Economy in focus: Lithuania

Though it continues to struggle with inflation as it adjusts to cutting Russia out of its energy mix, Lithuania is set for renewed, if modest, growth.

Since the liberalisation of its economy following the restoration of its independence in 1991, Lithuania has enjoyed massive growth; its gross domestic product grew 308 per cent between 2000 and 2017.

It has prominent biotechnology and laser industries, and the Lithuanian retail chain Maxima—which also has stores in Poland, Bulgaria, Latvia, and Estonia—is one of the largest employers in the region. Its IT sector and start-up scene is strong, particularly in fintech.

Lithuania has an ‘A’ long term issuer default rating from Fitch

Nevertheless, the last few years have challenged the Lithuanian economy in unprecedented ways. The war in Ukraine and ensuing energy crisis have seen Lithuania experience among the highest inflation rates in the eurozone. A trade dispute with China brought about by closer Lithuanian ties with Taiwan has seen undeclared indirect secondary sanctions on product components made in Lithuania that threaten the unity of the European Union single market. 

GDP declined in the fourth quarter of 2022 and is expected to continue to decline in the first two quarters of 2023, economist Sebastian Leitner of the Vienna Institute of International Economic Studies (wiiw) tells Emerging Europe, but there is good news.  

Numbers from January show Lithuanian exports and external demand from the EU at a stronger rate than expected, and in the third and fourth quarters of 2023, GDP growth will rebound enough to result in modest net GDP growth in 2023 of 1.3 per cent. Growth is then forecast to climb to 2.8 per cent growth in 2024 and three per cent in 2025. 

Impacts of the war in Ukraine on energy and labour 

The high energy intensity of Lithuania’s economy and prominence of oil and gas in its energy mix left the country especially vulnerable to shocks caused by rising energy prices after Western sanctions on Russia after its invasion of Ukraine last February. In 2020, Lithuania imported 73 per cent of its oil and 42 per cent of its gas from Russia. 

“After 2014, Lithuania was one of the first countries to try and find a way to become independent from Russian gas. So they ordered a liquefied natural gas (LNG) terminal, and this terminal was already in place some years ago.” Leitner says.  

“However, it was never used, because they just wanted the possibility to decouple. It was clear that LNG was much more expensive than gas via the pipeline from Russia. Nevertheless, when the war started, they were immediately able start moving away from Russian gas, turning instead to Norway.” 

Lithuania ended the import of Russian energy in April and May of last year, but despite its pre-emptive step to decouple from Russia, it has seen some of the eurozone’s highest inflation—reaching over 22 per cent in September—driven by energy prices. While energy prices are declining and wiiw forecasts inflation in 2023 of 10 per cent, commodity prices and wages are expected to rise more sharply than expected. 

“The data shows how tight the labour markets in the Baltics are,” Leitner says. “Although inflation is high in Lithuania, this year real wages will maybe even grow a little, which means that wages are increasing a lot. When it comes to price developments, there’s still enough demand and enough growth that people can afford to live in Lithuania, which is not the case in every country.” 

The influx of Ukrainian refugees into Lithuania has helped fill the demand for labour. Leitner estimates roughly half of the 70,000 Ukrainian refugees that have come to Lithuania have been integrated into the labour force—close to the similarly high rate in Estonia.  

New additions to the labour pool are good for Lithuania, whose population is ageing at a rate above that of the EU as a whole. The Organisation for Economic Co-operation and Development (OECD) has recommended Lithuania link retirement age and life expectancy after 2026 to maintain the sustainability of its pension system. 

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Trade dispute with China 

Lithuania has never enjoyed an especially warm relationship with China, but their strained relationship hit a new low in 2021 after Lithuania and Taiwan—which mainland China claims as its own—approved plans to open representative offices in each other’s capitals. Most provocative, however, was the use of the name ‘Taiwanese Representative Office’—a break from the global naming convention that refers to Taiwan’s offices as ‘Chinese Taipei’. 

In response, China blocked not only imports from Lithuania, but French, German, and Swedish imports containing Lithuanian components. German companies pressured Vilnius to back down.  

However, prior to this crisis, only one per cent of Lithuania’s exports went to China, and these were mostly low value-added goods. The total volume of bilateral trade was modest, and Lithuania ran a substantial trade imbalance. China was not a major source of foreign investment in Lithuania.  

The crisis decimated Sino-Lithuanian diplomatic and economic relations, and the EU has pursued a naming and shaming strategy that has involved filing a formal trade dispute with China at the World Trade Organisation this January. 

“The European Commission showed that it will protect its members—including Lithuania—from any retaliation measures and that they will help those individual countries. China is not really enforcing measures anymore,” Leitner says. “From the figures, one doesn’t see that there’s great harm done to the Lithuanian economy. There are enough other countries demanding the goods of Lithuania in this respect.” 

While it will still take time for the Lithuanian economy to fully rebound from inflation, the energy crisis, and the trade dispute with China, the forecast for the next few years is one of modest GDP growth and stagnation at worst. Outright recession will be avoided.

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