Lithuanian Shadow Economy No. 3 The shadow economy still makes up a quarter of the Lithuanian economy


PRESS RELEASE │LFMI: The shadow economy still makes up a quarter of the Lithuanian economy

May 2014, Vilnius.In 2014, the shadow economy will account for 25 percent of the total economic activity in Lithuania, the Lithuanian Free Market Institute (LFMI) estimates. For the sixth consecutive year, the shadow economy will be significantly higher than before the economic crisis, when it was 18 per cent of GDP.

“A quarter of economic activity still takes place in the background. While the shadow economy declined slightly, it is mainly due to the country’s improved economic situation, rather than a decrease in taxes or a more favourable regulatory environment. The government is fighting under-the-table dealings, but as long as there are a significant number of low income earners, and there is high taxand regulation, the shadow economy will be significant,”says VytautasŽukauskas, senior policy analyst and research manager at LFMI.

Lithuania’s financial control and law enforcement agencies have provided 64 ways to combat the shadow economy between 2013 and 2014. Most of them are designed for tighter controls, or to enforce higher penalties.

The shadow economy occupies 27 per cent of the alcohol market, and 28 per cent of the cigarette and tobacco market.

The shadow economy is not only the problem of customs, tax authorities and other authorities. Law enforcement should not be asking,‘how do we better identify and punish perpetrators?’in fighting the shadow economy, but rather, “how can we make it easier for business to operate legally?’

Excessive restrictions only grow the shadow economy. In essence, the government is required to adopt such laws, taxes and regulation, so that it ensures individuals can pursue their own interests in a legal and profitable way,” V. Žukauskas remarked.

According to LFMI’s report on the shadow economy, half the price of gasoline now includes tax (value-added tax (VAT) and excise duties), with the price of diesel accounting for about 40 percent. Gasoline excise tax in Lithuania exceeds the minimum set by the EU. It is estimated that the reduction of gasoline tax to a minimum could reduce the price of fuel by about 30 cents.

26 percent of Lithuanian residents said that they purchased illegal fuel in 2013.

“High fuel taxes are an obvious cause of the shadow economy,” V. Žukauskas notes. “However, rather than reducing tax, it has been proposed to introduce new restrictions.”

At least 20 percent of Lithuanian residents worked illegally or received a part of their salary under-the-table. “The shadow labour market would diminishif we reduce labour taxes. Labour is taxed at aphenomenal40 percent. We also need to increase the amount of tax-exempt income (TFI), and modernise the Soviet era breathing labour code,”V. Žukauskas said.

The shadow economy grew rapidly between 2008 and 2010, and accounted for as much as 28 percent the country’s GDP.In 2013, it decreased to 26 percent of GDP.


The shadow economy has a big impact on the alcohol sector and accounts for 27 percent of the market.

The shadow economy’s influence is similarly high inthe Lithuanian cigarette and tobacco market. Since 2012, the illegal alcohol market has declined from 36 to 27 percent.

28 percent of the cigarette market is in the shadow economy

By the end of 2013, the illegal cigarette market in Lithuania amounted to 28 percent of the market. Absolutely the biggest part of the illegal market has been smuggled goods.

81 percent of non-Lithuanian smuggledtobacco products were indicated to be from Belarus, and 8 percent from Russia.

The largest share of illegal tobacco was found in Alytus (40 percent), Tauragė (38 percent), Ukmergė (38 percent), and Panevezys (36 percent).

One fifth of Lithuanians are still working in the shadow economy

In 2013, at least 20 percent of the Lithuanian population worked illegally or received a part of their salary under the table (data from January 2014 survey).In 2012, 22 per cent of the population was involved in the labour shadow.

Illegal fuel in the shadow economy

At the end of 2013, 29 percent of residents said that they, or their family members, had purchased illegal fuel during 2012. A survey in January 2014 noted that the number of Lithuanians engaged in illegal trade decreased to 26 per percent during 2013.

The survey revealed that the majority of black market fuel is acquired through nearby borders, namely Belarus and Russia. The cities most involved in sourcing illegal fuel includedAlytus, Taurage, Telsiai, and Marijampolė.

“The Lithuania Shadow Economy” is a periodicalLFMI research publicationthat examines the problems of the informal economy. The first edition was dedicated to the excise shadow in Lithuania; the second – to shadow in the labour market.The third issue addresses the effectiveness of counter action to the shadow economy. The publication uses the following assessment methods in its examination: surveys, statistical data analysis, andeconometric modelling.