Projections of Lithuanian Economic Indicators (October 2008)

Following the recommendation by the International Monetary Fund to Lithuania to strive for the smooth deceleration in economic development, but also to prepare for a possible sharp slowdown in economic growth.

Taking the scenario of slowdown in economic development as the basis for the draft State budget for 2009, the Government assumes the responsibility that in the current circumstances of the global financial crisis, financing commitments of the Government to appropriation managers will hold any challenges. In order to ensure financing stability short-term and long-term measures are planned. Long-term financing stability measures will be proposed by the reform of the general government finance planning system, and short-term measures will be envisaged by the cautiously drafted State budget.

GDP

The projection of real gross domestic product (GDP) growth of 5.3% for 2008 has been holding against changing environment already for the second year in turn. Confidence in economic stability is also strengthened by the results of the first half-year of 2008: Lithuanian terms of trade having improved by 4 percentage points show that this year Lithuanian trade deficit will improve by a several percentage points of GDP. Earlier projected GDP growth of 4.5% in the year 2009 is still possible in case all businessmen rationally chose the strategy of increasing sales volumes and stabilising the prices. However, by cautiously planning public finances according to the scenario of slowdown in economic development in 2009 the growth of volumes is projected to be up to 1.5% of GDP, as the prudent assumption is made that businessmen may fail to correct speedily the mistakes made in 2008: unreasonably delayed reduction in real estate prices and unfoundedly increased consumer prices. Therefore, in drafting the budget the forecast that the growth of national GDP will be more moderate than it was announced earlier is followed. In 2009 GDP growth will represent 1.5%, in 2010, after decommissioning Ignalina nuclear power plant (NPP) – 1.8 %, and in 2011 it will approximate to a rapid potential growth of 4.5 %.

Average Wages and Consumer Prices

The basic factor which influenced inflation in the latter years – credit growth – is declining and disinflation keeps its accelerated pace from July 2008. However, following the presumption of the cautious scenario of economic indicators that entrepreneurs may lose an opportunity of cutting prices in 2008 and restoring consumer purchasing power in 2009, therefore, the Ministry of Finance changes and adjusts inflation projections for 2008. Annual inflation estimated based on harmonised consumer price index in December will make up 10.3 % (6.8 %.*), and average annual inflation will grow up to 11.4 % (9.2 %*).

Considering inertia of the labour market and disinflation trends emerged in July 2008, the Ministry of Finance increases the average national earnings projections. It is envisaged that, as compared with 2007, average wages will increase by 20 % this year (18.9 %*). Afterwards its growth will gradually approximate the labour productivity growth: in 2009 average wages will increase by 9.8 % in the country (9.8 %*), in 2010 – 2.4 % (9 %*), in 2011 – 3.2 % (8.3 %*), respectively. It is planned that in 2011 average wages before taxes will make up LTL 2,509.

High fuel prices, commitments to increase excise duties, inflation in 2006–2008 are not a rational basis for forming long-term inflation expectations. The evidences of the credit growth downturn emerged in the first half of this year, therefore, the central scenario projects that in the end of 2011 after weakening affect of excise duties on tobacco and feasible impact of decommissioning of Ignalina NPP, the effect of deflation credit growth will be observed and the average annual price level decrease will account for 0.1 % (2.3 %*). Deflationary pressure on local producers will be faced already in 2010, however, due to decommissioning of Ignalina NPP, inflation would undergo a jump of about 2 percentage points as a result of increasing electricity prices: increasing electricity prices will be compensated by deflation processes taking place in other sectors. In 2009 comparatively accelerated inflation will sustain due to inflationary expectations which forced up for a short period in 2008, the subsequence of which will shift to 2009 from inertia based on a presumption of the lack of business rationality. In 2009 average annual inflation will make up to 5.4 % (5.1 %*), in 2010 – about 3.6 % (3.6 %*).

Based on the currency board arrangements, a fixed exchange rate of the euro against the litas guarantees the average multi-annual inflation to remain close to eurozone inflation.

***

* - acc. to spring projections for 2008.