Summary: KEY ISSUES Context and Outlook. The economy has entered a broadly favorable trajectory of healthy and balanced growth, thanks to a multi-year reform effort. Output should surpass its pre-crisis peak of 2008 for the first time this year, but now in a sustainable manner. Downside risks dominate however, reflecting primarily external factors. The income gap with Western Europe remains considerable, underscoring the need for continued policy discipline and reform. The momentum will need to come increasingly from structural changes as dividends from macroeconomic adjustment run their course. Analysis of key structural issues in this report draws on the companion Baltic Cluster Report. Euro Adoption. Lithuania is well placed to adopt the euro next year, in terms of entry criteria, sustainability of low inflation and public finances, and external stability. It will be a welcome boon to the economy, enhancing financial stability and bringing integration gains. But upgrading supporting policy frameworks, especially to better control the business cycle, will be imperative for EMU membership to be a lasting success. Fiscal Policy. The repair of public finances is well advanced but not yet complete. More consolidation is needed to reach the medium-term objective and materially bring down the debt ratio after its relentless post-crisis increase. It should come from high-quality revenue measures; a public expenditure review would help ensure spending efficiency within an overall tight envelope. Financial Stability. Financial stability has improved further and the main challenge now is resuscitating private sector credit growth to support investment. Structural Reforms. Tackling high structural unemployment, securing a vibrant export sector for the future, and pushing ahead with key infrastructure projects in energy and transport are important priorities.

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