2026-03-26
Independent Fiscal Institution: war in Iran increases uncertainty – inflation is expected to accelerate
The greatest risk to the economy at present is linked to the war in Iran – the development of both the Lithuanian and global economies will depend on its course. Following the rise in energy prices, the Independent Fiscal Institution forecasts that annual inflation in Lithuania will accelerate to 3.9% this year, whilst GDP will grow by 3.3%. If the war in Iran drags on, energy prices may remain high for a longer period, so it is important to prepare in advance so that the most targeted measures can be applied if necessary. During this period of uncertainty, it is critically important not to make hasty, wide-ranging decisions that would be disproportionately costly to the state budget compared to the benefits gained.
The National Audit Office, as the Independent Fiscal Institution (IFI), has assessed the increased geopolitical uncertainty, analysed the macroeconomic environment and prepared projections for economic indicators.
Following the rise in energy prices, the IFI has lowered its real GDP growth projection for 2026 to 3.3% due to slower growth in domestic consumption and external demand. Nevertheless, the economy is forecast to grow slightly faster this year than in 2025, driven by growth in household consumption linked to changes in the second pillar of the pension system and by higher inflows of EU funds.
“The ongoing war in Iran has increased geopolitical uncertainty and caused a surge in energy prices. For this reason, we have raised the inflation forecast for 2026 to 3.9%. Prices are expected to rise more slowly in subsequent years. We forecast that the labour market situation will remain stable, and household purchasing power will grow moderately despite higher inflation,” says Jurga Rukšėnaitė, Head of the Budget Monitoring Department.
The main risks to the Lithuanian economy are currently linked to the situation in the Middle East. The outbreak of war has increased uncertainty in energy markets. If energy prices remain high, this could fuel inflation and slow global economic growth.
“Although the predicted impact of the war in Iran on inflation is currently limited, we are already seeing discussions about possible government interventions. Given such high levels of uncertainty, it is vital to prepare measures in advance in case the situation in the energy market deteriorates, thereby avoiding hasty and disproportionately costly decisions. It is essential to recognise that broad, horizontal measures are extremely costly for the state, so all decisions must be as targeted as possible, taking into account the cost-benefit ratio. For example, given the limited fiscal space, consideration could be given to temporary aid for energy-intensive businesses or targeted compensation for the most vulnerable households, using existing support schemes,” notes Auditor General Irena Segalovičienė.
Based on its own projections and other methods, the IFI has assessed and endorses the macroeconomic indicator projections for fiscal planning in the Economic Development Scenario for 2026–2029, published by the Ministry of Finance on 24 March 2026. These are consistent with the assumptions set out by the Ministry of Finance and are based on relevant statistical data.