LITHUANIA'S NEW BUDGET INCREASES DEFENSE SPENDING,

UNCLAS SECTION 01 OF 02 VILNIUS 001110

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PGOV MARR LH
SUBJECT: LITHUANIA'S NEW BUDGET INCREASES DEFENSE SPENDING,
BUT LAGS BEHIND NATO COMMITMENTS



1. (SBU) Summary. Minister of Defense Juozas Olekas told the
Ambassador that Lithuania's 2007 budget meets the Defense
Ministry's goal of programming an increase in defense
spending as a percentage of GDP of .05 percent, to 1.25
percent. While this is technically accurate due to modest
official forecasts of GDP growth, defense spending is rising
more slowly than the budget as a whole and too slowly to meet
Lithuania's defense transformation needs. End Summary.

Defense spending increases less than other spending
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2. (SBU) Lithuania's Defense Minister told the Ambassador
December 13 that he was "satisfied" with Lithuania's recent
defense allocation, but added that the government has
committed to supplemental defense allocations with revenues
from the anticipated sale of the Mazeikiu Nafta oil refinery.
Lithuania's 2007 budget allocates 1.115 billion litas (USD
413 million) to the Defense Ministry and an additional 5
million litas (USD 1.85 million) to other defense spending
based on the NATO definition, representing a 14.5 percent
nominal increase in defense spending. This is less than the
overall increase in budget expenditures of about 21 percent.
The budget also allocates 4 million litas to civilian
assistance projects administered by the MFA in Ghor province,
where Lithuania leads a Provincial Reconstruction Team.

Economic growth outpaces growth in defense spending
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3. (U) The GOL has publicly committed to meet NATO's
unofficial defense spending floor of two percent of GDP by
increasing spending as a percentage of GDP by .05 percent per
year. Had the budget met this goal since Lithuania joined
NATO, defense spending would be 1.32 percent of GDP in 2007.
In fact, defense spending as a percentage of Lithuania's
surging GDP has been falling. Defense spending for 2006 will
likely be only 1.20 percent of GDP, rather than the 1.28
percent that was programmed, down from 1.42 percent and 1.27
percent in 2004 and 2005, respectively. This is largely
because Lithuania's GDP growth will exceed the 2006 budget's
forecast of seven percent in real terms. (Nominal GDP growth
is forecast to be 14.5 percent in 2006.) Similarly, real
defense spending in 2007, forecasted at 1.25 percent of GDP,
could turn out to be lower (or higher) depending on the
economy's performance in 2007. The budget forecasts a 6.3
percent rise in real GDP (10 percent rise in nominal),which
would be the smallest economic expansion in Lithuania since
2002, and is below estimates by the Economist Intelligence
Unit and IMF.

Defense Ministry: more money needed to meet goals
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4. (SBU) Lithuania's Ministry of Defense has kept up spending
to support its overseas commitments and to make sure that
donated equipment is employed effectively. Lithuania will
take over funding of the Ghor Province PRT from the United
States beginning January 2007. As a result, Lithuania's 2007
budget for international operations is slated to reach 90
million litas (about USD 33 million),approaching Lithuania's
informal limit for operations of ten percent of total defense
spending. Much of the increase will go to U.S. defense
contractor Kellogg, Brown and Root, which the Lithuanians
have contracted to provide support to the PRT at least until
November 2007. Also, Lithuania has budgeted for upcoming
training, shipping, fuel, spare parts and cryptography
equipment for two minesweeper ships to be transferred under
the DOD Excess Defense Articles program.


5. (SBU) Lithuania's defense spending is not rising fast
enough to meet some of its other needs. Post's Defense
Attache has noted the curtailment of training ambitions over
the past year, including the cancellation of the Lithuanian
Navy's participation in the BALTOPS multinational maritime
exercise because of the lack of funds for fuel. Similarly,
enrollment has been steadily declining, due to lack of
funding, at many of the courses provided by the
Reconnaissance School. In other cases, the Lithuanian Armed
Forces have acquired weapons systems, such as 120mm mortars,
but have not funded the spare parts necessary for maintenance
or the training required for crews. The defense budget
shortfalls also have a negative effect on the planned
modernization of logistics capabilities. As Lithuania works
to stand up a second deployable battalion task group by 2009,
it will struggle at current funding levels to create the
necessary combat service support structures to sustain such a
unit in the field.


VILNIUS 00001110 002 OF 002


Comment
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6. (SBU) Despite its modest size, Lithuania continues to be a
stalwart ally. At the same time, to meet NATO's need for
interoperable, sustainable, and deployable forces, the GOL
needs to provide enough resources to ensure that its
transformation and modernization needs are met -- which in
our estimation requires more funding than has been
forthcoming. We will continue to press this issue with
Lithuanian interlocutors at all levels.
CLOUD