Identifier
Created
Classification
Origin
05VILNIUS144
2005-02-11 14:17:00
CONFIDENTIAL
Embassy Vilnius
Cable title:  

LITHUANIA'S FINANCE MINISTER OUTLINES GOL ECONOMIC

Tags:  AFIN ECON EFIN LH PGOV PREL 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000144 

SIPDIS

E.O. 12958: DECL: 02/09/2014
TAGS: AFIN ECON EFIN LH PGOV PREL
SUBJECT: LITHUANIA'S FINANCE MINISTER OUTLINES GOL ECONOMIC
PLAN, OFFERS ASSISTANCE ON BILATERAL ISSUES

REF: A. A. VILNIUS 138 AND PREVIOUS


B. B. 2004 VILNIUS 760

Classified By: GSO MATTHEW SINGER
FOR REASONS 1.4 (B) AND (D)

C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000144

SIPDIS

E.O. 12958: DECL: 02/09/2014
TAGS: AFIN ECON EFIN LH PGOV PREL
SUBJECT: LITHUANIA'S FINANCE MINISTER OUTLINES GOL ECONOMIC
PLAN, OFFERS ASSISTANCE ON BILATERAL ISSUES

REF: A. A. VILNIUS 138 AND PREVIOUS


B. B. 2004 VILNIUS 760

Classified By: GSO MATTHEW SINGER
FOR REASONS 1.4 (B) AND (D)


1. (SBU) Summary. Finance Minister Algirdas Butkevicius,
meeting with Ambassador Mull on February 9, delivered an
optimistic prognosis for Lithuania's continued strong
economic growth. While stressing that some politically
difficult questions still lie ahead, Butkevicius discussed
several areas of the economy on which he is focused and
expressed confidence in Lithuania,s continued economic
success. Butkevicius is using the target of Euro convergence
in 2007 to keep Lithuania's deficits and fiscal policy in
line. He discussed his hopes for adjusting Lithuania,s tax
code to provide more incentives for growth and to discourage
the shadow economy. Butkevicius discussed prospects for
Lithuania's continued economic growth and pointed to
Lithuania's recent Euro bond issuance as an example of strong
investor confidence in Lithuania's economy. Minister
Butkevicius pledged support on a variety of tax questions
that affect GOL-USG relations END SUMMARY.


2. (C) Ambassador Mull met with Algirdas Butkevicius,
recently reconfirmed as Finance Minister, February 9 as part
of his tour of Lithuania's new Cabinet (ref a). It was the
Ambassador's eleventh cabinet-level meeting in the last seven
weeks. Butkevicius had previously expressed concern about
the then-rising profile and strength of the Labor Party (ref
b),which is now part of the ruling coalition. He observed
that the current government is experiencing a "trial period"
and is under pressure from the press. He is, nonetheless,
optimistic that Lithuania's social and economic position will
continue to improve. Butkevicius said that he believes that
2006 will be the most difficult year for Lithuania, because
the Government will have to increase revenues in order to
meet criteria for entering the Eurozone in 2007. He agreed
with the Ambassador's comment that revenue-raising mechanisms

-- i.e., increasing taxes and decreasing expenditures -- are
not popular with parliamentarians.

--------------
Euro Convergence and Eurobonds
--------------


3. (SBU) Ambassador Mull asked for Butkevicius' views of the
recent Article IV evaluation of Lithuania by the IMF, which
gave the country high marks, but raised concerns about the
savings rate, productivity, and fiscal policy. Butkevicius
said that the key to further reform was the GOL's euro
convergence program. Butkevicius said that meeting euro
convergence criteria by the GOL's target of 2007 would
address the IMF's principal concerns, particularly in
controlling Lithuania's deficit spending. He said that Prime
Minister Brazauskas fully supports this goal and, with
respect to some of the austerity measure Butkevicius
described to him, told the MinFin "we have to approve the
convergence program, and we have to follow it." Butkevicius
also said that Lithuanian politicians seem increasingly
interested in the convergence program, and that Butkevicius
always explains that there are more advantages than
disadvantages to the program.


4. (SBU) Butkevicius spoke proudly of Lithuania's 600-million
euro Eurobond issue that came out this month. Demand for the
issue exceeded 4 billion euros. He also highlighted the
bonds record-low yield 3.75 percent, as opposed to the
Eurobond issue in 2004, which yielded 4.5 percent.
Butkevicius feels that this decrease in the cost of borrowing
reflects international market confidence in Lithuania's
economic stability and prospects.

--------------
Adjusting Lithuania's Tax System
--------------


5. (SBU) When questioned by Ambassador Mull as to whether he
approved the use of tax incentives to increase foreign direct
investment (FDI) in Lithuania, Butkevicius noted that overall
FDI increased in Lithuania last year. He also noted that
Lithuania's tax burden relative to GDP is the lowest in
Europe. Butkevicius acknowledged, however, that the tax
structure for Lithuania's capital and labor markets is
unbalanced: for labor, taxes are too high, and for capital
they are too low. Butkevicius said that he would like to
incrementally lower the personal income tax (PIT) in
Lithuania. Currently, the tax stands at 33%. The Minister
would like to reduce it to 30% in 2006, 27% in 2007, and 24%
in 2008. Butkevicius also said that he is in discussions
amending the law on profits to recognize training costs as
business expenses.

6. (SBU) Butkevicius detailed plans to be made in conjunction
with the Ministry of Social Security and Labor (MSSL) to
increase the threshold at which employer contributions to
SODRA - Lithuania's retirement and health social insurance
system - are required to be paid. The Ministry of Finance's
tax inspectors, who collect the SODRA taxes on behalf of the
MSSL, would also work with the Department of Statistics on
this issue. However, Butkevicius added that his ministry has
trouble training the tax inspectors. Butkevicius also cited
Lithuania's large shadow economy as a target of his
attention. He expressed his hope to address this vast pool
of unreported income and uncollected tax and customs fees by
prohibiting the sale of imported goods at Lithuania's
enormous Garuniai open-air market.

--------------
Lithuania's Continued Economic Growth
--------------


7. (U) Lithuania's growth in GDP for 2004 was 6.6%.
Butkevicius noted that the 2003 GDP growth figure of 9.9% was
unsustainable and reflected a boom in real estate in
construction; the 2004 figure more properly reflected the
economy's long-term growth potential. He noted another sign
of the sustainability of this growth rate was the increase in
Lithuania's exports to European Union (EU) countries, which
in 2004 increased from previous years. (The media reported
on February 10 that Nord LB adjusted down its forecast of
Lithuania's 2005 GDP from 6.6% to 5.9%.)

--------------
Bi-lateral Issues
--------------


8. (SBU) Ambassador Mull asked about a variety of bilateral
issues focusing on taxation, many of which had been mentioned
in the Ambassador's last discussion with Butkevicius in June
2004 (ref b). Chief among these was Lithuania's application
of VAT to USG assistance and Fulbright Scholars' stipends.
Such taxation had led to the cancellation of planned
anti-fraud training in 2004, and endangered a potential
Science and Technology Agreement between the U.S. and
Lithuania. Butkevicius indicated that the Embassy should
shortly receive formal notice from the Government on the
resolution of this problem. He also said he would resolve
the issue of taxation of Fulbright stipends.


9. (SBU) Ambassador Mull raised three other issues regarding
taxes: inconsistencies in returning VAT refunds to U.S.
diplomats; the tax inspectorate's attempt to have the U.S.
Embassy register with the tax inspectorate for the purpose of
collecting SODRA for locally engaged staff; and the tax
inspectorate's continuing insistence that the Embassy pay a
tax on trucks - thus preventing the Embassy from properly
registering its trucks.


10. (SBU) Regarding VAT refunds, Butkevicius noted that other
diplomatic missions had also complained about this matter.
He suggested that the missions draft a joint letter to the
MFA, which would initiate a process to resolve the matter.
Butkevicius said that he will talk to the MSSL to resolve the
SODRA problem. As to the truck tax, Butkevicius says that a
decision has already been reached, and that he will shortly
inform the Embassy of that decision in writing.

-------------- --------------
Comment: Fiscally Responsible - but not Flexible?
-------------- --------------


11. (C) Butkevicius was friendly and cooperative throughout
the meeting, and seemed eager to resolve our bilateral
issues. He came across as a responsible fiscal
disciplinarian; it is not surprising that he is unwilling to
consider tax reductions as incentives to attract FDI to
stimulate growth, since he sees his principal task as keeping
the tax revenues flowing. He does, however, seem pragmatic
enough to review our various taxation problems with the GOL.
MULL