Lithuania: Risk Assessment
Country Risk Rating
Business Climate Rating
- Membership of the Eurozone since 2015 and the OECD since 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
- Tight labor market: shrinking workforce (emigration of skilled young people) and high structural unemployment
- Large informal 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, agrifood, furniture, electrical equipment)
- Competitiveness eroded by insufficient productivity gains
Recovery after a relatively modest recession
The economic outlook for 2021 is characterized by the recovery following the COVID-19 pandemic-induced recession in 2020. After COVID-19 first hit Lithuania in spring, the government reacted fast with a nationwide lockdown for 6 weeks, with all non-essential shops and services closing and public life coming to a standstill. These measures helped to contain the number of COVID-19 cases in a very modest area. A second wave that started in early autumn of 2020 turned out much stronger and resulted in another lockdown (at the end of October 2020), albeit with less restrictive measures (e.g. shops remained open for most of the time). While the restrictive measures in Lithuania were similar to other European countries (e.g. Germany), the economic damage was significantly lower. In the first half of 2020, GDP fell only by 1.2% compared to the same period in 2019, which was the second-best result in the EU after Ireland. Strong production in the important food industry and in pharmaceuticals helped to stabilize economic growth. After a dynamic economic recovery in the summer of 2020 and another setback in economic activity in late 2020, because of the second lockdown, GDP growth in 2021 should be positive but muted. It will depend on the development of the pandemic/the introduction of a vaccine, as well as the economic performance of the main export destinations: Russia, Poland, and Latvia (which together account for 31% of all exports). Private consumption should remain one of the main drivers of economic growth, as the unemployment rate will slowly descend from its 2020 highs to lower but still elevated levels in 2021. Wage growth should be accordingly lower in 2021 (around 3.3% after 6.5% in 2020). Growth support will probably also come from the fiscal stimuli that were already decided in 2020 and that are particularly concentrated on investments. In 2020, the government decided on an additional budget of EUR 3.5 billion (7% of GDP) in order to support the health sector and to provide wage subsidies for employees. Moreover, guarantee schemes were expanded (EUR 1.3 billion, 2.6% of GDP) and a business support fund was introduced (EUR 1 billion, 2.1% of GDP). Besides this, an investment plan worth EUR 6.3 billion (13% of GDP) was approved (EUR 2.2 billion are new, the rest was accelerated) to invest, for instance, into infrastructure and digitalization through the end of 2021. Additional support should come from the ECB, which should extend its asset purchase programs (APP with the normal EUR 20 billion per month and PEPP by an additional volume of around EUR 680 billion) until the end of 2021, alongside another extension of its targeted long-term refinancing operations (T-LTROs).
Public debt and the current account surplus reach record highs
The stimuli programs had a price. After four consecutive years of surpluses, the public budget went into a strong deficit in 2020. The additional investment measures in 2021 will lead to another strong deficit (comparable in size with the deficit of 2010). Therefore, pubic debt will increase to almost 50% of GDP, a record in Lithuanian history. The current account surplus has surprisingly reached a record high in 2020. The structural goods trade deficit decreased noticeably, as imports fell stronger than exports, while the services balance remained in surplus and the structural deficit of the income balance (e.g. capital income) decreased. In 2021, the deficit of the trade balance should increase again somewhat with a stronger recovery of domestic demand, but the current account surplus will probably remain relatively high.
New Prime Minister elected to fight the recession
Former Finance Minister and opposition politician Ingrida Šimonytė won, for the conservative party “Homeland Union”, the parliamentary elections in October 2020. The party holds now 50 of the 141 seats in parliament. The victory reflected the public support for a comeback of Šimonytė’s austerity policy, which she worked on from 2009 to 2012 when she dealt with the repercussions of the financial market crisis and stabilized public finances via harsh cutbacks. The Farmer and Greens-party of the former Prime Minister Saulius Skvernelis, which lost 22 seats and reached 32 seats, came second in the general election. The new Prime Minister Šimonytė formed a coalition with the Liberal Movement (12 seats) and the Freedom Party (11 seats). Together, they have a small majority of 73 seats. The next parliamentary election should take place in October 2024.