Country Report Lithuania April 2009

Outlook for 2009-10

• The new governing coalition, led by the centre-right Homeland Union-Lithuanian Christian Democrats (TS-LKD), is likely to face fractures over the forecast period, despite having a large majority in parliament.
• Public discontent with the government's austerity programme will intensify as the economic downturn gathers pace.
• The government aims to cut spending and boost revenue in order to narrow the budget deficit, but revenue collection will suffer from the downturn in economic activity, and budget targets will continue to be overshot slightly.
• Tight lending conditions and declining consumer confidence will lead to a deep slump in private consumption and investment in 2009. We forecast that real GDP will fall by 8.5% in 2009 and by a further 2.5% in 2010.
• A fall in domestic demand, together with lower commodity and oil prices, is forecast to bring down average annual inflation to 4.3% in 2009. We expect a slight increase, to 4.9%, in 2010 as commodity prices and power prices rise.
• Falling import demand will lead to a marked narrowing of the current-account deficit as a share of GDP in 2009. A recovery in exports in 2010 will bring the deficit down further, to less than 3% of GDP.

Monthly review

• Lithuania's European commissioner, Dalia Grybauskaite, has formally declared her candidacy for the presidential election due on May 17th, and remains the clear front-runner.
• Tax changes implemented in January 2009 have resulted in a shortfall in budget revenue. The Ministry of Finance is intent on pushing through further expenditure cuts in an attempt to meet its deficit target.
• Speculation has risen that Lithuania might be required to devalue its currency. Local savers caused a brief rush on banks in early March as they changed litas into euro and other foreign currencies.
• Statistics Lithuania has revised downwards its estimate of GDP in the final quarter of 2008. Real GDP fell by 2.2% year on year, and household consumption fell by 3%the first such contraction since 1995.
• A sharp slump in retail trade, which fell by 30% year on year in January-February 2009, suggests that private consumption fell even more rapidly in the first quarter of 2009.
• Declining domestic demand led to a sharp narrowing of the current-account deficit in the fourth quarter of 2008. For the year as a whole the deficit is estimated at 11.9% of GDP, compared with 14.6% of GDP in 2007.