While Lithuania exited the COVID-19-induced recession in early 2021, Coface underlines how the pandemic has remained an issue for further economic development. After a relatively strong growth momentum, especially at the beginning of 2021 and in the summer, the further wave has particularly dampened private consumption (61% of GDP) at the turn of the year. Furthermore, high inflation, which reduces purchasing power, is another factor that negatively affects private consumption. The inflation rate reached around 11% in early 2022, as both individual goods and energy prices became more expensive. War heats inflation, with households’ bills expected to increase by 50% to 60% above the average of the last years during the winter months. And in the current instance of commodity prices, no one can say how much is attributed to Russia, US/EU monetary policies, supply/demand, or countless other factors that determine prices. Commodity prices didn’t just increase in the past few weeks. There are many forces that brought commodities to new all-time highs, already in the works long before Russia ever crossed the border. First of all, QE and stimuli in front of supply chain bottleneck.

And while exports should improve slightly in 2022, they are still very dependent on the pandemic’s development in their main destinations, Russia and Latvia (together 23% of total exports), where bigger COVID-19 waves occurred in late 2021. As Lithuania is a small, open economy, imports should increase more than exports, thanks to the domestic recovery, and net foreign trade will have a negative effect on economic growth. Positive impulse should still come from public consumption and investments. After the end of additional state support measures for companies in late 2021, there is still EUR 304 million (0.7% of GDP) reserved to deal with the pandemic in 2022. Moreover, national defense expenditures should increase by 12.2% to a total of EUR 1.176 billion. (2.05% of GDP), due to the tense situation with Belarus and Russia.

Even before politicians began declaring the end of the pandemic, rising prices were people’s top concern, particularly the increase in gas prices. Since Russia is one of the world’s leading energy producers, sanctions imposed on Russia, as well as Germany’s decision to shut down the Nord Stream 2 pipeline, provide a convenient excuse for rising gas prices. The Ukraine crisis allows central banks to either postpone rate increases or blame Russia for any unemployment that accompanies the rate increases. The war crisis also provides an excuse to increase federal spending.

Within the EU Recovery Fund EUR 2.2 billion in grants (4.5% of GDP) are reserved for Lithuania between 2021 and 2026. In the second half of 2021, the first tranche (13% of all grants) of the early-approved plan already went to Lithuania, so investment programs into green energy and education could already start during winter. The ECB will buy its assets in a total envelope of EUR 1850 billion until the end of March 2022. All maturing bonds of this envelope will be reinvested until the end of 2023. Besides, net purchases under the normal asset purchase program will continue.

The termination of major public stimuli programs combined with higher defense expenditures will result in a slowly decreasing but still high public deficit in 2022. This will not suffice to stop the widening of the public debt, which will reach a historical record level. Nevertheless, with a share of around 53% of GDP, it remains below the Maastricht criteria. The current account surplus rose dramatically in 2020 but will fall back to its 2019 level in 2022 due to the normalization of the trade balance in the wake of reviving domestic demand, while the services balance and the income balance (e.g. capital income) will probably not show major changes compared to 2021.