IMF Completes 2026 Article IV Review of Lithuania

Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed the Article IV Consultation ^[1] for the Republic of Lithuania and endorsed the staff appraisal without a meeting on a lapse-of-time basis. ^[2] The authorities have consented to the publication of the Staff Report prepared for this consultation ^[3] .

Growth remained steady at 2.9 percent in 2025, driven by domestic demand and inventory accumulation. Investment strengthened and consumption remained resilient supported by robust income growth, fiscal easing, and favorable financial conditions, despite high uncertainty. Inflation remained elevated at 3.4 percent in 2025, reflecting domestic pressures, and rose to 5.1 percent in May 2026, mainly on higher energy prices. The labor market stayed tight with persistent labor shortages and strong wage growth, despite the elevated structural unemployment mainly due to skills mismatches.

Fiscal policy was expansionary in 2025-despite a smaller-than-budgeted deficit at 1.8 percent of GDP-reflecting stronger‑than‑expected revenues and some underutilization of spending. Public debt rose to 39.5 percent of GDP. The national fiscal rule was amended to align with European Union fiscal rule, resulting in a slight easing by shifting the target from a balanced structural balance to net expenditure growth, while aiming for a structural deficit below 1 percent when not in excess deficit procedure.

Growth is projected at 2.8 percent in 2026, with expansionary policies supporting activity despite the drag from higher energy prices. Strong domestic demand-driven by Pillar II pension withdrawals, wage growth, fiscal support, and EU‑funded investment-will underpin activity. Elevated energy prices, reflecting continued reliance on imported energy, will temporarily raise inflation to 5.2 percent in 2026 before gradually moderating. Growth is projected to decelerate to 2.2 percent in 2027 before strengthening in 2028 with the second wave of Pillar II pension withdrawals.

Executive Board Assessment ^[4]

In concluding the 2026 Article IV Consultation with Republic of Lithuania, Executive Directors endorsed staff's appraisal as follows:

Lithuania's near-term outlook remains steady as expansionary policies offset the adverse energy price shock while adding to inflation; risks are tilted to the downside. Growth is projected to remain broadly stable at 2.8 percent in 2026, as fiscal expansion, Pillar II withdrawals, EU-funded investment, and strong wage growth sustain demand and cushion the impact of the energy shock. Inflation is expected to rise further on energy and tax effects and robust demand, before easing over the medium term. Risks are tilted toward weaker growth and higher inflation, reflecting geopolitical uncertainty, energy price volatility, and the potential for stronger-than-expected domestic demand. Over the medium term, delayed reforms and rising spending pressures could weigh on fiscal sustainability and convergence.

A medium-term fiscal strategy is needed to offset rising spending pressures with durable revenue measures and targeted expenditure reforms to anchor debt at prudent levels. Without action, government debt is projected to rise rapidly to 60 percent of GDP by 2033. A tighter fiscal stance is warranted already in 2026-saving revenue overperformance and limiting energy support to targeted, temporary measures-to help contain inflation while preserving fiscal buffers and price signals. Given low tax revenues relative to peers and limited room to cut core services, consolidation should rely mainly on permanent revenue measures-through broadening and increasing property taxation, enhancing personal income tax progressivity, reducing inefficient exemptions, and improving VAT compliance-complemented by spending reprioritization and efficiency gains, including containing public wage bill growth, better targeting social benefits, and improving efficiency in health and education. A more predictable policy course would help enhance its effectiveness and credibility. Strengthening the fiscal council's independence and mandate would further support fiscal discipline.

The weakening of Pillar II has increased the need to reinforce pension sustainability and adequacy. Recent changes will lower replacement rates and raise future fiscal costs, making it essential to preserve existing Pillar I buffers and safeguard the overall pension system against mounting demographic pressures. The near-term focus should be on ensuring stability and predictability of Pillar II pensions, including by maintaining state contributions to preserve participation incentives. Ultimately, a comprehensive assessment of the pension framework is needed to reinforce Pillar II and better align it with European best practices.

Increasing financial momentum and rising cyclical risks call for macroprudential policy to stay vigilant and ready to act if vulnerabilities build up further. Credit to firms and households has accelerated, supporting buoyant housing activity and contributing to a moderate but widening house price misalignment, while vulnerabilities persist in commercial real estate. Systemic risks remain contained on the back of strong bank fundamentals, but changes to the borrower-based measures planned in August 2026 could add to already strong credit and house price dynamics, particularly amid robust wage growth and additional liquidity from Pillar II withdrawals-warranting readiness to tighten if risks intensify. At the same time, evolving risks-particularly cyber and financial integrity risks linked to fintech and virtual assets-call for continued supervisory vigilance and enhance AML/CFT oversight.

The external position is broadly in line with the level implied by fundamentals and desirable policies. The current account weakened in 2025 but remained in surplus and close to its norm. It is expected to turn modestly negative in the coming years before recovering. Fiscal consolidation to safeguard sustainability, alongside structural reforms to support productivity and attract investment, will help sustain external balance over the medium-term.

To sustain growth momentum, growth should transition away from demand stimulus toward more durable drivers, notably productivity gains and investment. A temporary surge in net migration has supported recent growth while Pillar II withdrawals and fiscal expansion are expected to sustain momentum in the near term. Yet, the capital stock is low, and the unemployment rate remains persistently high with large regional variations, underscoring long-standing structural challenges. Population aging, skills mismatches and shortages, and regional labor‑market and productivity disparities continue to weigh on potential growth and the efficient allocation of resources.

Addressing structural labor constraints requires reforms to strengthen skills, improve work incentives, and ease mobility. Priorities include closer alignment of education and training with labor market needs, scaling-up reskilling and active labor market policies, and strengthening vocational training. Social benefits should be better targeted to preserve work incentives. Streamlining entry procedures and integration support for foreign workers, together with easing mobility frictions through better connectivity and an expanded supply of quality, affordable housing, would support employment and productivity.

Raising investment and productivity needs deeper domestic and EU capital markets to ease firms' financing constraints. Priorities include broadening non-bank financing through stronger investor participation and alternative instruments. Baltic capital market harmonization efforts should be complemented by further progress toward the EU single market. ILTE can help fill remaining gaps, but stronger governance and oversight are needed to ensure sound risk management and avoid crowding out private finance.

Strengthening productivity and competitiveness demands faster digital adoption and reduced energy dependence. Wider AI uptake and greater access to R&D support would lift firm performance. Despite progress in renewables, reliance on energy imports remains high; further investment in renewables, storage and grids, complemented by the shift to low-emission transport-including rail-electrification and faster EV uptake-would reduce vulnerabilities and support competitiveness.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

[3] Under the IMF's Articles of Agreement, publication of documents that pertain to member countries is voluntary and requires the member consent. The staff report will be shortly published on the www.imf.org/[country ] page.

[4] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm