Robertas Dargis: “New investors are no longer looking at Lithuania”

  • 2023-07-18

Lithuanian industry surprised with its results throughout the crisis period. Lithuania's gross domestic product grew by 1.9 percent last year, but fell by 0.4 percent in the fourth quarter, yet wages increased by almost 12 percent last year. However, when consumption grew last year, the Lithuanian economy deviated from the path of sustainable growth and now we are entering the predicted period of stagnation.

The manufacturing industry, the steam locomotive of the economy in Lithuania, ended 2022 in annual decline, down by 9.1 percent from a year ago. It creates the largest part of the added value of the economy, activates the longest added value chains within the country, it is the largest employer and ensures the most significant income stream for the state budget. 

Besides, the industry sector is Lithuania's largest exporter, which earns two-thirds of total revenue from exports. In 2022, the export of goods of Lithuanian origin grew at a record high 33 percent. However, during the last months of the year, decreasing trends in the export of goods of Lithuanian origin started shaping up. This may reflect an impending slowdown in international trade, a slowdown in global economic growth, or even signs of a recession. 

Moreover, the era of low interest rates, which prevailed all over the globe since the financial crisis in 2008, ended in the middle of 2022. In order to control the unprecedented growth of inflation in the EU, the European Central Bank increased the base interest rates. For Lithuanian companies, whose loan portfolio has so far been dominated by loans with variable interest rates, such monetary policy strategies already lead to an increase in the price of existing and new loans. The interest rates are high and access to capital is shrinking, and then we still have the war in Ukraine, the subsequent result of which was the drought of raw materials that used to come from Russia and Belarus. Therefore, production has fallen. According to the state data agency, industrial production capacity utilization in February was 10 percent lower than last year at the same time.

The decreasing certainty of industrial companies about the future is also reflected by the surveys of the Confederation of Lithuanian Industrialists (CLI). If earlier companies were able to secure orders three months in advance, now the (un) certainty currently covers a period of one to two months. Having orders two months ahead is not good. If last fall’s average order was for from six to nine months, now that number has decreased to two months. This is worrying, and companies are starting to look at what would happen if orders stopped. The fewer orders ahead, the harder it is for companies to export to other countries. According to economists, in January, exports of goods of Lithuanian origin was down 5 percent compared to the same period last year.

The company managers, who took part in the CLI Expectations Index survey, said that the first and most important task now is solving demand problems. 

In today's stressful times, with declining industry expectations and a slowing economy, labour shortages remain one of the biggest challenges facing businesses. Not only highly qualified exceptional talents are missing – there is also an acute shortage of blue-collar worker. 

Besides, although the peak of the global energy crisis seems to be in the past, the problem of long-term supply of sustainable energy resources in the country has not been solved at the moment – neither in Lithuania nor in the EU. Therefore, this will be one of the main factors limiting the development of the industry for some time to come.

However, there are more worrying signs for the industry – new investors are no longer looking at Lithuania. A stable, predictable regulatory and tax environment is one of the most important factors for investors when evaluating the investment environment in a particular country. The same criteria are important for our business as they plan their expansion. Here in Lithuania we are now at a tipping point as tax reform has begun to be considered. It is very important that tax changes should be aimed not only at increasing budget revenues, but also at increasing the country's competitiveness, creating favourable conditions for the development of companies, increasing Lithuania's competitiveness in terms of talent and reducing the taxation of labour relations and encouraging the creation of jobs.

Robertas Dargis is former President of Lithuanian Confederation of Industrialists (2012 to 2020). He is currently the President of the Lithuanian Real Estate Development Association and Chairman of the Board and the owner of JSC Eika, a major RE developer.