Estudos Económicos
Lithuania

Lithuania

Population 2.8 million
GDP 18,994 US$
A3
Country risk assessment
A2
Business Climate
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Synthesis

major macro economic indicators

 

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 4.1 3.5 3.6 2.4
Inflation (yearly average, %) 3.7 2.5 2.3 2.2
Budget balance (% GDP) 0.4 0.7 0.3 0.2
Current account balance (% GDP) 0.9 1.6 1.1 -0.4
Public debt (% GDP) 39.4 34.2 32.0 30.2

(e): Estimate. (f): Forecast. Fiscal year from July 1st - 31st June (*Budget deficit includes grants)

STRENGTHS

  • Membership of the eurozone since 2015 and the OECD since May 2018
  • Sound public and external accounts
  • Banking system dominated by three Scandinavian institutions
  • Transit zone between the European Union and Russia / Kaliningrad enclave
  • Diversification of energy supply (Klaipeda gas terminal, shale gas potential, electricity links with Poland and Sweden)
  • Rising FinTech sector

WEAKNESSES

  • Tight labour market: shrinking workforce (emigration of skilled young people) and high structural unemployment.
  • Large underground economy (26% of GDP)
  • High income disparity between the capital and the regions, particularly in the northeast, where poverty persists
  • Limited value added of exports (mineral products, wood, agri-food, furniture, electrical equipment)
  • Competitiveness eroded by insufficient productivity gains

RISK ASSESSMENT

Slowing growth

After a brisk performance in 2019, growth is expected to slow in 2020, as it begins to move towards its potential level. Private consumption (two-thirds of GDP), which is the main contributor to growth, is expected to remain strong as a result of an increase in the untaxed allowance for personal income, pension indexation, higher minimum wages and a strong labour market. The labour market is benefiting from the impr­ovement in the historically high level of immigration, which is expected to exceed the similarly high level of emigration. At the same time, the tight labour market and hikes in the minimum wage, which is high relative to productivity, will have a negative impact on the competitiveness of companies. This could affect export performance (80% of GDP). In addition, rising international trade tensions could have an adverse impact, causing trade to make a negative contribution to growth. Investments (almost 20% of GDP), including those financed by the EU, are expected to continue at a similar pace in 2020. Private investment in equipment and intellectual property is expected to remain an important driver of growth, as companies continue to face labour shortages and high capacity utilization rates. Residential construction is expected to contribute less to investment growth owing to less favourable financing conditions.

 

Public and external accounts nearly in balance

According to the budget approved by the government, revenues are set to increase significantly (9%), almost at the same rate as expenditure (8%). The bill provides for an increase in excise duties on hard liquor, tobacco and fuel, and scraps the excise tax exemption on diesel fuel used for heating. It expands the property tax base and introduces a tax on polluting cars. The tax package also includes proposals to tax the assets of credit institutions and retail chains and to slow down the increase in the non-taxation threshold. The lion’s share of expenses will be directed towards social spending. If the balance of municipalities and the social security system is added, the deficit should turn into a surplus. The stated objective is to accumulate reserve (up to €1.6 billion in 2020, or 3.3% of GDP) and reduce public debt, 75% of which is held by non-residents and nearly 30% of which is denominated in foreign currency.

In 2020, the current account is expected to show a small deficit. Although the moderation of domestic demand will limit imports, declining EU demand will worsen the goods deficit. The trade surplus (2.3% in 2019) generated by the high level of exports of services, particularly tourism and road transport, is therefore expected to decline. Transfers (2.2% of GDP), mainly composed of remittances from expatriates and European funds, despite holding steady, will not compensate for the income deficit (5.3%), which is attributable to the high stock of FDI in the country (25% of GDP). Portfolio investment abroad is expected to change little. The size of Lithuania’s gross foreign debt (75.7% of GDP in 2018) needs to be considered in the light of the debt’s composition: State (39%), central bank (27.5%), banks (11%) and non-financial companies (26%), the assets held abroad by the country (84% of GDP) and the fact that the debt is denominated in euros.

 

Another election year to dispel political uncertainty

In 2019, Gitanas Nauseda, a 55-year-old independent candidate, defeated Ingrida Simonyte, another independent candidate, in the presidential election. After finishing third in the election, Prime Minister Saulius Skvernelis, a member of the centrist LVZS Party, announced his intention to resign on election night. He later decided to continue in his position until the next parliamentary elections in October 2020. The Homeland Union – Lithuanian Christian Democrats (TS-LKD) Party currently leads the polls, with about 26% of voters. Popular support for the ruling LVZS Party has declined considerably since mid-2019, and the party stands at around 16%. The Social Democratic Party of Lithuania (LSDP) follows closely with 14%, while the Social Democratic Labour Party of Lithuania (LSDDP) is currently below the 5% threshold required to obtain one of the 70 seats in parliament allocated based on proportional representation. The business environment is improving, with Lithuania taking 11th place in the Doing Business 2020 ranking.

 

Last update : February 2020

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