Industry

These are startling insights that some analysts of the world economy, heads of investment banks who, by the way, have nothing to do with Lithuania, have been giving thus far. However, when in July it was announced that during the second quarter of this year Lithuania’s GDP slumped by as much as 22.4 per cent as compared with the same time period of the past year, even the confirmed sceptics of Lithuania’s economy became concerned. What happened that one of the Baltic tigers has become a deplorable kitten within half a year? There are dozens of reasons and they are clearly seen not only inside the country but also in the rest of the world. However, some of the reasons were internal, for example, a too rapid and drastic tax reform.

The tremendous growth is history already

A tremendous economic growth in 2007 and the first half of 2008 changed the behaviour of Lithuanian consumers. An enormous bubble of real estate formed, banks competed with one another in giving loans for almost a mere trifle, life on credit was becoming similar to the lifestyle of a middle-class American. Business also lived on large loans.
However, with the first signs of a crisis export markets were the first to be affected. During several past years the growth of Lithuania’s export was striking indeed and many analysts related the bright future of our life to even more dramatic growth of export. However, in December 2008 export fell by as much as 15 per cent, which trumpeted that the country’s economy was going to face hard times. During the first half of 2009 export dropped another 30 per cent and Lithuanian enterprises were faced with the problems of realization. 70 per cent of the heads of enterprises interviewed by the Department of Statistics do not expect the export volumes to increase in the immediate future. Thus, Lithuania, which lived on trade with foreign countries, was confronted with the first serious threat.

The drought of loans put a stop to business

The banks managed by the Scandinavians, which made granting of loans much stricter in the autumn of the past year, were the first to respond to the forthcoming hard times. Business that had lived on loans had to suspend investments, freeze production and development. Today the banks themselves admit that loans, which were granted right and left in Lithuania, did the country’s economy a disservice. This overheated Lithuania’s economy and blew up the bubble of real estate.
However, the tap of loans that is completely turned off also ruins economy. It is not only the funds of business projects, dwelling loans but also those of the European Union support allocated through the banks that are getting stuck. The Minister of Finance Ingrida Ðimonytë stated that when banks reduced lending in the Baltic States, it was the same as “disconnecting a life support machine”. Though the banks retorted that issuance of loans was too risky, the crisis showed that such a small country as Lithuania was dependent on the policy pursued by the banks. Especially if this policy is dictated by the Scandinavian parent banks. According to the data presented by the Lithuanian banks, issuance of new dwelling and consumption loans during the past half year has decreased by as many as four times. At the end of the past year the banks annually granted dwelling loans for almost LTL 400 million, and the amount of consumption loans granted totalled LTL 200 million. At the beginning of this year dwelling loans issued by the banks totalled LTL 100 million, whereas the consumption loans amounted to over LTL 50 million per month. This is the lowest indicator during the past one and a half year.

Consumers have become damped down

Specialists on statistics and economy analysts state that a dramatic fall in the GDP of the second quarter of this year (22.4 per cent) had been determined by reduced production and slumped consumption. It was the internal consumption that has changed most dramatically in Lithuania this year. First and foremost, this was influenced by the new tax reform hastily presented in December, which has been going on thus far. Considerably increased taxes, the increased VAT and excise on fuels, tobacco and alcohol have by far damped down the consumers.
The decreased level of consumption has hit retail trade. This had the greatest impact on the non-food product market. For example, during seven months of this year trade in motor cars, their spare parts and services related to that has dropped by as much as 30 per cent. Trade in food products in January-June, as compared with the same time period last year, has fallen by as much as 16.3 per cent. On the whole, turnover of retail trade in June, as compared with the same month last year, has dropped by as much as 25 per cent. As high as 30 per cent drop was recorded in March. Gitanas Nausëda, adviser to the President of SEB Bank, described the authorities’ actions to suddenly increase taxes in the following way: “They behave like a milkmaid who does not give any grass to a cow but pulls the latter’s teat harder and harder”. A large part of business people have the same opinion, however, the Government has begun to rescue the state, which has found itself on the borderline of insolvency, in its own way.
The fact that during the first half year the most significant fall in value added was noticed at building, industrial and production services enterprises shows the condition the building business, which had flourished for a long time in Lithuania, has found itself in.
The latter sector was the first to start dismissing workers en mass. Real estate business has become frozen, and prices, which have been falling for longer than half a year are hardly to stop in the immediate future.

The number of enterprises going bankrupt is on the increase

The economic recession in Lithuania has brought the bacillus of bankruptcies to Lithuania’s economy. During the first half-year of this year twice as many bankruptcy procedures have been started in Lithuania as during the same time period last year. According to the preliminary data of the Enterprise Bankruptcy Management Department under the Ministry of Economy, during the first half-year of this year bankruptcy procedures of 936 enterprises were started in Lithuania, which is 55 per cent more than at the same time in 2008 (420). “Debts to suppliers, cut prices of production and losses incurred were quite a shock to the enterprises. The chain of disrupted payments affected also those enterprises, which were still able to carry out their activities. Borrowing that has become more expensive and the increased risk greatly restricted their possibilities of surviving, and lead the majority of enterprises to bankruptcy”, Jekaterina Rojaka, Head of the Economic Research Subdivision of DnB Nord bank, explained the reasons of bankruptcies.
This year debts between businesses have increased considerably, heads of enterprises ever more often appeal to the Tax inspectorate with requests to defer paying back loans. For example, the amount of taxes requested by natural persons and economic entities to be deferred totalled LTL 144 million as of 31 July this year. However, this shows debts to the Tax Inspectorate only, whereas in business 3-4 month debts have become a norm already.

Unemployment is still on the increase

The economic situation that has been getting worse faster than it was forecasted, a too rapid tax reform and the authorities’ unwillingness to reduce expenditures brought another disaster – the uncontrollably increasing unemployment. Only a year ago Lithuanian enterprises were feverishly looking for workers of any qualification and today the unemployment rate in some regions accounts for almost 20 per cent. The general level of unemployment in the country is 9.68 per cent. During the first half-year almost 40 per cent of the enterprises decreased the number of workers (in construction – as much as 70 per cent). At least 50 per cent of the employers intend to decrease the personnel during the second half-year of the year.
According to the analysts of Swedbank, growing unemployment will be one of the most serious problems of Lithuania’s economy in 2009-2010. It is forecasted that this year unemployment will account for 14.5 per cent in the country, and in 2010 it will reach as much as 16 per cent. Business is made to reduce the number of jobs, the state does the same, which means that during these two years the number of newly unemployed peopled might reach about 165 thousand, and in the year 2010, when the peak of unemployment has been reached, about 260 thousand people in the country might be out of work.
47 per cent of the employers interviewed by the Labour Exchange have reduced salaries to their employees during the first half-year, however, the real number is thought to be much greater. A cut in salaries was made in relative stages in Lithuania. Salaries have been reduced three or four times rather than once. Perhaps due to this less than 4 per cent of employers intend to reduce salaries to their personnel during the second half-year. People working in construction (37 per cent of the interviewed), services (25 per cent), agricultural (21 per cent) sectors are most likely to receive lower salaries in the immediate future.

The budget is still on the decrease

It is not only statistics of unemployment that sow the bacillus of gloomy moods but also does the correction of the budget. Jokes are made in Lithuania that this year the budget is being made more exact more often than the wind changes. Though when the budget being planned was considerably reduced in May it was said that it was the last cut that summer, however, this did not happen. On 23 July the Seimas of the Republic of Lithuania reduced the budget once again – the planned income was “shortened’ by as much as two million Litas. The budget expenditure has been reduced because fewer salaries would be paid to the state politicians, judges, state officials, civil and statutory servants and employees of the budgetary institutions. Of course, this has affected the employees earning the smallest income most significantly – teachers and physicians.
The public authorities were instructed to reduce their expenditures, excluding payment for work and investments, by as much as 55 per cent next year. This includes expenditure on goods and services, various procurements, business trips, upkeep of the institutions.

How to rescue Sodra?

The system of social insurance in Lithuania is the formation that is sinking most rapidly and giving least hopes. With the number of people capable of work decreasing and the number of pensioners and recipients of benefits increasing Sodra is going to the bottom like some monolith and causes an ever-greater concern. There were as many plans to rescue Sodra as there were authorities in Lithuania; however, none of them brought any substantial benefit.
Excessive ungrounded expenditure such as the maternity leave and the system of benefits in Lithuania, which are the most general one in the world, also sink the Sodra boat. Mothers were made happy by being paid a 100 per cent salary during the first year of the maternity leave, and 85 per cent during the second year. The birth rate increased in the country, its growth was the largest in the European Union. However, as a result of all that expenditure of Sodra increased considerably. This year the budget deficit of Sodra totals a billion Litas already. Of course, the ruling circles speak about the rescuing plan too. For example, the Ministry of Social Security and Labour, when rescuing the Sodra budget proposes to stop paying for the first three days of sickness and to reduce the sickness benefit up to 75 per cent of the amount of the compensated salary. Also, it is proposed to approve of the proposal that the employer should pay the sickness benefit for the fourth and fifth day of incapacity for work. At the present time the employer pays for the first two days of sickness and Sodra starts paying beginning with the third day. Hence, there are different proposals, however, thus far the rescuing plans have remained a mere mirage.

Lithuania borrows most expensively

Lithuania is not going to appeal to the International Monetary Fund because the terms set by the latter are especially painful, the authorities of the county announce. Borrowing from the IMF cheaply would spoil the country’s image; this would be a sign to the investors that Lithuania has reached the end of its tether. Therefore Lithuania is borrowing little amounts in different markets but does it expensively. Actually Lithuania is borrowing most expensively in the whole of the European Union. It is thought that paying back debts will become another hindrance to recovery of economy. In the course of five years our country will have to pay its creditors for the loans already taken more than LTL 19 billion loans and interest on them. Soon Lithuania will have to borrow another LTL 10 billion. However, this is not the end yet. It is forecasted that during the second half-year of this year the country will have to borrow about LTL 3,5 billion to stop the holes in the budget, and next year – at least LTL 6 billion. If the interest rate to be paid on these loans is 9.5 per cent (the amount for which Lithuania distributed Eurobonds in the international markets last time), this credit will cost our country additionally LTL 900 million annually. This year Lithuania is going to pay almost LTL 846 million interest on the loans already taken, next year this figure will stand at LTL 1,114 billion. “Great commitments will hamper our country’s recovery. Instead of encouraging economy the state will have to allocate large amounts to paying back the debts”, states Jekaterina Rojaka, DnB Nord bank analyst. It might happen that wishing to pay back the debts the authorities will be made to increase taxes on business and the residents in the future.

Excise has been reduced on diesel fuels only

With taxes increasing and salaries decreasing it took a long time for the authorities to admit the mistakes they had made. The belt that was too tightened did its bit – consumption in Lithuania dropped most dramatically in the whole of the European Union, which had an impact on the greatest fall in GDP all over the continent – as much as 22 per cent. Decreased consumption increased smuggling, the Lithuanians started to do shopping in Poland, they bought fuels in Latvia because due to lower excises and due to the devaluated Zloty in Poland everything became cheaper in the neighbouring countries. At the end of the summer it became clear that consumption of fuels dropped by as much as 30-40 per cent, and in the filling-station on the border – by as much as 80 per cent. The revenue of the budget dropped even more significantly, however, the authorities were not ready to admit the mistakes they had made. It was only under the pressure from society and business people that it was decided to reduce the excise to the former level. Of course, such a decision was made too late, however, at least attempts were made to make the carriers fill their tanks in Lithuania rather than in the neighbouring countries. By the way, Lithuania greatly exceeded the excise minimum set by the European Union not only on diesel fuels but also on petrol and gas.

Export is Lithuania’s hope

Analysts of Swedbank forecast that this year Lithuania’s GDP will drop by as much as 13 per cent. Economy’s fall will continue in the 2010 too when GDP is forecasted to drop another 3 per cent. “Pessimism and insecurity as to the future greatly affect domestic consumption, which had been the main propeller of the country’s economy for a long time. However, society is becoming accustomed to the new surrounding and is moving into lower gear to be able to get through the bumpy roads of the current conditions”, said the representative of the bank Tomas Andrejauskas.
Analysts of Swedbank forecast that Lithuania’s export, which decreased by as much as 21.8 per cent during the first two months of this year has suffered the most severe blow and within the year 2009 its volumes will decrease by at least 20 per cent. Meantime a decrease in import volumes is forecasted to account for 25-30 per cent. Analysts of Swedbank forecast that real wages in Lithuania will decrease by about as much as 10 per cent this year and by another 5 per cent in the year 2010.
According to the Minister of Finance of the Republic of Lithuania Ingrida Ðimonytë, this year will witness the greatest fall and next year we shall have in any case to see more positive results of GDP. However, according to her, this does not mean that the condition of the budget will be better, therefore saving of public finances further will be unavoidable, and the assimilation of the European Union funds will be one of the few remaining possible sources of encouraging economy. “We all should concentrate our efforts now towards a maximal rapid use of the European Union support because these are the only funds, which the authorities can infuse into economy and help economy to recover”, stated the Minister.

New electric power plant is like a mirage

Even after the foreign markets have recovered, Lithuania will not be able to get free of the clutches of the crisis soon. It is a pure coincidence that the citadel of cheap electricity – Ignalina Nuclear Power Plant to be decommissioned as of 1 January, will bring its own problems. Though Lithuania is no longer frightened of the lack of electricity, the price of electricity is an ever more popular subject of discussions. Thus far it has been clear that Lithuania is going to import half electrical energy from Russia, which will increase its dependence on the clutches of a Russian bear. Elektrënai Electric Power Plant in Lithuania should generate 25 per cent of electricity, however, electricity produced by that plant is expensive, even more expensive than electricity imported from Russia. It was for this reason that the said electric power plant operated at times under the limited regime because Russian electricity was cheaper. The forthcoming year will bring many novelties to the electricity sector – finally the electricity market should appear because Lithuania is going to buy part of energy at auctions. However, time has not come for Lithuania yet to become connected to the electric networks of the West. The Electricity Bridge to Poland is in essence a buried idea. Even close cooperation between the Presidents of Poland and Lithuania failed to bring success to the project. The Electricity Bridge to Sweden is still at the level of paper work – all that was finally decided after many years is that the cable from Sweden would run through Lithuania.
Prospects of the nuclear power plant are even gloomier. The President of the country Dalia Grybauskaitë hinted that she did not firmly believe that Lithuania could build a new nuclear power plant all by itself. Not only because the national investor LEO LT in which private and state-owned capital was joined is being dissolved. LEO LT had to be an example of how private and state-owned capital, as well as cooperation between business people and the authorities could be of benefit in seeking for the common goal – a nuclear power plant. It tuned out, however, that it was too early for Lithuania to speak not only about the new power plant but also about synergy of business and the power. Lithuania is hardly to remain a nuclear state for other reasons too – its neighbours are already laying foundations for their own power plants, thus, in the future there might be a surplus of electricity. Nuclear power plants are intended to be built in Kaliningrad Region and Belarus, which will be built almost on Lithuania’s borderline. In the opinion of the President of the Republic of Lithuania Dalia Grybauskaitë, one variant is possible – that a foreign investor should build the power plant and Lithuania would undertake to buy electricity from it. However, it is not clear whether this would be worthwhile. Hence, after the New Year Lithuania will become ever more dependant on Russia from the point of view of energy.