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Successfully investing in Lithuania

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last updated on 16 June 2023 | reading time approx. 7 minutes

 

 

 

How do you assess the current economic situation in Lithuania?

According to the Central Bank of Lithuania, the country’s economic development in 2022 was quite slow, but should resume faster growth in 2023. Large-scale investment and export will be the major drivers of growth in 2023 and the years ahead. A stable labour market, rising wages, and a slowdown in inflation will contribute to growth in the purchasing power of Lithuanian residents. In 2022, Lithuania’s economic activity was character­ised by rapid deceleration. Its effect on the labour market, however, was only marginal. In 2022, the unemploy­ment rate declined to 5.9 percent – its lowest level since 2009. In Q4 2022, unfavourable global trends and high inflation had unsurprisingly led to a slowdown in economic activity. Incentives for private investment were de­pres­sed not only by Russia’s war in Ukraine, but also by the slower growth and uncertain economic future of both Lithuania and its main trade partners.

Lithuania’s improving long-term outlook, as assessed by international rating agencies, demonstrates the sta­bility of its internal market. The country received the following scores: A+ (Standard & Poor), A2 (Moody’s), and A (Fitch). 

According to the International Tax Competitiveness Index Rankings 2022, Lithuania ranks 8th in the world (score: 76.9) amongst the most competitive tax systems in the OECD. The following strengths of the Lithuanian tax system have been highlighted in the rankings: a) business investments in machinery, buildings, and intan­gibles receive above-average tax treatment; b) Lithuania’s corporate tax rate is 15 percent, well below the OECD average of 23.6 percent; c) Lithuania’s personal income taxes are flatter than average, enabling the government to raise revenue from taxes on workers with few distortions. 

The Index of Economic Freedom 2023, which measures a country's economic freedom on a scale from 0 to 100, placed Lithuania at No. 20 worldwide (out of 176 countries), with an overall score of 72.2. According to the In­dex, broad-based, dynamic growth was ensured not only by policies opening up Lithuania to global commerce and trade, but also by competitive taxation and a relatively efficient regulatory system. 

Lithuania also ranked 29th (out of 63) worldwide in the IMD World Competitiveness Index 2022, published by the Swiss Institute of International Management, thereby repeating its previous record. The Index ranks coun­tries according to their ability to manage the competencies necessary to achieve long-term value creation. Each country’s competitiveness is measured based on 333 individual criteria directly related to the quality of its busi­ness environment. The key factors behind Lithuania’s attractiveness were the following: reliable infra­struc­ture (68.8 percent), high level of educational attainment (59.4 percent), skilled workforce (57.8 percent), eco­no­mic dynamism (51.6 percent) and a business-friendly environment (45.3 percent).

How would you describe the investment climate in Lithuania? Which sectors offer the largest potential?

In 2022, despite global challenges, Lithuania has managed to attract a record amount of foreign direct invest­ment (FDI). Agreement was reached on 57 projects that are expected to create more than 5,000 jobs and attract €134.5 million of fixed asset investment over the next three years. In the second half of 2022, investment was mainly driven by the need to upgrade the existing energy production and consumption facilities, as well as by the more extensive use of EU support funds.

According to the Central Bank of Lithuania, cumulative FDI in Lithuania in 2022 grew by 9.7 percent and amoun­ted to €29.7 billion. In Q4 2022, FDI reached €449.7 million, driven primarily by the growth in rein­vest­ment. At the end of Q4 2022, the largest investors in Lithuania were: Germany (€5.6 billion), Sweden (€3.2 billion), Estonia (€3.1 billion), the Netherlands (€2.5 billion), and the UK (€2 billion).

Being an EU and NATO member state, Lithuania is increasingly favoured by German producers as a safe loca­tion for near-shoring, and an alternative to Russia and/or Belarus, and in some cases – even Asian countries. This is supported by the fact that German industrial companies have been heavily investing in Lithuania for the past several years.

Lithuania’s technology sector continues to lead the national economy in terms of growth rate. In 2022, Lithua­nia was chosen for investment by 21 technology companies, such as Raydiant, birkle IT, GOD, and Blis Digital. Lithuania's business service industry also remained attractive to international companies, with Nobia, BMI Group, Mediq, and Continental establishing multifunctional competence centres in the country. Further invest­ment came from the manufacturing companies Pon Bike, Maler Oy, and Dokka Fasteners, with more potentially on the way, given Ryanair’s plans to build two aircraft maintenance hangars in Kaunas. 
 
According to Invest Lithuania, the country's investment promotion agency, Lithuania has become a regional centre of excellence for global technology companies. The number of start-ups has more than doubled over the last decade, and there are now over 200 fintechs operating in Lithuania, making it the 2nd largest fintech hub in Europe by the number of licensed companies. 

With 7 Free Economic Zones (FEZ) ready for business, Lithuania has all the infrastructure needed to meet in­ves­tors’ requirements. The country also boasts a business service industry that’s uniquely attractive to well-known international brands, thanks to its young population, high number of university and college graduates, as well as one of the region’s least saturated business service markets.

In addition, with Invest Lithuania’s guidance, native life sciences companies have become among the most profi­table in the country, exporting 90 percent of their output around the world, and further consolidating Lithuania’s global reputation as an emerging life sciences leader.

Finally, Lithuania’s hard work over the years to boost its attractiveness to foreign investors has so far resulted in a truly business-friendly legal framework and seven Free Economic Zones.

What challenges do German companies face during their business ventures into Lithuania?

The war in Ukraine is currently the biggest challenge German companies face in Lithuania. early all of the eco­no­mic ties Lithuania had with Belarus and the Russian Federation have now been severed. This concerns both the import and export of goods and services from and to these countries, as well as the access of Russian and Belarusian citizens to the Lithuanian labour market. The latter has become all but impossible – the only excep­tion being Russian and Belarusian citizens holding a pre-existing visa issued by Lithuanian authorities.
 
Companies still active in both the Russian and the Lithuanian markets have been named and shamed on social media, and face risks of privately organised boycotts and a tarnished reputation in Lithuania.
 
To ensure compliance with sanctions, many Lithuanian banks have drastically reduced the number of payment transactions with the Russian Federation and, partly, also with Belarus.
 
On top of that, German companies face largely the same challenges in Lithuania as they do in most other coun­tries, namely – rising interest rates, a shortage of qualified employees, and high inflation. 
 

One of Lithuania's strategic goals is to increase it's electric power generation capacity, thereby reducing dependence on imports. How is the market for renewable energy developing in Lithuania?

Lithuania has committed itself to rapidly increasing its local electric power generation capacity by aggressively pushing for renewables. As one of the essential steps towards this goal, Lithuania seeks to develop offshore wind farms in the Baltic Sea and reduce the country's dependence on electricity imports. With an Environ­mental Impact Assessment (EIA) report for an offshore wind farm recently submitted by the Energy Ministry, a tender to select a developer for the first offshore wind park is expected to be launched in the autumn of 2023. 

In Lithuania, the permitted generating capacity for all types of renewable energy sources, including trans­mis­sion and distribution networks, is currently 1,653 MW. This accounts for more than a third of the country's total capacity. Offshore wind farms, together with onshore renewable energy projects, will make a major contribution to Lithuania's energy independence.

Following the approval of a new procedure for connection to the electricity transmission grid, the Lithuanian electricity transmission system’s operator has reported a massive increase in activity by renewable energy de­ve­lopers. Requests concerning the conditions for grid connection have been submitted by numerous solar, wind, and storage plants with a total permitted generating capacity of 7,500 MW. The applications include 2,900 MW of solar and 3,800 MW of wind power. Developers are also planning to install an additional 800 MW of electricity storage. 

Synchronising the Baltic electricity system with continental Europe remains a major challenge. After Russia's invasion of Ukraine, Lithuania took decisive steps to cut off imports of gas, oil, and electricity from Russia. However, the country’s electricity systems are still linked to Russia, making them dependent on decisions taken in Moscow. Lithuania is fully committed to desynchronisation from the BRELL ring and is working with regional partners to achieve this goal as soon as possible. 

Litgrid, the Lithuanian electricity transmission system’s operator, successfully carried out an isolated opera­tional test on Saturday, 22 April 2023. F or the first time, Lithuania’s electricity system was disconnected from the Russian-controlled IPS/UPS and operated with full autonomy. This isolated operational test is one of the most important steps in the preparation for synchronising Lithuania’s electricity system with that of the rest of continental Europe. 

Lithuania, Latvia, and Estonia, together with Russia and Belarus, are currently still dependent on the IPS/UPS system, where electrical frequency is centrally regulated by Russia. Connection to the continental European grids and synchronous operation with Poland, Germany, and other European countries will be achieved by 2025 at the latest.
 

In your opinion, how will Lithuania develop?

Lithuania’s future economic development scenario has been drawn up by the Ministry of Finance on the basis of the country’s performance in 2022. Although Lithuania’s economy managed to cope reasonably well with the challenges posed by the war triggered by Russia last year in Ukraine, annual GDP growth was 1.9 percent for the whole year, with signs indicating a more difficult period ahead.

According to the Bank of Lithuania, economic activity in 2023 will be dampened by continued geopolitical ten­sions over Russia’s aggression in Ukraine, an unstable external environment, and the growing impact on do­mes­tic and foreign demand of monetary tightening, which started last year. Annual GDP growth in 2024-2026 is currently expected to reach 3 percent on average, while the cost of investment in the country is predicted to grow by 5.4 percent during the same period.

Estimates hold that investment growth in 2023 will be driven in part by the more rapid implementation of pro­jects financed through EU funds and the Recovery and Resilience Plan.

As economic activity recovers from 2024 onwards, the economic development scenario envisages that the un­em­ploy­ment rate will gradually decrease to 6.8 percent and will reach ~6 percent in the outer medium-term years. Overall, the magnitude of negative economic consequences of the war for Lithuania will depend on the duration of hostilities in Ukraine, and the EU’s ability to cope with energy challenges.

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