VILNIUS - Lithuania reported a drop in second quarter GDP of 22.4 percent, in initial Department of Statistics' estimates, reports news agency ELTA. The economic downturn in Lithuania is tied to steep falls in its exports along with weak domestic demand.
The drop in private consumption is also affected by worsening labor market trends, together with tighter bank lending conditions to households. Unemployment growth together with robust wage declines is driving down disposable incomes.
Analysts say that the reduction in household expenditures is negatively affected by smaller flows in house purchase and consumer loans. Tighter lending conditions, with expectations tied to a further fall in real estate prices, and a substantially more sober assessment of future income, contributed to banks' shrinking portfolio of household loans. This can be seen in figures showing that for the first quarter of this year, households repaid more loans compared to new ones that were taken out.
In the case of the slowing drop in economic activity, the 'stabilization' scenario, pessimistic future expectations may further weaken demand for loans and stimulate households to hold back on spending even more than currently forecast. If the assumption of robust external demand leading Lithuania in its recovery does not materialize, a stronger downturn than forecast could result.
This year, so far, is marked with weak investment spending, given the strong uncertainty over economic prospects. If the global recovery remains protracted, investment levels are expected to further contract.
The country's increasingly desperate economic situation may make it the next country in Eastern Europe to ask the International Monetary Fund for emergency loans, reports news agency AP. The second quarter output figure was worse than analysts expected, leading some to think that they will soon follow Latvia in seeking an international bailout.
"Revenues are falling short as the recession dampens economic activity and tax receipts, and the center-right government is being forced to borrow on international capital markets and raise taxes to fill a widening budget gap," says news daily Lietuvos Rytas analyst Rimvydas Valatka.
He says that "I'm really surprised that the government has not gone to the IMF yet and instead is borrowing money at a much higher interest rate from other sources," and that it was "unacceptable" that the government had issued a 500 million euro, five-year Eurobond in June with an annual interest of over 9 percent, instead of borrowing from international lenders at a much lower rate.
Chairman of parliament's finance committee Kestutis Glaveckas said that it was "unlikely that Lithuania would avoid seeking a bailout loan."
"We may have to turn for a loan, but it would be a significantly smaller amount than Latvia's," he said, estimating that the possible loan size would be about 10 billion litas (2.9 billion euros) - 12 billion litas.
Lithuania, despite deteriorating conditions, has managed to hold out thanks to a more diversified economy, but rapidly falling exports, down 30 percent year-on-year in the first half of 2009, are making the prospects of a quick recovery increasingly remote.
The recession follows several years of strong growth, sparked by easy credit and a real estate boom. Surprisingly, in Lithuania, where growth was more moderate than in Estonia and Latvia, the downturn is turning out to be worse than expected, as some of its key export markets - Russia, Belarus and Ukraine 's are also experiencing severe economic conditions, and have devalued their currencies. Lithuania's strong currency, tied to the euro, has made its exports less competitive
"If financial assistance becomes necessary because of the worsening economy, we will resort to the IMF," says Finance Minister Ingrida Simonyte. This is a "pragmatic" move, she says.
The Finance Ministry reports that revenues for the first half of the year were 11.3 percent lower than the target. Parliament has already amended the 2009 budget by raising the value-added tax, from 19 to 21 percent, and forcing through public sector wage and pension cuts.