Lithuanian center-right government staves off IMF borrowing plans

  • 2011-10-26
  • By Linas Jegelevicius

OVERHAUL NEEDED: Kaetana Leontjeva says reform, and cutting, is needed before more state borrowing.

KLAIPEDA - Lithuanian Finance Minister Ingrida Simonyte has introduced a 2012 state budget draft, forecasting 21.8 billion litas (6.3 billion euros) of revenue and 22.5 billion litas of expenditure. Compared to 2011, the projected national budget, with the EU funding allocations deducted, is bigger by 56.9 million litas. The finance minister plans 9.5 percent budget revenue growth next year; however, the state intends to borrow approximately 9.4 billion litas, 6.4 billion of which will be used to service the mounting state debt and its interest.

With the austerity measures extending into the next year, the center-right government seemingly does not intend to subject itself to them, splurging budget money by sending government officials to dubious seminars as far away as New Zealand, Malta and Columbia.
The biggest threat for the budget looms in that of the national Social Security (SS) system, known as Sodra, whose expenses are to exceed income by more than 2 billion litas next year. Pensions, maternity leave payouts and multiple loan administration charges make up the bulk of the Social Security budget. With intentions to restore the pre-crisis pension level, the average retirement pension will go up on average by 9 percent, which, some experts warn, will further enlarge the SS budget gap.

“Considering the increasing inflation, the pension restoration only nominally restores their value. However, the pay of those who earn the pensions will not go up. The demands to restore the purchasing power of the restored pensions would not likely be fulfilled, as it would be dishonest for the employed people who earn them. On the other hand, considering that the upcoming Parliament elections will take place next year, postponing pension restoring is also impossible,” remarks Teodoras Medaiskis, a Vilnius University associate professor.

With the Social Security “bubble” due to the Conservatives’ adopted legislation to boost maternity leave payouts, from 300 million litas in 2007 to 1.2 billion litas in 2009, SS debt will reach an ominous 9 billion litas next year, sinking the whole social security system. “The triple SS growth for maternity leaves has turned out to be unbearable to the whole Lithuanian budget. In order to ease the burden, we ought to come back to the 2007 Sodra budget level, at least allocate a half billion litas for the purpose. However, again, in an election year, it just will not happen, as we all see the SS debt mounting further. It means Lithuania will be made to borrow for satisfying its social needs. However, that is what our government does not like to do, though there are no other options available,” Medaiskis pointed out.

With the projected 4.7 percent GDP growth and 5.5 percent salary hike in 2012, some Lithuanian experts caution, the upbeat forecasts mismatch heavily with the newest world economy outlook, predicting a sizeable economy shrinkage in 2012, especially in Europe. For Lithuania, relying heavily on European export markets, the projected GDP and salary growth levels can be just impossible to achieve.

With a 35 billion litas’ state debt increase, Lithuania’s hopes of introducing the euro starting in 2014 diminish every day. With the state getting increasingly unable to cope with its huge debt, the question of borrowing from the International Monetary Fund (IMF) will sooner or later to reach the table of Lithuanian PM Andrius Kubilius, who has been desperately trying to stave off this option as if a financial taboo.

However, more and more well-known financiers are urging Kubilius to sit down with the IMF, particularly when the IMF lending conditions, i. e. interest rates, are favorable. Kestutis Glaveckas, Seimas’ Budget and Finance Committee chairman and a prominent economist, predicts that, likely, Lithuania will not avoid borrowing from the IMF. “In the most likely scenario, Lithuania will have to apply to the International Monetary Fund for a loan in order to maintain the interest rate and cheap borrowing balance.”

“To speak picturesquely, there are two doors when it comes to borrowing from the Fund: one with bells and the other with a buzzer. The approach to the IMF ringing the bells, the way the Latvians did, is very non-appealing, as the IMF will set its demands for us; the other approach, ringing the IMF’s door buzzer, what the Poles did, is quite attractive, as its leaves a lot of room for mutual agreement through negotiations,” Glaveckas pointed out in the Lithuanian media recently.

The parliamentarian says that, according to his calculations, in order to just service old loans and their interest, Lithuania will need 5.3 billion litas next year. “The amount can go as high as 10 billion litas for all needs,” Glaveckas added. He says Lithuania can borrow 3-4 billion litas in domestic financial markets and, as for the rest, 3-4 billion litas would be borrowed from the IMF. At this time, we can expect quite low loan interest, barely exceeding 3 percent. I am pretty sure that Lithuania would be granted a loan with favorable interest rates. I do not see anything bad if Lithuania applies to the IMF. I spoke about an IMF loan a few years ago, but I was sneered at. I cannot foretell when we could address the IMF, but I reckon it can be next year, in January or February. Maybe we will not need to do that if Lithuania miraculously finds money somewhere,” Glaveckas said to Delfi.

He is supported by Lithuanian Bank Association president Stasys Kropas: “Should we not all resolve to dare to overcome the resistance of the ruling coalition in fighting off the IMF phobia? I reckon the present time is quite a good time to secure IMF financing; otherwise, next year, there will be many IMF loan seekers in the market, making borrowing more complicated. In addition, should we be granted an IMF loan, it would enable the government to decrease the current state debt service,” Kropas noted.

However, PM Kubilius does not give in to the IMF-favored reasoning, saying, “The IMF is an important institution which, upon extraordinary financial difficulties in the global markets, helps out those who are indeed in need for help. The current situation in the world financial markets is not stable; however, we hope it will improve. So far, we do not consider any emergency measures thereupon. We have managed our budget so that we can bravely look out to the 2012 prospects, irrespective of how it will develop in the international markets. Nevertheless, Lithuania will have to borrow next year, and we will do that cleverly. If the borrowing rates are acceptable – we hope they will be such – we will borrow,” Kubilius said after a preliminary 2012 budget hearing in the Parliament.

Lithuanian Finance Minister Simonyte also rejected the IMF possibility, stopping short of repudiating it. “If there is a real need for [borrowing], I cannot say that we will not turn to the IMF,” Simonyte added.
Lithuanian Free Market Institution (LFMI) expert Kaetana Leontjeva says “borrowing from the IMF would be a political decision for which there is no urgent necessity.”

“Though some Lithuanian politicians may be lured by IMF’s lower interest rates, we would pay a price for an IMF loan through its larger role in the domestic taxation policies. The implementation of the IMF proposals – introducing real estate and vehicle taxes – would be definitely harmful to Lithuania,” Leontjeva maintained to The Baltic Times.

She says that, before raising the question of borrowing, it must be decided whether the Lithuanian authorities exert enough to cut down the mounting state deficit. “In 2012, the bulk of the state budget deficit will be in the Social Security system, which has not been reformed. Therefore, in the future, to decrease the need for borrowing, Lithuania has to carry out a thorough overhaul of the SS. We also should not forget the state budget, with some programs which are unnecessary. To borrow less, the government has to do some homework – point to programs and cut them off,” the LFMI expert emphasized. 

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