Lithuanian economy dreads deflation

VILNIUS - As the summer winds down in Lithuania, prices have entered their fourth month of decline, and some economists are questioning if it is just a seasonal trend or worse. But mention the word deflation and you are likely elicit a variety of responses, from frivolous exuberance to dread.

Last month saw a figure of minus 0.5 percent, the lowest price dip so far this year. Also, merchants having trouble moving merchandise are continuing to slash prices.

But is deflation something to fear and, moreover, does what is happening in Lithuania even qualify as real, bona fide deflation?

Rasa Morkunaite, director of the Economic Research Center, a private consultancy, thinks deflation is one symptom of a grim overall economic reality, along with high unemployment and surging bankruptcy figures. "Deflation is one of the features of the depression," Morkunaite said. "The purchasing power of people is falling and that's it."

One of the major contributors to the lack of cash in people's pockets is the fall-off in exports to Russia. And, she added, poor economics right now in Western Europe are not helping Lithuanian exporters to find reliable new markets.

The problems faced by Litimpeks Bank, she feels, exemplifies another bane of the business sector - mismanagement. The central bank suspended Litimpeks operations Aug. 12.

"Companies and banks are not able to work efficiently and are [being] forced to go into bankruptcy," Mor-ku-naite said. "The rate of bankruptcies is very high and will remain high. A lot of companies will go out of business. That's one of the features of deflation, of depression."

One barometer that Lithu--anians are not as well-off now as they had once been is sagging numbers in many retail sectors. The Department of Statistics reported substantial decreases in overall trade and retail figures - in June they were 10.9 percent less at comparative prices than at the same time last year. Also, trade and retail sales figures fell 12.9 percent in the first six months of this year.

Alarming to some was a 54 percent plummet in sales of textiles, one of Lithuania's major industries. Also dropping significantly are sales figures for cars, electric household goods, radios and television sets. But not all sectors fell off too badly - sales of footwear and leather products rose 35.3 percent over the last half year and sales of medical and orthopedic products have grown 23.1 percent .

Arvydas Kazlauskas, chief expert in the Economics Ministry's division of economic development poli-cy, said the current trend is not so fearsome. "In my opinion it's short-term deflation which won't have such a bad influence on the whole economy," Kazlauskas told TBT.

Kazlauskas sees some positive aspects in deflation - it could trigger a more competitive attitude among Lithuanian exporters. "Exports to Western markets increased and enterprises [have] reoriented for higher quality," he said.

Kazlauskas thinks another reason deflation exists in Lithuania is because of the fixed exchange rate. "When the currency board is liquidated and the litas is re-oriented to the euro/dollar basket next year, I think that deflation will be finished," he said. He also expects that much of the price drops are representative of seasonal deflation. In autumn, he predicts, costs for hot water and electricity will increase, triggering inflation of 0.6 percent to 0.8 percent for household expenses.

However, Raimondas Kuodis, the head of the Bank of Lithuania's macroeco-nomics division, thinks that currency issues do not affect prices. "I think [deflation] is a natural process," Kuodis told TBT. "Others say that this is a policy-induced process, but I strongly disagree with that. We've got a very stimulating fiscal policy in Lithuania. The budget deficit is growing year after year. Under a fixed exchange rate monetary policy is not effective in influencing real processes. Monetary policy has nothing to do with deflation."

Kuodis also insists that it is too early to start talking about deflation. "My view is that deflation as it's treated in Lithuania is controversial for me," he said. "It's partly an economic phenomenon and partly hysteria. Most economists in Lithuania think that deflation - well, deflation reminds them of the Great Depression of the '30s. But times are different now."

By his definition, deflation denotes the simultaneous decrease of prices of most groups of commodities during a long-term period.

Year-on-year, Kuodis contends, only foodstuffs got cheaper by 5 percent, and health services by 2.6 percent. "The remaining 10 groups of services and goods were increasing year-on-year, and some of them very rapidly," he said. "Communications by 17 percent, house heating, electricity, gas and other things by 7.9 percent, transportation by 5.7 percent, education by 4.4 percent."

Kuodis does not dispute the widely held view that the Russian crisis is causing the economic ebb, but he is not willing to push the panic button yet. "Even if it's deflation, should we fear it? Partly yes, partly no. The main thing is that the labor market remains flexible."