We use cookies to personalise the website and offer you the greatest added value. They are, among other purposes, used to analyse visitor usage in order to improve the website for you. By using this website, you agree to their use. Further information can be found in our data privacy statement.



Successfully investing in Lithuania

PrintMailRate-it

last updated on 19 May 2021 | reading time approx. 3 minutes

 

 

 

How do you assess the current economic situation in Lithuania?

Lithuania has recorded significant growth over recent years, including in the 1st quarter of 2020. This growth is the result of the rapid modernisation of its economy, a diversified industrial sector, and a well-performing banking system. However, the Covid-19 pandemic caused turbulence for the country’s economy.

According to economists, although Lithuania’s economic activity still lags behind its pre-pandemic levels, the country’s economic contraction during the second wave of Covid-19 has been relatively mild, and has been less destructive than the contraction cause by the first wave. With international trade in Lithuania’s export partners and other countries recovering, manufacturing production continued to grow substantially in late 2020 and early 2021. According to the Central Bank of Lithuania, Lithuania’s rate of inflation, which stood at 1.1 per cent in 2020, is projected to be 1.6 per cent in 2021 and 1.9 per cent in 2022.

Manufacturing output volumes in many sub-sectors of this field have already exceeded the levels recorded before the pandemic. The overall development of the manufacturing sector is also being supported by newly developed products oriented towards managing the pandemic situation. At the end of 2020, a rise in construction work also contributed to the growing levels of economic activity in Lithuania. There were also some major developments in the energy sector in Lithuania in 2020, with the results of these projects set to be felt through 2021 and beyond.

According to the Central Bank of Lithuania, after a 0.8 per cent drop in 2020, Lithuania’s real GDP is expected to return to growth in 2021, increasing by 2.9 per cent this year.

In the “Index of Economic Freedom 2021”, which measures the degree of economic freedom in the world's nations, Lithuania holds the 15th position worldwide (out of 178 countries) with an overall score of 76.9. This score has increased by 0.2 points, primarily because of an improvement in government integrity. Lithuania is ranked 8th among 45 countries in the Europe region, and its overall score is above both the regional and global average.

“The World Bank's Doing Business Report 2020”, which uses various factors to assess how easy it is to start and run a business in various countries, ranks Lithuania 11th in the world (out of 190).

“The IMD World Competitiveness Index 2020”, launched by the Swiss Institute of International Management, places Lithuania in 31st place (out of 63 countries worldwide). According to the index, Lithuania has significantly improved its position in the field of economic development, but has declined in the areas of business efficiency, public sector efficiency, and infrastructure assessment.

 

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

Lithuania is one of the most appealing Baltic states in terms of investment. This is due to the low costs of establishing a company, but also thanks to the presence of various industries, which attract more foreign enterprises every year. So far, the most attractive industries for investment have been high-tech, manufacturing, global business services and ICT. Recently, Lithuania was ranked 1st globally for fulfilling business needs for ICT. The country provides an ideal environment for the setting up of service and data centres. In recent years, Lithuania has managed to attract global players such as Hella, Uber, Nasdaq, Continental, Western Union, Cognizant, Danske Bank, Sermo, Intrum, Telia, Yara, Hellmann, and DHL.

Overall, cumulative FDI in Lithuania increased by 4.1 per cent in 2020. Analysts expect that in 2021 investors' appetites in Lithuania will continue to tilt towards stocks that favour diversification and both growth and value segments of the market. In a relatively low interest rate environment that favours equities, they will also focus on real assets and other asset classes over fixed income for intermediate and longer-term objectives.

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 favourable to foreign investments have been set up. On the 1st of January 2021, legislative amendments (dubbed the “Green Corridor”), entered into effect in Lithuania, creating more favourable conditions for local and foreign capital investments in large-scale projects in manufacturing, data processing and data hosting services.

In recent years, the country has been developing into a European automotive hub. Over 400 indirect automotive suppliers in Lithuania generate a total turnover of more than 400 million euro. In the past 2 years, many German automotive suppliers have also made major investments in new production sites in the Kaunas Free Economic Zone.

Overall, it can be assumed that Lithuania's attractiveness as a business and investment location for German investors and other companies will further increase in the future.

 

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

The Covid-19 pandemic, and the regulatory response to control its spread, have made for a difficult business environment just like in any other EU-country. Specifically, travel restrictions have caused difficulties for German stakeholders who rely heavily on posted or mobile employees. In addition, Lithuanian banks are further tightening their internal anti-money laundering regimes, which makes the opening of a bank account, in particular, an even more burdensome process for foreign investors. German companies should pre-emptively address this by carefully choosing the right company setup. Due to the relatively young age of the Lithuanian judicial system, a more comprehensive contract management and compliance regime is necessary to reconcile the business culture of German investors with the country-specific features of Lithuania.

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's declared focus is on expanding renewable energy and regaining its energy independence, which was lost when the Ignalina nuclear power plant was shut down and decommissioned in 2009. The newly introduced market premium model, which aimed to boost the development of renewable energies, will be cancelled, but for positive reasons – the goal of reaching 5 TWh of energy production (or planned production) from renewable sources per annum by 2025 has already been reached in 2021. Only one feed-in-tariff tender took place in September 2019, where the winner was awarded with a market premium of 0 euro/MWh. This development proved that renewable energy projects can exist at market conditions without additional state support.


However, only a small fraction of the wind energy projects currently in the pipeline are in the later phases of development. The development of these projects is being slowed down by extensive administrative requirements and the lack of support from local municipalities. In addition to this, there is a lack of grid capacity left for the connection of new energy projects, even though developers are obliged to bear 100 per cent of the connection costs.

This situation is subject to change as the government’s primary focus is slowly shifting towards the development of offshore wind energy parks. A public tender has been recently organised to prepare a special development plan and strategic environmental feasibility study for an offshore wind farm. 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, and thus reduce electricity imports. The government announced plans to hold the first auction for the development of the offshore wind park in 2023.


In your opinion, how will Lithuania develop?

According to the latest economic forecasts. Lithuania’s rate of inflation, which stood at 1.1 per cent in 2020, is projected to be 1.6 per cent in 2021 and 1.9 per cent in 2022. Meanwhile, real gross domestic product (GDP) is calculated to return to its pre-pandemic level by mid-2021 and to surpass its potential level in early 2025.

The pandemic situation and its management will continue to have a significant effect on economic development. In the nearest future, economic activity is projected to remain restrained, as there are still relatively severe restrictions on economic activities and mobility in place both in Lithuania and abroad.

Since it is not easy to predict changes in the pandemic situation in the nearest future, Lithuania has set two possible scenarios for its economic development. The mild scenario assumes that the number of Covid-19 cases diminishes more rapidly and new vaccines are implemented faster. In this case, the government would ease the restrictions imposed on economic activities and mobility and boost the economy in the upcoming year. Under this scenario, most economic activities would see improvement.

The severe scenario assumes that the containment of the pandemic has limited success and that new Covid-19 clusters continue to emerge. The severe scenario would mean that the restrictions currently imposed on economic activities and mobility, which weigh down on the economy, would stay in place longer and the process of their mitigation would require more time. This would affect many macroeconomic indicators – domestic demand would take a lot longer to recover and household income would increase less, while unemployment would also remain heightened for a longer period of time. It is estimated that under the severe scenario, economic activity would not actually decrease, but its growth rate would be small.

Contact

Contact Person Picture

Tobias Kohler

Partner

+370 5 2123 590
+370 5 2791 514

Send inquiry

 Publication

Deutschland Weltweit Search Menu