COMMISSION STAFF WORKING DOCUMENT Country Report Lithuania 2019 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011
Date: 2019-02-27
Institutions: European Commission, Secretariat-General
Subjects: Lithuania, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 27.2.2019  SWD(2019) 1014 final  COMMISSION STAFF WORKING DOCUMENT Country Report Lithuania 2019 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2019) 150 final}  
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Reform priorities 

3.1.  Public finances and taxation 

3.2.  Financial sector 

3.3.  Labour market, health, education, and social policies 

3.4. Competitiveness reforms and investment 

1.  Macroeconomic perspective 

2. 

Assessment of barriers to investment and ongoing reforms 

Annex A: Overview table 

Annex B: Commission Debt Sustainability Analysis and fiscal risks 

Annex C: Standard Tables 

3 

7 

13 

17 

17 

21 

24 

34 

38 

38 

47 

52 

53 

Annex D: Investment Guidance on Cohesion Policy Funding 2021-2027 for Lithuania  59 

References 

LIST OF TABLES 

Table 1.1: 

Key economic indicators 

Table 2.1: 

Assessment of 2018 CSR implementation 

Table 3.2.1: 

Financial soundness indicators 

Table C.1: 

Financial market indicators 

Table C.2: 

Headline Social Scoreboard indicators 

Table C.3: 

Labour market and education indicators 

Table C.4: 

Social inclusion and health indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

Table D.1: 

Policy Objectives 

1 

63 

12 

15 

21 

53 

54 

55 

56 

57 

58 

59 

 
 
 
 
LIST OF GRAPHS 

Graph 1.1: 

Breakdown of GDP growth 

Graph 1.2: 

Contribution to HICP inflation change 

Graph 1.3: 

Key labour market indicators 

Graph 1.4: 

Financing of the international investment position 

Graph 1.5: 

At-risk-of-poverty or social exclusion rate and its components 

Graph 1.6:  General government balance and gross debt 

Graph 2.1:  Overall multiannual implementation of 2011-2018 CSRs to date 

Graph 3.1.1:  Gini coefficient development in the Baltic countries 

Graph 3.2.1:  Credit growth 

Graph 3.2.2:  Annual change in real house prices 

Graph 3.2.2.1:  Reform effect on equivalised household disposable income 

Graph 3.4.1:  Labour productivity, whole economy (2000=100) 

Graph 3.4.2: 

Total investment 

Graph 3.4.3:  FDI inflows 

Graph 3.4.4:  Breakdown of ULC growth 

Graph 3.4.5:  Real effective exchange rate, index (ULC and HICP based) 

Graph 3.4.6:  Export market share development 

Graph 3.4.7:  GDP per head (PPS) in 2016, EU28 = 100 

Graph 3.4.8: 

Total population change in %, 2010-2016 

LIST OF BOXES 

Box 2.1: EU funds and programmes contribute to addressing structural challenges and to fostering 

growth and competitiveness in Lithuania 

Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights in Lithuania 

Box 3.3.2: EUROMOD simulations of adopted tax changes 

Box 3.4.1: Investment challenges and reforms in Lithuania 

7 

8 

8 

9 

10 

11 

13 

17 

21 

23 

29 

34 

35 

35 

39 

39 

40 

42 

42 

16 

26 

29 

38 

2 

 
 
 
 
 
EXECUTIVE SUMMARY 

The Lithuanian economy continues to catch up 
with the rest of the European Union rapidly but 
needs  to  adjust  to  the  challenge  of  a  shrinking 
a  business-friendly 
to 
population.  Thanks 
environment, a resilient financial system and stable 
government  finances,  the  country  has  rebounded 
swiftly  since  the  economic  crisis  and  enjoyed 
relatively  high  growth  in  recent  years.  However, 
the  fruits of its rapid economic development  have 
not  been  equally  shared  among  its  social  groups 
and  regions.  The  declining  population,  including 
the  labour  force,  is  putting  pressure  on  the  labour 
market  and  social  security  systems.  Persistent 
weaknesses in the education and health sectors are 
limiting  potential  growth.  Stronger  investment  in 
human capital, innovation, resource efficiency and 
transport are key to raising productivity and long-
term growth potential (1). 

to  weakening 

Domestic  factors  are  driving  growth.  Growth 
reached  3.6  %  in  2018.  It  was  underpinned  by 
robust  consumer  spending  as  wages  rose  and 
inflation  slowed.  Investment  also  grew  steadily 
following  a  strong  rebound  in  2017.  However, 
imports  exceeded  exports  as  the  latter  slowed 
down  due 
foreign  demand. 
Consumer  spending  and  investment  are  expected 
to remain the main drivers of growth in the coming 
period.  In  addition  to  continued  rises  in  wages, 
disposable  income  should  get  a  boost  from  the 
income tax and social security reforms that will be 
implemented 
time, 
investment  growth  is  expected  to  remain  strong, 
boosted  by  Lithuania's  faster  absorption  of  EU 
funds. 

in  2019.  At 

the  same 

The  strong  economic  performance  is  helping 
finances.  Rapid  wage  growth  and, 
public 
consequently,  strong  consumer  spending  boosted 
tax  revenue  over  the  last  3  years.  Together  with 
cautious  government  spending,  this  has  enabled 
surplus. 
Lithuania 

its  budget 

to  keep 

in 

(1)  This  report  assesses  Lithuania’s  economy  in  light  of  the 
European Commission’s Annual Growth Survey published 
on 21 November 2018. In the survey, the Commission calls 
on  EU  Member  States  to  implement  reforms  to  make  the 
European  economy  more  productive, 
resilient  and 
inclusive.  In  so  doing,  Member  States  should  focus  their 
efforts  on  the  three  elements  of  the  virtuous  triangle  of 
economic  policy  —  delivering  high-quality  investment, 
efforts  on  productivity  growth, 
reforms 
focusing 
inclusiveness  and 
institutional  quality  and  ensuring 
macroeconomic stability and sound public finance. 

Nonetheless,  the  surplus  is  expected  to  shrink  in 
the  coming  years  due  to  legislated  cuts  in  income 
taxes.  Public  debt  remains  below  40 %  of  GDP. 
However,  despite  pension  reforms  adopted  in 
recent years, long-term risks to fiscal sustainability 
are  still  present  due  to  negative  demographic 
trends  and  inconsistencies  in  the  system’s  design 
that could undermine pension adequacy over time. 

and 

are  high 

emigration 

The  shrinking  population,  notably  of  people  of 
working  age,  remains  a  major  bottleneck  to 
growth.  Lithuania’s  population  has  fallen  by 
nearly  25 %  since  the  early  1990s.  The  main 
reasons 
adverse 
demographic  trends.  Net  emigration  continues 
even  though  its  pace  has  slowed  recently.  The 
shrinking  working-age  population  is  one  of  the 
reasons  for  the  increasing  shortages  of  skilled 
labour and is also pushing up wages. Employment 
stands at over 77 %, above the EU average,  while 
unemployment fell to 6.3 %. Youth unemployment 
and  long-term  unemployment  are  below  the  EU 
average.  However, 
the  rates  of  people  with 
disabilities  and  low-skilled  people  in  work  are 
worse than the EU average.  

increases.  By 

The  labour  cost  growth  is  among  the  fastest  in 
the  EU.  After  a  sharp  contraction  during  the 
financial  crisis,  wages  started  to  recover  rapidly, 
albeit  from  a  low  level.  Wage  growth  was  driven 
by the growing shortage of workers and a range of 
including  consecutive 
labour  market  policies, 
contrast, 
minimum  wage 
productivity  growth  was  sluggish  between  2012 
and  2016,  which  led  to  increasing  unit  labour 
costs.  The  higher  costs  have  not  had  a  significant 
impact on Lithuania’s export performance so far as 
companies  have  absorbed  them  in  their  profit 
margins.  However,  a  continued  fast  increase  in 
labour 
Lithuania’s 
competitiveness  in  the  longer  run.  The  strong 
rebound  in  productivity  growth  seen  in  2017, 
which  was  helped  by  the  pick-up  in  investment, 
therefore needs to be maintained. 

could  weaken 

costs 

investments  on  human  capital, 
Focusing 
innovation, using resources more efficiently and 
improving  transport  connections  would  boost 
productivity  and  growth  potential.  Skills 
investment, 
shortages  are  hindering  private 
especially  with  the  labour  force  shrinking,  and 
together  with  poor  health  status  of  the  population 
are  limiting  productivity  gains.  Increasing  social 

3 

 
 
                                                           
 
 
in 

innovation 

inclusion could help reduce high levels of income 
inequality  and  poverty,  and  uneven  access  to 
employment.  Strengthening 
the 
private sector and increasing its capacity to absorb 
technology could support the shift toward activities 
that  are  more  knowledge-based  and  add  higher 
value  to  the  economy.  Using  resources  more 
efficiently  would  reduce  the  costs  for  businesses 
and  households.  Better 
transport  connections 
would allow Lithuanian companies to export more. 
Focusing  on  efficiency  of  investment  would  help 
Lithuania  reach  its  strategic  goals.  Annex  D 
the 
identifies  key  priorities  for  support  by 
European  Regional  Development  Fund, 
the 
European Social Fund Plus and the Cohesion Fund 
over  2021-2027  in  Lithuania,  building  on  the 
investment  needs  and  challenges 
analysis  of 
outlined in this report. 

Lithuania  has  made  limited  (2)  progress  in 
country-specific 
2018 
the 
addressing 
recommendations. 

There  has  been  some  progress  in  the  following 
areas:  

  Tax  authorities  continue  to  promote  voluntary 
tax  paying  culture  and  the  use  of  smart  tax 
administration  system.  These  measures  are 
starting  to  give  positive  results  although  the 
overall tax compliance remains low.  

the 

increase 

  The  introduction  of  the  pension  indexation 
from  2018  aims 
fiscal 
to 
sustainability of the pension system, but might 
decrease  the  adequacy  of  pensions  in  the  long 
run. Additional reforms passed in summer 2018 
aim to strengthen the second pension pillar but 
their  effect  will 
the 
largely  depend  on 
willingness of people to participate in it.      

There  has  been  limited  progress  in  the  following 
areas: 

  The  outcomes  and  efficiency  of  the  general 
education  system,  as  well  as  adult  learning, 
remain  relatively  low.  The  implementation  of 

(2)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
the 
country-specific  recommendation 
overview table in the Annex. 

is  presented 

in 

Executive summary 

reforms  in  the  education  sector,  including  the 
merger of universities, is slow.  

and 

hospitals 

strengthening 

  The legal frameworks for further consolidation 
of 
disease 
prevention  at  the  local  level  have  yet  to  be 
adopted. Measures taken to improve the quality 
of  health  care  were  partial,  targeting  only 
primary  care  entities.  Despite  some  measures 
taken  to  reduce  the  price  of  pharmaceuticals, 
out-of-pocket payments remain high, especially 
for the most vulnerable groups. 

reduction 

  The  design  of  the  tax  and  benefit  system  has 
slightly  improved,  but  its  impact  on  income 
inequality  and  poverty 
remains 
limited. The  guaranteed  minimum income  was 
increased  (and  started  to  be  indexed)  and  so 
was  the  universal  child  benefit.  Recent  tax 
reform  introduced  some  progressivity  in  the 
personal  income  taxation,  but  the  effects  on 
reducing  income  inequality  are  expected  to  be 
small.  Public  spending  on  social  protection 
remains low.  

  Some interim measures  were taken to improve 
the  efficiency  of  public 
investment,  but 
integration  of  the  investment  and  strategic 
planning  is  not  foreseen  before  the  2021-2023 
budget.  

  Despite  some  slight  improvements  in  the 
coordination  of  the  research  and  innovation 
policy, the new coherent policy still needs to be 
developed.  Some  measures  were  introduced  to 
increase  the  cooperation  between  science  and 
industry, which, however, remains limited.  

There has been no progress in the following areas: 

  The tax base was not broadened to sources less 
to  growth.  Environmental  and 

detrimental 
property taxes remain low.  

Regarding  progress  towards  its  national  targets 
under  the  Europe  2020  strategy,  Lithuania  has 
achieved  its  overall  renewable  energy  target  as 
well  as  the  targets  regarding  the  employment  rate 
of  the  working-age  population,  greenhouse  gas 
emissions, the share of early school leavers and the 
share  of  the  population  that  has  attained  tertiary 
education. However, more effort is needed to reach 

4 

 
 
                                                           
Executive summary 

in  2018 

linked  pension  rises 

  Recent  pension  reforms  have  made  the 
system  more  financially  sustainable  but  the 
adequacy  of  pensions  remains  a  concern. 
The  introduction  of  the  pension  indexation 
formula 
to 
increases in the wage bill. This will balance the 
pension contributions received and spending on 
public  pensions,  thereby  making  the  system 
more  financially  sustainable.  However,  since 
the  overall  wage  bill  is  expected  to  increase 
more  slowly  than  individual  wages  due  to  the 
shrinking  workforce,  pensions  might  not  keep 
pace  with  wage growth over time.  As a  result, 
the  adequacy  of  pension  benefits,  which  is 
already  among  the  lowest  in  the  EU,  is 
expected to drop further in the medium term. 

reaching 

  The  shrinking  labour  force  and  the  lack  of 
necessary  skills  are 
limiting  Lithuania's 
growth  potential.  With  the  growing  shortage 
of  workers,  the  employment  rate  and  the 
proportion 
in 
of  working-age 
people 
employment  are 
record  highs. 
However, 
relatively  high  unemployment 
among  vulnerable  groups  suggests  weaknesses 
in government measures to improve the level of 
skills  and  to  help  the  jobless find  work.  Many 
low-skilled or people with disabilities are not in 
work or training. Participation in adult learning 
is stagnant at  well below the  EU average. The 
labour  force's  low  level  of  digital  skills  is 
limiting  the  use  of  digital  technologies  by 
businesses and the potential for innovation. 

  Ensuring  efficiency  and  quality 

in  access 

in  the 
education  and  training  system  represents  a 
major challenge. Student numbers continue to 
decline  across  all  education  levels  but  the 
education  system  is  not  adjusting  at  the  same 
pace.  Urban-rural  disparities 
to 
quality  education  and  in  student  performance 
are  large.  This  calls  for  organising  the  school 
and  university  networks  more  efficiently,  to 
improve  their  quality  and  make  them  more 
inclusive  of  disadvantaged  groups.  New 
measures  have  been  adopted  to  upgrade  the 
vocational  education  and  training  system  but 
concerns  about  their  implementation  remain. 
Policies 
in  adult 
learning are being implemented but their effect 
is limited. 

increase  participation 

to 

the  energy  efficiency  target,  increase  the  share  of 
renewable  energy  in  the  transport  sector,  reduce 
the  number  of  people  at  risk  of  poverty  or  social 
exclusion,  and  increase  expenditure  on  research 
and development, particularly in the private sector. 

the 

indicators  of 

Lithuania’s  performance  on  the  indicators  of 
the Social Scoreboard supporting the European 
Pillar  of  Social  Rights  is  mixed.  The  improved 
conditions on the labour market are well reflected 
in 
the  Social  Scoreboard 
supporting  the  European  Pillar  of  Social  Rights: 
the  employment  rate  is  high  for  both  men  and 
women, unemployment is decreasing and there are 
fewer young people not in employment, education 
or 
inequality  and 
poverty  remain  high,  even  though  the  impact  of 
social  transfers  on  reducing  poverty  has  slightly 
improved.  

training.  However, 

income 

Key structural issues analysed in this report, which 
point  to  particular  challenges  for  Lithuania’s 
economy, are the following.  

income 

  The  tax  and  benefits  system  is  having  little 
impact  on  reducing 
inequality. 
Despite recent changes to personal income tax, 
the  tax  system  is  still  not  very  progressive. 
Combined  with  low  expenditure  on  social 
policies,  this  makes  the  power  of  the  tax  and 
benefits  system  to  reduce  income  inequalities 
among  the  least  developed  in  the  EU.  There 
was  no  progress  in  broadening  of  the  tax  base 
to sources less detrimental to economic growth, 
like  environmental  taxes,  including  car  taxes, 
and property taxes. 

inequality 

  Levels  of  poverty  and  inequality  remain 
among  the  highest  in  the  EU.  Poverty  and 
income  inequality  remain  major  challenges 
despite  Lithuania's  fast  economic  growth. 
largely  driven  by 
is 
Income 
comparatively  strong  growth  in  the  income  of 
top earners. Social dialogue between employers 
and trade unions in the private sector is limited, 
which  weakens  the  position  of  low  wage 
earners.  Poverty  affects  mostly  older  people, 
people  with  disabilities  and  single-parent 
households.  The  risk  of  poverty  or  social 
exclusion in rural areas is nearly double that of 
urban areas. 

5 

 
 
Executive summary 

and  digital  connections,  also 
challenge.  

remains  a 

  The  poor  quality  of  research  and  limited 
business-science  cooperation  are  hindering 
productivity  growth.  The 
research  and 
innovation  system  is  fragmented  and  private 
R&D  investment  is  among  the  lowest  in  the 
EU. This is yielding innovation results that are 
mediocre  overall  and  is  limiting  the  growth 
potential  of  the  Lithuanian  economy.  Progress 
with  the  reform  of  innovation  policy  has  been 
slow.  The  higher  education  reform  envisages 
consolidating  universities'  fragmented  research 
capacities,  but  these  measures  have  yet  to  be 
implemented.  Developing  coherent  policy 
measures 
science-business 
support 
cooperation  and  introduce  a  simplified  and 
consolidated  research  and  innovation  support 
system remains a challenge. 

to 

  The health status of the population remains 
poor.  Life  expectancy  is  among  the  lowest  in 
the  EU  and  mortality  rates  are  above  the  EU 
average. Progress with the reforms in the health 
sector  is  slow.  Spending  in  healthcare  is  too 
low  to  address  the  multiple  challenges  the 
sector faces. The proposals to further shift from 
hospital-based  care  towards  a  model  based  on 
stronger  primary  care  remain  at  a  draft  stage. 
Public  health  policies  do  not  sufficiently 
involve local offices in dealing with risk factors 
related to lifestyle. The overall quality of health 
services  remains  a  concern  and  measures  to 
improve  the  quality  of  health  care  remain 
scarce.  High  out-of-pocket  payments  (on-the-
spot  payments  to  healthcare  providers)  and 
wide 
the  most 
vulnerable groups. 

regional  disparities  hurt 

  The benefits of Lithuania's speedy economic 
convergence are heavily concentrated in the 
two  metropolitan  areas.  Regional  disparities 
in Lithuania are larger than the EU average and 
have been widening over the past two decades. 
Predominantly rural regions, which cover most 
of  the  territory  and  host  nearly  55 %  of  the 
population,  are  experiencing  strong  population 
declines  compounded  by  decreasing  access  to 
quality  public  services.  Significant  socio-
economic  disparities  within  the  country  show 
that  certain  regions  have  distinct  investment 
links  between  adjacent 
needs. 
territories within Lithuania, including transport 

Increasing 

6 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

The  economy  is  maintaining  a  robust  growth 
momentum. Real GDP growth is expected to have 
reached  3.6 %  in  2018  after  peaking  at  4.1 %  in 
2017.  Private  consumption  remained  the  main 
engine  of  growth,  supported  by  rising  wages  and 
easing inflation, while for the second year in a row 
investments  were  spurred  by  high  capacity 
utilisation  in  the  context  of  increasing  labour 
shortages. After an impressive export performance 
in  2017  (when  export  growth  reached  13.6 %  and 
was  the  highest  in  the  EU),  exports  slowed  down 
due to  weakening external demand and the  strong 
base  effect.  Consequently,  the  contribution  of  net 
turned  slightly  negative. 
exports 
According  to  the  Commission’s  Winter  Forecast, 
growth in Lithuania is expected to slow to 2.7 % in 
2019  and  2.4 %  in  2020.  The  main  reason  is 
less  dynamic  external 
expected 
environment,  which  will  further 
limit  export 
growth.  At  the  same  time,  domestic  factors  — 
consumption  and  investment  —  are  expected  to 
remain the main drivers of growth (see Graph 1.1). 

to  growth 

to  be 

the 

and favourable credit conditions. It is estimated to 
have  grown  by  4.2 %  in  2018,  up  from  3.3 %  in 
2017.  In  the  coming  period,  disposable  income 
should get an additional boost from income tax and 
social security reforms adopted in summer 2018.  

Investment 

flat 

Investment  has  started  to  recover. The  share  of 
investment in GDP dropped sharply after the crisis 
and  has  since  remained  below  the  EU  average. 
in  2016, 
However,  after  being  almost 
investment  growth  accelerated  to  an  average  of 
7 %  in  2017-2018.  The  major  contribution  came 
from  private  investment,  while  public  investment, 
heavily  reliant  on  EU  funds,  remained  subdued 
despite  a  recent  pick-up  in  their  usage.  In  recent 
years, the structure of investment has become more 
favourable  to  growth,  geared  towards  machinery 
and  intellectual  property  and  away  from  housing. 
Investment growth is expected to remain buoyant, 
boosted  by  continued 
financing 
conditions, 
for  modernisation  and 
automation, and improved use of EU funds. 

favourable 

the  need 

Graph 1.1: 

Breakdown of GDP growth 

Inflation 

Inflation  slowed  down  markedly  as  the  effects 
of  2017  increases  in  excise  duties  disappeared. 
After  reaching  3.7 %  in  2017,  HICP  inflation 
dropped  to  2.5 %  in  2018.  Prices  are,  however, 
being permanently driven upwards by rising prices 
of  services,  mainly  due  to  the  rising  wages.  In 
2018, these pressures were reinforced by rising oil 
and  gas  prices,  while  the  contribution  of  changes 
in excise duties, albeit much smaller than in 2017, 
was  still  positive  (see  Graph  1.2).  Strong  wage 
growth 
to  support 
disposable  income  and  service  price  increases  in 
the  future,  but  overall  inflation  is  expected  to 
moderate  further  in  the  coming  period  as  the 
effects of higher oil prices fade away. 

is  expected 

to  continue 

* Forecast 
Source: European Commission 

Consumption 

Strong  wage  growth  continues  to  support 
consumption. Private consumption benefited from 
a  boost  in  disposable  income  sustained  by  falling 
unemployment,  continuous  real  wage  increases 

7 

-30-25-20-15-10-505101520070809101112131415161718*19*20*%, ppsInventories investmentInvestment (GFCF)ConsumptionNet exportsReal GDP growth 
 
 
1. Economic situation and outlook 

opportunities  than  other  counties,  and  this  drives 
the  internal  interregional  migration.  However,  in 
other  regions  employment  opportunities  remain 
scarce. Unemployment rates remained persistently 
high  in  the  least  developed  regions  (14.9 %  in 
Utena  County  as  compared  to  4.8 %  in  Vilnius 
County).  Other  key  labour  market  indicators  have 
improved, returning to pre-crisis levels. Long-term 
unemployment fell to 2.1 % in the third quarter of 
2018  (EU  average:  2.9 %).  Youth  unemployment 
(13.3 %)  and  the  rate  of  young  people  not  in 
employment,  education  or  training  (NEET,  at 
9.1 %) were below the EU average in 2017. 

Graph 1.3: 

Key labour market indicators 

Source: European Commission 

Cost-competitiveness 

Wage growth remains among the highest in the 
EU. The average  monthly  gross  wage  in the  third 
quarter  of  2018  was  up  by  10 %  from  the  same 
period in 2017, representing the fastest growth rate 
of the last 9 years. Rapid wage growth reflects the 
tightening  labour  market  with  increasing  labour 
shortages, especially in the country’s largest cities, 
as  well  as  successive  minimum  wage  increases 
since  2015.  In  addition,  over  the  course  of  2018, 
the government decided to raise wages for workers 
in healthcare and higher education. 

cost 

The  dynamism  of  wages  has  led  to  strong  unit 
labour 
2012-2016 
productivity growth was heavily outpaced by wage 
growth.  This  led  to  rapidly  increasing  unit  labour 
increase 
costs,  whose 

three-year  cummulative 

increases.  Over 

Graph 1.2:  Contribution to HICP inflation change 

Up to October 2018 
Source: European Commission 

Demographic developments 

Demographic developments pose a challenge for 
future economic growth. Lithuania's demography 
is  adversely  affected  by  ageing  and  an  overall 
population  decline.  The  main  drivers  of  the  latter 
are the negative natural population growth rate and 
persistent  net 
emigration.  Over  2006-2018 
Lithuania  experienced  one  of  the  largest  relative 
depopulations in the EU (from 3.3 million in 2006 
to 2.8 million in 2018). To address the challenge of 
emigration,  the  government  adopted  in  2018  a 
2018-2030 strategy on demography, migration and 
integration.  The  aim  of  the  strategy  is  to  ensure 
population  growth  and  improve  its  age  structure. 
The  strategy  focuses  on  family  support  policy, 
and 
of  migration 
management 
comprehensive ageing policy. 

flows 

Labour market 

The  labour  market  continued  to  perform  well, 
but  strong  regional  differences  persist.  Since 
2010,  employment  and  unemployment  indicators 
have continuously been improving (see Graph 1.3). 
Employment  reached  a  record  high  of  77.5 %  in 
the third quarter of 2018 while unemployment was 
6.3 % in the fourth quarter, a rate last observed in 
2008.  Nevertheless,  this  has  to  be  seen  in  the 
context of a shrinking working age population. The 
activity  rate  reached  82 %  in  2017.  Vilnius  and 
labour  market 
Kaunas  counties  offer  better 

8 

-2024681012-2024681012070809101112131415161718ServicesNon-energy industrial goodsProcessed foodUnprocessed foodEnergyHICPCore inflation727476788082051015202530354005060708091011121314151617%%Activity rate 20-64 (rhs)Unemployment rate 15-74 (lhs)Long-term unemployment rate 15-74 (lhs)Youth unemployment rate 15-24 (lhs)NEET rate 15-24 (lhs) 
 
 
reached  16 %  in  2017,  the  highest  in  the  EU. 
However,  the  impact  of  rising  labour  cost  on 
external  cost-competitiveness  and 
the  export 
performance has been limited so far, cushioned in 
part  by  reduced  profit  margins.  This,  however, 
may  not  be  sustainable  in  the  longer  term.  While 
productivity  growth  picked  up  strongly  in  2017, 
maintaining  cost  competitiveness  would  require 
that  wage  growth  is  matched  by  productivity 
growth in the longer run. 

External position 

The current account has been broadly balanced 
in  recent  years,  reaching  a  small  surplus  in 
2017.  This  was  driven  by  an  exceptional 
performance  in  exports  which  benefited  from 
improved external demand and increased capacity, 
especially in the  manufacturing and transportation 
sector,  due  to  higher  investment.  In  the  coming 
period, robust private consumption and investment 
demand for capital goods are expected to result in 
a deficit in the goods trade balance. This should be 
partially offset by the strong performance of trade 
in  services,  especially  in  the  transport  sector  and 
travel, together with the positive secondary income 
balance. 

Lithuania’s external position improved over the 
decade.  The  net  international  investment  position 
(NIIP)  improved  from  almost  -60 %  of  GDP  in 
2009  to  -36 %  of  GDP  in  2017.  This  was  mainly 
linked to the decreased dependency of the financial 
sector, mainly commercial banks, on parent banks 
abroad.  The  NIIP  is  currently  mainly  made  up  of 
foreign 
long-term 
investment 
government  debt  (see  Graph  1.4).  This  implies  a 
low  risk  from  Lithuania’s  external 
relatively 
position to the broader macroeconomic stability. 

direct 

and 

1. Economic situation and outlook 

Graph 1.4: 

Financing of the international investment 
position 

Source: European Commission 

Poverty and inequality 

the  share  of 

Despite  recent  progress,  poverty  remains  a 
major  challenge.  Overall, 
the 
population  at  risk  of  poverty  or  social  exclusion 
(AROPE) has decreased since Lithuania joined the 
EU  in  2004.  However,  it  remains  among  the 
highest  in  the  EU  (29.6 %  in  2017,  compared  to 
22.4 %  in  the  EU,  see  Graph  1.5).  The  risk  of 
poverty or social exclusion in rural areas is nearly 
double  that  of  urban  areas,  which  corresponds  to 
the  gap  in  the  unemployment  rate  between  cities 
and  rural  areas  (4.5 %  v  11 %  in  2017).  In 
particular  the  metropolitan  areas  of  Vilnius  and 
Kaunas,  where  significant  economic  activity  is 
centred,  drive  a  significant  gap  between  AROPE 
rates  in  urban  and  rural  areas  (3).  Lithuania’s 
expenditure  on  social  protection  is  among  the 
lowest in the EU and the impact of social transfers 
on  poverty  reduction  is  limited,  but  the  recent 
reforms of social benefits are the first steps in the 
right direction. 

Income  inequality  is  still  among  the  widest  in 
the EU. In 2017, the income of the richest 20 % of 
households  was  7.3  times  greater  than  of  the 
poorest  20 %.  This  reflects  both  the  low  level  of 
benefit adequacy and the very limited progressivity 
of the tax system. In 2017, the median incomes of 
rural households were only 67 % of those of urban 

(3)  In  2017,  the  AROPE  rate  in  rural  areas  was  37.2 %, 

compared to 19.9 % in cities. 

9 

-100-75-50-250250708091011121314151617% of GDPReserve assetsNet portfolio investment, equity and investment fund shares/unitsNet portfolio investment, debt securitiesOther investment (net)Net direct investmentNet international investment position (NIIP)Marketable debt (NIIP minus FDI and shares) 
 
 
                                                           
1. Economic situation and outlook 

Financial sector 

Lithuania’s  banking  system  is  well  capitalised, 
liquid  and  profitable.  The 
level  of  non-
performing loans is below the EU average and the 
level  of  capital  is  high,  ensuring  the  banking 
sector’s  resilience  to  adverse  shocks.  Amid  a 
financial  upturn,  the  profit  of  the  banking  sector 
remained  historically  high.  Banks'  net  interest 
income  continued  to  grow,  mainly  due  to  cheap 
funding  and  rapidly  expanding  credit,  the  latter 
accompanied  by  rising  housing  prices.  The  main 
systemic  risks  to  financial  stability  relate  to  these 
cyclical  developments  in  credit  and  real  estate 
markets,  as  well  as 
structural 
interconnectedness  with  Nordic  financial  groups 
amidst  high  real  estate  valuations  and  household 
indebtedness  in  some  Nordic  countries.  This 
warrants  proactive  use  of  macro-prudential  policy 
tools  by 
the  Bank  of  Lithuania  and  close 
collaboration among financial supervisors. 

to  banks' 

Public finance 

Lithuania  is  maintaining  its  public  finances  in 
surplus.  In  2017,  the  general  government  budget 
surplus stood at 0.5 % of GDP (see Graph 1.6). It 
was  the  second  year  in  a  row  that  Lithuania 
sustained  a  strong  fiscal  position  thanks  to  robust 
tax  revenue  collection  and  contained  government 
spending.  The  general  government  balance  is 
expected  to  remain  around  ½%  of  GDP  in  2018 
and  2019.  The  general  government  debt 
is 
expected to decrease further  from 39.4 % of GDP 
in  2017  to  37.9 %  in  2019.  Nonetheless,  fiscal 
challenges  are  likely  to  remain  relevant  in  the 
medium  term,  as  the  declining  population  and 
ageing  are  expected  to  put  upward  pressure  on 
spending  on  pensions,  healthcare  and  long-term 
care. 

inequality  of  disposable 

households, one of the lowest shares in the EU. In 
light  of  the  low  redistribution  through  taxes  and 
social  transfers  (European  Commission,  2018a), 
income  slightly 
the 
increased  in  2017.  The  recent  reform  of  personal 
income tax is not expected to have any significant 
effect  on  the  progressivity  (see  Box  3.3.2).  The 
indicators of the Social Scoreboard, supporting the 
European Pillar of Social Rights, show the level of 
income inequality in Lithuania as critical (see Box 
3.3.1). 

Graph 1.5:  At-risk-of-poverty or social exclusion rate and 

its components 

Source: European Commission 

Regional disparities 

the  past  15  years,  Lithuania  has 
Over 
experienced  the  fastest  convergence  in  the  EU, 
but the benefits of economic growth are uneven 
across  regions.  Disparities  among  Lithuania's 
regions  have  steadily  grown  in  this  period.  While 
GDP  per  capita  reached  nearly  110 %  of  the  EU 
average  in  the  capital  region  of  Vilnius,  it  is  only 
between  42 %  and  77 %  in  other  regions.  The 
country’s  rapid  convergence  is  mainly  fuelled  by 
two  regions  —  the  capital  region  of  Vilnius  and 
Kaunas  County  —  producing  42 %  and  20 %  of 
the national GDP, respectively. In 2014-2016 these 
regions  grew  on  average  by  4.6 %  (Vilnius)  and 
3.3 %  (Kaunas),  while  the  other  regions,  which 
have  a  higher  share  of  rural  areas,  stagnated  or 
were in recession. 

10 

05101520253035404505060708091011121314151617% of populationAt-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households 
 
1. Economic situation and outlook 

Graph 1.6:  General government balance and gross debt 

* Forecast 
Source: European Commission 

11 

051015202530354045-12-10-8-6-4-202409101112131415161718*19*20*% of GDP% of GDPStructural balanceNominal balanceOutput gapGross debt (rhs) 
 
 
1. Economic situation and outlook 

Table 1.1: 

Key economic indicators 

(1) NIIP excluding direct investment and portfolio equity shares.   
(2) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
(3) The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the 
section on taxation.   
Source: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for 
real GDP and HICP, Autumn forecast 2018 otherwise) 

12 

Real GDP (y-o-y)8.2-0.43.02.44.13.62.72.4Potential growth (y-o-y)6.11.72.01.92.63.23.63.5Private consumption (y-o-y)11.0-2.24.15.03.3...Public consumption (y-o-y)2.9-0.70.4-0.1-0.4...Gross fixed capital formation (y-o-y)17.2-6.86.30.36.8...Exports of goods and services (y-o-y)9.98.84.64.013.6...Imports of goods and services (y-o-y) 15.23.36.33.812.0...Contribution to GDP growth:Domestic demand (y-o-y)11.8-3.53.83.23.4...Inventories (y-o-y)0.1-0.20.5-1.0-0.6...Net exports (y-o-y)-3.72.9-1.30.11.3...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)-0.2-0.80.10.20.00.10.20.0Capital accumulation (y-o-y)2.71.11.11.21.31.51.51.5Total factor productivity (y-o-y)3.61.40.80.61.31.71.92.0Output gap4.6-4.20.21.12.72.82.01.1Unemployment rate7.313.210.57.97.16.56.36.3GDP deflator (y-o-y)6.23.30.91.44.32.63.73.6Harmonised index of consumer prices (HICP, y-o-y)3.34.70.20.73.72.52.22.1Nominal compensation per employee (y-o-y)15.12.85.36.78.78.27.76.0Labour productivity (real, person employed, y-o-y)7.82.11.40.44.7...Unit labour costs (ULC, whole economy, y-o-y)6.80.63.86.43.84.24.22.9Real unit labour costs (y-o-y)0.5-2.52.94.9-0.51.60.6-0.7Real effective exchange rate (ULC, y-o-y)4.6-1.62.65.83.33.51.70.5Real effective exchange rate (HICP, y-o-y)0.11.11.42.00.14.0-0.5-0.5Savings rate of households (net saving as percentage of net disposable income)-1.0-0.1-2.8-3.6-5.2...Private credit flow, consolidated (% of GDP)16.6-1.30.74.43.7...Private sector debt, consolidated (% of GDP)56.872.155.056.156.1...of which household debt, consolidated (% of GDP)17.428.022.022.822.4...of which non-financial corporate debt, consolidated (% of GDP)39.444.033.033.333.6...Gross non-performing debt (% of total debt instruments and total loans and advances) (2)0.711.96.73.83.1...Corporations, net lending (+) or net borrowing (-) (% of GDP)-7.56.28.04.26.55.75.15.6Corporations, gross operating surplus (% of GDP)33.335.536.833.133.633.633.734.6Households, net lending (+) or net borrowing (-) (% of GDP)-0.40.0-2.8-3.7-4.9-5.7-4.9-5.1Deflated house price index (y-o-y)18.1-9.83.74.55.4...Residential investment (% of GDP)2.52.52.53.02.7...Current account balance (% of GDP), balance of payments-10.3-3.90.6-0.80.9-0.8-0.8-0.6Trade balance (% of GDP), balance of payments-9.4-3.40.81.22.8...Terms of trade of goods and services (y-o-y)1.8-0.41.12.20.4-0.50.20.9Capital account balance (% of GDP)1.33.22.91.51.2...Net international investment position (% of GDP)-44.9-54.6-45.2-42.7-35.9...NIIP excluding non-defaultable instruments (% of GDP) (1)-15.4-25.7-15.9-13.6-7.9...IIP liabilities excluding non-defaultable instruments (% of GDP) (1)51.171.662.877.075.6...Export performance vs. advanced countries (% change over 5 years)54.343.928.92.44.8...Export market share, goods and services (y-o-y)..-1.33.310.3...Net FDI flows (% of GDP)-3.0-1.8-0.8-0.4-1.3...General government balance (% of GDP)-0.7-6.2-1.20.30.50.60.40.1Structural budget balance (% of GDP)..-1.3-0.4-0.6-0.5-0.5-0.4General government gross debt (% of GDP)17.431.140.639.939.434.837.937.6Tax-to-GDP ratio (%) (3)29.929.028.130.029.830.230.630.5Tax rate for a single person earning the average wage (%)26.522.522.7.....Tax rate for a single person earning 50% of the average wage (%)20.018.017.8..... 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

of 

all 

83 % 

Since  the  start  of  the  European  Semester  in 
2011, 
country-specific 
recommendations  addressed  to  Lithuania  have 
recorded  at  least  'some  progress'  (4).  17 %  of 
these CSRs recorded 'limited' or 'no progress'  (see 
Graph  2.1).  Lithuania  has  achieved  substantial 
progress  and  full  implementation  in  the  areas  of 
including 
and 
policy 
fiscal 
governance  of 
state-owned  enterprises,  and 
improving the security of energy supply. 

governance, 

Graph 2.1:  Overall multiannual implementation of 2011-

2018 CSRs to date 

The multiannual CSR assessment looks at the implementation 
since 2011 until the 2019 Country Report. 
Source: European Commission 

Lithuania has  maintained its public finances in 
surplus  and  continued  adjusting  the  pension 
system  to  address  its  fiscal  sustainability  and 
adequacy.  For  the  third  year  in  a  row,  Lithuania 
achieved a general government surplus, which was 
well  supported  by  tax-rich  economic  growth.  In 
structural  terms,  Lithuania’s  budget  position  has 
improved  significantly,  as  the  structural  budget 
deficit  shrunk  from  3.5 %  of  GDP  in  2011  to  an 
estimated  0.6 %  in  2018.  It  also  made  efforts  to 
strengthen  its  fiscal  framework.  The  government 
implemented measures to reduce the tax burden on 
low  income  earners  and  increase  tax  compliance. 
However, during the recent overhaul of the income 
tax  system,  Lithuania  once  again  did  not  use  the 
opportunity to broaden the tax base to sources that 
are  less  detrimental  to  growth,  and  thus  to 
compensate,  at  least  partly,  for  the  costs  of  the 
reforms. From 2018, the fiscal sustainability of the 
pensions  system  has  been  strengthened  by 
introducing  a  pension  indexation  formula.  These 
reforms  also  address  to  some  extent  the  low 

(4)  For  the  assessment  of  other  reforms  implemented  in  the 

past, see in particular Section 3. 

adequacy of pensions. However, in the longer term 
the  overall  low  level  of  spending  on  pensions 
might limit further improvements. 

remaining 

limited  progress 

Lithuania  has  made 
in 
improving  the  quality,  efficiency  and  labour 
market relevance of education and training. The 
reforms in general education are still ongoing, with 
the  efficiency  of  the  school  network  and  the 
quality  of  outcomes 
the  main 
challenges.  The  reform  of  the  higher  education 
system  is progressing slowly. The  measures taken 
to  improve  vocational  education  and  training 
(VET)  seem  promising,  but  consistent  progress  is 
still needed to ensure effective governance of VET 
institutions  and  improve  the  learning  experience. 
Lithuania  continues  to  strengthen  its  network  of 
adult  learning  coordinators  in  municipalities,  but 
the  results  are  limited  so  far  and  participation  in 
adult learning remains low. 

Progress with improving the performance of the 
health  sector  has  been  limited.  Measures  to 
further consolidate the hospital network are  yet to 
be  adopted.  Adopting  legislation  on  the  use  of 
alcohol  and  tobacco  in  recent  years  has  helped 
somewhat to contain health risk factors. However, 
public  health  interventions  at  local  level  remain 
limited  due  to  low  investments  and  the  lack  of  a 
framework ensuring that municipalities implement 
evidence-based  interventions.  In  recent  years,  an 
increasing number of measures have also sought to 
the  quality  of  healthcare  services. 
improve 
However,  their  scope  remains  limited,  addressed 
only to primary care and introduced on a voluntary 
basis.    Despite  some  measures  taken  in  the  last  2 
of 
the 
years 
pharmaceuticals,  including  the  reduction  of  user 
charges  and  VAT  and  incentivising  the  sale  of 
cheaper products, measures to address affordability 
for specific groups have not been adopted yet.  

overall 

reduce 

costs 

to 

Lithuania  is  continuing  its  efforts  to  reduce 
poverty  and  income  inequality,  but  the  results 
are limited so far. In recent years, some important 
measures  have  been  taken  to  address  poverty. 
These  include  the  revision  of  unemployment 
benefits,  the 
increase  of  the  state  supported 
income,  and  improving  legislation  on  cash  social 
assistance.  From  2019,  Lithuania  has  further 
increased the universal child benefit, which should 
have  a  positive  impact  on  poverty  reduction. 

13 

No Progress2%Limited Progress15%Some Progress37%Substantial Progress31%Full Implementation15%* The overall assessment of the country-specific recommendations related to fiscal policy excludes compliance with the Stabilityand Growth Pact** The multiannual CSR assessment looks at the implementation until 2019 Country Report since the CSRs were first adopted. 
 
 
                                                           
2. Progress with country-specific recommendations 

However, important challenges remain. The risk of 
poverty  for  elderly  people  and  people  with 
disabilities  remains  high,  and  despite  the  recent 
remains 
the  adequacy  of  benefits 
progress, 
relatively  low.  Income  inequality  remains  among 
the  highest  in  the  EU,  and  the  recent  tax  reforms 
do not seem to be sufficiently effective in reducing 
it.  Tailoring  taxes  and  benefits  in  a  way  that 
reduces  poverty  and 
inequality,  and 
increasing  incentives  to  enter  the  labour  market, 
remain major challenges.  

income 

in  addressing 

the  CSRs  on 

Overall, Lithuania has made limited progress in 
addressing the 2018 CSRs (5). Some progress was 
achieved 
tax 
compliance  and  strengthening  the  sustainability 
and  adequacy  of  the  pension  system.  However, 
progress  in  addressing  the  issues  in  the  labour 
market, education and health sector, improving the 
design of the tax and benefit system, as well as in 
increasing 
public 
investment  and  research  and  innovation  policy 
more efficient, was limited. There was no progress 
in  broadening 
less 
detrimental to growth. 

by  making 

productivity 

to  sources 

tax  base 

the 

(5)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR is presented in the overview table in the Annex.  

14 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                           
2. Progress with country-specific recommendations 

Table 2.1: 

Assessment of 2018 CSR implementation 

Source: European Commission 

15 

 Lithuania Overall assessment of progress with 2018 CSRs: Limited progress CSR 1: Improve tax compliance and broaden the tax base to sources less detrimental to growth. Ensure the long-term sustainability of the pension system while addressing the adequacy of pensions. Some progress:   Some progress in improving tax compliance.   No progress in broadening the tax base to sources that are less detrimental to growth.   Some progress in improving the fiscal sustainability of the pension system and increasing adequacy of pensions. CSR 2: Improve the quality, efficiency and labour market relevance of education and training, including adult learning. Improve the performance of the healthcare system by a further shift from hospital to outpatient care, strengthening disease prevention measures, including at local level, and increasing the quality and affordability of care. Improve the design of the tax and benefit system to reduce poverty and income inequality. Limited progress:   Limited progress in improving the quality, efficiency and labour market relevance of education and training, including adult learning.  Limited progress in improving the performance of the healthcare system.  Limited progress in improving the design of the tax and benefit system to reduce poverty and income inequality. CSR 3: Stimulate productivity growth by improving the efficiency of public investment, ensuring efficient governmental coordination of research and innovation policy and tackling gaps and inefficiencies in public measures supporting science-industry cooperation.  Limited progress   Limited progress in improving the efficiency of public investment.   Limited progress in ensuring efficient governmental coordination of research and innovation policy and tackling gaps and inefficiencies in public measures supporting science-industry cooperation.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: EU funds and programmes contribute to addressing structural challenges and to 
fostering growth and competitiveness in Lithuania 

Lithuania  is  a  major  beneficiary  of  the  European  Structural  and  Investment  (ESI)  Funds  and  can 
receive  up to EUR 8.4 billion over 2014-2020. This potentially  represents around 3 % of GDP annually. 
By the end of 2018, an estimated EUR 5.6 billion (66 % of the total) had been allocated to projects on the 
ground. Over the same period, Lithuania signed 13 agreements for EUR 390 million for strategic transport 
projects  under  the  Connecting  Europe  Facility.  A  total  of  313  participants  received  funding  of  EUR 40 
million under Horizon 2020 (including 69 SMEs which received about EUR 13 million).  

EU  funding  has  helped  to  address  policy  challenges  identified  in  the  2018  CSRs.  Actions  financed 
through European Regional and Development Fund (ERDF) and European Social Fund (ESF) cover, among 
other  things:  support  for  ongoing  reforms  in  the  health  and  education  sectors,  notably  by  investing  to 
improve access  to quality healthcare across the country; support for consolidating education infrastructure 
and  raising  the  quality  of  education  at  all  levels;  promoting  R&I  in  the  private  sector  and  cooperation 
between science and business. By the end of 2018, ERDF and Cohesion Fund (CF) investment had reached 
more than 4 800 businesses and attracted over EUR 450 million in private funds matching public support. 
Around  22 000  pupils  are  studying  in  renovated  schools.  A  total  of  76  upgraded  health  care  institutions 
provide  improved  services  for  over  220 000  patients.  Among  other  achievements,  ERDF  and  CF 
investments led to the reconstruction of 480 km of roads and 60 km of railways and improved wastewater 
treatment  services  for  995 000  people.  The  ESF  invested  in  people  and  in  social  inclusion  —  more  than 
71 000  unemployed  persons  (including  about  20 000  young  people  aged  under  29)  improved  their 
employability. More than 110 000 pupils could improve their skills in formal and non-formal education and 
about 10 000 people participated in lifelong learning activities. Social services were provided for more than 
11 000  people,  and 16 000 people  with  disabilities  were  given  support  to  enable  them  to  work  in  adapted 
workplaces. Each year about 200 000 people received food packages from FEAD, together with measures to 
support their social inclusion.  

In  addition,  the  Commission  can  provide  tailor-made  technical  support  upon  a  Member  State's 
request  via  the  Structural  Reform  Support  Programme  to  help  Member  States  implement  growth-
sustaining  reforms  to  address  challenges  identified  in  the  European  Semester  process  or  other 
national reforms. Lithuania, for example, received support to enhance the public sector efficiency through 
the optimisation of the institutional framework of public-sector organisations, enable industry transformation 
through digitalisation and address corporate insolvency. In 2018, technical support is being provided to the 
Office  of  the  Government  of  the  Republic  of  Lithuania  for  its  efforts  to  reduce  shadow  economy  via 
measures  that  raise  awareness  and  create  positive  incentives  in  the  public.  Support  measures  are  also 
underway to enhance the capacity of local authorities to evaluate the long-run sustainability of their financial 
structure  and  develop  structural  analysis  of  the  revenue  and  expenditure  of  municipalities.  In  addition, 
support is also being provided to the authorities to help reform the network of teacher education institutions 
and to help develop alternative access to finance for SMEs. 

EU actions strengthen national, regional and local authorities and civil society. EUR 123 million of ESI 
Funds  has  been  allocated  for  strengthening  the  capacity  of  public  administrations  at  different  levels  by 
prompting  close  cooperation  with  stakeholders.  Lithuania  is  also  benefiting  from  support  under  the  pilot 
action  for  regions  in  industrial  transition,  which  provides  advisory  services  for  the  development  of  a 
comprehensive strategy for national economic transformation. 

EU  funding  is  helping  to  mobilise  private  investment.  ESI  Funds,  especially  via  ERDF  and  CF,  are 
mobilising additional private capital by allocating about EUR 700 million in the form of loans, guarantees 
and  equity.  This  is  expected  to  leverage  additional  private  investment  of  EUR 1.3  billion.  Altogether, 
EUR 650  million  of  the  ESI  Funds  have  been  paid  in  the  form  of  financial  instruments.  In  addition,  the 
European  Fund  for  Strategic  Investments  (EFSI)  has  allocated  EUR  399  million  to  13  infrastructure  and 
innovation projects  and 6  SMEs projects  in  Lithuania.  This  is  set  to  trigger  EUR  1.5  billion  in  additional 
investments. Lithuania ranks 11th in the overall volume of approved EFSI operations as a share of GDP. 

More information on: https://cohesiondata.ec.europa.eu/countries/LT 

16 

 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

3.1.1.  FISCAL POLICY 

Lithuania plans to maintain the budget surplus. 
In 2018, according to preliminary data, the general 
government  balance  remained  in  surplus  for  the 
third  consecutive  year,  amounting  to  0.6  %  of 
GDP.  However,  due  to  costs  of  the  reforms 
legislated  in  the  middle  of  2018,  the  general 
government  surplus  is  set  to  decrease  slightly  to 
0.4 %  of  GDP  in  2019.  Revenue  losses  stemming 
from  adjustments  to  personal  income  tax  and 
social  security  contributions  are  expected  to  be 
partially  offset  by  additional  revenues  thanks  to 
improvements 
the 
termination  of  transfers  from  the  State  Social 
Insurance  Fund  to  private  pension  funds.  Overall, 
taking  into  account  increases  in  public  wages, 
social  benefits  and  other  types  of  social  support, 
the current fiscal stance is considered to be slightly 
expansionary. 

tax  administration  and 

in 

3.1.2.  TAX POLICY 

Lithuania  has  one  of  the  lowest  tax-to-GDP 
ratios in the EU. Total tax revenues were 29.5 % 
of GDP in 2017 compared with the EU average of 
39.0 %.  Lithuania  relies  mostly  on  indirect  taxes 
(11.9 % of GDP) and social security contributions 
(12.3 %  of  GDP).  Direct  taxes  account  for  only 
5.4 %  of  GDP,  among  the  lowest  proportions  in 
the  EU  (data  for  2017).  However,  the  tax  burden 
on low-income labour is relatively high. 

The  tax-benefit  system  has  one  of  the  weakest 
powers to correct income inequality in the  EU. 
As measured by the Gini coefficient (6), Lithuania 
has  relatively  high  inequality  in  pre-tax  market 
income.  Combined  with  a  weak  redistribution 
through taxes and social transfers, this leads to one 
of 
income 
inequality  in  the  EU.  Moreover,  inequality  is  on 
the  rise  with  the  Gini  index  climbing  to  37.6  in 
2017  from  37.0  in  2016  (see  Graph  3.1.1).  This 

levels  of  disposable 

the  highest 

(6)  The  scale  of  the  Gini  coefficient  is  from  0  to  100.  The 
value  0  corresponds  to  perfect  equality  (same  income  for 
everybody) while 100 corresponds to maximum inequality 
(all income distributed to only one person and all the others 
have nothing.). 

compares  to  levels  in  neighbouring  Estonia  and 
Latvia  of  31.6  and  34.5,  respectively.  The  EU 
average stands at 30.3. 

Graph 3.1.1:  Gini coefficient development in the Baltic 

countries 

(1) Income data are adjusted for household size  
(2) EU-SILC 2016 data are based on income generated in 
2015 (with the exception of IE and UK.) 
Source: European Commission 

Despite the reduction in the tax burden for low 
income  earners,  overall 
tax  progressivity 
remains  low.  The  tax  wedge  (7)  on  low-income 
earners  in  2017  (34.0 %  for  singles  without 
children  earning  50 %  of  the  average  wage)  fell 
compared to 2016 (-2.5 pps). However, it remains 
above  the  EU  average  of  32.4 %,  even  though 
income  tax  in  Lithuania  is  well  below  the  EU 
average.  Lithuania  continued  to  raise  the  non-
taxable  income  threshold  in  personal  income  tax, 
from  EUR  310  in  2017  to  EUR 380  in  2018,  and 
increased 
for  people  with 
disabilities,  while  the  minimum  wage  was  set  at 
EUR 400. 

allowance 

the 

Personal 
tax  will  become  more 
progressive in 2019. The new personal income tax 

income 

(7)  The tax wedge indicator is defined as the sum of personal 
income  taxes  and  employee  and  employer  social  security 
contributions  net  of  family  allowances,  expressed  as  a 
percentage of total labour costs (sum of the gross wage and 
social  security  contributions  paid  by  the  employer).  The 
indicator  is  computed  by  the  OECD  based  on  the  OECD 
Tax and Benefit model. 

17 

30323436381011121314151617European UnionEstoniaLatviaLithuania 
 
                                                           
 
                                                           
3.1. Public finances and taxation 

introducing 

reform  further  increases  the  non-taxable  income 
threshold.  This  is  expected  to  reduce  the  tax 
payable  by  low  income  earners  and  help  cut 
poverty  by  focusing  on  the  most  disadvantaged 
people  in  the  workforce  (see  Box  3.3.2).  In 
addition,  Lithuania 
a  new 
is 
progressive  tax  structure  for  personal  income  tax 
with  a  20 %  and  27 %  (8)  tax  rate  replacing  the 
existing 15 % flat tax rate. However, the income of 
self-employed  people  and  certain  social  security 
benefits  like  maternity  benefits,  sickness  benefits, 
etc. will continue to be taxed at 15 %. This implies 
that the effective labour taxation rate  on the  same 
job is not neutral in respect to which legal form of 
activity  is  chosen  (individual  activity  certificate, 
self-employed or regular employment contract). 

the 

emissions  are  very  limited  and  new  vehicles 
purchased 
least 
in  Lithuania  are  among 
environmentally friendly in the EU. No changes to 
car  taxation  or  the  road-use  tax  for  private 
passenger  vehicles  are  envisaged.  Lithuania  has 
one  of  the  lowest  excise  duties  on  petrol,  diesel 
and  other  motor  fuels  in  the  EU.  The  overall 
implicit  tax  rate  on  energy  is  among  the  EU’s 
lowest.  However,  excise  duties  on 
tobacco 
products  will  further  increase  and  a  tax  on 
electronic  cigarette  liquid  will  be  introduced  in 
2019. Property taxation remains low and no further 
changes  are  planned.  In  2017,  Lithuania  collected 
only 0.3 % of GDP from recurrent property taxes, 
which  is  significantly  below  the  EU  average  of 
1.6 %. 

security 

contribution 

The  overall  progressivity  of  labour  taxation 
remains  relatively  low  due  to  changes  to  the 
social 
(SSC).  The 
combined SSC rate (employer and employee) will 
be reduced by around 19 pps. Employers’ SSC rate 
will be set at 1.47 % instead of current 30.5 %, and 
employees’  contribution  rate  will  be  raised  to 
19.5 % from 9 % currently. To compensate for the 
statutory  tax  increase  for  employees,  employers 
are  legally  obliged  to  increase  gross  salaries  by 
28.9 %.  Additionally,  Lithuania  introduced  a  SSC 
cap  with  the  aim  of  attracting  investors. The  cap 
will  be  applied  to  yearly  incomes  exceeding  120 
average  monthly  wages  and  will  be  gradually 
reduced to 84 average monthly wages in 2020 and 
this  measure 
to  60 
counterbalances  the  labour  taxation  progressivity 
introduced  by  the  personal  income  tax  reform  for 
the  highest  earners  and  is  not  expected  to  reduce 
income inequality (see Box 3.3.2). 

In  practice, 

in  2021. 

The  current  reform  does  not  involve  any 
broadening  of  the  tax  base  to  more  growth-
friendly  sources,  despite  entailing  budgetary 
costs (see Box 3.3.2). Environmental taxes, which 
account  for  1.9  %  of  GDP,  are  mostly  taxes  on 
energy  (1.7  %  of  GDP).  Environmental  taxes  are 
significantly  below  the  EU  average  of  2.4  %  of 
GDP  (data  for  2017).  Taxes  on  transport  are  the 
lowest  in  the  EU  and  do  not  take  into  account 
vehicles’  environmental  performance.  CO2-based 
motor  vehicle  taxes  are  not  in  place  in  Lithuania. 
lower  CO2 
favour  cars  with 
Incentives 

to 

(8)  For annual income exceeding 120 average monthly  wages 
(in 2019), 84 (in 2020), and 60 (from 2021 onwards). 

investment. 

Lithuania’s  R&D  incentives  are  generous  but 
appear  ineffective  in  motivating  private  sector 
R&D 
In  2017,  private  R&D 
expenditure amounted to 0.3 % of GDP, compared 
to an EU average of 1.4 %. The fiscal instruments 
in  place  to  support  R&D  include  a  deduction  of 
300 % of R&D expenditures  from taxable income 
if certain innovation criteria are met and a scheme 
allowing  faster depreciation of  some  R&D capital 
assets.  A  reduction  in  compliance  costs  and 
relieving 
the  administrative  burden  on  small 
businesses  could  widen  the  use  of  R&D  tax 
incentives.  

3.1.3.  TAX COMPLIANCE 

relatively 

compliance 

Tax 
low. 
remains 
Although the VAT gap (9) decreased slightly from 
25.6 %  in  2015  to  24.5 %  in  2016,  Lithuania  still 
has  one  of  the  largest  gaps  in  the  EU  (CASE, 
2018).  The  country  has 
introduced  several 
measures  to  combat  the  shadow  economy  and 
improve 
compliance.  The  State  Tax 
Inspectorate  is  continuing  taxpayer  awareness 
campaigns  and  promoting  a  voluntary  taxpaying 
culture.  The  cash  registry  receipt  lottery  game 
organised by the Inspectorate showed good results, 
with  more  than  two  thirds  of  VAT  payers  in  the 

tax 

(9)  The VAT gap is the difference between the estimated VAT 
revenues  (VAT  Total  Tax  Liability)  and  the  amount  of 
VAT  actually  collected.  The  VAT  gap  measures  the 
effectiveness  of  VAT  enforcement  and  compliance 
measures.  It  estimates  revenue  loss  due  to  fraud  and 
evasion, tax avoidance, bankruptcies, financial insolvencies 
and miscalculations. 

18 

 
                                                           
                                                           
3.1. Public finances and taxation 

they 

year  period.  During  preparation  of  the  draft 
budgetary plan for 2019 the Lithuanian authorities 
also  made efforts to perform  expenditure reviews. 
Though such reviews had been implemented in the 
past, 
lack  a  more  structured  approach, 
including adopted methodologies and tools. Taking 
into  account  the  small  size  of  the  government 
sector,  Lithuania  would  also  benefit  from  a 
fundamental  review  of  state  functions  in  the 
context of limited public funding. In 2019, during 
the  second  stage  of  the  reform,  the  Ministry  of 
Finance  plans 
legal 
documents  and  procedures  on  budget  structure, 
implementation, monitoring and evaluation. 

the  necessary 

to  draft 

3.1.5.  DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

Lithuania  faces  low  sustainability  risks  in  the 
long  term.  The  early-
short,  medium  and 
detection indicator of fiscal stress, S0 (10), is below 
its  critical  threshold,  both  for  the  fiscal  and  the 
financial  competitiveness  sub-indices  (see  Annex 
B). Similarly, fiscal sustainability risks appear low 
over  the  medium  term,  both  according  to  the 
sustainability  gap  indicator  S1 (11)  and  the  debt 
sustainability analysis,  given  the  moderate  current 
debt-to-GDP  ratio  and  the  limited  sensitivity  to 
possible 
shocks (European 
Commission,  2019).  Lastly,  over  the  long  term 
Lithuania is considered at low fiscal sustainability 
risk. The sustainability gap indicator S2 (12) shows 
that  only  a  small  fiscal  adjustment  would  be 
required to stabilise debt in the long run. 

macro-fiscal 

Total  ageing  costs  are  projected  to  remain 
relatively  flat  in  the  long  term.  They  are 

(10)  Short-term fiscal stress is measured by the S0 indicator, an 
early-detection  indicator  designed  on  the  basis  of  past 
crises  to  highlight  short-term  fiscal  risks  stemming  from 
the  financial-competitiveness  or  the  fiscal  side  of  the 
economy. 

(11)  The  medium-term  fiscal  sustainability  indicator  S1  shows 
the additional  adjustment  effort  required,  in  terms of  a  
cumulated    gradual    improvement    in    the  structural   
primary   balance   over   five   years (starting  from  2021),  
to    reach    a  60 %  debt-to-GDP    ratio  by  2033,  including   
paying   for   any   future   additional expenditure  arising  
from an  ageing  population. 

(12)  The  long-term  fiscal  sustainability  indicator  S2  shows  the 
upfront adjustment   to   the   current   structural primary 
balance (subsequently kept constant at the  adjusted  value  
forever)    that    is    required    to  stabilise  the  debt-to-GDP 
ratio over the infinite horizon,  including  paying  for  any  
additional expenditure arising from an ageing population. 

awareness 
'Smart 

catering  sector  registered  in  the  lottery.  Several 
public  relations  campaigns  aimed  at  increasing 
public 
engagement  were 
and 
tax  administration  system' 
undertaken. 
(i.MAS) measures introduced in recent years have 
almost halved the time businesses need to comply 
with tax rules, from 171 hours in 2015 to 99 hours 
in 2017 (World Bank, 2018a). 

Lithuania  will  introduce  taxpayer  risk  profiles 
and other compliance measures from 2019. The 
government  will  provide  a  one-time  opportunity 
for  taxpayers  to  benefit  from  the  tax  amnesty  in 
2019. Private individuals will have the opportunity 
to  recover  some  of  their  personal  income  tax  if 
they  use  services  with  certified  tax  accounting. 
Other compliance measures are planned, such as a 
free  accounting 
small 
businesses  in  2019  and  a  'virtual  cash  register' 
project in 2020. 

services 

system 

for 

3.1.4.  FISCAL FRAMEWORK 

the 

fiscal  rules  has  been 
Application  of 
broadened.  According  to  the  Constitutional  Law 
on  the  Implementation  of  the  Fiscal  Treaty,  from 
1 January 2018, all large budgets in the central and 
local government sector have to be balanced or in 
surplus  in  structural  terms.  This  requirement, 
intended to further strengthen fiscal discipline, was 
applied in 2018 for the first time to the budgets of 
the  three  biggest  municipalities  and  the  National 
Health Insurance Fund. According to the Law, the 
balanced  budget  rule  does  not  apply  to  the  state 
budget  and  the  State  Social  Insurance  Fund.  In 
July  2018,  the  Law  on  the  Budget  Structure  was 
amended  to  improve  the  transposition  of  Council 
requirements 
Directive  2011/85/EU  on 
for 
frameworks.  The 
Member  States’  budgetary 
amendments 
the 
aimed 
transparency of the macroeconomic and budgetary 
forecasts produced by the Ministry of Finance and 
improving  the  monitoring  of  national  fiscal  rules 
(Office of the Seimas of the Republic of Lithuania, 
2018). 

increasing 

are 

at 

Lithuania seeks to further improve its medium-
term budgetary planning system. Under the first 
stage  of  this  reform,  budgetary  procedures  were 
revised in 2018. Deliverables and key performance 
indicators  were  set  for  appropriation  managers, 
who  are  expected  to  achieve  them  over  a  three-

19 

 
                                                           
3.1. Public finances and taxation 

second 
contributions (13).  

pillar 

and 

pay 

higher 

pension 

Despite  rapid  population  ageing,  expenditure 
on healthcare and long-term care is expected to 
remain  relatively  contained.  It  is  projected  to 
increase from, respectively, 4.1 and 1.0 % of GDP 
in 2016 to 4.6 and 1.7 % by 2040. Both increases 
are  below  EU  average  expenditure  growth  over 
this period. 

projected to increase from 16.0 % of GDP in 2016 
to  16.7 %  in  2030  and  peak  at  17.1 %  in  2040 
before  decreasing  again  to  below  16 %  in  2070 
(European Commission, 2018b). 

the  contributions 

The introduction of the new pension indexation 
formula  in  2018  increased  fiscal  sustainability. 
Following  the  2016  reform,  pension  benefits  and 
accumulated  pension  points  are  now  indexed  on 
the  basis  of  changes  in  the  total  wage  sum.  The 
introduction  of  a  link  between  public  pension 
expenditure  and 
received 
provides for an automatic balancing of the system. 
The  indexation  mechanism,  together  with  the 
increase in eligibility requirements for full pension 
benefits,  should 
reduce  pension  expenditure 
between  2016  and  2060  by  3.7 %  of  GDP 
(European  Commission,  2018b)  compared 
to 
projections  based  on  the  previous  rules.  Since 
pensions  account  for  over  40 %  of  all  age-related 
risk 
reduced 
costs, 
demographic  ageing  poses  to  Lithuania’s  public 
finances.  However,  baseline  pension  projections 
for  Lithuania  are  subject  to  important  risks  as  the 
to  put 
legislation  expects  authorities 
current 
forward  corrective  measures  in  case  the  benefit 
ratio decreases (European Commission, 2018c). 

the  overall 

this  has 

redistributive  mechanism 

Increasing fiscal  sustainability, however, comes 
at the cost of declining pension adequacy. Since 
the  total  wage  bill  is  expected  to  increase  at  a 
slower  pace  than  wages  due  to  the  rapidly 
shrinking working-age population, the benefit ratio 
is projected to fall in the future. This is particularly 
worrisome  since  Lithuania  has  one  of  the  lowest 
benefit ratios in the EU (see Section 3.3.3). With a 
relatively  weak  corrective  power  of  the  tax  and 
benefit system (see Section 3.1.2), pensions are the 
main 
in  Lithuania. 
Declining  adequacy  would  therefore  significantly 
increase  poverty  rates.  To  address  the  issue  of  a 
low  replacement  ratio,  the  government  passed  an 
additional  pension  reform  in  summer  2018  to 
move  the  basic  pension  from  the  State  Social 
Insurance  Fund  to  the  state  budget.  According  to 
the  Lithuanian  authorities,  this  aims  to  reinforce 
the  link  between  benefits  and  contributions  and 
strengthen  the  second  pension  pillar  (see  Section 
3.3.3).  The  results  of  the  reform  will  largely 
depend  on  the  participation  rate,  i.e.  on  the 
willingness  of  participants  to  stay  enrolled  in  the 

(13)  The previous contribution formula of 2 %+2 %+2 % (from 
employee,  social  security  contribution  and  state  budget) 
will be replaced by 4 %+0 %+2 % (from employee, social 
security contribution and state budget). 

20 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                           
3.2.  FINANCIAL SECTOR 

3.2.1.  FINANCIAL STABILITY  

financial  position  of 

the  Lithuanian 
The 
is  strong.  Lithuanian  banks 
banking  sector 
operate  with  high  levels  of  capital  (Table  3.2.1). 
As of June 2018, the total capital ratio was 19.0 %, 
well  above 
the  minimum  capital  adequacy 
requirements  and  the  capital  buffers  currently  in 
place.  As  regards  its  composition,  the  capital 
consists almost entirely of Common Equity Tier 1 
(CET 1), which is the highest-quality capital (CET 
1  ratio  of  18.7 %).  The  rapid  decline  in  funding 
costs  was  the  main  contributor  to  high  bank 
profitability,  with  a  return  on  equity  of  13.5 %. 
The  non-performing 
its 
decreasing  trend  to  below  the  European  average, 
falling to 3.1 % from 3.7 % the year before. Banks 
in  Lithuania  have  minor  exposure  to  non-bank 
non-residents  (only  2.3 %  of  the  total  amount  of 
outstanding  loans  as  of  Q1-2018),  as  the  loan 
portfolio  is  largely  domestically  oriented.  The 
loan-to-deposit  ratio  remains  safely  below  100 %, 
at  93 %  at  the  end  of  November  2018,  indicating 
sustainable bank funding amid active lending. 

loan  ratio  continued 

Table 3.2.1: 

Financial soundness indicators 

(1) ECB aggregated balance sheet: loans excluding to 
government and MFI / deposits excluding from government 
and MFI  
Source: European Central Bank 

One  of  the  main  systemic  risks  to  financial 
stability  relates  to  cyclical  developments  in 
to 
credit  and  real  estate  markets.  Credit 
Lithuanian  residents  continues  to  grow  robustly, 
albeit at a slower pace than to corporations (Graph 
3.2.1).  The  housing  loan  portfolio  posted  the 
highest  growth,  with  an  annual  growth  of  around 
8 %  in  2018.  Given  the  sustained  upswing  in  the 
credit and  housing  market (see Section 3.2.3), the 
Bank  of  Lithuania  decided 
a 
countercyclical buffer of 0.5 % at the end of 2017 
(with effect from January 2019). In June 2018, the 
Bank further increased it to 1 % (with effect from 
June 2019), as credit growth continued and banks’ 

apply 

to 

profitability  was  high.  The  primary  objective  of 
this  macro-prudential  tool  is  to  make  the  banking 
system  more  resilient  and 
less  pro-cyclical. 
Measures aimed at the borrower’s side date back to 
2011, when the Bank approved the Regulation for 
Responsible  Lending,  which  was  amended  in 
2015. It includes a loan-to-value ratio of maximum 
85 %,  a debt-service-to-income  ratio  of  maximum 
40 %  (50  %  with  a  5%  interest  rate;  60%  in 
exceptional circumstances) and a loan  maturity of 
maximum 30 years. 

Graph 3.2.1:  Credit growth 

Source: European Central Bank 

Lithuania’s  banking  sector  has  become  one  of 
the  most  concentrated  in  the  EU,  thereby  also 
increasing  systemic  risk.  As  of  September  2018, 
the  three  largest  banks  (Swedbank,  SEB  and 
Luminor)  hold  a  market  share  of  82 %.  This  is 
partly  attributable  to  the  relatively  small  market 
size  and  the  high  competitiveness  of  the  big 
players  which  crowd  out  smaller  institutions.  The 
Bank of Lithuania actively encourages the entry of 
new participants into the market and, together with 
the  government,  in  2016  submitted  a  set  of 
proposals  and  amendments  of  legal  acts  covering 
diverse alternative financing sources for small and 
medium sized enterprises (SMEs). 

banking 

A  highly  integrated  and  concentrated  Nordic-
close 
Baltic 
supervisors. 
collaboration  among 
Risks  mainly  relate  to  the  Scandinavian  housing 
markets  and 
their 
households.  They  may  materialise  in  the  form  of 

system  warrants 
financial 

indebtedness  of 

the  high 

21 

2014q42015q42016q42017q42018q12018q2Non-performing loans6.85.64.03.23.43.1o/w foreign entities6.4-----o/w NFC & HH sectors9.67.55.54.44.44.4o/w NFC sector10.38.46.25.04.84.2o/w HH sector8.96.64.83.73.93.6Coverage ratio31.532.332.230.827.627.9Return on equity(1)7.77.511.99.112.9 -Return on assets(1)0.90.91.00.91.3 -Total capital ratio21.324.819.419.119.6 -CET 1 ratio20.924.319.118.819.3 -Tier 1 ratio20.924.319.118.819.318.7Loan to deposit ratio80.183.882.378.884.099.7-6-4-202468101214Jan 12Oct 12Jul 13Apr 14Jan 15Oct 15Jul 16Apr 17Jan 18Oct 18y-o-yo % change Non-financial corporationsTotal privateHouseholdsMortgage credit 
 
 
 
 
 
3.2. Financial sector 

in 

costs 

and  higher 

constrained  lending  activity,  short-term  deposit 
financing 
volatility, 
for 
Lithuanian  banks,  given 
the  relatively  heavy 
dependence  on  wholesale  funding  from  some 
Nordic countries. Supervisors from the Nordic and 
Baltic  countries  are  aware  of  potential  spillovers 
and  of 
legal 
the  existing  differences 
frameworks.  They  are  cooperating  closely  to 
maximise  the  effectiveness  of  national  macro-
prudential  policy 
level 
playing  field  for  all  credit  institutions  and  reduce 
the risk of regulatory arbitrage. In this respect, the 
Bank  of  Lithuania  has  decided  to  automatically 
reciprocate  other  EU  countries’  macro-prudential 
policy  measures,  (14)  e.g.  the  lower  limit  for  risk 
weights  on  residential  mortgage  loans  in  Finland 
(15)  as  well  as  a  1 %  systemic  risk  buffer  rate  to 
banks’ Estonian exposures (16). 

instruments,  ensure  a 

to  Lithuania’s 

Ensuring  cyber  security  remains  an  important 
financial  system. 
challenge 
FinTech  developments  are  increasing  the  risk  of 
cyber  attacks,  which  may  have  a  large  impact  on 
financial 
and 
unregulated  digital  money  that  may  be  used  as  a 
payment pose additional risks to financial stability 
— notably money laundering, hacking and market 
risk  in  terms  of  the  exchange  rate  of  the  virtual 
currency. 

stability.  Virtual 

currencies 

3.2.2.  ACCESS TO FINANCE 

Difficulties  in  accessing  finance  affect  SMEs’ 
innovation  and  growth.  More  than  one  of  eight 
SMEs  considered  access  to  finance  its  most 
important  concern.  This  is  among  the  highest  and 
the 
almost  double 
improved  availability  of  funding,  SMEs  access  to 
finance  score  remained  close  to  the  EU  average. 
(European  Commission,  2018d).  SMEs  continued 

the  EU  average.  Despite 

in 

to 

rates 

large 

the  EU, 

to  experience  some  challenges  in  obtaining  loans. 
This  is  evidenced  by  one  of  the  highest  loan 
rejection 
the  perceived 
deterioration  of  banks’  willingness  to  provide  a 
loan, and higher relative  borrowing cost for  small 
loans 
loans  (European  Commission, 
2018e). The market gap for business financing was 
estimated  at  EUR  660  million  in  2018  and 
growing. Funding gaps were high and growing for 
risk capital and start-ups in particular (Ministry of 
the 
Finance,  2019).  These  bottlenecks  affect 
entrepreneurial  ecosystem  and 
innovation 
capacity  (see  Section  3.4.1),  hindering  SMEs’ 
growth. 

the 

3.2.3.  HOUSING MARKET 

House  prices  are  slowing.  After  averaging  5 % 
since  2014,  growth  in  house  prices  has  slowed 
recently as housing supply catches up with demand 
growth  (see  Graph  3.2.2).  The  supply  of  new 
housing  in  Vilnius  and  its  suburbs,  the  country’s 
biggest  real  estate  market,  has  reached  post-crisis 
highs  and  the  stock  of  unsold  apartments  in  the 
three largest cities has started to increase since the 
beginning of 2017. The demand for housing is still 
strong, fuelled by rapidly rising wages (see Section 
3.4.2),  benign  financial  conditions  and  positive 
expectations. In the first half of 2018, the number 
of  monthly  transactions  was  the  highest  since  the 
2007-2008  peak  (State  Enterprise  Centre  of 
Registers,  2018).  Since  2010  housing  market 
activity  has  been  concentrated  in  more  densely 
populated areas and the largest cities, but in 2018 
less  populated  areas  started  to  get  very  active  as 
well. 

(14)  While  reciprocation  is  voluntary,  with  its  decision  to 
reciprocate  automatically,  Lithuania  is  implementing  in 
practice 
Systemic  Risk  Board 
recommendation  of  15 December  2015  on  the  assessment 
of  cross-border  effects  of  and  voluntary  reciprocity  for 
macro-prudential policy measures. 

European 

the 

(15)  Banks  established  in  Lithuania  thus  need  to  comply  with 
the same requirements for risk weights as the Finnish banks 
when  lending  to  households  with  a  mortgage  on  housing 
units located in Finland. 

(16)  Eesti  Pank  has  requested  the  authorities  of  other  member 
states to apply equivalent additional buffer requirements to 
the banks that provide services in Estonia through branches 
or directly cross-border. 

22 

 
                                                           
3.2. Financial sector 

Graph 3.2.2:  Annual change in real house prices 

Note: The median represents a middle value of house price 
growth reported by three sources 
Source: State Enterprise Centre of Registers, Statistic 
Lithuania, UAB OberHaus, Commission calculations 

large 

The  key drivers  in the housing  market seem to 
in  balance.  The  overall  valuation  gap 
be 
the  European  Commission (17) 
calculated  by 
signals  that  house  prices  in  Lithuania  are  not 
overvalued.  This  indicator,  however,  does  not 
regional  differences,  which  are 
catch 
prominent in  Lithuania (Vilnius and other cities  v 
rural areas). While credit growth, supported by low 
interest  rates, 
improving  financial  health  of 
households  and  positive  expectations,  has  been 
noticeable  in  recent  years,  households  are  also 
financing  a  large  share  of  housing  purchases  with 
their  own  resources  (18).  The  household  debt  at 
26 %  of  GDP  in  2017  is  among  the  lowest  in  the 
EU, aligned with fundamentals, and not leading to 
prudential  concerns (19).  These  factors  point  to  an 
overall  balanced  situation  in  the  housing  market 
and  suggest  limited  risks  of  market  correction  at 
the present juncture.   

(17)  The analysis of price valuations is based on an average of 
three  metrics:  (i)  affordability  gap  (price-to-income 
deviation  with  respect  to  its  long-term  average);  (ii) 
dividend  gap  (price-to-rent  deviation  from  its  long-term 
average);  and  (iii)  estimates  of  deviations  of  house  prices 
from  equilibrium  values  justified  by  housing  demand  and 
supply fundamentals. See Philiponnet and Turrini, 2017. 
(18)  Although  decreasing,  the  number  of  housing  transactions 
financed without a mortgage remains high, at around 60 % 
(State Enterprise Centre of Registers). 

(19)  Fundamentals-based 

are 

based 

on 
benchmarks 
methodologies developed by the European Commission in 
2017 and 2018. The are derived from regressions capturing 
the  main  determinants  of  credit  growth  and  taking  into 
account a given initial stock of debt. Prudential thresholds 
represent  the  debt  threshold  beyond  which  the  probability 
of  a  banking  crisis  is  relatively  high,  minimising  the 
probability of missed crisis and that of false alerts.  

23 

-40-30-20-100102030405060070809101112131415161718Median 
 
                                                           
  
3.3.  LABOUR MARKET, HEALTH, EDUCATION, AND SOCIAL 

POLICIES 

3.3.1.  LABOUR MARKET 

The  labour  market  continues  to  perform  well 
but  a  shrinking  labour  force,  skills  shortages 
and  territorial  disparities  remain  challenges. 
The  working-age  population  decreased  from  1.8 
million  to  1.7  million  between  2014  and  2017, 
reducing the potential supply of labour at a time of 
economic  growth.  Work-related  immigration  has 
increased and a majority of third-country nationals 
fill the jobs requiring medium skills, mainly in the 
transport,  construction  and  service  sectors.  To  a 
certain  extent,  this  indicates  the  inability  of  the 
to 
Lithuanian  education  and 
anticipate  and  provide 
skills. 
Employment opportunities are also very unequal in 
Lithuania:  in  2017  the  employment  rate  gap 
between people living in cities and those living in 
rural areas was one of the highest in the EU (13.7 
pps). 

training  system 
required 

the 

is 

for 

skills 

levels 

Employment  opportunities 
low-skilled 
workers  are  fewer  than  in  other  EU  Member 
States.  Tertiary  graduates  in  Lithuania  perform 
better  on  the  labour  market  than  the  EU  average. 
Their  unemployment  rate  in  2017  was  lower  than 
the  EU  average  (3.0 %  v  4.6 %  in  the  EU).  The 
employment  rate  difference  for  people  with 
different 
significant.  The 
employment  rate  for  the  low,  medium  and  high-
skilled  is  44 %  (55 %  in  the  EU),  70 %  (73 %  in 
the  EU)  and  90 %  (84 %  in  the  EU)  respectively. 
Due 
the 
unemployment rate of the medium and low-skilled 
is  decreasing,  but  remains  well  above  the  EU 
average  and  has  not  yet  reached  pre-crisis  levels. 
The  government  has  recently  started  developing 
national 
resource  monitoring 
processes,  but  there  is  no  structured  regulatory 
framework  for  anticipating  the  skills  that  will  be 
needed in the medium term. Ensuring the supply of 
skills  is  one  of  the  main  areas  where  demand  for 
investment remains significant. 

labour  market, 

skills/human 

tightening 

the 

to 

Spending  on  and  coverage  by  active  labour 
market  policy  measures  remains 
limited 
compared to other EU countries. The proportion 
of  registered  unemployed  people  in  Lithuania 
covered by these policies is relatively low (around 
20 %).  The 
are 
underrepresented  as,  for  example,  they  count  for 

unemployed 

low-skilled 

is  also 

only  16 %  (October  2018)  of  total  participants  in 
vocational  training  programmes.  Participation  by 
people  with  disabilities  in  active  labour  market 
low.  The 
policy  (ALMP)  measures 
measures are overwhelmingly financed by external 
sources  like  the  European  Social  Fund  (around 
60 %  of  the  total  cost).  In  2018  the  cost  of 
providing  these  measures  increased  due  to  the 
configuration  of  vocational  training  provision  and 
increased  costs  for  other  measures,  but 
the 
resources  allocated  remain  limited.  The  extent  of 
the  ALMP  measures'  coverage 
to 
funding,  and  the  demand  for  investment  will 
remain significant.  

linked 

is 

Cooperation  between  the  Public  Employment 
labour 
Service  and  other  stakeholders  on 
market  activation  is  lacking.  This  reduces  the 
relevance  and  effectiveness  of  ALMP  measures. 
To  ensure  better  effectiveness  and  relevance  of 
labour  market  activation  measures,  and  their 
integration  with  social  and  health  services, 
Lithuania 
integrated 
is  developing  a  special 
services  model.  It  envisages  cooperation  between 
different  stakeholders,  including  social  partners, 
municipalities  and  civil  society  organisations.  In 
2019,  a  pilot  project  of  the  model  targeting  the 
long-term unemployed will be launched in several 
municipalities. 

The  level  of  digital  skills  in  the  labour  force  is 
limiting  the  use  of  digital  technologies  by 
businesses.  While  the  use  of  digital  technologies 
by businesses is above the EU average, the number 
of  ICT  specialists  is  among  the  lowest  in  the  EU 
with  2.7 %  ICT  specialists  as  a  percentage  of 
employed individuals, against 3.7 % on average in 
the  EU.  This,  and  the  decreasing  number  of 
graduates  in  STEM  subjects  (science,  technology, 
engineering and mathematics), are factors limiting 
the  further  uptake  of  digital  technologies.  Among 
businesses  that  have  recruited  or  tried  to  recruit 
reported  hard-to-fill 
ICT 
vacancies.  Lithuanian 
also 
underinvesting  in  enhancing  digital  skills:  only 
their 
9 %  of  companies  provide 
personnel to develop and upgrade their ICT skills, 
significantly  below  the  EU  average  of  23 % 
(European  Commission  2018f).  The  Lithuanian 
Digital Agenda  strategy and the National Industry 
Digitalisation Platform ‘Pramonė 4.0’, launched in 

specialists,  40 % 

businesses 

training 

are 

to 

24 

 
 
3.3. Labour market, health, education, and social policies 

2017, have helped the digital transformation of the 

economy but further efforts are needed. 

25 

 
3.3. Labour market, health, education, and social policies 

Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights in 
Lithuania 

The European Pillar of Social Rights is designed as a compass for a renewed process of upward convergence 
towards better  working  and living conditions in the European Union (1). It sets out 20 essential principles 
and rights in the areas of equal opportunities and access to the labour market; fair working conditions; and 
social protection and inclusion. 

Lithuanian’s  performance  on  the  indicators 
of  the  Social  Scoreboard  supporting  the 
European  Pillar  of  Social  Rights  is  mixed. 
Continuous  economic  growth  is  driving  the 
good performance of the labour market and the 
employment  rate  of  both  women  and  men  has 
risen.  However,  skills  shortages  are  becoming 
evident. Lithuania continues to have one of the 
smallest  gender  employment  gaps  in  the  EU. 
The  economic  growth  has  not  yet  translated 
into  greater  social  inclusion,  though.  Income 
inequality  (measured  by  the  income  quintile 
ratio),  which 
by 
disproportionate  growth  in  the  income  of  top 
earners,  is  the  main  challenge.  The  impact  of 
social  transfers  on  poverty  reduction,  while 
improving  slowly,  remains  weak.  The  level  of 
poverty  and  social  exclusion  remains  among 
the  highest  in  the  EU  and  there is  much  more 
to be done to achieve convergence.  

largely 

driven 

is 

Poor  health  outcomes  call  for  persisting 
challenges  in  the  healthcare  system  and 
public health policies to be addressed. Unmet 
medical  needs  are  around  the  EU  average  but 
out-of-pocket  payments  are  still  high  and  have 
an  impoverishing  effect  on  certain  groups. 
Lifestyle risk factors need to be addressed more 
consistently  and  the  role  of  local  entities  in 
public health policies needs to be strengthened.  

The  recent  increase  in  social  benefits  has 
improved  the  impact  of  social  transfers  on 
poverty  reduction.  The  situation 
is  not 
assessed  as  critical,  in  contrast  to  the  2018 
Country Report. The universal child benefit system, introduced in 2018, has been instrumental in reducing 
the risk of poverty for households with children, including for single-parent families (see Box 3.3.2).  

(1)  The European Pillar of Social Rights was proclaimed on 17 November 2017 by the European Parliament, the Council 
and  the  European  Commission:  https://ec.europa.eu/commission/priorities/deeper-and-fairer-economic-and-monetary-
union/european-pillar-social-rights/european-pillar-social-rights-20-principles_en 

in  Lithuania 

Social  dialogue 
slowly 
improving.  The  institutional  setup  for  involving 
the  social  partners  at  national  level  is  in  place. 
Bipartite social dialogue is rather weak, with some 

is 

progress  being  made 
sectoral 
agreements, but only in the public sector. There is 
scope  for  further 
in  particular 
focusing  on  the  know-how  and  training  of  the 

improvement, 

signing 

in 

26 

Early leavers from education and training (% of population aged 18-24)Better than averageGender employment gapBest performersIncome quintile ratio (S80/S20)Critical situationAt risk of poverty or social exclusion (in %)Critical situationYouth NEET (% of total population aged 15-24)On averageEmployment rate (% population aged 20-64)Better than averageUnemployment rate (% population aged 15-74)On averageLong-term unemployment rate (% population aged 15-74)On averageGDHI per capita growth Best performersNet earnings of a full-time single worker earning AWWeak but improvingImpact of social transfers (other than pensions) on poverty reductionTo watchChildren aged less than 3 years in formal childcareTo watchSelf-reported unmet need for medical care On averageIndividuals' level of digital skillsOn averageSocial protection and inclusionEqual opportunities and access to the labour marketDynamic labour markets and fair working conditionsSOCIAL SCOREBOARD FOR LITHUANIAMembersStatesareclassifiedaccordingtoastatisticalmethodologyagreedwiththeEMCOandSPCCommittees.ThemethodologylooksjointlyatlevelsandchangesoftheindicatorsincomparisonwiththerespectiveEUaveragesandclassifiesMemberStatesinsevencategories(from"bestperformers"to"criticalsituation").Forinstance,acountrycanbeflaggedas"betterthanaverage"iftheleveloftheindicatorisclosetoEUaverage,butitisimprovingfast.Formethodologicaldetails,pleaseconsultthedraftJoint Employment Report 2019, COM (2018)761 final. Data update of 29 January 2019.NEET:neitherinemploymentnorineducationandtraining;GDHI:grossdisposablehousehold income.                       
 
 
3.3. Labour market, health, education, and social policies 

indexation of pensions in 2018, which could have 
had some positive impact. (see Section 3.3.3). 

The  risk  of  poverty  for  people  with  disabilities 
is  also  one  of  the  highest  in  the  EU,  and  is 
increasing.  About  44 %  are  at  risk  of  poverty  or 
social exclusion compared to 30 % in the EU. The 
AROPE rate gap between people with and without 
disabilities  is  one  of  the  highest  in  the  EU  (twice 
the EU average). At the same time, access to jobs 
for  people  with  disabilities  who  are  able  and 
willing to work is improving, but remains limited. 
The employment rate gap between people with and 
without  disabilities  is  31 pps  compared  with  the 
EU average of 26 pps. The lack of skills and of the 
effectiveness  of  vocational  rehabilitation  are  two 
of  the  main  obstacles  to  integrating  people  with 
disabilities  into  the  labour  market  (ANED,  2018). 
Public  and  private 
to 
is  needed 
facilitate 
the  people  with 
disabilities into the labour market and put in place 
an effective scheme of social economy. 

integration  of 

investment 

the 

Despite  recent  progress,  the  adequacy  of 
benefits  remains  low.  Social  protection  spending 
in  Lithuania  is  among  the  lowest  in  the  EU, 
amounting  to  about  15 %  of  GDP  in  2016  (22). 
This  is  also  reflected  in  the  poor  adequacy  of  the 
guaranteed  minimum  income,  which  in  2016  was 
(23) 
around  36 %  of 
compared  to  the  EU  average  of  58 %  (European 
Commission  2018g). 
the 
minimum  monthly  guaranteed  income  was  raised 
for  the  first  time  since  2008  (by  almost  20 %  or 
EUR 20 in absolute terms). 

In  January  2018, 

the  poverty 

threshold 

Current  reforms  have  allowed  for  an  increase 
in the state-supported income as well as family-
related benefits. The government is taking further 
action  to  increase  the  adequacy  of  support  by 
introducing the ‘amount of minimum consumption 
needs’ and a system of automatic indexation based 
on this amount.  The new  system is effective  from 
1 January  2019  but  has  not  led  to  any  significant 
change  in  monetary  terms  compared  to  2018,  and 
does  not  compensate  for  the  10-year  freeze  in  the 
state-supported  income.  A  universal  child  benefit 
system was put in place in 2018, and from January 
2019  the  amount  has  increased  from  EUR 30  to 

(22)  Data  for  European  system  of  integrated  social  protection 

statistics 2016 are provisional as of 23 Oct. 

(23)  60 % of median income. 

social  partners,  developing  models  of  cooperation 
between  the  trade  unions  and  work  councils,  and 
incentivising  engagement 
in  negotiations  at 
sectoral  and  company  level.  In  this  context, 
investment  in  building  up  the  social  partners’ 
capacity and engagement is important to ensure the 
effectiveness  of  social  dialogue,  in  line  with  the 
social dialogue principle  of the European Pillar of 
Social Rights. 

3.3.2.  SOCIAL POLICIES 

Income inequality remains one of the highest in 
the EU and is largely driven by income growth 
among top earners. According to the indicators of 
the  Social  Scoreboard,  supporting  the  European 
Pillar  of  social  rights,  Lithuania  faces  a  critical 
challenge  on  income  inequality.  In  2017,  the 
income  of  the  richest  20 %  of  the  population  was 
7.3  times  higher  than  the  poorest  20 %,  up  from 
7.1  times  from  the  previous  year.  The  top  20 % 
also earned 2.7 times that of the middle 20 %, one 
of  the  highest  ratios  in  the  EU.  The  effect  of 
benefits  on  reducing  market  income  inequality  is 
below  the  EU  average  and  the  tax  system  is  not 
conducive  to  reducing  inequality  (20).  The  tax 
reform passed in 2018 seems to be having little to 
no  effect  on  disposable  income  inequality  (see 
Section 3.1.2 and Box 3.3.2). 

Old-age  poverty  remains  a  serious  challenge, 
with levels well above the EU average. In 2017, 
over  16 %  of  people  over  65-years-old  were 
severely materially deprived. This is lower than in 
2016  (17 %),  but  still  three  times  higher  than  the 
EU average (5 %). Also in 2017, 33 % of over-65-
year-olds  were at risk of poverty, after  significant 
year-on-year increases since 2012 due to pensions 
not keeping up with the increase in salaries. There 
is also concern at the levels of older women at risk 
of-poverty or social exclusion (AROPE) (21), with 
a  20 %  pps  gender  gap.  These  data  do  not  take 
account  of  the  recent  policy  changes  and  the 

(20)  In 2017, taxes reduced income inequality by only 8.7 % v 
the  EU  average  of  11.7 %.  The  benefits  reduced  income 
inequality by 31.0 %, below the EU average of 40.4 %. 
(21)  This is a headline indicator of the Europe 2020 strategy and 
corresponds to the total number of persons who are at risk 
of  poverty  or  severely  materially  deprived  or  living  in 
households with very low work intensity. Persons are only 
counted  once  even  if  they  are  present  in  several  sub-
indicators. 

27 

 
                                                           
                                                           
3.3. Labour market, health, education, and social policies 

49 %  in  2056,  placing  Lithuania  among  the 
countries  with  the  lowest  such  rates  in  the  EU 
(European  Commission,  2018h).  The  changes  to 
the  pension  system  in  January  2018  led  to  a 
gradual  increase  in  the  number  of  working  years 
required to qualify for a full pension, from 30 to 35 
years  by  2027,  and  introduced  annual  indexation. 
The  indexation  will  increase  old-age  pensions  by 
6.9 %  and  7.6 %  in  2018  and  2019,  respectively. 
This  increase  should  help  to  reduce  the  old-age 
poverty rate  in the short and  medium term. In  the 
long term, the increase in the adequacy of pensions 
might  remain  limited  due  to  the  decrease  in  the 
working-age 
public 
expenditure on pensions. 

population 

low 

and 

‘general’ 

As  of  January  2019,  the  pension  system  has 
been  further  adjusted  to  mitigate  the  risks 
caused by demographic trends.  A points system 
is  introduced  for  calculating  the  earnings-related 
part  (individual  pension  component),  which  is 
expected  to  lead  to  a  more  transparent  accrual  of 
entitlements in the future. The government shifted 
the 
(basic)  components  of  social 
insurance  pensions  to  the  state  budget,  and  the 
statutory  funded  pension  scheme  (second-pillar 
pension  scheme)  was  strengthened  by  introducing 
automatic  enrolment  for  those  aged  under  40, 
which  should  increase  coverage.  From  2020,  the 
annuities  will  be  paid  by  a  single  institution,  the 
State  Social  Insurance  Fund  Board.  To  cope  with 
future  economic  shocks,  Lithuania  established  a 
social  insurance  reserve  fund  in  2018.  This  will 
strengthen  the  fiscal  sustainability  of  the  pension 
system.  However,  some  concerns  remain  over 
pension adequacy in the long term. 

EUR 50  per  child  per  month.  This  measure  will 
reduce  the  at-risk-of-poverty  rate  for  households 
with children (see Box 3.3.2), but there is still a lot 
of  scope  for  further  social  convergence  with  the 
rest of the EU. 

High  levels  of  homelessness  persist.  The  most 
for  Lithuania 
recent  data  on  homelessness 
(FEANTSA,  2015),  estimate 
that  over  4 000 
people are homeless or living in shelters. Lithuania 
has  one  of  the  highest  rates  in  the  EU  of 
households  unable  to  keep  the  home  adequately 
warm  in  winter,  and  of  tenants  overburdened  by 
housing  costs.  The  housing  cost  overburden  for 
tenants  is  48 %,  among  the  highest  in  the  EU. 
Lithuania  also  faces  a  shortage  of  social  housing 
(OECD,  2016).  The  poor  quality  of  housing 
remains a concern  in rural areas.  At almost 10 %, 
the rate of severe housing deprivation for the rural 
population, though falling, remained above the EU 
average  in  2017,  and  significantly  higher  than  for 
urban  dwellers  (6 %).  To  address  the  issue  of 
homelessness  and  poor  quality  of  housing, 
investment  needs  to  be  ensured,  in  particular  at 
municipal level. 

3.3.3.  PENSIONS 

The  Lithuanian  pension  system  is  not  effective 
at  protecting  the  elderly  against  poverty  and 
social  exclusion.  Public  pension  expenditure  on 
pensions  as  a  share  of  GDP  is  among  the  lowest 
(24) in the EU (European Commission, 2018b). As 
a  result,  old-age  benefits  are  low,  unable  to  keep 
pace with the increase of salaries, and the old-age 
poverty  rate  is  one  of  the  highest  in  the  EU  (see 
Section 3.3.2). Recent reforms put more emphasis 
on financial sustainability but were less successful 
in  ensuring  adequacy  (see  Section  3.1.5).  The 
theoretical  net  replacement  rate 
low  and 
estimated  to  drop  by  7 pp.  from  56 %  in  2016  to 

is 

(24)  6.9 % of GDP in 2016 (11.2 % in the EU), 7.0 % in 2040 
(12 %  in  the  EU)  and  5.2 %  in  2070  (11 %  in  the  EU), 
baseline scenario. 

28 

 
                                                           
 
 
 
 
 
3.3. Labour market, health, education, and social policies 

Box 3.3.2: EUROMOD simulations of adopted tax changes 

This box presents the results of a simulation conducted by the Joint Research Centre of the European 
Commission using EUROMOD(1) based on the reforms adopted by the government in mid-2018. From 
January 2019, notable changes to social insurance contributions (namely their consolidation and the shift to 
employees) and personal income tax came into force. In addition, the universal child benefit was increased 
from EUR 30 to EUR 50 per month while the minimum monthly wage was set at EUR 555. 

According  to  the  simulation  outcome,  the  adjustments  to  personal  income  tax  and  social  insurance 
contributions are set to result in revenue losses of around EUR 560 million (or 1.2 % of GDP). Though 
changes in personal income tax are expected to generate additional tax receipts of EUR 1.3 billion (or 2.7 % 
of  GDP),  revenues  from  social  insurance  contributions  are  set  to  shrink  by  EUR 1.8  billion  (or  3.9 %  of 
GDP). The overall simulated tax cuts are around EUR 120 million higher than the estimates provided by the 
Lithuanian Ministry of Finance. The discrepancies can be explained by the differences in data used for the 
calculations,  such  as  the  fact  that  EU-SILC  does  not  capture  high-income  earners  well,  and  assumptions 
about wage dynamics. The cost of the increase in child benefit is expected to amount to EUR 140 million or 
0.3 % of GDP, which is in line with the estimates of the national authorities. 

Overall, the simulated reforms have a positive impact on individuals from all income deciles, with the 
smallest relative gains for the top decile (see Graph 1). Equivalised household income is expected to rise 
by an average of 4.7 %. The implicit tax rate is expected to fall on average from 8.1 pps in the first decile of 
equivalised  income  to  2.4  pps  in  the  tenth.  This  assessment  does  not  take  account of  voluntary  additional 
transfers  to  private  pension  funds  that  could  eliminate  the  positive  effect  of  the  tax  cuts  on  disposable 
income. 

Graph 1: Reform effect on equivalised household disposable income 

%

,
e
m
o
c
n

i

l

e
b
a
s
o
p
s
d
n

i

i

e
g
n
a
h
C

7

6

5

4

3

2

1

0

1

2

3

4

5

6

7

8

9

10

Income deciles (lowest to highest income) 

Source: European Commission, Joint Research Centre 

Effects  on  disposable  income  inequality 
are  expected  to  be  neutral  overall.  The 
simulation shows the Gini coefficient only 
slightly  decreasing  from  34.52  to  34.25. 
However, the at-risk-of-poverty rate drops 
significantly for households with children. 
For  example,  the  rate  for  single-parent 
families  falls  by  8.8  pps.  This  highlights 
the  positive  impact  of  increasing  the 
universal child benefit. 

Shifting the social insurance contribution burden from employers to employees would provide positive 
(albeit  mild) work  incentives.  According  to  the  results  from  the  labour  supply  model,  simulated  reforms 
slightly increase both the average participation rate and the number of hours worked. In the former case, the 
reform marginally raises the probability of the unemployed entering the labour market. In the latter case, the 
policy  changes  create  an  incentive  to  work  additional  hours,  by  shifting  from  part-time  jobs  to  full-time 
employment and overtime.  

(1)  EUROMOD is the tax-benefit microsimulation model for the EU.  It simulates benefit entitlements and tax liabilities 
(including  social  security  contributions)  of  individuals  and  households  according  to  the  tax-benefit  rules  in  place  in 
each Member State. The simulation is based on representative survey data from the European Statistics on Income and 
Living  Conditions  (EU-SILC)  and  covers  the  main  elements  of  direct  taxation,  social  contributions  and  non-
contributory benefits. An added labour supply module allows estimates of behavioural effects on the labour market. 

29 

 
 
 
 
 
 
 
 
 
3.3. Labour market, health, education, and social policies 

3.3.4.  HEALTH 

Health outcomes remain among the worst in the 
EU.  Life  expectancy  at  birth  is  6  years  below  the 
EU  average  and  characterised  by  a  large  gender 
gap.  Excess  mortality  due 
to  cardiovascular 
diseases and suicides, mainly among men, is more 
than  double  the  EU  average;  in  2016  it  was  on 
average  30 %  higher  in  rural  areas  than  in  urban 
areas.  Preventable  and  amenable  mortality  was 
respectively  2  and  2.5  times  higher  than  the  EU 
average. 

Absolute  levels  of  hospitalisation  remain  high 
and bed occupancy ratios and variation are low. 
The  shift  from  hospital  to  primary  care  improved 
the  capacities  of  primary  care  to  manage  patient 
care, but was put on hold at the end of 2017. Some 
measures which have been taken have the potential 
to  further  consolidate  the  hospital  network.  These 
limiting  contracting  for  surgery  and 
include 
maternity  to  hospitals  exceeding  a  minimum 
volume of services, and standardising pathways for 
stroke and some myocardial infractions. However, 
more  decisive  steps  at  higher  administrative  level 
to  plan  the  delivery  of  hospital  services  across 
municipalities is key to a quicker transition. 

conditions 

care-sensitive 

Spending  on  healthcare  is  low  and  major 
challenges to the efficiency of spending and the 
quality  of  health  services  remain.  Health 
expenditure  amounted  to  6.3 %  of  GDP  in  2017, 
and  was  among  the  lowest  in  the  OECD  (OECD, 
2018a). Overall, the focus on quality is insufficient 
and  quality-assurance  policies  and  measures 
for 
remain  underdeveloped.  Hospitalisations 
ambulatory 
remain 
significant  and  hospital  mortality 
for  acute 
conditions  is  high.  A  system-wide  support  for 
continuous  healthcare  quality  improvement  at  the 
clinical level is not developed and compliance with 
clinical  guidelines  and  quality 
in 
hospitals,  even  if  sometimes  monitored,  does  not 
inform  decisions.  Progress  in  the  accreditation 
programme  launched  in  2016  is  insignificant. 
Strengthening  policy  impact  evaluation  and  the 
application  of  Healthcare  Systems  Performance 
Assessment  methods  is  an  important  enabling 
condition for results-driven investments. 

indicators 

in 

the 

right  direction.  However, 

Public  health  policy  measures  are  relatively 
weak.    Public  health  initiatives,  which  are  the 
responsibility of local public health offices, are of 
small scale and the resources to scale up activities 
are  too  low.  Strengthened  co-operation  of  public 
health bureaus with primary care centres is a good 
step 
the 
effectiveness  of  measures  on  the  ground  is  not 
evaluated  and  monitoring 
the 
to 
indicators. 
in 
assessment 
Measures addressing the key drivers of poor health 
with  a 
risk  groups  are 
underdeveloped. Despite legislation put in place to 
reduce the use of alcohol and smoking, alcohol and 
tobacco consumption remains high. 

focus  on  specific 

terms  of  process 

limited 

is 

care 

Primary 
organised,  with 
is  well 
modernised  general  practitioner  and  nursing 
services, but there is room to strengthen its role 
in  managing  patients’  health.  Some  guidelines 
continue to unnecessarily limit the responsibilities 
the  share  of 
of  general  practitioners,  and 
responsibilities  between  general  practitioners  and 
specialists is not fully delineated. Recent measures 
to  expand 
functions  of  primary  care 
practitioners  are  a  step  in  the  good  direction. 
Furthermore,  the  role  of  primary  care  teams  in 
coordinating  patient  care, 
including  mental 
healthcare,  is  not  being  fully  exploited.  Recent 
measures  to  reorganise  services  for  patients  with 
mental  health  problems  have  the  potential  to 
increase  access  to  mental  health  at  primary  care 
level.  

the 

effective 

Long-term  care  is  predominantly  provided  by 
residential  care  institutions,  but  not  all  needs 
are  met.  In  2014,  47 %  of  elderly  people  in  need 
of  long-term  care  were  on  the  waiting  list.  As 
elderly  people  report  having  particularly  low 
health  status,  the  needs  for  integrated  social  and 
health  services  for  the  elderly  will  continue  to 
grow.  Considering  that  Lithuania  is  one  of  the 
fastest-ageing  Member  States,  well-functioning 
and 
and 
deinstitutionalisation  will  remain  a  significant 
The 
challenge 
the  medium 
in 
deinstitutionalisation  programme, 
2014, aims at  moving people  with disabilities and 
children  from  institutional  care  to  home-  and 
community-based 
Its 
care 
implementation  is  going  well  in  reducing  the 
number of children under institutional care, but for 
persons  with  mental  disabilities  the  programme  is 
and 
less 

term. 
launched 

Long-term 

advanced. 

long-term 

services. 

care 

care 

in 

30 

 
3.3. Labour market, health, education, and social policies 

and 

mismatches. 

shortages 
Government 
expenditure  on  education  was  5.2 %  of  GDP  in 
2016, above the EU average of 4.7 %. The share of 
total  public  government  expenditure  that  goes  to 
education and training has remained broadly stable 
since  2010,  at  around  15 %  (v  around  10.5 %  in 
the  EU).  However,  the  funds  are  mostly  used  to 
maintain  the  buildings  and  not  to  improve  the 
quality of education (National Audit Office, 2017). 
Even  though  certain  constraints  are  imposed  by 
specifying  a  minimum  amount  of  expenditure  for 
non-salary expenses such as textbooks, continuing 
professional  development  of  teachers,  ICT  and 
student  career  guidance,  the  spending  tends  to 
gravitate towards the required minimum level. 

the  school 
Demographic  decline  has  put 
network  under  pressure.  The  number  of  pupils 
and  students  across  the  education  system  has 
declined  by  19 %  since  2010.  This  has  led  to  one 
of  the  lowest  student-to-teacher  ratios  in  the  EU 
(on  average  there  are  8  students  for  every  teacher 
in primary and secondary school v 13 in the EU in 
2016).  In  addition,  strong  differences  exist  across 
education  levels  and  regions.  The  number  of 
general  school  pupils  declined  by  22 %  over  the 
period,  whereas  that  of  primary  pupils  alone  rose 
by 1 %. In geographic terms, while Vilnius County 
lost  6 %  of  pupils  in  general  education  between 
2010  and  2017,  the  rest  of  the  country  saw 
enrolment  decline  by  25 %.  As  a  consequence, 
schools, mainly those in rural areas, merge classes 
by bringing together pupils from grades 1 to 4 into 
a  single  class,  which  risks  compromising  the 
quality  of  education.  This  demographic  shift  calls 
for  strategies  to  preserve  access  to  high-quality 
education  for  all  while  ensuring  the  efficiency  of 
teachers 
the  school  network  and  supporting 
affected by school consolidation.  

The new ‘class basket’  model might prevent an 
efficient organisation of the school network.   In 
September  2018,  the  government  moved  from  the 
'student  basket'  funding  model  for  schools  to  the 
‘class  basket’  and  ‘quality  basket'  models.  The 
‘quality  basket’  model  aims  to  link  funding  with 
quality  indicators  while  the  ‘class  basket’  model 
bases funding on the number of classes in a school. 
In  the  new  system,  funds  for  teacher  salaries 
cannot  be  used  to  cover  administrative  costs  and 
municipalities  must  add  extra 
for 
extremely small classes. However, the model does 
not  prevent  funding  for  schools  with  a  small 

funding 

deinstitutionalisation will remain a challenge in the 
medium 
adequate 
investment.  

and  will 

require 

term 

The  affordability  of  healthcare  remains  a 
challenge.  Out-of-pocket  payments  represent  a 
third  of  health  spending  in  Lithuania  (32 %  in 
2016)  and  are  heavily  concentrated  among  older 
people 
(aged  60+)  and  households  without 
children.  80 %  of  out-of-pocket  payments  are  due 
to  medicines  and  this  proportion  is  even  higher 
among households belonging to the lowest income 
quintile  (WHO,  2018).  Several  measures  intended 
to  reduce  user  charges  on  prescription  medicines 
were implemented in 2017 and 2018, and measures 
to 
the  most 
vulnerable  groups  have  been  presented,  but  not 
adopted yet. Though declining, informal payments 
remain high with one in four patients still declaring 
them  in  2016  (Transparency  International,  2016). 
time 
Unmet  medical  needs  due 
exceeded  the  EU  average  in  2016.  This,  together 
with  low  affordability,  reduces  access  to  quality 
healthcare, 
in  particular  for  more  vulnerable 
groups. 

increase  financial  protection  of 

to  waiting 

strategy 

forecasting 

Imbalances  in  the  health  workforce,  including 
territorial  ones,  are  becoming  evident.  These 
imbalances  are  not  addressed  through  a  fully-
fledged 
of 
involving 
professions  and  skills.  Recent  measures  taken  to 
modernise the system of doctors' training are a step 
in  the  good  direction.  Training  of  nurses  is  not 
adapted  to  current  needs  and  remains  a  particular 
challenge. The territorial distribution of healthcare 
personnel  exacerbates 
these  challenges,  with 
specialists particularly unevenly distributed across 
the country.  Considering the overall ageing of the 
working age population, increased investment will 
be  needed  to  address  the  current  and  potential 
imbalances  in  the  supply  of  the  health  workforce. 
The  government  focuses  on  creating  incentives  to 
attract  medical  staff 
to  public  services  by 
increasing  salaries  at  20%  annual  rate  in  2018, 
2019 and 2020. 

3.3.5.  EDUCATION AND SKILLS 

The quality and efficiency of the education and 
training  systems  remain  major  challenges. 
Education and training systems and adult learning 
remain  relatively  ineffective  in  addressing  skills 

31 

 
3.3. Labour market, health, education, and social policies 

(EU  average  10.6 %).  However,  the  early  school 
leaving  rate  for  people  with  disabilities  is  much 
higher  than  the  EU  average  (36 %  v  24 %). 
Lithuania  has  launched  the  Action  Plan  on  the 
Inclusion 
and 
Multidimensional Education for 2017-2022, which 
aims  to  reduce  the  number  of  children  in  special 
schools, but it is too early to assess progress. 

in  Education 

of  Children 

School  outcomes  are  below  the  EU  average, 
with a wide performance gap between rural and 
urban  areas.  There  is  a  significant  gap  between 
students  from  urban  and  rural  areas,  which  have 
smaller  schools  and  merged  classes.  This  gap  is 
wider  than  observed  among  Lithuania’s  regional 
peers  (OECD,  2017)  and  is  mostly  explained  by 
the  socio-economic  status  of  rural  families  and 
schools. A 
schools 
implement  some  form  of  monitoring  of  students’ 
progress, and in only 18 % do leaders indicate the 
improvement  of  learning  outcomes  and  school 
performance  indicators  as  a  goal  (National  Audit 
Office,  2017).  Additional  efforts  are  needed  to 
improve  school  monitoring  and  better  identify 
individual  educational  needs  in  order  to  improve 
school outcomes.  

share  of  audited 

small 

to  decrease. 

The  number  of  students  in  higher  education 
In  2017  Lithuania 
continues 
remained  the  EU  leader  in  tertiary  educational 
attainment, at 58 % of people aged 30-34. In 2017, 
the  employment  rate  of  recent  tertiary  graduates 
was  7  pps  higher  than  the  EU  average  (92 %  vs 
85 %). Due to demographic trends, the  number of 
students fell by 37 % between 2010 and 2017 and 
is expected to further decrease, partly because the 
minimum  admission  requirements  have  been 
raised  to  improve  the  quality  of  new  entrants. 
However,  higher  education  in  Lithuania  is  not 
inclusive:  the  tertiary  education  attainment  gap 
between  people  with  and  without  disabilities  is 
twice the EU average (28 pps v 13 pps). 

Implementation  of  the  reform  of  the  higher 
education system is progressing at a slow pace. 
A number of institutions and programmes have not 
adjusted to the declining number of students, thus 
lowering  the  quality  and  efficiency  of  higher 
education.  The  government  launched  a  series  of 
reforms,  most  notably  to  consolidate  the  network 
of  universities  and  strengthen  the  accreditation 
system. However, their implementation is lagging. 
Three  mergers  are  currently  ongoing  but 

number  of  pupils,  weakening  the  incentives  to 
optimise the oversized school network and to make 
it  more 
the 
implementation  of  the  new  funding  system  are 
expected by March 2019. 

efficient.  First 

results 

of 

to 

teachers’  salaries  and 

Reforms 
initial 
training  have  been  launched  but  the  public 
debate  on  wage  increases  is  ongoing.  A  new 
collective  agreement  with  teacher  unions  was 
signed  in  November  2017  and  launched  a  move 
from  salaries  based  on  teaching  hours  to  a  fixed 
salary model. The model, introduced in September 
2018,  aims 
to  provide  a  smoother  salary 
progression.  In  the  new  system,  school  heads  are 
more  responsible  for  managing  teachers'  working 
hours. The final step in the teacher system reform 
relates  to  initial  teacher  education.  The  new 
Teacher  Training  Regulation  adopted  in  May 
2018, 
study 
programmes  and  teacher  placements,  as  well  as 
quality  criteria 
training 
for  national 
centres,  but  will  require  investment  to  become 
operational. 

sets  quality 

requirements 

teacher 

for 

Participation  in  early  childhood  education  and 
care  (ECEC)  is  increasing,  but  challenges  in 
access and quality remain. Participation in ECEC 
by  children  older  than  4  years  is  increasing  but 
remains  below  the  EU  average  (91 %  vs  95 %  in 
2016).  For  children  under  3, it  has  increased  only 
marginally  and  is  half  the  EU  average  (15 %  in 
2016  vs  33 %).  The  increase  in  overall  enrolment 
in  ECEC  is  tempered  by  regional  differences  in 
participation  and  quality.  The  enrolment  of  3-6 
year-olds  in  rural  areas  is  approximately  half  the 
rate in urban areas. These disparities arise from the 
limited  availability  of  public  ECEC,  transport 
difficulties 
in  rural  areas  and  differences  in 
demand. The increasing number of private centres 
is making ECEC services more widely accessible, 
mainly in urban areas. However, the proportion of 
the  costs  of  privately-provided  ECEC  reimbursed 
through  public  subsidies  varies  by  municipality, 
and  not  all  families  receive  a  subsidy.  Investment 
is needed to increase access to public ECEC. 

Lithuania’s  education  and  training  system  is 
successful in preventing early leaving. Lithuania 
continues  to  perform  well  in  preventing  early 
leaving from education and training. With the rate 
at  5.4 %  in  2017,  Lithuania  reached  its  Europe 
2020 target and is among the EU’s top performers 

32 

 
3.3. Labour market, health, education, and social policies 

significant  steps  are  still  required  to  consolidate 
the  higher  education  network  comprising  more 
than  40  state-owned  and  private  universities  and 
colleges.  

learning  and  to  put  in  place  a  sustainable  adult 
learning  system,  in  particular  targeting  low-  or 
medium-qualified adults and smaller companies. 

3.3.6.  INVESTMENT NEEDS 

in 

A  rapidly  shrinking  working  age  population 
and  persistently  high  levels  of  poverty  and 
inequality  call  for  increased  investment  in 
education, training and social inclusion to foster 
long-term  inclusive  growth.  Skills  shortages  and 
mismatches  are  among  the  main  obstacles  to 
business investment, pointing to the need to invest 
more 
reskilling 
flexible  upskilling  and 
opportunities  and  better  anticipate  new  skills 
requirements.  Better  aligning  education  curricula 
to  labour  market  needs  and  expanding  adult 
participation in learning are needed to reduce skills 
shortages.  Making  use  of  the  full  labour  potential 
also  requires  investment  in  social  inclusion  and  a 
reduction  in  material  deprivation;  an  affordable 
and 
the 
availability  of  child  and  long-term  care  services, 
including deinstitutionalisation. 

effective  healthcare 

system; 

and 

for 

continued 

In  2017,  Lithuania  took  additional  steps  to 
upgrade  its  vocational  education  and  training 
(VET)  system.  The  initial  steps  seem  promising, 
but  significant  and  consistent  progress  is  still 
needed  to  implement  the  changes  in  governance 
and  the  curriculum  if  the  upgrade  is  to  transform 
learning  experience 
in  schools.  In  2019,  24 
updated  or  new  professional  standards,  as  well  as 
the  guidelines 
renewal  of 
professional  standards,  need  to  be  adopted.  All 
modular  VET  programmes  should  be  updated  in 
line with new professional standards by July 2020. 
Extending access to new (modular) programmes is 
envisaged  as  at  present  only  24 %  of  VET 
qualifications  can  be  attained 
through  such 
programmes,  even  if  43 %  of  all  VET  students 
were  already  enrolled  in  modernised  programmes 
in  2018.  Reform  of  the  governance  of  VET 
institutions was completed in 2018 but it has yet to 
be seen whether the involvement of municipalities 
and the social partners will result in VET making a 
stronger  contribution  to  local  needs  for  skills, 
improved  work  organisation  practices 
and 
technology  adoption.  Investment  is  needed  to 
increase  the  uptake  of  updated  modular  VET 
programmes  and  broaden  work-based  learning 
opportunities. 

Adult participation in learning remains low. At 
5.9 % in 2017, it remained below the EU average 
of  10.9 %.  Some  measures  to  encourage  adult 
learning  have  been  rolled  out  at  municipal  level 
but  adult  learning  features  low  on  the  political 
agenda  and  in  the  education  reform  (Ministry  of 
Education  and  Science,  2018).  The  resources 
deployed have very  limited impact on the ground. 
There is a lack of coordination of the validation of 
programmes  across  education,  the  labour  market 
and  the  voluntary  sector.  Coverage  by  existing 
instruments,  such  as 
to 
companies or guidance to individuals, is low or not 
well balanced or targeted. Less than 10 % of adults 
in  Lithuania  report  having  received  any  guidance 
on learning opportunities in 2016, compared to an 
EU  average  of  24 %  (European  Commission, 
2018i).  Public  financial  incentives  or  grants  are 
mostly 
large 
focused  on  medium-sized  and 
businesses.  Investment  is  needed  to  boost  adult 

incentives 

financial 

33 

 
3.4. COMPETITIVENESS REFORMS AND INVESTMENT 

3.4.1.  PRODUCTIVITY  

Following  a  period  of  rapid  catching-up  with 
the  EU,  productivity  growth  has  slowed  since 
the  crisis.  At  the  same  time,  labour  productivity 
growth rate is still among the highest in the in the 
EU. This reflects the  fast catching-up process and 
the  effects  of  the  structural  transformation  of  the 
economy  towards  modern  technologies,  mainly  in 
agriculture  and  manufacturing.  In  2017,  labour 
productivity stood at over 75 % of the EU average, 
almost  35  pps  higher  than  in  2000.  However, 
productivity growth has been more or less stagnant 
in  2012-2016.  This  is  mainly  linked  to  subdued 
total  factor  productivity  growth,  indicating  a  lack 
of technology uptake by companies. Accompanied 
by  a  rebound  in  investment  growth  (see  Section 
3.4.2),  productivity  growth  recovered  in  2017. 
Increasing the share of knowledge-based activities 
in  the  economy,  based  on  skills  and  technology 
upgrade,  would  help  sustaining  these  positive 
developments  and  resume 
fast  catch-up 
process. 

the 

Graph 3.4.1:  Labour productivity, whole economy 

(2000=100) 

Source: European Commission 

Productivity  growth  is  concentrated  in  low 
value  added  sectors.  A  breakdown  of  real 
productivity  growth  for  2016  shows  that  it  has 
been  highest  in  low  value  added  sectors,  such  as 
agriculture  and  manufacturing.  These  are  also 
sectors  that  are  strongly  oriented  towards  exports 
and which experience pressure to innovate in order 
to  maintain  their  cost  competitiveness.  This  is 

confirmed by firm-level data. At firm level, labour 
productivity  growth  appears  to  have  been  higher 
among  exporting 
to  non-
exporters) and — contrary to most EU countries — 
among low-productivity firms (CompNet, 2018). 

(compared 

firms 

rapidly  declining  population 

impacts  productivity. 
Population  decline 
(see 
Lithuania's 
Section  1)  impacts  productivity  growth  in  several 
ways. Net emigration is leading to increasing skills 
shortages,  which  are  already  very  prominent  (see 
Section  3.3.1).  Furthermore,  it  is  making  the 
provision of a number of activities less productive 
because  of  diminished  usage,  such  as  schools, 
hospitals,  roads  and  energy  infrastructure.  On  the 
other  hand,  a 
labour  supply  and 
resulting  high  wage  growth  is  putting  pressure  on 
in  productivity  -  enhancing 
firms 
and 
technologies, 
robotisation.  This 
increasingly 
important  in  the  context  of  increasing  unit  labour 
cost  and  its  impact  on  cost-competitiveness  (see 
Section 3.4.3) 

automatisation 

is  becoming 

tightening 

invest 

such 

as 

to 

3.4.2.  INVESTMENT 

Investment needs 

is 

in  Lithuania 

The  economy  needs  additional  investment  in 
innovation, resource efficiency and connectivity 
to ensure a smoother integration into the single 
market and raise productivity growth. The level 
of  innovation  and  technology  absorption  capacity 
of  businesses 
low.  Higher 
investment  levels  are  needed,  especially  in  the 
private sector, to increase productivity growth. The 
economy  remains  relatively  resource-intensive, 
with  high  dependency  on  energy  and  material 
imports. Resource productivity is low while energy 
consumption  is  high,  especially  in  the  residential 
and  transport  sectors.  More  investment  in  energy 
efficiency  and  domestic  energy  generation  from 
renewable  sources  would  help  to 
'green'  the 
economy  and  put  it  on  a  more  sustainable  growth 
path,  while  also  reducing  dependency  on  energy 
imports.  Better  connectivity  of  air,  rail,  maritime 
and  road  transport  would  increase  the  economy's 
productivity and allow it to take full advantage of 
the single market (see Section 3.4.4). 

34 

90100110120130140150160170180190200210000102030405060708091011121314151617LTEELVEA19 
 
 
3.4. Competitiveness reforms and investment 

compared  to  levels  around  5 %  before  the  crisis. 
The  lower  inflows  have  resulted  partly  from  poor 
international  market  conditions  holding  back 
investment  and  FDI,  but  also  from  transforming 
the  Lithuanian  economy  to  a  market  economy  – 
the  level  of  inflows  seen  before  the  crisis  will 
probably  not  be  reached  again  because  they  were 
large  privatisations  and 
related  mostly 
acquisitions.  However,  Lithuania  is  still  far  from 
the  productivity  frontier  and  attracting  FDI,  with 
the  transfer  of  capital  and  knowledge  it  implies, 
remains an important policy goal. 

to 

Graph 3.4.3:  FDI inflows 

Source: United Nations Conference on Trade and 
Development (UNCTAD) 

Research, development and innovation 

The  competitiveness  of  the  country’s  research 
and  innovation  (R&I)  system  is  hampered  by 
the  shortage  of  skills  and  a  lack  of  a  coherent 
programme  for  publicly  funded  science  to 
collaborate  with  businesses.  Lithuania 
is  a 
moderate innovator, ranking at around 70 % of the 
EU  average  (European  Commission,  2018j).  In 
particular, the low level of R&I outputs shows that 
policies to date have not yet delivered the expected 
benefits  for  the  economy  and  competitiveness. 
the  proportion  of 
Despite  gradual  progress, 
innovative  businesses  in  Lithuania  is  lagging 
behind 
those 
introducing  product,  organisational  or  marketing 
innovations (OECD, 2018b). Cooperation between 
businesses  and  universities  or  research  centres  — 

the  EU  average, 

in  particular 

Investment  

increasing 

Despite recent increases, investment remains at 
a  relatively  low  level,  notably  in  the  corporate 
sector.  Total  investment  stood  at  19.7 %  of  GDP 
in  the  third  quarter  of  2018.  During  the  crisis, 
corporate  sector  investment  dropped  by  almost 
40 %  between  2007  and  2009.  It  has  slightly 
recovered  since,  but  has  remained  significantly 
below  the  other  Baltic  countries  and  the  EU 
average  throughout  the  period  (see  Graph  3.4.2). 
However,  from  2017,  investment  started  to  grow 
robustly (see Section 1) and has been accompanied 
by 
growth.  This 
productivity 
momentum  needs  to  be  sustained  in  order  to 
improve long-term growth prospects and speed up 
the  convergence  process.  In  the  last  decade, 
household  and  government  investment,  which  is 
highly  dependent  on  EU  funds,  stayed  rather 
stable.  However,  at  3.3 %  of  GDP,  public 
investment  in  Lithuania,  although  above  the  EU 
average of 2.8 %, remains 30-40 % below the level 
of  other  Baltic  countries.  In  view  of  possible 
changes  in  the  allocation  of  EU  Cohesion  Funds 
and the national co-financing rate, Lithuania would 
need to plan sufficient public investment to ensure 
funding for key policy areas. 

Graph 3.4.2:  Total investment 

Source: European Commission 

The  lack  of  investment  is  aggravated  by  low 
levels  of 
investment 
inward  foreign  direct 
(FDI).  FDI  inflows  have  been  consistently  below 
those  of peer countries in recent  years (see Graph 
3.4.3).  They  remain  depressed  at  1.2 %  of  GDP, 

35 

101520253035400203040506070809101112131415161718% GDPEELVLTEU-28-5051015200001020304050607080910111213141516% GDPEELVLTEU-15 
 
 
3.4. Competitiveness reforms and investment 

structure of the economy, which mostly consists of 
lower  value  added  industry  and  services.  In 
Lithuania  total  value  added  in  high  and  medium 
high-tech  manufacturing  and  knowledge-intensive 
services  is  among  the  lowest  in  the  EU  and 
stagnant  since  2007.  Further 
in 
innovative  SMEs,  including  internationalisation 
and  support  for  moving  up  global  value  chains, 
clusterisation  and  cooperation  activities  could 
support  a  shift  to  high-tech/higher  value  added 
products. 

investment 

innovation 

The  ongoing  reform  of  innovation  policy  aims 
to  raise 
levels  and  absorption 
capacity.  The  leadership  of  the  Ministry  of  the 
Economy  and  Innovation  has  been  strengthened 
through  being  given  additional  responsibilities  to 
ensure  the  promotion  of  innovation  and  boost  the 
experimental  development  part  of  research  and 
innovation  (26). The  reform  takes  into  account  the 
recommendations  stemming  from  the  European 
Commission’s  Horizon  2020  Policy  Support 
Facility  in  2017,  which  is  focused  primarily  on 
increasing  the  engagement  between  business  and 
science  and  the  attraction  of  innovation  intensive 
FDI 
implementation  of 
recommendations is uneven, however. The highest 
uptake 
FDI-related 
relation 
recommendations and progress is still required on 
aspects such as the overhaul of financial incentives 
for science-business cooperation or the revision of 
the 
research 
financially 
performance.  The  success  of  the  reform  will 
require  ensuring  the  coherence  of  R&I  policies, 
underpinned by efficient coordination of the policy 
mix and  close  cooperation  between  the  involved 
authorities.  

(RIO,  2018).  The 

system 

reward 

in 

to 

to 

is 

Resource efficiency 

Resource  productivity  in  Lithuania  remains 
low.  It  has  not  grown  since  2010  and  at  0.8 
EUR/kg remains far below the EU average of 2.0 
EUR/kg.  Eco-innovation,  where  Lithuania  is  also 
below 
the  EU  average,  could  help  resource 
productivity  to  improve.  Investments  need  to  be 
scaled up to unlock the potential in sectors such as 
waste  management,  solar  and  wind  energy,  green 
transport and construction. 

an  important  channel  of  knowledge  transfer  and 
commercialisation — remains scarce.  

Investment  in  R&D  is  below  the  EU  average 
and remains highly dependent on ESI Funds. In 
2017,  total  R&D  investments  amounted  to  only 
0.9 % of GDP, compared to an EU average of 2.1 
and far away from its 2020 target of 1.9 %. Public 
investment,  which  is  funded  mainly  from  EU 
funds,  made  up  the  bulk  of  R&D  investment  at 
0.6 %  of  GDP.  Private  R&D  investment  reached 
only 0.3 % of GDP, which is one fifth  of the EU 
average  and  constitutes  one  of  the  lowest  private 
investment  levels  in  the  EU  (25).  Public  R&D 
investment  is  focused  on  the  Smart  Specialisation 
strategy,  which  is  rather  broad  and  covers  most 
economic  sectors,  thus  contributing  to  a  thin 
spread of limited funding. 

of 

increase 

researchers 

underfunding 

The 
and 
fragmentation of the R&I system is resulting in 
low  quality  of  public  research.    As  part  of  the 
ongoing  reform  of  the  higher  education  system, 
multiple amendments to the Law on Research and 
in  2017-2018  provide  for  a  gradual 
Studies 
increase in researchers’ salaries by 40 % over 2018 
and  2019  and 
in  PhD 
the  83 % 
scholarships  announced  for  2019.  They  also 
introduced industrial PhDs and a progressive move 
by 
to 
reward 
incentivising 
industry, 
internationalisation  and  participation  in  Horizon 
2020. The merging of universities with the aim of 
consolidating  the  country's  fragmented  research 
capacities is ongoing (see Section 3.3.5). To ensure 
its  success,  this  process  requires  close  monitoring 
by universities and authorities and a strengthening 
of  their  administrative  capacities,  especially  in 
relation to the development and implementation of 
coherent  joint  research  agendas  of  the  merged 
entities. 

institutional 
cooperation 

performance 

with 

The economy's capacity to innovate and absorb 
R&I is limited. Innovating firms in Lithuania are 
relatively small in size. They are weakly integrated 
around  domestic  clusters  and  into  global  value 
chains,  with  low  potential  of  attracting  critical 
mass 
large-scale 
innovations.  Low  business  demand  for  research 
and  innovation  is  mainly  predetermined  by  the 

investments  and  developing 

(25)  Business expenditure on R&D as %  of  GDP  —  Lithuania 

ranks 25th in the EU. 

(26)  Stipulated in the new Law on Technologies and Innovation, 
adopted in 2018 and changes to the Law  on Research and 
Studies, 2018. 

36 

 
                                                           
                                                           
3.4. Competitiveness reforms and investment 

Lithuania  already  reached  68  %  of  renewables  in 
central  heating  with  existing  heat  production 
facilities. Due to technical limitations and thermal 
load  shifting  over  diurnal,  weekly  and  seasonal 
periods some of the equipment operate  at only 50 
%  of 
their  capacity.  Therefore,  additional 
investments are needed for the installation of heat 
storages  to  reach  their  full  operational  potential 
and  efficiency.  That  would  increase  amount  of 
energy  produced  from  renewables  as  well  as 
increase reliability of district heating systems. 

The  share  of  renewables  in  transport  remains 
low. Transport is the sector with the highest energy 
consumption  and 
is  responsible  for  half  of 
Lithuania's  total  greenhouse  gas  emissions.  Cars 
remain  the  main  mode  of  transport  while  public 
transport  (rail  and  buses)  accounts  for  only  10 % 
of  passenger 
the  share  of 
travel.  However, 
renewables in the transport sector is very low and 
decreasing. It  fell  from 4.6 % in 2015 to 3.7 % in 
2017,  well  below  the  2020  target  of  10 %. 
Alternative-fuel passenger cars represent less than 
1 %  of  total  cars,  despite  expanding  networks  of 
refuelling points and electric charging points. 

is 

increasing 

consumption 

Energy 
and 
additional  efforts  are  needed  to  meet  the 
targets.  The 
national  climate  and  energy 
residential and transport sectors are responsible for 
the  highest  share  of  final  energy  consumption. 
While  the  final  energy  intensity  in  transport  is 
increasing,  some  savings  have  been  observed  in 
the  industry  and  services  sectors  as  well  as  in  the 
residential  sector.  However,  energy  intensity  in 
these  sectors  is  still  above  the  EU  average  and 
renovating  the  large  stock  of  inefficient  housing 
and  public  buildings  remains  a  challenge.  The 
financing gap for modernising multi-apartment and 
public infrastructure is estimated at EUR 2 billion 
until 2030. 

Lithuania  is  taking  further  steps  towards  a 
more circular economy, but waste management 
remains  a  challenge.  Investment  will  need  to  be 
scaled up to meet the new post-2020 EU recycling 
targets for different waste streams (27).  Additional 
improve  waste 
efforts  will  be  needed 
prevention, 
separate  waste 
collection  at  source  and  out-of-home  separate 
collection, sorting and recycling. Lithuania has one 
of  the  lowest  landfill  fees  in  the  EU,  which 
remains  an  obstacle  to  improving  the  economic 
viability  of  recycling.  New  energy-from-waste 
projects  are  in  the  pipeline,  creating  the  risk  of 
over-capacity in this sector.  

to 
reuse, 

product 

To  achieve  national  climate  and  renewable 
energy  goals,  significant  investment  is  needed. 
Lithuania  expects  emissions  to  rise  by  6 %  by 
2030  relative  to  2005  levels  whereas  its  binding 
EU  target  is  a  reduction  of  9 %.  With  a  25.6 % 
share for renewables in 2016, Lithuania is already 
above its 2020 target (23 %) and aims to reach an 
ambitious  45 %  by  2030.  This  includes  doubling 
domestic  power  generation  capacities  (with  70 % 
of electricity produced domestically in 2030). This 
will  be  achieved  through  investment  in  wind  and 
solar  power  generation  and  wide  uptake  of  small-
scale  renewable  installations  owned  by  private 
energy consumers and communities (with 30 % of 
consumers  producing  energy  for  their  own  needs 
in  2030).  Successfully  integrating  the  increased 
amounts of renewable energy and the large number 
require 
of  producing  consumers  will  also 
investment  in  smart  energy  systems,  including 
transmission, 
storage 
infrastructure  as  well  as  investment  in  increasing 
the  amount  of  required  balancing  capacities. 

distribution 

and 

(27)  Directive  (EU)  2018/851,  Directive  (EU)  2018/852, 
Directive  (EU)  2018/850  and  Directive  (EU)  2018/849 
amend  the  previous  waste  legislation  and  will  set  more 
ambitious recycling targets for the period up to 2035. 

37 

 
                                                           
3.4. Competitiveness reforms and investment 

Box 3.4.1: Investment challenges and reforms in Lithuania 

1.  MACROECONOMIC PERSPECTIVE 

Despite a pick-up in 2017 and 2018, investment in Lithuania remains rather low at 19 % of  GDP. This is 
below  the  EU  average  and  the  levels  of  other  Baltic  countries,  mainly  because  of  lower  investment  in 
dwellings  and  machinery.  Recently,  however,  productive  investment  —  machinery  and  other  investment 
(including R&D) — has started to grow at a healthy pace. This has been driven by private investment in the 
context  of  high  capacity  utilisation  and  labour  shortages,  supported  by  high  corporate  profits,  positive 
expectations and easy financing conditions (see Section 1). In the coming period, investment should remain 
one of the main drivers of growth, with support also from faster use of EU funds from 2019.   

From  2018,  there  are  three  promotional  banks  in  Lithuania.  The  Investment  and  Business  Guarantees 
Agency  (INVEGA)  promotes  start-ups,  SMEs  and  innovations.  The  Public  Investment  Development 
Agency  (VIPA)  promotes  the  renovation  and  development  of  residential  and  public  infrastructure  and 
energy efficiency. The Agricultural Credit Guarantee Fund supports agricultural products.              

2. 

ASSESSMENT OF BARRIERS TO INVESTMENT AND ONGOING REFORMS 

The  business  environment  is  generally  favourable  to  investment,  which  faces  only  limited  barriers 
(European  Commission,  2015).  According  to  the  World  Bank's  2018  Ease  of  Doing  Business  indicator, 
Lithuania  is  the  14th  easiest  country  in  the  world  to  run  a  business  in.  To  further  improve  the  business 
environment  a  number  of  measures  have  been  introduced  recently  in  the  area  of  protecting  minority 
investors, paying taxes, trading across borders and labour market regulation. 

Main barriers to investment and priority actions underway: 

1.  The lack of skilled workers remains a major bottleneck to investment. Although Lithuania invests more 
in education and training than the EU average, the efficiency of this spending remains low and school 
outcomes remain below the EU average. Adult learning and vocational education and training have so 
far not been sufficiently effective  in raising the level of skills in the workforce. To address the issue, 
reforms are being implemented in Lithuania's education and training system (see Section 3.3.5). 

2.  Poor  innovation  results  are  not  helping  to  support  the  competitiveness  of  the  economy  and  attract 
investment. Investment in R&D, especially in the private sector, is low while tax incentives, although 
generous,  do  not  appear  to be  motivating  enough  for  companies  to  innovate  due  to  their  complexity. 
Cooperation  between  the  public  and  private  sectors  is  limited.  To  address  this  issue,  the  government 
has started implementing the reform of innovation policy (see Section 3.4.2).  

38 

Regulatory/ administrative burdenTaxationPublic administrationCSRAccess to financePublic procurement /PPPsCooperation btw academia, research and businessCSRJudicial systemFinancing of R&D&ICSRInsolvency frameworkBusiness services / Regulated professionsCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionWages & wage settingDigital Economy / TelecomEducation, skills, lifelong learning CSREnergyTransportLegend:Some progressNo barrier to investment identifiedSubstantial progressCSRInvestment barriers that are also subject to a CSRFully addressedNo progressNot assessed yetLimited progressPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
3.4.3.  COMPETITIVENESS 

respectively, 

Rapid  wage  growth  in  Lithuania  has  outpaced 
productivity  growth  in  recent  years.  Nominal 
unit labour costs (ULC) increased cumulatively by 
16 %  in  2014-2017,  the  fastest  growth  in  the  EU. 
Following a very strong ULC growth in 2015 and 
2016,  of  5.1 %  and  6.4 % 
it 
decelerated somewhat to 3.8 % in 2017 (see Graph 
3.4.4).  Since  2011,  wage  growth  has  consistently 
outweighed  productivity  growth.  ULCs  have 
grown  across  all  sectors  and  most  strongly  in 
construction, which is in line with the recent surge 
in  construction  activity.  Wage  growth  over  recent 
years  has  been  mainly  driven  by  a  tightening 
labour  market  and  a  range  of  labour  market 
policies,  in  particular  consecutive  minimum  wage 
increases.  For  the  coming  years  a  continued 
increase  in  ULCs  is  forecast,  on  the  back  of 
upward  wage  pressures  stemming  from  the  tight 
labour market conditions. 

Graph 3.4.4:  Breakdown of ULC growth 

which  appreciated  by  11.5 %  between  2014  and 
2017.  This  wage  cost  appreciation  relative  to 
trading partners implies a risk of  undermining  the 
price competitiveness of Lithuania’s exports.  

The  pass-through  of  the  high  labour  cost 
growth  to  prices  has  so  far  remained  muted. 
Wage  growth  has  been  slow  to  affect  prices  of 
goods  and  services.  This  is  reflected  in  the 
inflation-based  REER  (measured  by  harmonised 
index  of  consumer  prices  (HICP),  which  has 
appreciated much more moderately than the ULC-
based REER, at 2.3 % over 2014-2017 (see Graph 
3.4.5).  Given  the  position  of  Lithuania  as  a  price 
taker  on  international  markets,  ULC  increases  in 
the export sector have mainly come at the cost of a 
reduction  in  profit  margins.  While  this  ensures 
price competitiveness in the short run, it may harm 
investment  and  might  not  be  a  sustainable  long-
term solution. 

Graph 3.4.5:  Real effective exchange rate, index (ULC and 

HICP based) 

* Forecast 
Source: European Commission 

* Forecast 
Source: European Commission 

Long-term  competitiveness  could  be  hampered 
by  sustained  high  wage  growth  and  subdued 
productivity growth. The unit labour cost growth 
has considerably exceeded that of Lithuania's main 
trading  partners.  This  is  reflected  by  the  ULC-
based  real  effective  exchange  rate  (REER) (28), 

Despite  the  rising  labour  costs,  Lithuania’s 
external  performance  does  not  seem  to  have 
been  harmed  so  far.  The  growth  in  Lithuania’s 
export  market  share  in  2017  was  among  the 
highest 
the  EU,  supported  by  strongly 
favourable  overall  economic  sentiment  as  well  as 
the rebound in exports to Russia. At the same time, 

in 

(28)  The  Real  Effective  Exchange  Rate  (REER)  assesses  a 
country's  price  or  cost  competitiveness  relative  to  its 
principal  competitors  in  international  markets.  Changes  in 

cost  and  price  competitiveness  depend  not  only  on 
exchange rate movements but also on cost and price trends. 
A rise in the index means a loss of competitiveness. 

39 

-10-8-6-4-20246810101112131415161718*19*20*Rate of change y-o-y (%)Inflation (GDP deflator growth)Real Compensation per EmployeeProductivity Contribution (negative sign)Nominal unit labour costULC in EU289095100105110115120125130101112131415161718*19*20*LT ULCLT HICPEU ULCEU HICP 
 
 
                                                           
 
 
                                                                                   
the  5-year increase in export  market shares shows 
a relatively muted development. This is mostly due 
to the sharp drop in Russian demand following the 
introduction  of  international  sanctions  (see  Graph 
3.4.6). Positive developments in the export market 
shares  are  reflected  in  the  trade  balance,  and 
consequently  in  the  current  account  balance.  In 
2014-2017, the current account has shown a small 
deficit of 0.7 % of GDP on average, with the most 
recent  year  2017  posting  a  surplus  of  0.9 %  of 
GDP. According to the 2018 Commission Autumn 
Forecast,  for  the  coming  years  a  small  deficit  is 
expected,  which  can  be  linked  to  the  projected 
pick-up of EU funds. 

Graph 3.4.6:  Export market share development 

3.4. Competitiveness reforms and investment 

Core  Network  essentially  still  needs  to  be  built, 
with  only  the  inland  waterways  completed.  The 
quality  of  Lithuania's  transport  infrastructure  and 
logistics  is  close  to  the  EU  average  for  road  and 
rail  but  below  the  average  for  ports  and  air 
transport infrastructure. 

the 

transport 
Expanding  and  upgrading 
infrastructure  requires  large  investments.  The 
priorities for transport investments include TEN-T 
and  local  infrastructure,  sustainable  transport,  and 
safety.  In  the  context  of  the  North  Sea-Baltic 
Corridor,  54  projects  have  been  identified  with  a 
total investment need of EUR 4 billion over 2016-
2030. The  bulk  of  this  focuses  on  the  Via  Baltica 
highway  and  electrification  of  the  rail  network, 
which  remains  among  the  least  electrified  in  the 
EU,  with  only  6.4 %  of  rail  tracks  electrified.  To 
complete the largest ongoing project, Rail Baltica, 
will require additional investment of about EUR 2 
billion  (4.2 %  of  GDP)  (Rail  Baltica,  2017).  This 
railway  will  connect  two  major  economic  centres 
(Kaunas  and  Vilnius)  with  Poland,  Latvia  and 
Estonia, unlocking additional benefits from the EU 
single market. It will also help reduce the growing 
road  traffic 
thus  improving  overall 
transport  efficiency.  The  project  is  scheduled  for 
completion  by  2026 
(European  Commission 
2018k). 

intensity, 

Source: European Commission 

3.4.4.  SINGLE MARKET INTEGRATION 

Transport 

Low  international  connectivity  is  hampering 
competitiveness  and  limiting  the  benefits  from 
the single  market.  Lithuania suffers from limited 
international  connectivity  in  terms  of  rail,  road, 
maritime and air. Rail traffic is dominated by East-
West  flows,  while  the  North-South  axis  remains 
underdeveloped.  Lithuania  ranks  21st  in  the  EU 
Transport  scoreboard,  and  continues  to  have  the 
least  developed  TEN-T  core 
road  and  rail 
network(29).  The  Lithuanian  part  of  the  TEN-T 

(29)  The  EU  Transport  scoreboard  compares  how  Member 
States  perform  in  30  categories  covering  all  aspects  of 
transport. 

Additional  investments  are  needed  to  improve 
road safety. Lithuania has one of the EU's highest 
road accident fatality rates. In 2017, it reported 67 
road fatalities per million people, compared to the 
EU  average  of  49.  Lithuania  can  catch  up  with 
better-performing  countries  by  investing  in  safer 
infrastructure  (e.g.  the  ongoing  works  on  Via 
Baltica),  improving  road  users’  behaviour  and 
introducing safer vehicles.  

Accessibility  and  competition  in  the  transport 
market  remain  a  challenge.  A  weak  regulatory 
body  and  non-existent  competition  constitute 
obstacles  to  the  efficient  functioning  of  the  rail 
market.    The  long-pending  issue  of  the  lack  of 
mandatory  public  tender  procedures  for  the  new 
Klaipėda  port 
lease  contracts,  which 
constituted an unjustified restriction on freedom of 
establishment,  has  been  solved  through  recent 
legislative amendments. Their implementation will 
need to be monitored. 

land 

40 

-40-30-20-1001020300708091011121314151617Rate of change y-o-y (%)Contribution: World export growth (euros, neg. Sign)Contribution: Export growth (euros)Growth rate of the export market shares 
 
                                                           
3.4. Competitiveness reforms and investment 

security  of  supply,  and  climate  mitigation and 
adaptation.  The  Plan 
to  be  adopted  by 
is 
31 December  2019  in  line  with  the  Regulation  on 
the Governance of the Energy Union and Climate 
Action (30). The information provided, including in 
the  draft  plan  submitted  on  17 December  2018, 
will  further  help  in  identifying  and  assessing  the 
country's  energy  and  climate-related  investment 
needs.  

Digital Single Market 

Lithuania  faces  obstacles  in  preparing  for  the 
rollout  of  the  next  generation  of  mobile  data-
based  services.  The  government  has  developed  a 
strategy  on  usage  of  the  700 MHz  band,  which  is 
key  for  the  future  5G  rollout  and  the  deployment 
of  5G-based  services  all  over  the  European 
territory.  Nevertheless,  due 
restrictions 
stemming  from  cross-border  coordination  issues 
with non-EU countries, the timely implementation 
of the strategy remains a challenge. 

to 

Lithuania  performs  relatively  well  on  mobile 
access and pricing of fast broadband networks. 
The  Lithuanian  broadband  price 
index  ranks 
among the top performers in the EU. Lithuania has 
good  4G  coverage  (98 %  of  households)  and  take 
up.  However,  fixed  broadband  coverage  is  still 
below  the  EU  average  at  96 %,  which  means  that 
4 %  of  households  cannot  have  fixed  internet  at 
home.  As  far  as  take-up  of  fixed  broadband  is 
concerned,  only  a  low  percentage  of  households 
has  internet  at  home,  with  Lithuania  among  the 
worst  performing  countries  in  this  regard  (64 % 
compared 
(European 
to  77 %  EU  average) 
Commission 2018f). Challenges related to the lack 
of  fast  broadband  connectivity  in  rural  areas  (see 
Section  3.4.4)  are  preventing  a  share  of  the 
population  from  taking  advantage  of  the  digital 
transformation.  Currently, 
and 
broadband 
implementing 
Lithuania 
infrastructure projects to improve coverage of rural 

technological 

is 

the  Council  of  11 December  2018  on 

(30)  Regulation  (EU)  2018/1999  of  the  European  Parliament 
and  of 
the 
Governance  of  the  Energy  Union  and  Climate  Action, 
amending  Regulations  (EC)  No  663/2009  and  (EC)  No 
715/2009  of  the  European  Parliament  and  of  the  Council, 
Directives  94/22/EC,  98/70/EC,  2009/31/EC,  2009/73/EC, 
2010/31/EU, 2012/27/EU and 2013/30/EU of the European 
the  Council,  Council  Directives 
Parliament  and  of 
2009/119/EC and (EU) 2015/652 and repealing Regulation 
(EU)  No  525/2013  of  the  European Parliament and  of  the 
Council (Text with EEA relevance.). 

Single energy market 

The opening of the liquefied natural gas (LNG) 
terminal  has  reduced  Lithuania’s  energy 
dependence  on  Russia.  The  LNG  terminal  in 
Klaipėda  started  operating  at  the  end  of  2014  and 
has  allowed  for  diversification  of  gas  suppliers  in 
Lithuania  and 
the  whole  Baltic  region.  The 
terminal  has  sufficient  capacity  to  cover  around 
90 % of all current demand in the Baltic States. It 
has helped to reduce Lithuania’s high dependency 
on  gas  imports,  significantly  reduced  the  price  of 
gas  for  consumers  and  improved  the  country's 
energy  security.  In  2017,  46 %  of  total  gas 
consumption  volume  was  imported  through  the 
in  building  the  gas 
LNG 
is  slow, 
interconnector  pipeline  with  Poland 
however.  This  pipeline  (known  as  GIPL)  will 
connect  the  Baltic  countries  with  the  continental 
European  gas  network  for  the  first  time  and  is 
essential  for  developing  the  regional  market  for 
natural  gas.  The  European  Commission  has  been 
working with Poland to overcome the delays faced 
by the project. 

terminal.  Progress 

is  set 

that  forms 

In  summer  2018,  the  three  Baltic  states  agreed 
on  how  to  synchronise  their  electric  grids  with 
the European network. For historical reasons, the 
Baltic  states  are  still  operating  in  a  synchronous 
the  so-called  BRELL  ring 
mode 
(Belarus-Russia-Estonia-Latvia-Lithuania). 
To 
reap  more  benefits  from  the  single  market  and 
increase the security of their electricity supply, the 
to  synchronize  Baltic  countries 
target 
electricity  grids  with  continental  Europe  by  2025. 
After  years  of  discussions  it  is  decided  that 
synchronisation  will  take  place  through  Poland, 
notably  via  the  existing  link  between  Poland  and 
Lithuania  (LitPol)  together  with  a  new  link.  The 
drafting  of  a  connection  agreement  is  expected  to 
be completed by spring 2019. A EUR 323 million 
grant  is  already  awarded  to  finance  1st  stage  of 
synchronization  project.  The  parties  are  preparing 
an application  for an additional financing of EUR 
805  million  necessary  for  the  2nd  stage  of  the 
synchronization  process  towards  its  completion 
until 2025. 

In its forthcoming National Energy and Climate 
Plan,  Lithuania  will  provide  an  overview  of  its 
investment  needs  until  2030  for  the  different 
dimensions  of  the  Energy  Union.  They  will 
include  renewable  energy,  energy  efficiency, 

41 

 
                                                           
3.4. Competitiveness reforms and investment 

The rapid depopulation and ageing of regions is 
putting pressure on the efficiency and quality of 
public  infrastructure  and  services.  The  rapid 
decline  in  and  ageing  of  the  population,  due  to 
negative  demographic  trends  and  external  and 
internal  migration,  are  much  stronger  outside  the 
capital  region  and  major  cities  (see  Map  3.4.8). 
This poses a challenge to the country's prospects of 
achieving  more  cohesive  and  sustainable  growth, 
but also for the efficiency and quality of its public 
sector  as  it  is  putting  significant  pressure  on  the 
education,  health  and  social  systems  (see  Section 
3.3).  The  at-risk-of-poverty-rate  in  rural  areas  is 
considerably  higher  than  in  cities  and  the  gap 
continues to grow. 

Graph 3.4.8:  Total population change in %, 2010-2016 

areas and is launching the project "Development of 
Next  Generation  Access  Infrastructure  RAIN3", 
with  the  goal  of  further  increasing  coverage  with 
the next generation network.   

3.4.5.  REGIONAL DISPARITIES 

persist 

differences 

Significant 
among 
Lithuania's  regions  even  as  the  country  as  a 
whole  is  converging  rapidly  with  the  EU.  In 
2016, GDP per capita was 2.6 times  higher in the 
richest  than  in  the  poorest  NUTS3  region of 
Lithuania (31).  This gap is higher than two decades 
ago  and  it  continues  to  grow  (See  Map  3.4.7). 
Most economic development takes place in Vilnius 
and  Kaunas  counties,  which  contribute  42 %  and 
20 % to the total GDP of the country, respectively. 
The 
in 
two  cities  have  played  a  key  role 
Lithuania’s 
process  whereas 
economic  growth  has  been  much  lower  in  the 
predominantly  rural  regions,  which  cover  most  of 
the  Lithuanian  territory  and  host  nearly  55 %  of 
the  population.  In  2016,  the  Vilnius  and  Kaunas 
regions  accounted  for  81.7 %  of  total  FDI,  with 
68 %  taken  by  Vilnius  city.  The  Vilnius  region 
attracts  most  of  the  investment  in  knowledge-
intensive services, while FDI in manufacturing has 
shifted to other regions. 

convergence 

Graph 3.4.7:  GDP per head (PPS) in 2016, EU28 = 100 

Note: Total population in the EU28 in the same period 
increased by 1.64%. 
Source: European Commission 

Source: European Commission 

(31)  Nomenclature  des  unités 

territoriales  statistiques  — 
territorial units defined for statistical purposes. NUTS1 (3-
7  million  inhabitants),  NUTS2  (800  000    to  3  million 
inhabitants), NUTS3 (150 000 to 800 000 inhabitants). 

regions. 

the 
rural 

competitiveness 

The  lack  of  adequate  skills  and  the  high  share 
of the population that is economically inactive is 
of 
on 
weighing 
predominantly 
General 
weaknesses  analysed  in  Sections  3.3  and  3.4  are 
amplified at the regional level. Small, low-tech and 
less  knowledge-intensive  companies  and  low-
productivity  farming  dominate  the  economy  of 
predominantly  rural  and  intermediate  regions.  At 
the  same  time,  most  FDI  and  productive  public 
investment  is  concentrated  around  the  two  main 
economic  development  poles  of  Vilnius  and 
Kaunas.  This  leaves  many  businesses  in  the  other 
regions lagging on technological progress and this 
weighs  heavily  on  their  productivity.  Due  to 
demographic  trends  in  the  country,  the  rural  and 
intermediate  regions  are  dominated  by  residents 
who  are  older,  economically  less  active  and  have 

42 

 
 
                                                           
 
3.4. Competitiveness reforms and investment 

systems  or  a  lack  of  incentives  or  support  for 
regular  commuters.  Moreover,  while  overall 
Lithuania  performs  relatively  well  on  digital 
mobile coverage and take-up, there is a significant 
digital  divide  between  urban  and  rural  areas  as 
regards  fix  broadband  connectivity:  only  87 %  of 
rural  households  have  internet  access,  below  the 
EU  average  of  92 %  (European  Commission 
2018f).  While  Lithuania  becomes  more  digitised, 
its  electronic  communication  networks,  especially 
the  public  very  high-capacity  networks,  become 
critical infrastructure that need to be secured from 
cyber  threats.  It  is  important  for  the  Lithuanian 
economy  that  citizens  and  businesses,  whether  in 
the  countryside  or  in  cities,  can  get  access  to 
connectivity with high speed and security. 

is  hindering 

investments.  Most  of 

The  lack  of  a  coherent  regional  development 
the  effectiveness  of 
strategy 
cohesion  policy 
the 
productive  investment  takes  place  in  the  largest 
cities,  while other regions receive  a  much  smaller 
share  of  the  funds  and  mostly  invest  in  quality  of 
life.  In  the  absence  of  a  national  strategy  for 
territorial  development  and  ‘space  aware’  sectoral 
strategies,  the  territorial  investments  are  often 
driven by national sectoral priorities. In most cases 
territorial development strategies are not linked to 
any  regional  specialisation  or  potential  economic 
development of the territory (with the exception of 
Vilnius  and  Klaipėda)  and  are  limited  to  the 
administrative  boundaries,  with  no  functional 
approach  to  building  linkages  that  would  allow 
wealth  or  opportunities  to  spread  from  richer  to 
poorer  regions.  The  implementation  of  integrated 
territorial development strategies is also hampered 
by the low capacity of local and regional bodies to 
administer  integrated  territorial  investments,  their 
low  financial 
lack  of 
independence  and 
incentives to attract investments and create jobs. 

the 

help 

could 

increase 

Better  access  to  quality  public  services  and 
connectivity 
the 
attractiveness  of  the  poorest  regions.  The  EU 
Cohesion  Funds  will  continue  to  represent  a 
significant  share  of  overall  public  investments  in 
Lithuania,  with  an  impact  of  1.7 %  on  projected 
2021-2027  GDP,  or  2.7 %  of  GDP  when  national 
co-financing  is  included  (European  Commission 
2018l).  Tailored  strategies  for  the  various  regions 
are  needed  in  order  to  address  their  specific 
challenges.  The  investments  in  the  economic 
development prospects of the major cities and their 

lower  socio-economic  status.  Despite  persistently 
high  levels  of  unemployment  in  these  regions, 
these  factors  result  in  limited  availability  of 
low 
adequately  skilled 
domestic demand. This limits their ability to attract 
the  investment  necessary  for  sustainable  regional 
economic  development,  and  further  reinforces  the 
downward  spiral  of  declining  regions  and  the 
socio-spatial polarisation within the country. 

labour  and  generally 

sustainable  urban  mobility  and 

The  quality  of  public  services  varies  among 
regions,  resulting  in  region-specific  investment 
needs. The higher concentration of the population 
in cities and surrounding areas is putting additional 
pressure  on,  and  creating  the  need  for  investment 
in, 
social 
infrastructure.  On  the  other  hand,  depopulation 
together  with  the  ageing  of  the  population  is 
putting  even  more  pressure  on  the  efficiency  and 
quality  of  public  services  in  the  predominantly 
rural  regions,  creating  particular  challenges  in  the 
health  and  education  sectors.  There  are  wide 
disparities  in  education  and  health  outcomes  in 
urban  centres  and  rural  areas,  pointing  to  gaps  in 
access  to  good  quality  services  (See  Section  3.3). 
The slow speed of reforms in education and health 
institution  networks  to  adapt  them  to  the  swift 
population decline in smaller towns and rural areas 
issues:  an 
to  serious  efficiency 
leading 
is 
increasing 
spent  on 
is 
share  of 
maintenance of buildings and administration rather 
than  on  the  quality  of  education  and  health 
services.  Moreover,  high  emigration  rates  and  a 
lack of  medical personnel are  further thinning out 
health services outside the main cities. 

funding 

Significant  disparities  in  mobility  and  digital 
infrastructure  endowments  underline  distinct 
investment  needs.  Connections  between  TEN-T 
corridors  and  national  or  local  transport  networks 
—  across  Lithuania's  borders  —  are  rated  among 
the  least  developed  in  the  EU  (see  Section  3.4.3). 
Gaps  in  connectivity  with  peripheral  and  border 
regions  are  still  substantial  as  reflected  by  the 
share of population in a neighbourhood of 180 km 
radius  accessible  within  1h30  by  road  is  44% 
(below  the  EU  average  of  46%).  The  mobility 
difficulties  are  limiting  both  the  possibility  for 
people  to  commute  to  work  and  the  country's 
attractiveness  for  new  investments.  In  addition  to 
infrastructure  gaps,  mobility  bottlenecks  are  also 
caused by inconvenient public transport routes and 
schedules,  fragmented  municipal  public  transport 

43 

 
3.4. Competitiveness reforms and investment 

business  environment,  companies’  performance 
and public sector effectiveness. 

Public administration 

The  government  is  implementing  a  reform  to 
further improve the quality of the public sector. 
Changes  laid  down  in  the  new  Civil  Service  Law 
include a narrower definition of public servants, an 
evaluation  of 
their  performance,  centralised 
recruitment  procedures,  a  more  flexible  incentive 
system  and  increased  liability.  The  measures  also 
aim  to  optimise  public  sector  institutions  and 
introduce  clear  tasks  among  them,  to  generate 
savings  by  introducing  shared  services,  and  to 
improve 
quality 
through 
standards.  However,  the  civil  service  is  losing 
competitiveness in the labour market due to its low 
salaries and unattractive working conditions. It has 
difficulties  in  attracting  new  qualified  staff,  while 
increasing numbers of professionals are leaving the 
service.  This  is  leading  to  the  ageing  of  the  civil 
service  and  requires  a  long-term  strategy  to  make 
the  public  sector  an  attractive  employer  for  the 
young. 

common 

quality 

substantially 

Lithuania  has 
in 
improved 
providing  digital  public  services,  but  could 
benefit  from  a  more  strategic  vision.  Progress 
has  been  driven  by  the  use  of  e-Government 
services, the availability of pre-filled forms and the 
availability  of  open  data,  where  Lithuania  has 
made a significant effort to reduce the considerable 
gap  with  the  EU  average  (European  Commission 
2018m).  However,  there  are  often  uncoordinated 
elements  in  the  digital  service  transformation 
process  which  if  managed  appropriately  could 
build  a  more  modern,  open,  responsive  and  data-
driven  public  sector.  There 
is,  therefore,  an 
investment  need  for  public  sector  institutions  to 
coordinate  better  with  each  other  in  order  to 
improve  their  performance  and  develop  more 
advanced and fully interactive services. 

Despite  the  overall  good  management  and 
control  of  EU  funds,  the  system  would  benefit 
from  streamlining  and  simplification.  Drawing 
on the lessons learned during the current financial 
period,  a  major  simplification  of  procedures  and 
reduction  of  administrative  burden  for  applicants 
and beneficiaries is necessary, including full use of 
the available simplification and flexibility options. 
local 
interaction  between  national  and 
More 

functional  urban  area  need  to  be  coupled  with 
investments in the needs and potential that exist in 
the  predominantly  rural  regions.  These  including 
the  inner  peripheries  located  on  the  border  with 
Belarus  and  Russia  (Taurage,  Utena,  Alytus). 
Appropriate cooperation mechanisms, international 
connections and incentive regimes to firms tailored 
to  specific  characteristics  of  each  region  would 
support  the  regional  catch-up  process.  Incentive 
regimes  providing  access  to  finance  in  particular 
need  to  be  justified  by  clearly  identified  market 
failures,  taking  account  of  the  availability  of 
financial instruments (see Section 3.2.2.). 

3.4.6.  GOVERNANCE AND INSTITUTIONAL 

QUALITY 

Business environment 

investor  protections  by 

improved  but 
The  business  environment 
resolving  insolvency  remains  an  issue.  In  2018, 
Lithuania  improved  in  terms  of  ease  of  doing 
business (World Bank, 2018a), ranking higher than 
Estonia,  Latvia  and  Finland.  It  strengthened 
minority 
introducing 
stricter  requirements  for  the  disclosure  of  the 
compensation  of  directors  and  other  high-ranking 
officers  on  an  individual  basis.  Exporting  was 
made  easier  by  improving  the  automated  customs 
data  management  system.  The  government  is  also 
performing  fitness  and  compliance  checks  to 
reduce  the  costs  and  administrative  burden  for 
businesses.  Specific  measures  also  aim  to  assess 
the regulatory impact on SMEs, but there is scope 
to  improve  their  effectiveness.  The  time,  cost  and 
conditions 
remain 
obstacles to doing business, in particular for failed 
entrepreneurs 
start  over.  The 
government put in place some measures to support 
second-chance 
including 
awareness-raising,  training  and  mentoring,  but 
more progress is needed. 

entrepreneurship, 

insolvencies 

resolving 

seeking 

for 

to 

The shadow economy continues to weigh on the 
business  environment.  The  shadow  economy 
index  worsened  by  1.7  percentage  points  in 
Lithuania to 18.2 % in 2017 (Stockholm School of 
Economics  in  Riga,  2018).  Lithuania  continues  to 
have a relatively high level of bribery. Corruption 
and  unfair  practices  by  other  companies  remain 
among  the  challenges  to  business,  worsening  the 

44 

 
authorities,  the  social  partners  and  civil  society 
organisations  through  all  stages  of  policy-making 
and  implementation  would  improve  involvement, 
In 
ownership  and  democratic  accountability. 
particular,  local  authorities  need  to  be  better 
equipped for developing their integrated territorial 
development  strategies  and  selecting  operations, 
and to be assisted through the entire process. 

Public procurement 

to 

support 

system. 

Further, 

procurement 

The  efficiency  and  transparency  of  public 
procurement  continued  to  improve,  but  some 
challenges  remain.  The  public  procurement 
system is improving, especially at the central level. 
Activities 
purchasing 
public 
risk  assessments  and  problem 
mechanisms, 
detection  are  managed  by  the  Public  Procurement 
Office  in  a  mature  manner.  Professionalisation 
remains  one  of  the  major  shortcomings  of  the 
the 
public 
competitiveness  of  the  procurement  market  has 
room  for  improvement.  In  2018,  there  was  only 
one  bidder  for  24  %  of  the  public  procurement 
procedures  published  in  the  EU  Official  Journal. 
Transparency  in  public  procurement  is  relatively 
high,  with  publication  of  information  on  all 
initiated  tenders,  successful  bidders  and  contracts 
awarded  (with  an  exception  for  the  lowest  value 
procurement).  Lithuania’s  significant  achievement 
in 
in  public 
procurement  helps  transparency,  with  99.8 %  of 
the 
offers 
Directives’  thresholds  submitted  electronically. 
Cross-border  procurement  remains  low,  with  a 
potential  negative  impact  on  prices.  At  the  local 
level, some concerns remain over the adequacy of 
procurement planning as well as over transparency 
and in-house procurement. 

in  procurement  procedures  above 

introducing  an  electronic  path 

the 

targets 

Achieving 
for  green  public 
procurement could encourage the emergence of 
new  markets  for  innovative  products.  To  this 
end,  a  national  strategy  requiring  authorities  to 
apply  'green public procurement' criteria in public 
tenders was adopted. The ambitious targets are still 
to be achieved. In 2016, green public procurement 
accounted  for  8 %  of  contracts  (13 %  in  value 
terms) (Dovilė Šličiuvienė, 2017). 

3.4. Competitiveness reforms and investment 

Corruption 

targeting 

initiatives 

legislative 

legislation 

Implementing 

The  government 
is  planning  measures  to 
strengthen  the  prevention  and  control  of 
corruption.  Lithuania’s  score  on  controlling 
corruption  is  70/100,  a  five-point  decrease  from  
the previous year (World Bank, 2018b). The scores 
on  components  relating  to  conflict  of  interest 
regulation  and  incidence  of  corruption  remained 
(World  Economic  Forum,  2018). 
unchanged 
Several 
the 
prevention  and  control  of  corruption  are  under 
the 
discussion. 
Whistleblowers' protection law (adopted in 2017), 
was  passed,  in  order  to  clarify  its  provisions  on 
internal  reporting  channels  and  compensatory 
mechanisms  in  case  of  retaliation.  A  new  law 
regulating  lobbying  is  under  discussion.  The 
proposal  narrows  down  the  definition  of  lobbying 
influence 
activities 
the 
administrative 
application  of 
to  ministers,  deputy-
ministers  and  heads  of  political  parties.  Reporting 
obligations would be introduced for both lobbyists 
and  officials,  to  allow  cross-checking  of  the 
information.  The  latter  bill  is  under  government 
discussion.  

to  exclude  attempts 
and 
decisions 
law 
the 

to 
extends 

to 

The  new  single  registry  of  interests,  initially 
envisaged for 2018, has now been postponed to 
2020.  The  Chief  Official  Ethics  Commission,  the 
body in charge of verifying declarations of private 
interest,  is  currently  unable  to  determine  the 
precise  number of officials  who did not fill in the 
declarations  as  the  system  for  submitting  them  is 
not integrated with other state/municipal registries 
and  databases.  Moreover,  there  is  a  very  broad 
range  of  officials  who  are  bound  to  submit  such 
declarations,  which  makes  it  difficult  to  put  a 
precise  figure  on  the  number  of  omissions.  In  the 
absence  of  an  integrated  system  that  would  allow 
the pre-filling of private interest declarations, there 
is  a  risk  of  certain  conflicts  of  interest  passing 
unnoticed.  It  is  hoped  the  problem  will  be  solved 
in  2020  with  the  implementation  of  an  integrated 
registry  of  private  interest  where  information  can 
be cross-checked. 

in 

There  have  been  improvements  in  addressing 
corruption 
the  healthcare  sector,  but 
irregularities  still  persist.  In  2018,  progress  was 
noted in terms of the transparency of sponsorships 
of  healthcare  professionals  and  pharmacists  to 

45 

 
3.4. Competitiveness reforms and investment 

participate  in  international  events,  as  well  as 
regarding civil society participation in supervisory 
councils  of  municipal  hospitals.  Moreover, 
informal  payments  in  the  health  sector  have 
decreased,  linked  to  the  Clean  Hands  programme 
the  government  has  been  running  since  2015  and 
possibly  also  thanks  to  a  salary  increase  for 
medical  staff  in  2018.  The  Ministry  of  Health 
estimates  the  rate  of  informal  payments  at  9 %  in 
2018, as compared to 35 % in 2017. However, the 
perception  of  corruption  remains  quite  high 
(European  Commission,  2017):  93 %  of  citizens 
(compared  to  31 %  EU  average)  believe  that 
giving  and  taking  bribes  and  abusing  power  for 
personal  gain  are  widespread  in  the  healthcare 
area. 

46 

 
 
ANNEX A: OVERVIEW TABLE 

Commitments  

Summary assessment (32) 

2018 country-specific recommendations (CSRs)  

CSR 1: Improve tax compliance and broaden the tax 
base to sources less detrimental to growth. Ensure the 
long-term sustainability of  the pension  system  while 
addressing the adequacy of pensions.  

Lithuania  has  made  some  progress  in  addressing 
CSR 1  

Improve tax compliance  

Some  progress  was  made  in  fighting  the  shadow 
economy  but  further  efforts  are  needed.  Tax 
compliance 
low.  Although 
Lithuania's VAT gap decreased slightly from 26 % in 
2015 to 25 % in 2016, it is still one of the largest in 
the EU. 

relatively 

remains 

Several  public 
relations  campaigns  aimed  at 
increasing  public  awareness  and  engagement  were 
undertaken. 

Smart Tax Administration system (i.MAS) measures 
introduced in recent years resulted in almost halving 
the time needed to comply with taxes. 

and broaden the  tax base to  sources less detrimental 
to growth.  

No  progress  was  made  in  broadening  the  tax  base. 
The new tax reform does not involve any shift of the 
tax base towards more growth-friendly sources. 

(32)  The  following  categories  are  used  to  assess  progress  in  implementing  the  country-specific  recommendations  (CSRs):  
No  progress:  The  Member  State  has  not  credibly  announced  nor  adopted  any  measures  to  address  the  CSR.  This  category 
covers a number of typical situations to be interpreted on a case by case basis taking into account country-specific conditions. 
They include the following: 

no legal, administrative, or budgetary measures have been announced 
in the national reform programme, 
in any other official communication to the national Parliament/relevant parliamentary committees or the European Commission, 
publicly (e.g. in a press statement or on the government’s website); 
no non-legislative acts have been presented by the governing or legislative body; 
the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures to be taken (unless the CSR explicitly asks for orientations or exploratory actions). However, it has 
not proposed any clearly-specified measure(s) to address the CSR. 

Limited progress: The Member State has: 
announced certain measures but these address the CSR only to a limited extent; and/or 
presented  legislative  acts  in  the  governing  or  legislative  body  but  these  have  not  been  adopted  yet  and  substantial  further,  non-

legislative work is needed before the CSR is implemented; 

presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 
Some progress: The Member State has adopted measures 
that partly address the CSR; and/or 
that address the CSR, but a fair amount of work is still needed to fully address the CSR fully as only a few of the  measures have 
been implemented. For instance, a measure or measures have been adopted by the national Parliament or by ministerial decision 
but no implementing decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way towards addressing the CSR and most of them 

have been implemented. 

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately. 

47 

 
 
 
 
 
                                                           
A. Overview table 

Environmental  taxes  are  significantly  below  the  EU 
average. Taxes on transport are the lowest in the EU 
and do not take into account vehicles’ environmental 
performance. CO2-based motor vehicle taxes are not 
in  place  in  Lithuania.  No  changes  related  to  car 
taxation  or  road-use  tax  for  private  passenger 
vehicles are envisaged. 

Property 
changes are planned. 

taxation  remains 

low  and  no  further 

Ensure  the  long-term  sustainability  of  the  pension 
system while addressing the adequacy of pensions.  

Some  progress  was  made  with  the  introduction  of 
the  pension  indexation  formula  from  January  2018 
and additional pension reforms legislated in summer 
2018. 

These reforms increase the fiscal sustainability of the 
pension system in the medium and long term and, to 
some  extent  addresses  the  issue  of  adequacy  in  the 
short term. Adequacy will also partly depend on the 
participation rate in the second pension pillar. 

In the longer term, however, adequacy might become 
an  issue,  mainly  due  to  the  low  spending  on 
pensions.  

Lithuania  has  made  limited  progress  in  addressing 
CSR 2  

CSR  2:  Improve  the  quality,  efficiency  and  labour 
market relevance of education and training, including 
adult  learning.  Improve  the  performance  of  the 
healthcare system by a  further shift  from hospital to 
outpatient  care,  strengthening  disease  prevention 
measures, including at local level, and increasing the 
quality and affordability of care. Improve the design 
of  the  tax  and  benefit  system  to  reduce  poverty  and 
income inequality.  

Improve  the  quality,  efficiency  and  labour  market 
relevance  of  education  and  training,  including  adult 
learning.  

Limited progress was made in the general education 
area. 

The  outcomes  and  efficiency  of 
the  general 
education system remain relatively low. The reforms 
are  ongoing,  but  no  substantial  positive  effect  on 
educational outcomes has yet been observed, and the 
efficiency  of 
the  education  system  remains  a 
challenge. 

Initial  VET  is  in  the  process  of  being  modernised; 
while some positive steps have been taken, it had not 

48 

 
 
 
 
A. Overview table 

yet improved sufficiently the supply of relevant skills 
for the labour market. 

The reform of the higher education network is slow. 

The  adult  learning  system  is  at  the  initial  stage  and 
there  has  not  been  any  significant  improvement  in 
adult participation in learning. 

Improve the performance of the healthcare system by 
a  further  shift  from  hospital  to  outpatient  care, 
strengthening disease prevention measures, including 
at 
the  quality  and 
local  level,  and 
affordability of care.  

increasing 

Limited  progress  was  made  in  improving  the 
performance of the healthcare system. 

Though preparatory work has been undertaken, legal 
frameworks  for  further  consolidating  the  hospital 
network  and  strengthening  disease  prevention  at 
local level have not been approved yet. 

taken 

Measures  were 
reduce  prices  of 
pharmaceuticals,  but  the  measures  to  address  the 
affordability  constraints  of  specific  groups  are 
pending. 

to 

Measures  taken  to  improve  the  quality  of  care  were 
partial,  targeting  only  primary  care  entities  and 
limited  to  the  introduction  of  some  monitoring 
indicators.  It  is  premature  to  assess  whether  these 
measures are sufficient to address quality concerns. 

Improve  the  design  of  the  tax  and  benefit  system  to 
reduce poverty and income inequality.  

Limited progress was achieved in improving the tax 
and benefit system. 

Lithuania has implemented some measures to reduce 
poverty  and  social  exclusion,  namely  increasing  the 
and 
level  of  guaranteed  minimum 
introducing  the  universal  child  benefit  system.  The 
indexation  of 
income  has  been 
established, and the  universal child benefit has been 
increased  in  2019.  However,  public  spending  on 
social  protection  is  low,  and  the  impact  of  social 
transfers on poverty reduction is limited. 

the  minimum 

income 

introduced  some  progressivity 

its 
Lithuania 
personal  income  taxation,  but  the  effects  on  income 
inequality are expected to be negligible.  

in 

CSR 3: Stimulate productivity growth by improving 
the efficiency of public investment, ensuring efficient 
and 
governmental 

coordination 

research 

of 

Lithuania  has  made  limited  progress  in  addressing 
CSR 3  

49 

 
 
 
A. Overview table 

policy 

innovation 
and 
and 
inefficiencies in public measures supporting science-
industry cooperation.  

tackling 

gaps 

Stimulate  productivity  growth  by  improving  the 
efficiency of public investment,  

Limited  progress  was  made  in  improving  the 
efficiency of public investment. 

Some  interim  measures  were  taken  to  improve  the 
procedures  for 
the  preparation,  evaluation  and 
selection of public investment projects. 

However,  the  new  integrated  approach  to  strategic 
and investment planning should be put in place only 
for the 2021-2023 budgeting process.  

ensuring  efficient  governmental  coordination  of 
research and innovation policy and tackling gaps and 
inefficiencies in public measures supporting science-
industry cooperation.  

Limited progress was made in the area of R&I. 

R&I  policy  coordination  was  slightly  improved  by 
reassigning  responsibility  for  it  to  the  Ministry  of 
Economy and the Ministry of Education and Science, 
and  transferring  the  experimental  development  in 
companies  file 
the  Ministry  of  Economics. 
However,  a  coherent  new  R&I  policy  still  needs  to 
be developed. 

to 

Some  progress  was  achieved  in  improving  science-
industry  cooperation.  Progressive  measures  were 
introduced  in  the  evaluation  of  universities  and 
research  institutes  (taking  account  of  their  ties  with 
businesses),  industrial  PhDs,  innovation  vouchers 
and other schemes.  

Europe 2020 (national targets and progress) 

Employment rate target: 72.8 % 

The  employment  rate  reached  76 %  in  2017,  above 
the national target and the EU average. 

R&D  target:  1.9 %  of  GDP  with  half  coming  from 
private sector 

In  2017  Lithuania’s  R&D  investment  was  0.9 %  of 
GDP  compared  to  0.8 %  the  previous  year.  Private 
investment  remains  low,  at  0.3 %  of  GDP  in  2017. 
R&D investment is unlikely to reach the target level 
by 2020. 

Greenhouse gas (GHG) emissions target: 

Europe 2020 target: 15 % 

Lithuania's emissions are expected to increase by 2 % 

50 

 
 
 
 
 
A. Overview table 

Non-ETS  target for 2020: +15 % compared to 2005 

in 2020 compared to 2005. It will consequently meet 
its target with a margin of 13 percentage points. 

Non-ETS  interim target for 2017: +7 % compared to 
2005 

that  Lithuania  has 
Preliminary  data 
overachieved its interim target for 2017 by around 1 
pp. 

indicates 

Renewable energy target: 23 % 

Share of renewable energy in transport sector: 10 %  

With  a  25.6 %  share  of  renewables 
in  2016, 
Lithuania  has  already  more  than  achieved  its  2020 
target and aims to reach an ambitious 45 % target by 
2030. 

However,  the  share  of  renewables  in  the  transport 
sector is very low and decreasing. It fell from 4.6 % 
in 2015, to 3.7 % in 2017, well below the 2020 target 
of 10 %. 

Energy  efficiency  target:  17 %  reduction  in  final 
energy use compared to 2009 level (reduction of 740 
ktoe), which implies reaching a 2020 level of: 

There  has  been  a  decoupling  of  primary  energy 
consumption  and  GDP  in  recent  years.  However, 
although  the  primary  energy  intensity  has  been 
decreasing, it remains above the EU average. 

6.5 Mtoe of primary 

4.3 Mtoe of final energy consumption 

Early school leaving target: < 9 % 

Tertiary education target: 48.7 % 

Lithuania’s  final  energy  consumption  was  relatively 
stable  between  2010  and  2015,  but  in  2016  it 
increased by 5 % to 5.11 Mtoe. Therefore, in order to 
reach  its  2020  final  energy  consumption  target, 
Lithuania must further increase its efforts to promote 
energy efficiency. 

The early school leaving rate among 18-24 year-olds 
increased to 5.4 % in 2017. Nevertheless, it remains 
significantly  below  the  EU  average  of  10.6 %, 
placing  Lithuania  among  the  leading  EU  Member 
States. 

Tertiary  attainment  among  30-34  year-olds 
in 
Lithuania was 58 % in 2017. It is above the national 
target and among the highest in the EU. 

Risk of poverty or social exclusion target: 814 000  Even though the number of persons at risk of poverty 
or  social  exclusion  has  fallen  from  the  2016  level, 
Lithuania  is  falling  short  of  its  national  target:  in 
2017,  843 000  people  were  at  risk  of  poverty  or 
social exclusion (29.6 % of the total population).  

51 

 
 
 
 
ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

52 

General Government debt projections under baseline, alternative scenarios and sensitivity tests2017201820192020202120222023202420252026202720282029Gross debt ratio39.434.837.937.635.834.533.733.032.532.332.432.733.4Changes in the ratio (-1+2+3)-0.6-4.63.1-0.3-1.8-1.3-0.8-0.7-0.5-0.20.10.30.7of which(1) Primary balance (1.1+1.2+1.3)1.61.51.20.80.60.40.30.20.1-0.1-0.2-0.4-0.5(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)0.50.40.40.30.30.30.30.20.1-0.1-0.2-0.4-0.5(1.1.1) Structural primary balance (bef. CoA)0.50.40.40.30.30.30.30.30.30.30.30.30.3(1.1.2) Cost of ageing0.00.00.00.10.20.40.50.70.8(1.1.3) Others (taxes and property incomes)0.00.00.00.00.00.00.00.00.0(1.2) Cyclical component1.11.20.80.40.30.10.00.00.00.00.00.00.0(1.3) One-off and other temporary measures0.00.00.10.00.00.00.00.00.00.00.00.00.0(2) Snowball effect (2.1+2.2+2.3)-2.0-1.3-1.3-1.5-1.2-0.8-0.5-0.5-0.4-0.3-0.2-0.10.1(2.1) Interest expenditure1.10.90.90.70.70.70.70.70.80.80.91.01.1(2.2) Growth effect-1.5-1.2-0.9-0.9-0.8-0.6-0.6-0.6-0.5-0.5-0.5-0.4-0.3(2.3) Inflation effect-1.6-1.0-1.2-1.3-1.1-0.9-0.7-0.7-0.6-0.6-0.6-0.6-0.6(3) Stock-flow adjustments3.1-1.75.72.00.00.00.00.00.00.00.00.00.0Note: For further information, see the European Commission Fiscal Sustainability Report (FSR) 2018. b. For the medium-term, the risk category (low/medium/high) is based on the joint use of the S1 indicator and of the DSA results. The S1 indicator measures the fiscal adjustment required (cumulated over the 5 years following the forecast horizon and sustained thereafter) to bring the debt-to-GDP ratio to 60 % by 2033. The critical values used are 0 and 2.5 pps. of GDP. The DSA classification is based on the results of 5 deterministic scenarios (baseline, historical SPB, higher interest rate, lower GDP growth and negative shock on the SPB scenarios) and the stochastic projections. Different criteria are used such as the projected debt level, the debt path, the realism of fiscal assumptions, the probability of debt stabilisation, and the size of uncertainties. c. For the long-term, the risk category (low/medium/high) is based on the joint use of the S2 indicator and the DSA results. The S2 indicator measures the upfront and permanent fiscal adjustment required to stabilise the debt-to-GDP ratio over the infinite horizon, including the costs of ageing. The critical values used are 2 and 6 pps. of GDP. The DSA results are used to further qualify the long-term risk classification, in particular in cases when debt vulnerabilities are identified (a medium / high DSA risk category). [2]Thechartspresentaseriesofsensitivitytestsaroundthebaselinescenario,aswellasalternativepolicyscenarios,inparticular:thehistoricalstructuralprimarybalance(SPB)scenario(wheretheSPBissetatitshistoricalaverage),theStabilityandGrowthPact(SGP)scenario(wherefiscalpolicyisassumedtoevolveinlinewiththemainprovisionsoftheSGP),ahigherinterestratescenario(+1pp.comparedtothebaseline),alowerGDPgrowthscenario(-0.5pp.comparedtothebaseline)andanegativeshockontheSPB(calibratedonthebasisoftheforecastedchange).Anadversecombinedscenarioandenhancedsensitivitytests(ontheinterestrateandgrowth)arealsoincluded,aswellasstochasticprojections. Detailed information on the design of these projections can be found in the FSR 2018.LT - Debt projections baseline scenario[1]Thefirsttablepresentsthebaselineno-fiscalpolicychangescenarioprojections.Itshowstheprojectedgovernmentdebtdynamicsanditsdecompositionbetweentheprimarybalance,snowballeffectsandstock-flowadjustments.Snowballeffectsmeasurethenetimpactofthecounteractingeffectsofinterestrates,inflation,realGDPgrowth(andexchangerates in some countries). Stock-flow adjustments include differences in cash and accrual accounting, net accumulation of assets, as well as valuation and other residual effects.[3] The second table presents the overall fiscal risk classification over the short, medium and long-term. a. For the short-term, the risk category (low/high) is based on the S0 indicator. S0 is an early-detection indicator of fiscal stress in the upcoming year, based on 25 fiscal and financial-competitiveness variables that have proven in the past to be leading indicators of fiscal stress. The critical threshold beyond which fiscal distress is signalled is 0.46. 2025303540455020162017201820192020202120222023202420252026202720282029Debt as % of GDP -LTBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario2030405020162017201820192020202120222023(% of GDP)Stochastic debt projections 2019-2023 -LTp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline2025303540455020162017201820192020202120222023202420252026202720282029Debt as % of GDP -LTBaselineHistorical SPB scenarioSGP scenario2025303540455020162017201820192020202120222023202420252026202720282029Debt as % of GDP -LTBaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenarioBaselineHistorical SPBLower GDP growthHigher interest rateNegative shock on SPBStochastic projectionsRisk categoryLOWLOWLOWLOWLOWMEDIUMDebt level (2029)33.443.435.135.533.7Debt peak year20192029201920192019Percentile rank53.0%69.0%Probability debt higher40.1%Dif. between percentiles29.0LOWLong termDSALOWDebt sustainability analysis (detail)Medium termLOWLOWShort termLOW(S0 = 0.2)(S1 = -1.8)S2LOW(S2 = 0.5)S1 
 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

1) Latest data Q3 2018. Includes not only banks but all monetary financial institutions excluding central banks. 
2) Latest data Q2 2018. 
3) Quarterly values are not annualised 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

53 

201320142015201620172018Total assets of the banking sector (% of GDP)1)68.869.766.269.767.764.3Share of assets of the five largest banks (% of total assets)87.185.786.887.190.1-Foreign ownership of banking system (% of total assets)2)91.592.091.891.991.690.8Financial soundness indicators:2)              - non-performing loans (% of total loans)-6.85.64.03.23.1              - capital adequacy ratio (%)17.521.324.819.419.119.0              - return on equity (%)3)8.67.77.511.99.113.5Bank loans to the private sector (year-on-year % change)1)-1.0-0.35.311.24.47.8Lending for house purchase (year-on-year % change)1)0.62.23.57.18.68.1Loan to deposit ratio2)-80.183.882.378.885.4Central Bank liquidity as % of liabilities1)-0.01.71.31.20.7Private debt (% of GDP)56.353.954.856.156.1-Gross external debt (% of GDP)2) - public33.338.038.035.534.129.2    - private19.217.517.517.519.718.6Long-term interest rate spread versus Bund (basis points)*226.2162.988.580.8--Credit default swap spreads for sovereign securities (5-year)*107.5100.976.462.850.852.8 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

1 People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI). 
2 Unemployed persons are all those who were not employed but had actively sought work and were ready to begin working 
immediately or within two weeks. 
3 Long-term unemployed are people who have been unemployed for at least 12 months. 
4 Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2019. 
5 Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation). 
6 Average of first three quarters of 2018 for the employment rate, unemployment rate and gender employment gap. Data for 
unemployment rate is seasonally adjusted. 
Source: European Commission 

54 

201320142015201620172018 6Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)6.35.95.54.85.4:Gender employment gap (pps)2.62.52.41.91.02.7Income inequality, measured as quintile share ratio (S80/S20)6.16.17.57.17.3:At-risk-of-poverty or social exclusion rate1 (AROPE)30.827.329.330.129.6:Young people neither in employment nor in education and training (% of population aged 15-24)11.19.99.29.49.1:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)69.971.873.375.276.077.3Unemployment rate2 (15-74 years)11.810.79.17.97.16.4Long-term unemployment rate3 (as % of active population)5.14.83.93.02.72.2Gross disposable income of households in real terms per capita4 (Index 2008=100) 100.9103.5108.2114.6118.5:Annual net earnings of a full-time single worker without children earning an average wage (levels in PPS, three-year average)942899111051711150::Annual net earnings of a full-time single worker without children earning an average wage (percentage change, real terms, three-year average)1.53.65.46.5::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction532.030.522.421.523.2:Children aged less than 3 years in formal childcare:22.99.715.220.3:Self-reported unmet need for medical care3.23.72.93.11.5:Individuals who have basic or above basic overall digital skills (% of population aged 16-74)::51.052.055.0: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator 
1 Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included 
2 PISA (OECD) results for low achievement in mathematics for 15 year-olds. 
3 Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science. 
4 Average of first three quarters of 2018. Data for youth unemployment rate is seasonally adjusted. 
Source: European Commission, OECD 

55 

Labour market indicators201320142015201620172018 4Activity rate (15-64)72.473.774.175.575.9:Employment in current job by durationFrom 0 to 11 months16.314.715.518.917.8:From 12 to 23 months11.412.311.711.012.5:From 24 to 59 months18.820.820.319.919.2:60 months or over53.552.352.550.250.5:Employment growth* (% change from previous year)1.32.01.32.0-0.50.5Employment rate of women(% of female population aged 20-64)68.670.672.274.375.576.0Employment rate of men (% of male population aged 20-64)71.273.174.676.276.578.7Employment rate of older workers* (% of population aged 55-64)53.456.260.464.666.167.6Part-time employment* (% of total employment, aged 15-64)8.48.67.67.17.67.3Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)2.72.82.12.01.71.8Participation in activation labour market policies(per 100 persons wanting to work)8.611.113.212.9::Transition rate from temporary to permanent employment(3-year average)41.438.246.139.5::Youth unemployment rate (% active population aged 15-24)21.919.316.314.513.311.3Gender gap in part-time employment3.84.24.23.43.73.9Gender pay gap1 (in undadjusted form)12.213.314.214.415.2:Education and training indicators201320142015201620172018Adult participation in learning(% of people aged 25-64 participating in education and  training)5.95.15.86.05.9:Underachievement in education2::25.4:::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)51.353.357.658.758.0:Variation in performance explained by students' socio-economic status3::11.6::: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

* Non-scoreboard indicator 
1 At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.  
2 Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone. 
3 Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation. 
4 People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months. 
5 Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59.   
6 Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard. 
Source:  European Commission, OECD 

56 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare4.24.14.14.44.6:Disability1.51.41.41.41.4:Old age and survivors7.26.97.17.06.7:Family/children1.41.11.11.11.1:Unemployment0.40.40.30.50.5:Housing0.00.00.00.10.1:Social exclusion n.e.c.0.70.60.40.30.3:Total15.514.514.514.814.6:of which: means-tested benefits0.90.80.60.50.4:General government expenditure by function (% of GDP, COFOG)Social protection12.011.411.411.111.2:Health5.95.65.55.85.8:Education5.85.65.45.45.2:Out-of-pocket expenditure on healthcare (% of total health expenditure)31.832.831.531.832.3:Children at risk of poverty or social exclusion (% of people aged 0-17)*31.935.428.932.732.431.6At-risk-of-poverty  rate1 (% of total population)18.620.619.122.221.922.9In-work at-risk-of-poverty rate (% of persons employed)7.69.18.39.98.58.5Severe material deprivation rate2  (% of total population)19.816.013.613.913.512.4Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan1.31.28.95.34.24.9Tenant, rent at market price8.128.93.228.75.712.9Proportion of people living in low work intensity households4 (% of people aged 0-59)11.411.08.89.210.29.7Poverty thresholds, expressed in national currency at constant prices*696473137420230325262727Healthy life years (at the age of 65)Females6.16.36.15.55.6:Males5.65.96.15.05.6:Aggregate replacement ratio for pensions5 (at the age of 65)0.50.50.50.50.50.4Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::53.058.468.670.4GINI coefficient before taxes and transfers*51.853.551.954.052.252.1GINI coefficient after taxes and transfers*32.034.635.037.937.037.6 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

1 Value added in constant prices divided by the number of persons employed. 
2 Compensation of employees in current prices divided by value added in constant prices. 
3 The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology.  
4 Average of the answer to question Q7B_a. "[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome?". Answers were codified as follows: zero if received everything, one if received 
75% and above, two if received below 75%, three if refused or rejected and treated as missing values if the application is still 
pending or don't know. 
5 Percentage population aged 15-64 having completed tertiary education. 
6 Percentage population aged 20-24 having attained at least upper secondary education. 
7 Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm  
8 Aggregate OECD indicators of regulation in energy, transport and communications (ETCR). 
Sources: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of SMEs' applications for bank loans). 

57 

Performance indicators201220132014201520162017Labour productivity per person1 growth (t/t-1) in %Labour productivity growth in industry0.123.245.510.20-0.564.16Labour productivity growth in construction-10.11-1.1913.85-6.68-6.0712.00Labour productivity growth in market services3.382.050.283.011.044.93Unit Labour Cost (ULC) index2 growth (t/t-1) in %ULC growth in industry2.540.543.736.214.980.86ULC growth in construction12.73-0.95-4.786.7617.473.70ULC growth in market services2.683.913.755.435.305.33Business environment201220132014201520162017Time needed to enforce contracts3 (days)370370370370370370Time needed to start a business3 (days)19.58.55.55.55.55.5Outcome of applications by SMEs for bank loans4:1.161.271.141.171.06Research and innovation201220132014201520162017R&D intensity0.890.951.031.040.840.88General government expenditure on education as % of GDP5.805.605.405.405.20:Employed people with tertiary education and/or people employed in science and technology as % of total employment474849505050Population having completed tertiary education5293031333435Young people with upper secondary education6899091919291Trade balance of high technology products as % of GDP0.230.06-0.08-0.46-0.40-0.30Product and service markets and competition200320082013OECD product market regulation (PMR)7, overall::1.52OECD PMR7, retail::1.11OECD PMR7, professional services::1.85OECD PMR7, network industries8::2.02 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 prices) 
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR) 
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR) 
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR) 
          Waste intensity: waste (in kg) divided by GDP (in EUR) 
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP   
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP 
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change) 
Real unit energy cost: real energy costs as % of total value added for the economy 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as % of value added for  manufacturing 
sectors 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP 
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT. 
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste 
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP 
Proportion of GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG emissions 
(excl. land use, land use change and forestry) as reported by Member States to the European Environment Agency. 
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2010 EUR) 
Transport carbon intensity: GHG emissions in transport activity divided by gross value added of the transport industry 
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels 
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk. 
Diversification of the energy mix: Herfindahl index covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels 
* European Commission and European Environment Agency 
Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators) 

58 

Green growth performance201220132014201520162017MacroeconomicEnergy intensity kgoe / €0.230.210.200.200.210.21Carbon intensity kg / €0.690.620.600.600.58-Resource intensity (reciprocal of resource productivity)kg / €1.241.451.321.291.301.32Waste intensity kg / €0.18-0.19-0.19-Energy balance of trade % GDP-7.5-6.1-4.7-3.6-2.6-3.0Weighting of energy in HICP%16.3916.8414.2513.6011.7912.02Difference between energy price change and inflation %3.8-1.8-4.8-9.2-5.5-3.6Real unit of energy cost% of value added27.627.827.728.729.8-Ratio of environmental taxes to labour taxesratio0.130.130.130.140.13-Environmental taxes% GDP1.61.71.71.91.91.9Sectoral Industry energy intensity kgoe / € 0.130.120.110.110.11-Real unit energy cost for manufacturing industry excl. refining% of value added13.913.814.014.314.5-Share of energy-intensive industries in the economy% GDP9.69.39.39.2--Electricity prices for medium-sized industrial users€ / kWh0.110.120.120.100.090.08Gas prices for medium-sized industrial users€ / kWh0.050.040.040.020.030.03Public R&D for energy % GDP0.010.020.010.020.010.01Public R&D for environmental protection% GDP0.000.000.010.010.000.00Municipal waste recycling rate%23.527.830.533.148.048.1Share of GHG emissions covered by ETS*%41.738.835.936.130.7-Transport energy intensitykgoe / €0.460.440.470.510.51-Transport carbon intensitykg / €1.291.231.311.411.42-Security of energy supplyEnergy import dependency%80.578.578.378.477.675.6Aggregated supplier concentration indexHHI99.797.587.871.751.5-Diversification of energy mixHHI0.290.270.270.270.270.27 
 
 
 
 
 
ANNEX D: INVESTMENT GUIDANCE ON COHESION POLICY 

FUNDING 2021-2027 FOR LITHUANIA 

Investment Guidance on Cohesion Policy Funding 2021-2027 for Lithuania (33)  

Building  on  the  Commission  proposal  for  the  next  Multi-Annual  Financial  Framework  for  the  period 
2021-2027  of  2  May  2018  (COM  (2018)  321),  this  Annex  D  presents  the    preliminary  Commission 
services views on priority investment areas and framework conditions for effective delivery for the 2021-
2027 Cohesion Policy. These priority investment areas are derived from the broader context of investment 
bottlenecks,  investment  needs  and  regional  disparities  assessed  in  the  report.  This  Annex  provides  the 
basis for a dialogue between Lithuania and the Commission services in view of the programming of the 
cohesion policy funds (European Regional Development Fund, Cohesion Fund and European Social Fund 
Plus). 

Table D.1: 

Policy Objectives 

(33)  This Annex is to be considered in conjunction with the EC Proposal for a Regulation of the European Parliament and of the 
Council on the European Regional Development Fund and on the Cohesion Fund COM(2018) 372 and in the EC Proposal for a 
Regulation of the European Parliament and of the Council on the European Social Fund Plus COM(2018) 382 and in particular 
the requirements for thematic concentration and urban earmarking outlined in these proposals. 

(Continued on the next page) 

59 

Policy Objective 1: A Smarter Europe – Innovative and smart industrial transformation Lithuania’s general innovation performance and the proportion of innovative and high added value businesses, which both are the main drivers of productivity and competitiveness, are lagging behind the EU28 average. High priority investment needs(1) have therefore been identified to enhance research and innovation capacities and the uptake of advanced technologies, where appropriate, in cooperation with other countries and in line with the EU Strategy for the Baltic Sea Region, as well as building on the lessons learned in Lithuania during the implementation of the Commission pilot project on industrial transition, and in particular to: • strengthen innovation performance and productivity growth by identifying smart specialisation areas on the basis of national and regional needs and potential; • increase the number of innovative firms in the smart specialisation sectors with the highest potential, and taking into account regional specialisations; • strengthen the supply side of research and innovation by increasing the attractiveness and competitiveness of the research system; • support collaborative research between universities and businesses, thereby enabling technology transfer and commercialisation of research outcomes. Uptake of broadband by households and use of advanced data-driven technologies by firms remain limited despite Lithuania's relatively high ranking in terms of broadband coverage. Priority investment needs have therefore been identified to reap the benefits of digitalisation for citizens, companies and governments, and in particular to: • increase Information and Communications Technology uptake in small and medium-sized enterprises, including supporting infrastructures and services; • promote the range, quality and interoperability of e-services provision and their uptake by citizens, with special focus on rural areas and the older population, and in a cross-border context; • upscale and accelerate open data, e-government.                                                             (1) The intensity of needs is classified in three categories in a descending order – high priority needs, priority needs, needs.  
 
 
 
 
 
                                                           
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Lithuania 

Table (continued) 

(Continued on the next page) 

60 

Firms in Lithuania are relatively small and weakly integrated into domestic and international clusters and global value chains. The start-up ecosystem is relatively young and dynamic and needs further development. High priority Investment needs have therefore been identified to increase the growth and competitiveness of small and medium-sized enterprises, and in particular to: • strengthen the competitiveness and growth prospects of the innovative small and medium-sized enterprises; • internationalise their activities and move up the global value chains; • identify new export markets and promote participation in cooperation networks and interregional clusters, including in the Baltic Sea region; • promote entrepreneurship, as well as the creation and growth of start-ups/scale-ups and accelerators.  The transition to new technologies in Lithuania is hampered by weak innovation and a low degree of digital proficiency within companies. Investment needs have therefore been identified to develop skills for smart specialisation, industrial transition and entrepreneurship and in particular to: • provide small and medium-sized enterprises and research institutions with targeted training on how to manage innovations;  • support small and medium-sized enterprises in re-skilling in smart specialisation areas; • develop universities’ and research institutions’ capacity to improve the commercial viability and market relevance of their research projects; develop digital skills in small and medium enterprises in order to increase their productivity. Policy Objective 2: A low-carbon and greener Europe – Clean and fair energy transition,  Green and Blue investment, circular economy, climate adaptation and risk prevention(2) Lithuania's economy is still relatively energy-intensive, with energy consumption levels well above the EU average, even though the country is expected to over-achieve its 2020 greenhouse gas emission reduction targets. High priority investment needs have therefore been identified to promote energy efficiency measures and renewable energy, and in particular to: • reduce energy consumption levels in housing, public buildings and by businesses; • support deployment of small-scale renewable electricity capacities, owned by energy communities, businesses or individual energy consumers; • support the transition to renewables in the heating sector;  • deploy solutions for smart electricity distribution grids and storage. Lithuania's economy is very resource-inefficient. Landfill remains the cheapest and still important way of treating waste in Lithuania, despite good progress in improving waste management performance. Investment needs have therefore been identified to further promote the transition to the circular economy, also with a view to achieving new recycling and landfilling targets, and in particular to: • support the shift towards more  waste prevention, reuse and recycling; • promote the use of recycled materials as alternatives to raw materials and of recycled content in general. Regarding climate change-induced risks Lithuania suffers from floods and flood-induced damages to the economy and infrastructure and from costal erosion. Investment needs have therefore been identified for climate change adaptation, risk prevention, disaster resilience to: • address risks as identified in the national risks assessment, with the focus on prevention; • promote coordinated and cooperative preventive measures actions in line with the EU Strategy for the Baltic Sea Region.                                                             (2) While outside of the scope of the ERDF and the Cohesion Fund (art. 6, paragraph 1(h), COM (2018)372), energy interconnectors could be financed by the Connecting Europe Facility in line with its objectives (art. 3, paragraphs 1 and 2 (b), COM(2018) 438).  
 
 
 
 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Lithuania 

Table (continued) 

(Continued on the next page) 

61 

Policy Objective 3: A more connected Europe – Mobility and regional Information and Communications Technology connectivity Lithuania’s transport infrastructure remains far below EU average standards in terms of network’s extension, research and innovation investments, carbon emissions and safety issues, even though coverage and quality have been significantly improved in recent years. High priority investment needs have therefore been identified to develop a sustainable, climate-resilient, intelligent, secure and intermodal Trans-European Transport Network, and it's accessibility, in particular to:  • complete core and comprehensive Trans-European Transport Network and bring it's national sections up to EU standards; • improve the access to Trans-European Transport Networks, the connectivity of the peripheral regions and cross-border mobility; • invest in addressing externalities (inefficiency, congestion, safety) and deploying new technologies. Concentration of population in cities and surrounding areas puts additional pressure on sustainable urban mobility, including accessibility issues and traffic congestion. Investment needs have therefore been identified to promote sustainable multimodal urban mobility to: • promote sustainable, cleaner and efficient urban transport systems as part of the relevant integrated territorial development strategies and sustainable urban mobility plans with the focus on functional areas; • promote investment in low-carbon public transport and active modes of transport. There is a significant digital divide, in terms of coverage and take-up, between urban and rural areas in Lithuania, even though the country performs relatively well in terms of overall broadband connectivity. Investment needs have therefore been identified to improve digital connectivity, and in particular to: • deploy very-high capacity networks, eliminating coverage gaps in rural and less populated areas; • improve the cyber security and physical security of investments in public very high-capacity networks. Policy Objective 4: A more social Europe – Implementing the European Pillar of Social Rights Population is ageing and emigration is high. Skills shortages are a challenge. Vulnerable groups are largely outside the labour market. Bilateral social dialogue and the capacity of the social partners are limited. Priority investment needs have therefore been identified to improve access to employment and promote the social economy, and in particular to:  improve the coverage of active labour market measures, especially for vulnerable groups, and promote a healthy and well–adapted working environment;  support the social economy and start-up social entrepreneurs;  support voluntary labour mobility across sectors and regions;   promote social dialogue and help the social partners in capacity building. The education and training system faces challenges. Formal childcare coverage is low. Gaps in employment based on skills level and on disability persist. Participation in adult learning is low. Large territorial differences remain. High priority investment needs, including in infrastructure, are identified to improve the quality, effectiveness and labour market relevance of the education and training system and to promote lifelong learning, flexible upskilling and reskilling opportunities for all, better anticipating change and new skills requirements, and in particular to:  support acquisition of key competences, including digital skills and innovation management, with a focus on reducing territorial and social disparities;  improve the quality and continuous training of the education and training workforce; • widen access to affordable and good quality childcare;  improve inclusive quality education for persons with disabilities;  expand life-long and workplace learning in cooperation with relevant stakeholders;  incentivise investment in training by employers;  support partnerships to ensure better transfer of information on labour market needs.   
 
 
 
 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Lithuania 

Table (continued) 

Source: European Commission 

62 

Poverty, social exclusion and income inequality are high. The availability of social housing is low. High priority investment needs have therefore been identified to foster active inclusion, improve employability and address material deprivation through food and basic material assistance, including accompanying measures, and in particular to:   support integrated active inclusion involving civil society and local communities;  increase outreach to vulnerable groups, address barriers to social and labour market integration and address the specific needs of carers;  reduce homelessness and improve access to social housing, including through infrastructure. Health outcomes are weak. Inefficiencies in the health care sector persist. Access to long-term care is low. Priority investment needs, including in infrastructure, are identified to improve the affordability, quality, effectiveness and resilience of health care and long-term care services, with a view to reducing health inequalities, and in particular to:   improve equal access to affordable and good quality healthcare and long term care;  move health services to the stronger primary care and more person-centred model;  complete the transition from institutional care to independent living community-based services;   support re-skilling, upskilling and retention of the healthcare, long-term and social care workforce;  improve public health and prevention policies, targeting the main health risk factors and groups. Policy Objective 5 – A Europe closer to citizens by fostering the sustainable and integrated development of urban, rural and coastal areas and local initiatives Lithuania’s biggest cities have played an important role in the country’s rapid convergence process, but wealth and opportunities are spread very unevenly and the divide between urban and predominantly rural areas is growing. High priority investments needs in the tailor-made, sustainable and integrated development of urban, rural and coastal areas and local interventions are therefore identified to complement policies to address the demographic challenges and socio-economic disparities, and in particular to: • improve the attractiveness, business environment of urban areas, create links with the functional urban areas; • address the needs and potential of the regions that are lagging behind in economic and social development, by combining adaptation and quality-of-life measures with investments to increase growth; • build the capacity and competencies of local and regional authorities and local communities to develop sound integrated territorial strategies and to assess and select projects. Factors for effective delivery of Cohesion policy • promote social innovation and social experimentation of projects and programmes; • broaden use of financial instruments and/or contributions to a Lithuanian compartment under   InvestEUfor revenue-generating and cost-saving activities;  build on the lessons learned in Lithuania during the implementation of the Commission pilot project on industrial transition;  • revise and simplify procedures, eliminating overlaps and excessive documentation and coordination requirements in  programming and implementing EU funds; • increase the capacity of intermediate bodies' and beneficiaries' to prepare and implement projects; • strengthen the partnership capacity of social partners and increase dialogue with civil society organisations;   • improve public procurement performance, in particular by making efforts to reduce the rate of "single-bidding" and more transparent procurements at municipal level   
 
 
 
 
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