Country Report Lithuania

Outlook for 2008-09

• The coalition government, led by the Social Democratic Party (LSP), is likely to survive until the election, due in October 2008. The election looks set to produce an ideologically disparate and probably unstable coalition.
• Fiscal policy has been restrained, but is looser than is justified given the continued need to stabilise the economy. Measures to promote disinflation will require attention from the authorities over the forecast period.
• The Economist Intelligence Unit forecasts that real GDP growth will slow to 5.6% in 2008 and to 5% in 2009, down from our previous forecasts of 5.8% and 5.5% respectively, owing to higher inflation and a worsened outlook for exports.
• We have raised our forecasts for average annual inflation, because of an increase in our forecasts for global food and oil prices. Inflation will accelerate to 10.2% in 2008, before declining to 6.5% in 2009.
• The current-account deficit was 13.7% of GDP in 2007. The deficit will stay high in 2008-09, at an annual average of around 11.3% of GDP, as a rise in debt-servicing costs drives up income debits.

Monthly review

• Ahead of the parliamentary election, the conservative opposition Homeland Union (TS) party has been gathering right-wing parties under a single umbrella. In May it merged with the Christian Democrats (LKD).
• A new party, the National Resurrection Party (TPP), was established in May by a group of celebrities. The TPP may capture part of Lithuania's large populist vote from the Order and Justice and Labour parties.
• The impasse within the EU on the mandate for talks with Russia for a new partnership and co-operation agreement appears to have been resolved. Lithuania had vetoed the start of talks, but its concerns have been addressed.
• Earlier decisions, such as raising public-sector salaries and cutting income tax, mean that the fiscal position has deteriorated.
• Amid considerable uncertainty over the outlook for the economy, the Bank of Lithuania (BoL, the central bank) downgraded its central macroeconomic indicators in late April.
• Real GDP growth slowed to 6.4% in the first quarter of 2008, from 8% in the previous quarter, on a preliminary estimate. Private consumption growth was still brisk. However, there are signs that the economy is set to slow further.
• The rapid expansion in bank lending is cooling as banks apply tighter lending criteria. A worrying development is that households and firms are borrowing more in euro to take advantage of lower interest rates.

SOURCE: Country Report