Lithuania

Domestic demand as the main growth driver

After a sharp recession between the last quarter of 2022 and the first half of 2023, economic activity is expected to pick up moderately in 2024. Growth should benefit, first and foremost, from a rebound in private consumption. The favourable situation in the labour market, boosted by the integration of young Russian, Belarusian and Ukrainian workers, and the rise in real wages, will encourage a recovery in consumption. However, this robustness could prompt household caution due to the reluctance to spend since the beginning of the health and energy crises. Inflationary pressures should maintain their downward trend in 2024 as the rise in service prices slows with the cost of labour. However, Lithuania's dependence on energy imports could lead to further pressure on consumer prices. The sudden cessation of Russian gas, oil and coal imports following Russia's invasion of Ukraine in 2022 was partially offset by the use of domestic gas (Klaip?da) and oil (B?ting?) terminals supplied by other sources, as well as by the strengthening of the European electricity interconnection (Poland, Latvia, Sweden). Some 60% of electricity was imported in the first half of 2023. The main inflationary pressures could come from electricity supplies from neighbouring Russia. Lithuania (like the other Baltic states) will remain connected to the BRELL power grid, which is controlled by Moscow, until 2025 when it will be connected solely to the European circuit. Investment boosted by European subsidies should also sustain business. The funds granted by the EU (RepowerEU, EUR 2.3 billion, 3.1% of GDP 2022) over the 2021-2027 period are part of a public investment programme designed to prepare the economy for the green and digital transition. These European loans will stimulate public infrastructure projects – mainly defence and energy, and to a lesser extent, private investment – which will nevertheless continue to be restricted by durably high credit costs. At the same time, the export sector will make a positive contribution to growth. However, EU sanctions and trade restrictions against Russia have significantly reduced trade flows with its former partners Russia and Belarus. Lithuania has since developed trade relations with neighbouring Poland (9% of exports in 2022), Latvia (12.7%) and Germany (8%), and is consequently suffering from sluggish European demand. While industry (furniture, wood, rubber, plastics) posted a negative performance (-2% year-on-year in 2023), disinflation, rising real incomes among partners, and stabilising external demand should help it recover in 2024.

Budget still under pressure, current account back in surplus

After posting a large deficit in 2022, the current account returned to surplus in 2023, and should maintain this positive performance in 2024. This is due to a reduction in the trade deficit, driven by growth in exports - supported by a slight upturn in European demand for plastics and chemical products - and lower imports, in the wake of rising energy prices. Trade in goods registered a negative balance on back of a durably high energy bill and declining industrial output. On the other hand, Lithuania maintained its large on the balance of services surplus, with the slight slowdown in exports of transport services more than offset by the rise in exports of financial services. While the surplus on the secondary income account strengthened with the inflow of European subsidies, the primary income deficit widened as foreign companies increased profit repatriation. Last, the capital and financial accounts were boosted by an encouraging rise in foreign direct and portfolio investment flows. Foreign currency reserves covering barely one month's imports stagnated in 2023. The external debt ratio fell in 2023 to 67.6% of GDP in Q3 2023. It is evenly divided between the private sector, 30% of which derives from FDI and intra-group loans, and the public sector, 80% of which is owed by the central government.

On the fiscal front, the public deficit widened in 2023. Growth in public spending, underpinned by higher social spending in the run-up to the October 2024 general election, wages and public investment, outstripped revenue growth as VAT receipts were lower than expected. For the same reasons, the public deficit is expected to widen further in 2024. Budget revenues from taxes and social security contributions are expected to rise slightly, but not enough to offset the increase in expenditure despite the phasing-out of energy subsidies (0.3% of GDP in 2023). Public debt should resume its upward trend in 2024.

The coalition should go to the polls

In May 2023, media coverage of a corruption scandal involving certain ministers led the majority party of the ruling coalition, the center-right Lithuanian National Union-Christian Democrats (TS-LKD), to call a parliamentary vote to bring forward the date of the parliamentary elections, scheduled for October 2024. As the bill failed to secure a qualified majority, the current government is expected to remain in power during the original term of office. Although the tensions have now subsided, they have left their mark on the coalition's popularity. While opinion polls conducted in December 2023 show the main opposition party, the Lithuanian Social Democratic Party (LSPD), in the lead with an almost 21% popularity rating, support for the TS-LKD has dropped to 14%. With regard to the May 2024 presidential election, the TS-LKD has nominated its Prime Minister Ingrida Simonyte as a candidate. Nevertheless, polls from October 2023 indicated incumbent independent Gitanas Nauseda to be the favourite as he was very popular for his astute handling of the war in Ukraine. Despite their narrow majority (74 out of 141 seats), the three parties in the coalition - TS-LKD (50 seats), and the two other liberal political parties, the Liberal Movement (LS, 13 seats) and the New Freedom Party (LP, 11 seats) - are set to complete their political agenda for 2024. Budget reform is crucial since the payment of part of the European funds is conditional on its implementation. Among other things, the plan is to increase the tax burden on the self-employed and high-income earners, raise social security contributions, and further reduce corporate taxation. Demographic decline is also an issue. Although educational and social reforms aim to narrow their focus on the quality of life offered in Western Europe, they are still not enough to attract foreign workers and retain local young people. The rollout of these reforms has been particularly slow due to the need to manage the war in Ukraine and the inflationary crisis. Intra-coalition tensions also slowed progress. The disagreement between LP and TS-LKD over same-sex civil unions, and lack of support from certain TS-LKD members, who have, moreover, joined LS and LP parliamentarians in voting against snap elections, accentuate the differences.

In foreign policy, relations with Russia and Belarus will remain extremely tense. Lithuania serves as a base for the Belarusian opposition and provides aid to Ukraine. Like Poland, it has built a fence along the Belarusian border. In addition, at the Vilnius summit in 2022, NATO pledged to increase its forces along the Russian border. In December 2023, the government signed an agreement with Germany authorising the permanent presence of a 4,800-strong German brigade on Lithuanian territory from 2025-2026. In return, Lithuania pledged in August 2023 to provide Ukraine with annual aid amounting to 1.4% of its 2023 GDP. At the same time, Lithuania is continuing to reduce its dependence on Russia. Gas storage facilities shared with the other Baltic states are supplied by the new joint Estonian-Finnish LNG terminal at Inkoo, as well as the national terminal at Klaipeda, shared with Latvia and Estonia. However, although imports of goods and services from Russia have halved, exports of goods and services to this country are still significant. Last, the relationship between China and Lithuania will continue to be mired in conflict. Vilnius’ decision to open a representative office in Taiwan in November 2021 led China to impose a trade embargo.

Last updated: April 2024