There are economic problems in most European countries, but not Lithuania, with both the economy and salaries growing. How is that possible?
It has also come as a surprise to us that our economic development in recent years has significantly surpassed that of other eurozone economies. One of the main reasons for this might be that our export structure has been successful; our exports have performed better than those of the other Baltic states.
The reason for this, in turn, is that our exports have been more diverse – both geographically and in terms of the types of goods we export. In Estonia, for example, one-third of exports go to Sweden and Finland. Meanwhile, in Lithuania, only up to 15 percent of exports are sent to Finland and Sweden. Our export markets are more diverse. In our top five export destinations, we have Poland, the United States, the United Kingdom and the Netherlands. Finland and Sweden are not in the top five, which is a key reason. In Estonia, you are much more dependent on Finland and Sweden. Furthermore, when it comes to what you export, you rely more on the export of timber and electronic equipment to Scandinavia.
Our export structure is much more diverse – it includes industries like metalworking, plastics and chemicals, and we also have a much stronger food industry. During difficult times, a larger share of the food industry helps because it is more stable. So, I believe that our export structure is the main reason we are currently performing better than the other Baltic countries. However, when the economies of Finland and Sweden recover, we will see changes here.
How important is the nearness of Poland, which is also doing well?
Yes, it does help, as Poland is among our chief export partners, and the Polish economy is doing much better than Finland or Sweden. It is among the main reasons we’re doing better.
Have national policies also helped Lithuanian companies?
This primarily benefits consumers and households, as unlike in Estonia, there haven’t been many changes to the tax system in recent years. People often complain that the tax system is constantly changing, but it seems to me that this is more talk than reality. The VAT rate for restaurants and catering services did increase from 9 percent to 21 percent, but overall, there haven’t been any major changes in recent years. This is in contrast to Estonia, where there has been a VAT increase and several changes will take place in 2025.
In Lithuania, the corporate tax rate will rise by one percentage point to 16 percent next year, but again, this is a minor change and will not directly impact households or their financial situation. The only significant change at the moment is a substantial increase in excise duties on motor fuels. We also have a supportive fiscal policy, which means that government spending is growing faster than the economy and fiscal policy is currently supporting the economy. We’re seeing the results of this: pensions and wages have been increasing faster than economic growth, and this has a short-term positive impact.
However, we have elections this weekend (held on October 13 – ed.), and it wouldn’t be surprising if, when the new government and parliament begin their work, there is an increase in defense spending. It’s also quite likely that measures such as raising the VAT rate will be brought up and implemented next year. For now, though, things are relatively calm.
Are there any functional support measures or instruments for companies or foreign investors?
Of course, we have support measures, especially for major foreign investments, but I don’t think this makes us special in any way. I do not believe it to be the secret to why the Lithuanian economy is doing well today.
Lithuania introduced a special tax for banks. Estonia decided not to, fearing detrimental effects on the business environment. What effect has the banking tax had on Lithuania’s business environment?
This did not have a direct impact on businesses or households, because if we look at lending to companies or households in the Baltic countries, loan activity in Lithuania has grown at the same pace as in Estonia, or even more, so it hasn’t affected lending activity or interest rates.
The negative impact lies in the fact that, when we talk about Lithuania’s attractiveness to foreign investors, it is clear that the perception of Estonia is more favorable, especially among financial investors. They see that in Estonia, a sharp increase in profits is treated as a normal business occurrence, and there is no need to take extraordinary profits away. In Lithuania, however, potential investors see that if you earn above-average profits and experience a sharp rise, the government may decide to take those extraordinary profits into the state budget.
Foreign investors are aware of this, they assess what’s happening, and when they choose in the future which country in the Baltics might be the best for starting investment, Estonia ranks higher than Latvia and Lithuania.
While the Estonian economy was developing faster when the Baltic countries had just joined the European Union, what is the situation now? Is the average Estonian or average Lithuanian wealthier and living better in the competition between the Baltics?
If we look at the longer term and not just focus on the present moment, I would highlight the employment rate in society, and in this regard, the figures are very similar in Lithuania and Estonia. Prices in Estonia are still higher than in Lithuania, but wages in Lithuania remain lower. The ratio between income and prices currently favors Lithuania, meaning Lithuanians can afford more in Lithuania than Estonians can in Estonia.
But nominally speaking, Estonians are still wealthier?
Yes, nominally, wages are higher, that’s clear, but prices are also higher. Especially when looking at service prices – dining out in a restaurant in Estonia is more expensive than in Lithuania, and with an average salary, a Lithuanian can afford more in a restaurant. However, the differences aren’t that big, and I think we are simply following Estonia’s trajectory. In the 2010s, you experienced rapid growth in the IT sector, and now our IT sector is growing, as is the number of workers in this field. We were previously far behind Estonia in this area, but now we are catching up. Perhaps you’ve reached a certain level of maturity, and it’s clear that making the next leap in the economy becomes more difficult at that stage.
Estonians are generally happy to see Lithuania doing well, and I suspect today is no exception. Is there something we could do to become stronger together?
If we demonstrate that we are preparing for geopolitical challenges and that we are paying enough to protect ourselves, it is a shared responsibility to show investors that the Baltic region is safe and remains attractive for investments, with solid returns still possible in the Baltic countries. We have a lot of work to do in the energy sector, both in terms of coordination and joining forces. In February of next year, we will join the European energy system. There is much collaborative work to be done, and instead of competing with each other, we should cooperate as much as possible.
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