On 24 July 2024 the IMF issued a report following discussions with Lithuania under Article IV of the IMF’s articles of agreement.

The Lithuanian economy has begun a recovery with lower inflation reflecting lower commodity prices, tighter monetary conditions and a contractionary fiscal policy. The labour market is tight and labour productivity has declined due to firms holding on to workers during the economic downturn.

The recovery is expected to continue. supported by high real wage growth and public investment and growing external demand. However, productivity and medium-term growth are likely to be negatively affected by global fragmentation, long-term spending pressures, lower corporate profitability and structural challenges in education, health and the labour market. Geopolitical risks could harm growth, and growth could also be slowed if the necessary structural reforms in pensions and education are not implemented.

The IMF report notes that a broadly neutral fiscal stance is appropriate, and any unused spending buffers or amounts received from revenue overperformance should be saved.

It is estimated that spending pressures from defence, ageing, climate commitments and higher borrowing costs could add between 5% and 10% of GDP to government spending. The report suggests that government strategy should maintain a pro-active fiscal policy. This should include pension reform; education and healthcare reforms; revenue mobilization; and preserving a strong fiscal position.
The IMF considers that the levy on banks should be phased out. The levy has had few disincentive effects, owing to its correct design, but extending the levy for one more year is problematic as the sector is already subject to higher tax rates. The report notes that the levy should be allowed to expire, to minimise any negative impact on efficiency. The levy could otherwise be seen as a tax on foreign investment, as the sector is dominated by foreign banks.

As Lithuania is susceptible to risks associated with climate change, the green transition should be accelerated, particularly in relation to adaptation. The IMF considers that the introduction of an economy-wide carbon tax on fossil fuels, together with the EU’s emission trading system, would facilitate faster decarbonization. This could also incentivize renewable investments and provide the resources needed to protect vulnerable population groups and strengthen the physical infrastructure.