Kaetana Leontjeva claims that investment taxation by the government is preventing growth.
KLAIPEDA - Though the profitability of Lithuanian companies have been slowly but steadily rising since the beginning of 2010, reaching nearly 2 billion litas (579.5 million euros) before taxes in the first quarter of this year, the level is less than half the number at the economy’s peak, through 2006-2008.
Nerijus Maciulis, Swedbank chief economist, explains it as a slump of domestic consumption. “One of the main reasons determining the overall profit growth is export volumes, exceeding the 2008 export record highs by 11 percent this year. However, when it comes to consumption in the domestic market, it still lags by approximately 20 percent from the peak in 2008,” Maciulis says.
Therefore, export-oriented companies ramped up their export efforts, seeing larger gains, while others eager to follow in their footsteps are scrambling to carry out structural changes in order to switch to the export market.
Inner devaluation, which translated in smaller payrolls, Maciulis says, also boosted profit growth. “Most Lithuanian companies, in terms of labor costs and created additional value ratio, compared to business establishments of neighbor countries, have increased their effectiveness and competitiveness, which have influenced the profit growth,” Maciulis pointed out to the daily Lietuvos Zinios.
However, domestic investments, a key factor in resuscitating the economy, the economist notes, have been sluggish and have not played an important role in increasing effectiveness and competiveness. “During 2009-2010, Lithuanian companies have invested very insignificantly into the local market. In the longer term, only purposeful investments into innovative, modern and productivity-increasing production means can secure growth of profit,” the Swedbank expert says.
Contrary to other EU countries, Lithuania, along with Latvia and Estonia, he says, have not incurred major inner devaluation and, therefore, considerable fluctuations of domestic demand throughout the recession. “Thereby, the Baltic countries’ domestic market-oriented companies dealt with relevantly little, or no, loss in 2009-2010, while their overall profit has shrunk less,” Maciulis pointed out.
He envisions profit and profitability growth next year as well; however, the expert warns that the growth rate will be slower.
Among causes to likely slow down the process, he discerns the high likelihood of higher salaries, decreasing foreign demand and insufficient investments in recent years. In addition, the looming double-dip recession may aggravate the investment environment, urging Baltic companies to put off their domestic investment plans.
Sigitas Besagirskas, Finance and Economics Department director at Lithuania’s Industrialist Confederation (LIC), maintains that, despite tangible recovery, profitability of Lithuanian companies, compared with other undertakings in the region, is rather meager. High export volumes are the only driving force to boost profitability, he points out. With the larger export scope, he notices, the margin of an export-oriented commodity, however, is decreasing. “Therefore, many companies deal with smaller current assets. Especially when prices of raw materials are rising faster than final production prices,” Besagirskas pointed out.
According to him, companies aiming to increase their profitability must increase the scope of their production and services, and orient them to export markets. “Otherwise, profitability will not be sufficient to make investments into the domestic market due to one substantial reason – a shortage of current assets. The profitability the non-export-oriented companies show is not enough to guarantee a good life in 3 or 4 years. It just allows getting by, not to invest,” the LIC representative maintains.
According to the Lithuanian Free Market Institute (LFMI) estimate, company profitability will reach 4.7 percent at its high this year, and 5.3 percent in 2012. “The rate is not very optimistic, especially taking into consideration the recent loss-making years. If we filtered the companies and disregard profitability of monopolistic state companies, we will see that the actual profitability growth would be much less,” the LIC representative said.
He does not dare to guess when Lithuanian industry will reach the 2003-2007 growth rates. “I do not see resumption of that yet. On the contrary, it is evident that the growth rate will slow down. Only direct foreign investments can stir the sluggishness. However, Lithuania has not done all its homework in attracting foreign investments over 20 years,” he pointed out. Among the causes to stave off foreign investors, he discerns financial and political realities in the country.
“Historically, most Lithuanian companies were used to carrying out their inner investments from borrowed resources, loans. With the stringent bank loan conditions, it just does not work as it used to. Second, prices of some energy resources in Lithuania are one of the highest in the EU. Third, big bureaucracy, particularly in territory planning and public procurements, scares off potential foreign investors,” Besagirskas asserted.
Swedbank analyst Maciulis points out that, for Lithuanian companies, two major sources of resources currently are the EU funding allocations and undistributed profit. “Though Lithuanian financial institutions have granted loans for over 8 billion litas in this year’s first 7 months, most of them are short-term, for one year. This way the borrowers are not so vulnerable to the possible shake-ups that might occur due to a double-dip recession; however, their current assets are not enough for more substantial investments,” Maciulis says.
According to investment volume, Besagirskas emphasizes, Lithuania falls behind even Latvia.
“There are several reasons for that. First comes territory planning. Usually, in order to start building a factory, no foreign investor can stand lengthy paperwork preparation procedures that often last 2 or 3 years in Lithuania. They take just too long, as, for example, in Germany, a businessman needs only a few months to have all paperwork necessary to build a factory” the expert pointed out.
However, the biggest hindrance staving off foreign investors, Maciulis says, is “the unattractive political and business environment.”
“The biggest sore of our political environment is corruption. While the international ratings of country competitiveness show that a foreign-capital company is not able to quickly and effectively start off its activity in Lithuania if it does not bribe the right person, we will continue having less direct foreign investment than we possibly could,” the economist emphasized.
An absence of a continuation of economic politics following new elections, he points out, serves also as a deterrence. “Every new election brings new priorities, strategies and plans. The abundance of regulating and supervising institutions and an unstable taxation environment also harm the business environment. Only having discussions about the introduction of progressive taxes can deter from investing here many foreign companies that are ready to invest into an activity requiring skilled labor resources,” the Swedbank chief economist said.
According to an LFMI survey, 67 percent of business respondents, asked about measures to encourage inner investments, pointed to the necessity to exempt re-invested profit from taxes. In Estonia, re-invested profit is not taxed at all, while in Lithuania the tax tariff is set at 15 percent.
“In Estonia, the investment environment and situation is much better than in Lithuania. However, it is hard to tell what part tax plays in Estonia. Nevertheless, I think the tax exemption would pay off in Lithuania over a few years. It would encourage our business entities not to take their part of profit out of the country, but to re-invest it here. The exemption would allow our companies to save and promote creation of new workplaces here,” Besagirskas maintained.
Kaetana Leontjeva, an LFMI expert, says that the taxation of re-invested profit equals taxation of expenditures. “A businessman wants to invest into his business expansion and create new workplaces, but he encounters state impediments. On the whole, it is illogical to tax investments when the government touts it encourages investments into the country,” Kaetana Leontjeva said to The Baltic Times.
She points out that a new foreign investment tax order that is in effect since 2009 is rather ambiguous. “For example, certain exemptions are applied only to certain property groups. Such exclusion is not a good practice, as foreign investors want laws to be as clear as possible,” she maintained.