Lithuania Economy

Lithuania Economy

Subchapters:

  • Basic data
  • Public finances and the state budget
  • Banking system
  • Tax system

Basic data

Lithuania emerged from the pandemic in 2020 with a drop in GDP of 0.1% and increased unemployment, which rose by 2.2% year-on-year. In 2021, Lithuania’s economy grew by 5.1%, surpassing the pre-pandemic level. Currently, the Lithuanian economy is driven by domestic consumption, exports and investments. Lithuania’s digitized economy has adapted well to the quarantine restrictions, and both businesses and consumers have proven to be very flexible. In addition, a further transformation of the economic structure is observed with the expansion of exports of high-value services and high-tech production (technical equipment, electronics, chemicals and pharmaceuticals), which have an increasing share of total exports. Between 2022-2024, the Lithuanian GDP is expected to decrease by 2.5-2.1%. Not only the high rate of inflation contributes to the expected slowdown of the economy, which has reached the highest level since 2008/9 and is growing the fastest in the EU (year-on-year inflation rate harmonized with the EU in March 2022 was 15.6%), but also the complex geopolitical situation and the rapid development of the main sectors of the Lithuanian economy in 2021. War in Ukraine and the resulting sanctions against Russia will dampen the growth of the Lithuanian economy, but recession or stagnation are not expected. At the beginning of 2022, the Lithuanian economy was still growing at an enviable pace – in the first two months, retail sales were 15% higher and manufacturing production was 24% higher than a year ago. Inflation, which was the highest of the three Baltic states at 4.7% in 2021 in Lithuania, is projected to be 4.6% in 2022 and fall to 2.1% the following year. The negative effects of high inflation are also expected to be mitigated by the government’s rescue package and continued strong wage growth, which is expected to be 8.4% on average in 2022. The unemployment rate should remain at around 6% in the following years. Labor shortages in the service sector are likely to be felt in the near term as workers are relocated to other sectors of the economy that grew during the pandemic. The labor shortage problem will be partially solved by refugees from Ukraine, of whom, according to estimates, around 15,000 should be successfully employed on the Lithuanian labor market. Check ebizdir for economical facts of Lithuania.

Lithuania is an industrial country with an industry share of 20.2% of GDP. Thanks to its successful integration into EU production value chains, manufactured goods account for more than 80% of Lithuania’s exports of goods and services, making it particularly important for Lithuania to maintain a strong and competitive industry in the country. The main industries are processing, chemical, furniture, woodworking, clothing and textile and electronic industries. Industry is mainly concentrated in larger cities such as Vilnius, Kaunas, Klaipeda and Šiauliai. Despite the dynamic growth, the linear structure of the Lithuanian economy means that custom production dominates and relatively low added value is created.

Table from MOP + additionally balance of payments, indebtedness/GDP.

Pointer 2019 2020 2021 2022 2023
GDP growth (%) 4.3 -0.8 4.9 0.6 0.5
GDP/population (USD/PPP) 40,408.10 39,983.00 43,823.50 46,420.00 48,280.0
Inflation (%) 2.2 1.1 4.6 12.9 6.4
Unemployment (%) 6.3 8.5 7.2 7,8 7.4
Export of goods (billion USD) 33.2 32.8 40.8 42 42.7
Import of goods (billion USD) 35.8 33.1 44.6 48.1 49.9
Trade Balance (Billion USD) -2.6 -0.5 -2.5 -4.6 -5.6
Industrial production (% change) 3.4 -1.9 19.5 3.6 4.1
Population (millions) 2.8 2.7 2.7 2.7 2.6
Competitiveness 29/63 31/63 ON ON ON
OECD export risk ON ON ON ON ON

Source: EIU, OECD, IMD

Public finance and state budget

Public finance 2021
State budget balance (% of GDP) -4
Public debt (% of GDP) 46.6
Current account balance (billion USD) 2.5
Taxes 2022
AFTER 15% (5%, 0%)
F.O 20%, 32%
VAT 21%

State budget revenues in 2022 are expected to reach EUR 14.380 billion, including EUR 3.268 billion from EU funds and other international financial institutions, and expenditures EUR 16.627 billion, including EUR 3.3252.264 billion from European and other international funds. The expected state budget deficit will amount to 3.3% of GDP in 2022, i.e. roughly a third less than in 2021 (4.4% of GDP). Most of the increase in this deficit is due to one-off costs related to managing the pandemic and the migration crisis. The largest expenditures in 2022 will be on social protection (EUR 4.58 billion), the economy (EUR 3.343 billion), education (EUR billion), general public services (EUR 1.783 billion), health (EUR 1.562 billion. EUR) and defense (1.298 billion EUR). In 2022, the state budget expects EUR 976 million to mitigate the effects of inflation and strengthen energy independence. In April of the same year, it was proposed to allocate EUR 370 million for humanitarian aid for Ukrainian war refugees in 2022. It is not excluded that in the event of a significant change in the economic situation, the state budget may be adjusted.

It is assumed that public debt will reach approximately EUR 2 billion by the end of 2022, or 41.8% of GDP. The financing need in 2022 is estimated at around EUR billion. The largest part of the funds – approx. EUR billion – will be used for debt repayment, of which EUR 1 billion for domestic debt repayment, EUR billion for foreign debt repayment. In connection with the end of the pandemic, Lithuania expects a return to the rules of fiscal discipline in the eurozone, i.e. by 2022, the Lithuanian deficit should not exceed 3%, or 2.7% is expected in 2022 and 1.6% in 2023. The total amount of foreign exchange reserves reached EUR 5,31 million in March 2022 (of which EUR 32 million was in gold). With the country’s entry into the eurozone on 1 January

Banking system

The Lithuanian banking sector consists of 17 banks, 10 of which have either a banking or specialized banking license, while 7 banks operate as branches of foreign banks. Specialized banks are associated with FinTech development in Lithuania. Lithuania is (behind Great Britain) the second largest FinTech center in Europe by the number of licensed companies and the largest in the EU. The National Bank of Lithuania (Lietuvos bankas) offers help and guidance to potential participants in the financial market through its Newcomer Program, which attracts new companies and supports them in developing new products in the country. The Lithuanian banking sector is dominated by subsidiaries of large Scandinavian banks. The two largest banks – SEB and Swedbank – own their parent banks in Sweden. Three other banks – AB Šiaulių bankas, UAB Medicinos bankas and AB Mano bankas – are considerably smaller and are owned by groups of local and foreign investors. The branches of foreign banks are also dominated by Scandinavian capital. The Lithuanian Central Credit Union unites 45 credit unions. The Lithuanian government has no ownership stake in the banking sector. Prudent credit policy and good results of the Lithuanian economy allowed banks to keep the ratio of non-performing loans at a very low level of 1.6%. In addition, Lithuanian banks are stable, resilient and well capitalized, as they all adhere to established prudential standards. Capital adequacy ratios exceed set standards, and according to the CET1 index, Lithuania was among the top 3 EU countries with a very high ratio in 2021.

Tax system

Lithuania is one of the least taxed EU countries.

Basic classification of taxes in Lithuania:

  • PO profit tax
  • FO income tax
  • VAT
  • health and social insurance
  • excise duty
  • fee for state natural resources
  • ecological fee
  • land tax and property tax
  • fee for using roads and highways
  • corporate income tax
  • tax for depositing waste in landfills.

DPFO has a base of 20% plus 6.98% health and 2.1-3% social insurance. Interest tax is 15% of income not exceeding 120 times the average wage. Income above this limit is taxed at a 20% rate. Losses from the sale of securities can be carried forward to the next tax period for up to 5 years. DPPO is 15%. A foreign investor investing more than USD 1 million and owning at least 30% of the company’s share capital pays no tax for 5 years and only 50% of the profit tax for the next 10 years. Small businesses (up to 10 employees and a turnover of EUR 300,000) are subject to a reduced rate of 0% during the first tax period and a rate of 5% in subsequent tax periods. The DPPO is increased by an additional 5% for revenues exceeding EUR 2 million for commercial banks, credit unions and central credit unions.

VAT for 2022 is set at 21%. The reduced VAT is 9%, 5% and 0%. VAT is not payable on humanitarian and charitable aid, goods and funds received from foreign governments or international organizations and on the import of personal items. So far, books and heating expenses have been left at a reduced rate of 9%, and medicines covered by state health insurance at a reduced rate of 5%. Companies with an annual turnover of over 45 thousand EUR are obliged to charge VAT.

Lithuania Economy