Government slashes budget

  • 2009-03-25
  • By Adam Mullett
VILNIUS - Following the Lithuanian prime minister's declaration that the country's economy is in free fall, the government has gone into a cost-cutting frenzy by slashing the year's budget by 3 billion litas (870 million euros) and cutting company CEO wages.
At the same time, the government has been raising millions of euros in private bonds.
The savings plan comes amid dire predictions by economic analysts that forecast the country's GDP for 2009 could drop by up to 15 percent.

"During last year all projections, which are being revised once per quarter, including the projections by the International Monetary Fund (IMF) for the whole world or the projections by the European Central Bank (ECB) for the European Union (EU), were worse than the previous ones," Prime Minister Andrius Kubilius said on Lietuvos Radijas.

"The forecasts updated by the Finance Ministry are no exception since Lithuania's economy is shrinking much faster than projected in December," he said.
The budget cuts will come at the expense of investment programs and institutions' budgets.
Pay cuts for employees of budget-funded institutions will be minimal this time, but a second budget revision is planned in June, Kubilius told reporters.

"We will carry out the first phase of the budget revision in April and the second one in June. We think that we can cut the state budget expenditure in April by around 3 billion litas without raising the key issue of additional revenues, in other words, taxes, and by minimally revising the salary issue. We are postponing these issues until June."
He said the planned pay cuts would not affect teachers and statutory civil servants.
Executive salaries of companies 100 percent owned by the government, however, will be cut by around 25 percent.

Lietuvos Gelezinkeliai (Lithuanian Railways), Lietuvos Pastas (Lithuanian Post) and the Ignalina Nuclear Power Plant are among such companies.
Progressive tax may be introduced in June to raise funds, as opposed to the flat 21 percent income tax currently in use.

The Sodra budget, which doles out pensions, unemployment and health benefits, will also be amended.
Kubilius expects the government will be able to meet its main goal of keeping the fiscal deficit at about 3 percent of GDP after the second budget revision in June.


Like Latvia, the Lithuanian government has been urged to approach the IMF for a loan.
Gitanas Nauseda, chief analyst of SEB Bankas, who is predicting the 15 percent drop in GDP, is urging the government to prepare for the worst and request assistance from the IMF.

"I think that the sooner we apply to the IMF the better it would be for us. I think that the guarantees from the IMF and ability to secure a credit line, which we could use by 100 percent or 50 percent, or 20 percent, this fact alone could have positive effects on our abilities and possibilities to borrow on the private market as well," Nauseda said adding that this should be done before making the budget cuts next month.

SEB Bankas' latest official predictions on Lithuania's GDP are a 9 percent decline this year, with unofficial sources saying that the Finance Ministry expects the GDP to contract by up to 10.4 percent.
Neither Kubilius nor Finance Minister Algirdas Semeta would confirm or deny the claims.
Nauseda's predictions are more pessimistic than his employer's.

"We have to get ready for a 15 percent economic decline as well. Unfortunately, such is the reality. It is manifested by industry performance, potential changes in other sectors, in particular construction and real estate, which will get much more pronounced in 2009," Nauseda said.
He did, however, praise the new government saying the policies of its predecessor would have left the country insolvent by now.

"True, that would be bankruptcy. In this case it would not be that important whether we default on obligations to creditors and financial institutions or public servants and pensioners," Nauseda said.
Lithuania's GDP grew by 3.1 percent last year. The country's worst performance was in 1993 when GDP slumped by 16.2 percent.


Alongside the drastic cuts in the budget are the government's attempts to raise funds by selling bonds to private investors.
The Lithuanian Finance Ministry recently raised 54 million euros via a private offering of euro-denominated government securities.
The new issue of 540,000 bonds with a nominal value of 100 euros each was registered with Lithuania's Central Securities Depository on March 24.

Another 250 million Estonian kroons (16 million euros) was raised via a private offering of kroon-denominated government securities. The issue was registered with the Central Securities Depository the same day.
DnB Nord Bankas purchased the kroon-denominated issue and expects to sell the securities to Estonian institutional investors.