher energy prices to pass through to end users to encourage energy conservation; mitigate only with targeted, temporary, lump-sum support for vulnerable households—and, where warranted, viable firms.
- Medium-term fiscal strategy:
- Rely primarily on permanent revenue mobilization given relatively low tax revenues and limited scope for significant spending cuts without affecting core services.
- Specific revenue measures recommended:
- Broaden the property tax base and raise property tax rates.
- Further reform the personal income tax to raise revenue and enhance progressivity.
- Limit inefficient exemptions in corporate income tax and excise duties.
- Narrow the value added tax compliance gap.
- Expenditure-side measures:
- Curb public wage bill growth.
- Greater means-testing of social benefits.
- Raise spending efficiency, including in health and education (continued rationalization of the school network and further strengthening preventive care to reduce inpatient treatment).
- Strengthen fiscal institutions:
- Enhance the fiscal council’s role—including through a separate mandate and legal status outside the National Audit Office—to strengthen independence and effectiveness.
- Pension system:
- Weakening of Pillar II intensifies the need to strengthen the pension system for long‑term fiscal sustainability and social adequacy.
- Preserve accumulated Pillar I balances to build buffers.
- Near-term: ensure stability and predictability of Pillar II pensions, including maintaining state contributions.
- Medium-term: comprehensive reassessment of the pension strategy to reinforce Pillar II and better align with European best practices.
Financial sector policies — findings and recommendations
- System soundness:
- Banking sector: well-capitalized, liquid, profitable; low non‑performing loans.
- Non-bank sector: evolving with active supervision; MiCA implementation reduced number of crypto-asset service providers.
- Pillar II withdrawals may reduce savings and constrain domestic capital market depth.
- Cyclical risks and housing:
- Credit growth accelerated to firms and households; moderate but rising house price misalignment.
- Commercial real estate: pockets of vulnerability but prices broadly stable.
- Emerging pressures from elevated prices and localized supply-demand mismatches.
- Systemic risks currently contained due to low borrower leverage, strong asset quality, ample liquidity, robust capitalization, and releasable capital buffers.
- Macroprudential guidance:
- Stand ready to tighten if credit growth and house prices accelerate further.
- Bank of Lithuania’s intention to ease LTV limits for first-time buyers will improve affordability but could add to credit and house price growth; partially offset by tighter debt service-to-income limits for all and stricter LTV for second and subsequent housing loans.
- If risks intensify, examples of warranted actions include increasing the countercyclical capital buffer (CCyB).
- Emerging risks:
- Cybersecurity: require higher investment in IT security; continued efforts to strengthen cyber resilience and cross-border incident coordination.
- Financial integrity: sustain efforts to strengthen implementation and risk-based supervision of AML/CFT measures—particularly in EMIs/PIs and CASPs.
Structural reforms — findings and recommendations
- Need to transition growth drivers:
- Shift away from demand stimulus (migration surge, Pillar II withdrawals, fiscal expansion) toward productivity gains and investment.
- Constraints: low capital stock, persistently high unemployment with large regional variations, population aging, skills mismatches and shortages, regional labor-market and productivity disparities.
- Labor market reforms:
- Strengthen education and training systems to match labor market needs.
- Scale up effective reskilling and active labor market policies with stable financing; further strengthen vocational training.
- Recalibrate social benefits to preserve work incentives while ensuring adequacy and targeting; refine unemployment benefit design to avoid repeated returns to unemployment.
- Ensure timely and efficient processing of work permit applications for foreign workers and strengthen migrant integration.
- Ease mobility frictions via improved connectivity and greater supply and quality of affordable dwellings in major cities.
- Investment, capital markets, and firm finance:
- Broaden non-bank financing channels and mobilize institutional and retail investors to deepen domestic capital markets.
- Expand alternative financing: venture capital and crowdfunding; leverage EU-funded instruments.
- Complement Baltic capital market harmonization with further progress toward the EU single financial and product market.
- Strengthen ILTE (newly transformed national promotional bank): governance, operational transparency, supervisory framework to ensure sound risk management and safeguards against crowding out private finance or undue external influence.
- Productivity and energy resilience:
- Expand adoption of digital technologies and AI, especially by smaller firms; enhance access to R&D support by streamlining administrative processes.
- Further accelerate green transition: additional renewables supply and storage, grid modernization and expansion to reduce external energy shock exposure and support competitiveness.
Concluding note
- The IMF team thanked Lithuanian authorities and interlocutors across government, the Bank of Lithuania, the European Central Bank, the private sector, unions, and business associations for constructive discussions.
Republic of Lithuania: Staff Concluding Statement of the 2026 Article IV Mission — May 26, 2026.