Lithuanian economy hums along, skirts hard-landing scenario

  • 2007-03-07
  • By Gary Peach
RIGA - Lithuania's economy exspanded 7.5 percent in 2006 as development stabilized and the country retreated from the hard-landing risks that trouble Estonia and Latvia. According to the Statistics Department, preliminary results show that gross domestic product increased 7.5 percent to 81.9 billion litas (23.7 billion euros), slightly higher than the previous estimate of 7.4 percent. In 2005 Lithuania's economy expanded 7.6 percent and in 2004 7.3 percent.

Last year's growth was fueled by gains in construction (up almost 19 percent year-on-year), financial intermediation and real estate services (8 percent) and transport and communications (7.1 percent).
While considerably slower than in Estonia and Latvia 's where growth last year was 11.5 and approximately 11.9 percent respectively 's Lithuania's rate of expansion is sustainable and not encumbered with the risks currently facing neighboring Baltic states.

Inflation, relatively at least, is under control. In January consumer prices in Lithuania were flat year-on-year. In Latvia, they grew 1.1 percent on an annual basis. Still, 2007 inflation is expected to reach 4.5 percent, considerably higher than the average 1.8 percent posted in the 13-member eurozone last year, according to Eurostat.
Administered prices 's such as energy 's and excise taxes will help fuel inflation as the year progresses. Starting March 1, for example, the excise on tobacco in Lithuania increased 30 percent, raising the average price of cigarettes by 14 percent.

To be sure, Vilnius is not completely free from overheating risks. First, wages in Lithuania grew nearly 20 percent last year, the Statistics Department reported. This naturally fueled spending, as household consumption grew 12.6 percent in 2006. In January alone retail sales surged 21 percent year-on-year, led by purchases of textiles, clothes and footwear, the department reported.
Imports rose 12.2 percent, far outpacing the increase of 5.4 percent in exports, the department reported. Last month the Bank of Lithuania reported that the current account deficit totaled 9.4 billion litas, or 11.5 percent of GDP. While this is far less than in the other Baltic states, it is still too large for many economists' comfort.

In January the International Monetary Fund said the government should tighten spending and implement tax reforms in order to facilitate further growth. The fund also warned that rising wages would erode Lithuania's competitive edge.
The current minority government is likely to consider cuts in personal income tax and in the tax-deductible minimum later this year. According to reports, the Cabinet will debate whether to lower income taxes from 27 to 20 percent in 2008 and then possibly to 15 percent in 2009. Whatever the decision, any tax cut is likely to further prod consumption.

Fiscally, Lithuania couldn't have had a better year in 2006. The budget surplus amounted to 0.02 percent of GDP, while tax collection, particularly on value added tax, soared 27 percent. As a result, budget revenues increased 17.5 percent in 2006.
The labor office reported on March 2 that unemployment was 3.9 percent in February, unchanged from month to month. The ranks of the unemployed amounted to 82,000 as of March 1.
The general trend is toward slower, stable growth, analysts say. If in the first quarter of 2006 GDP grew 8.5 percent, then fourth quarter expansion amounted to 6.6 percent.

Analysts say that economic activity will generally tend to cool over the next few years as the lending boom slows and the appreciation of real estate stabilizes. As consumers' expectations come down to earth, so will the borrow-and-spend cycle, analysts said.
The Hansabank Group has predicted that Lithuanian GDP would grow 6.5 percent this year and inflation would remain at the same level, or 4.5 percent.