The strong pre-COVID-19 economy boosted rapid convergence towards the OECD average incomes. An investment-friendly business climate helped attract foreign direct investment and integration in global-value chains.
OECD Economic Surveys: Lithuania 2020
OECD Economic Surveys: Lithuania
Executive summary
The covid crisis hit a buoyant economy
Figure 1. Lithuania is converging rapidly
GDP per capita, difference to OECD upper half
Source: OECD Economic Outlook database.
The recovery will be uncertain. The COVID-19 recession was comparatively mild, and the economy is recovering. The government swiftly set up a programme supporting households and firms, representing almost 10% of GDP, and plans new investments to support long-term growth. The economy is expected to contract by 2% in 2020 and to rebound by 2.7% in 2021, and unemployment will rise to around 9%, yet protracted disruptions in world trade would be harmful for the outlook.
Poverty is high, especially among the unemployed, less educated, single parents and older people. The tax-benefit system is not very redistributive and its size below the OECD average. The government should increase social support while keeping work incentives.
Regional disparities are increasing. Investment in peripheral regions is low and labour mobility towards economically strong areas insufficient. Productivity differences between core and peripheral regions are rising. The government should continue investing in rural areas while facilitating migration to more prosperous areas.
Table 1. The economy is projected to rebound
Source: OECD Economic Outlook 108 database (provisional).
Figure 2. Poverty is high
Poverty rate after taxes and transfers (50% poverty line), % of population, 2018 or latest year
Source: OECD Income Distribution Database.
Growth should be greener. CO2 emissions are below OECD average and declining, but mortality from exposure to fine particles is the highest in the OECD. Transport and energy are the main sources of emissions. Environmental taxation is low. The government set up a programme to co-fund private climate investment and wants to reach carbon neutrality by 2050. The government should also introduce a CO2 tax.
Figure 3. Regional inequality is rising
Productivity gap between rural and urban areas, premium in GDP per capita, %
Source: OECD Regional database.
Fiscal and financial policies are sound
Sound fiscal policy over the past years has created fiscal space to help the economy in the current crisis.
Fiscal policy is expansionary. The constitutional fiscal law of 2015 provides for tight surveillance. In 2019 the budget was in a small surplus. To help households and firms to weather the COVID-19 crisis, the government plans additional tax and spending measures totalling 10% of GDP. As a result, the balance is expected to turn sharply negative in 2020. Once fiscal positions have recovered, the government should simplify the fiscal framework and set a long-term debt target.
The COVID-19 crisis affects credit. About 40% of the corporate sector was affected by containment measures, exacerbating funding challenges especially for small firms. Non-performing loans in the banking sector declined markedly, and frequent use of macro-prudential regulation helped strengthen financial stability. The government eased financial conditions following the COVID-19 crisis and should continue to do so.
Reforming state-owned enterprises could boost the recovery
Wages grew faster than productivity over the past few years, reducing competitiveness while boosting lower incomes. Reforming state-owned enterprises could help raise productivity.
Figure 4. Competitiveness is declining
Index, 2005 = 100
Source: Economic Outlook database; and OECD Earnings database.
State-owned enterprises are oversized. The scope of state-owned enterprise (SOE) belongs to the largest in the OECD. Governance has improved over the past two years following the adoption of the 2018 “SOE Reorganisation and Optimization Plan”, but remains weak against OECD standards. Only half of the SOEs reach their targets. A clearer strategy defining the rationale for public ownership is needed, and SOEs should be subject to same regulations and market constraints as private companies.
Municipal SOEs pose a particular challenge. Around 250 municipal enterprises are active across 40 sectors, ranging from energy supply, waste treatment to local public transport, with few limits set on their scope. Municipal SOEs often compete with private providers and cross-subsidise corporate activities with revenues from publicly supported ones, distorting competition. The government should strengthen the regulatory framework for municipal enterprises, by establishing a level playing field between public and private providers.
Figure 5. State-owned enterprises proliferate
Scope of public ownership, Index from 0 to 6 (greatest scope), 2018
Source: OECD Product Market Regulation database.
Education should foster strong and relevant skills
Strong and relevant skills could help accelerate the recovery and reduce inequality across regions and income groups. The education infrastructure should better adapt to higher skill needs and shrinking student numbers.
Performance of primary and lower secondary education is weak. Spending on infrastructure is excessive, reflecting high spending on overly small schools. School performance lacks systematic oversight. Recent reforms were rather shy, mainly involving an increase in teacher salaries. The government should merge small schools and strengthen quality oversight.
Vocational education fails to provide relevant skills. The school network often lacks scale and specialisation. Firm-based learning (apprenticeships), introduced in 2016, still attracts few students. Reform should improve VET, including apprenticeships, thereby strengthening links to the labour market.
Tertiary education is fragmented. Recent attempts to consolidate the university network failed or did not bring the expected results. Funding provides few incentives to improve quality. The government should encourage universities to specialise in fewer areas. More rigorous quality assessment and a funding reform could also help improve quality.
Figure 6. School outcomes are weak
PISA scores, average, 2018
Source: PISA 2018 database.
Reforms to increase public integrity should bear fruit. Indicators of control and perceived risks of corruption suggest performance below OECD averages. Sectors with corrupt practices include health care and public procurement. In 2019 the shadow economy shrank after rising during four consecutive years. Recent policy measures to prevent foreign bribery have been impressive. Public integrity should remain a guiding principle in the government’s efforts to implement the 2015-2025 anti-corruption programme.
Figure 7. Control of corruption remains below OECD average
Scale, -2.5 (worst) to 2.5 (best) score
Source: World Bank Worldwide Governance Indicators.