Identifier
Created
Classification
Origin
05VILNIUS528
2005-05-23 05:10:00
UNCLASSIFIED
Embassy Vilnius
Cable title:  

LITHUANIA'S ECONOMY: WHY 2004 WAS SUCH A GOOD

Tags:  ECON EINV ETRD LH 
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UNCLAS SECTION 01 OF 02 VILNIUS 000528 

SIPDIS

STATE FOR EUR/NB, EB/ESC, EB/OMA
DEPT OF COMMERCE FOR MAC/DAS/EUR MELISSA WILSON
DEPT OF TREASURY FOR CHRISTOPHER GREWE

E.O. 12958: N/A
TAGS: ECON EINV ETRD LH
SUBJECT: LITHUANIA'S ECONOMY: WHY 2004 WAS SUCH A GOOD
YEAR


-------
Summary
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UNCLAS SECTION 01 OF 02 VILNIUS 000528

SIPDIS

STATE FOR EUR/NB, EB/ESC, EB/OMA
DEPT OF COMMERCE FOR MAC/DAS/EUR MELISSA WILSON
DEPT OF TREASURY FOR CHRISTOPHER GREWE

E.O. 12958: N/A
TAGS: ECON EINV ETRD LH
SUBJECT: LITHUANIA'S ECONOMY: WHY 2004 WAS SUCH A GOOD
YEAR


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Summary
--------------


1. Final 2004 figures confirm that Lithuania's economy remains
on a roll. High growth, low inflation, and expanding foreign
investment still characterize the economy. Surging domestic
consumption fed Lithuania's growth, but also contributed to a
growing current account deficit and upward pressure on prices.
This year promises more good news, with only slightly lower
growth. End summary.

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Expanding Economy
--------------


2. The Lithuanian economy grew by 6.7 percent in 2004,
boosting GDP to 22.3 billion USD. The construction and
manufacturing sectors experienced the quickest growth.
Domestic demand remains an important engine of economic
expansion. Overall industrial production (measured by sales)
grew by more than 10 percent, and by 12 percent in the case of
manufacturing. The sales of refined oil products were triple
those of 2003, reflecting the output of Lithuania's sole
refinery, Mazeikiu Nafta. The company earned a record net
profit of 721.8 million litas (USD 261.10 million) in 2004,
compared to 220.9 million litas (USD 71.9 million) net profit
in 2003. The food sector, which sells most of its production
on the domestic market, recorded lower sales, but should
perform better in 2005 if it can boost its export sales to the
EU.


3. Lithuanian banks did well in 2004. The banking sector saw
a net profit of 297 million Litas (USD 116 million),an annual
increase of 27 percent. Strong economic growth, low interest
rates on mortgages and consumer credit (averaging 4.51 and
5.72, respectively, for over-five-year loans),and confidence
in the real estate market spurred a construction boom. Banks
reported that loan portfolios rose almost 40 percent. All of
Lithuania's commercial banks recorded profits in 2004.


4. Year-end consumer price inflation in 2004 reached 2.9
percent -- the highest since 1997. Lithuania's membership in
the EU, although not the sole cause of inflation, turned out
to be painful for consumers. Consumer hoarding of some basic
commodities, such as sugar and bread, in anticipation of
expected (but generally never realized) EU tax and price

hikes, pushed up prices prior to Lithuania's EU accession.
Post-accession, vast bulk purchases of Lithuania's relatively
low-priced meat, for example, by buyers from other EU
countries sent some prices soaring. Wage increases in many
sectors, a response to worker flight to better-paying jobs in
other EU countries, also had an inflationary effect on goods
and services. Rising costs of domestic electricity and global
fuel prices will likely keep inflation at 2.9 percent or
higher in 2005, but analysts foresee inflation easing somewhat
in 2006.

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Public Finances
--------------


5. The GOL's fiscal position deteriorated somewhat in 2004,
strong growth notwithstanding. The budget deficit increased
from 1.7 percent of GDP in 2003 to 2.5 percent in 2004. This
reflected a rise in pension costs, discretionary expenditures
in the mid-year budget, and 2004 election expenses. The IMF
advised Lithuania to broaden its tax base, in particular by
expanding property taxation, and the GOL has proposed taxing
commercial property at one percent of market value, beginning
in 2006.

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Declining Unemployment
--------------


6. The unemployment rate continued to drop in 2004. The
official annual average unemployment rate (the ratio of the
registered unemployed to the working age population) was 6.8
percent, down from 8.1 percent the previous year. The other
popular measure, that of the Lithuania Statistics Department's
Labor Force Survey, pegged unemployment at 11.4 percent in
2004, the lowest rate in four years. One cause of declining
unemployment is that Lithuania's accession to the European
Union on May 1 stimulated and facilitated emigration. This
trend, likely to continue as entry restrictions to the
European labor market relax further, has led to shortages of
skilled workers in engineering, construction, electronics, and
IT, as well as to a growing need for truck drivers and low-
skilled workers to fill positions in the restaurant and retail
sectors. Unemployment in remote regions of Lithuania (e.g.,
Akmene and Mazeikiai) remains high, and the national
unemployment rate is above the EU average.


7. Growing labor shortages last year caused an increase in
average monthly earnings. According to the Lithuanian
Statistics Department, the annual change was greater in each
quarter of the year and reached 7.3 percent in the third
quarter. Most business leaders and analysts believe that
competition for labor from foreign markets and the local lack
of qualified employees will result in even faster growth in
average earnings this year.

-------------- --
Foreign Direct Investment (FDI) Flows Increased
-------------- --


8. After hitting a record low in 2003, total foreign direct
investment flows in 2004 rose 18 percent over the 1998-2003
average with total inward proceeds of 2.15 billion Litas (USD
774 million). Year-end accumulated FDI reached 16 billion
Litas (USD 5.8 billion),or 4,727 Litas (USD 1,700) per
capita. The manufacturing industry, electricity, gas and
water supply services, and wholesale and retail trade recorded
the largest foreign direct investment flows in 2004. U.S.
investment accounted for 372 million Litas, barely six percent
of the total FDI inflow last year. Leading investors were
Denmark (15.3%),Sweden (11.2%),and Russia (8.4%). With
several significant U.S investments taking place in the first
half of 2005, we expect to improve on this performance
significantly this year.

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Privatization Continues
--------------


9. The sale of a 34-percent stake in Lietuvos Dujos
(Lithuanian Gas) to Russia's Gazprom for 100 million Litas
(USD 35.7 million) constituted the largest privatization of

2004. Other sizeable asset privatizations in 2004 included
the sale of 84 percent of the alcohol beverage producer Alita
for 20.7 million USD, the Lithuanian Export and Import
Insurance Company, and the Government's stake in the Stock
Exchange and Central Depository. Receipts from privatizations
declined from 910 million Litas in 2003 to 410.5 million Litas
(USD 147.6 million) in 2004. Privatization is nearly
complete. Only a few large assets, including the Eastern
Power Grid, Lithuanian Airlines, and Lithuanian Railways,
remain in Government hands.

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Balance of Payments
--------------


10. The current account deficit (CAD) reached 1.6 billion USD
(7.2 percent of GDP) over 2004, rising year-on-year by 587.5
million Litas (USD 211 million),or 15 percent, compared to

2003. The increased foreign trade deficit primarily accounted
for the CAD's expansion, while the main factor keeping it in
check was a higher surplus in the services balance. The
country's vigorous growth, increasing income, and favorable
borrowing terms fuelled domestic demand, which accelerated
imports of consumer goods and exacerbated the merchandise
trade deficit. Exports of Lithuanian goods increased by 21
percent, while imports grew by 15.8 per cent, year on year.
Lithuania's trade with EU markets expanded. Annual export of
goods to EU member states grew by 29 per cent, accounting for
66 percent of total exports. The only notable non-European
export market was the United States, which accounted for five
percent of sales in 2004.

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Comment
--------------


11. The initiation this year of EU support fund disbursement
will keep the economy growing at a rapid pace. In the long
run, however, Lithuania will need to increase exports and
attract more investment to ensure that the economy continues
to expand. This will require the government to take on the
long, hard task of improving its investment climate and
carrying out structural reforms (including lower labor taxes)
that make the economy more productive and competitive.
MULL