Successfully investing in Lithuania

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last updated on 8 June 2022 | reading time approx. 6 minutes

 

 

 

How do you assess the current economic situation in Lithuania?

Since the war in Ukraine has established uncertainty in the Lithuania‘s economic outlook, the Central Bank of Lithuania presented three Lithuanian economy development paths: conventional, shock and larger shock scenarios. The conventional scenario forecasts a slower GDP growth and higher than previously forecasted average annual inflation. Based on the shock scenario, exports to Russia, Belarus and Ukraine are expected to shrink by two-thirds due to the sanctions. Meanwhile, the larger shock scenario covers a more severe assess­ment of economic developments, based on weaker assumptions about the international economic situation, the domestic economy and stricter sanctions. Under this sensitivity analysis, Lithuanian businesses practically stop exporting to Russia, Belarus and Ukraine, while demand from EU countries slows down even more.
 
Increasing migrant flows could have a positive impact on the Lithuanian labour market as well as possible agreements to increase the world‘s supply of energy resources from alternative suppliers, increasing energy efficiency, expansion of the renewable energy sector.
 
An improving long term outlook from international rating agencies demonstrates Lithuanian market’s stability.  Standard & Poor's credit rating for Lithuania stands at A+ with stable outlook. Moody's credit rating for Lithuania is set at A2 with stable outlook.
 
Within the “Index of Economic Freedom 2022”, which measures the degree of economic freedom in the world's nations, Lithuania holds the 17th position worldwide (out of 177 countries) with an overall score of 75.8. The country is ranked 12th among 45 countries in the Europe region, and its overall score is above the regional and world averages. According to the rankings, business freedom is strong, but labor freedom would benefit from additional reforms. 
 
“The IMD World Competitiveness Index 2021” announced by the Swiss Institute of International Management, ranks Lithuania in 30th place (out of 64 countries worldwide). The rankings rate a country’s competitiveness according to 334 measures directly relating to the quality of the local business environment. Reflecting its pool of highly skilled specialists and rapid adoption of advanced technologies, Lithuania climbed even higher in the digital measure (29th overall) and talent (28th).

  

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

In general, Lithuania, as EU and NATO member state, is increasingly considered by German production com­pa­nies as an excellent safe haven near-shoring location and alternative to Russian and/or Belarus or even Asian countries. In recent years, a number of German industrial companies has invested heavily in Lithuania. As a result, within 2021, Germany has become the largest foreign investor in Lithuania (EUR 5.6 billion). The major success stories are related to the entry of major German investors – “Continental”, “Hella”, “Homanit” − into the Lithuanian market. In addition, German life insurer Allianz entered the Lithuanian insurance market in 2021, taking over the Lithuanian and Polish business from British Aviva.

 

Lithuania is also profiting from relocation of highly qualified personnel and companies from Belarus. In total, 110 Belarusian companies showed interest in operations in Lithuania where they could create approximately 3.000 new workplaces.

  

According to the Bank of Lithuania, in Q4 2021, the flow of foreign direct investment (FDI) in Lithuania was positive and amounted to EUR 635.8 million. Meanwhile, cumulative FDI rose by 8.4 per cent over the year and amounted to EUR 26 billion at the end of 2021. The largest share of FDI was attracted by companies engaged in financial and insurance activities, manufacturing, wholesale and retail trade, real estate activities.

 

As Lithuania has been reducing its economic dependence on Russia for a long time by establishing foreign direct investment (FDI) relations with the Western Europe, especially with Germany and Scandinavian coun­tries, the negative impact on Lithuania's economy is expected to be quite moderate.

 

In 2021, Lithuania was concerned about the loss of some investors due to China sanctions. Lithuania has allowed Taiwan to open its representative office in Vilnius under the name “Taiwanese” instead of “Taipei”. As the result, China imposed a set of sanctions, such as cutting of credit limits and raising prices for Lithuanian companies, Lithuania's removal from the Chinese customs systems.

 

Essentially, four sectors propose the largest potential in Lithuania: Technology, Manufacturing, Global Business Services & ICT and Life sciences.

 

2021 was a year of record growth for Fintech in Lithuania, which was ranked in the TOP10 of the Global Fintech Index. According to Invest Lithuania, the country's investment promotion agency, with a continuous focus on improving its business and regulatory environment, Lithuania has strengthened its position as one of the top ecosystems globally for developing and rapidly scaling innovative fintech solutions. When it comes to the manufacturing sector in Lithuania, it stands out for favorable business environment, multiple governmental support opportunities and highly educated workforce. In addition, with a perfect level of connectivity between local cities and close co-operation between academic institutions and businesses, Lithuania might propose potential investors a hub for Business Services and ICT. As regards to the industry of Life sciences, currently this sector is on the rise. Lithuania is eager to offer attractive financial incentives for R&D and manufacturing activities as well as government support to ensure smooth business operations.

 

Within the consecutive years, Lithuania has been working intensively to attract foreign investment to the country. A more business-friendly legal base has been established, and free economic zones that are par­ti­cu­larly favorable to foreign investments have been set up. As of 2021, legislative amendments (dubbed the “Green Corridor”), entered into effect in Lithuania, creating more favorable conditions for local and foreign capital investments in large-scale projects in manufacturing, data processing and data hosting services.

  

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. Almost all economic ties with Belarus and the Russian Federation have been severed. This concerns both the import or 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 unless Russian and Belarusian citizens have existing national visa issued by Lithuanian authorities.

 

Companies that are still active in both the Russian and the Lithuanian markets have been named and shamed on social media and face risks of privately organized boycotts and a tarnished reputation in Lithuania.

 

Due to sanction compliance many Lithuanian banks have all but ceased to execute payment transactions to the Russian Federation and, partly, also to Belarus.

 

All regulatory measures by the Lithuanian government to control the spread of Covid-19 have been lifted. Their impact on the business environment is currently negligible. However, many companies feel, like in other countries, the impact of Chinese regulatory measures with regards to Covid-19 on their supply chains. The resulting shortage of raw materials, further worsened by the effects of the war, is leading to a sharp increase in prices and rising inflation. 

 

One of Lithuania's strategic goals is to increase local electricity generation and reduce dependence on imports. How is the market for renewable energies developing in Lithuania?

Lithuania has banned the import of electricity from Belarus, due to the fact the technically unsafe Astravyets nuclear power plant has started operation, Therefore Lithuania has to rapidly increase local electricity pro­duc­tion to cover the gap which occurred due to the blocked electricity flow form Belarus.
 
In April 2022t he Ministry of Energy of the Republic of Lithuania presented a package of legislative amend­ments designed to accelerate and stimulate the development and expansion of green energy by introducing fundamental reforms in the Lithuanian electricity sector. The amendments of the laws set an ambitious goal for Lithuania – to achieve full energy independence in less than 8 years, i.e. by 2030, thus making the country a leader in green energy. And since, as already mentioned, the initiated legislative amendments aim to inspire the acceleration of the development of green energy, these amendments are focused exclusively on improving the efficiency of the current regulation of the construction, installation and administration of offshore wind, onshore wind and solar power plants.
 
The amendments make it clear that solar power plants will no longer need to undergo screening and full en­vi­ron­mental impact assessments. Hybrid power plants, solar and wind plants can be built on agricultural land without any change of the land usage type.
 
All solar power plants connected to the transmission grid, wind and biogas plants operating commercially will be subject to a so-called “production surcharge”. The levy will be set at a rate of EUR 0.0013/kWh (EUR 1.3/mWh), with the money collected going towards community needs. The obligation to pay the generation levy is planned to start on 1 July 2023. This should reduce the hostility of local communities toward wind park developers as there are still myth surrounding wind part activity.
 
The Lithuanian government’s is also moving forward in the development of offshore wind energy parks. Special development plan and strategic environmental feasibility study for an offshore wind farm has been completed and environmental impact assessment is underway. The plan is to develop a 700 MW offshore wind park by 2030. The electricity produced from this wind park is expected to cover up to 25 per cent of Lithuania’s annual electricity demand. The government announced plans to hold the first auction for the development of the offshore wind park in 2023-2024.
 

In your opinion, how will Lithuania develop?

The uncertainty due to the war in Ukraine and the wide-ranging sanctions on Russia and Belarus make it diff­icult to define the outlook for Lithuania going forward. The war will definitely impact the Lithuanian economy but Lithuania’s flexibility and westward focus should mitigate the war-related losses. 
 
As Lithuania’s economic dependence on Russia is low enough, the disruption of trade relations with Russia will not have a significant negative impact on Lithuania. 
 
When it comes to the Lithuania’s economic growth in 2022, Lithuania’s GDP growth is projected to slow down, but will not turn negative. As Lithuania’s economic development is heavily dependent on foreign markets, major economic turmoil should not occur.

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