Country Report Lithuania January 2009

Outlook for 2009-10

• The new governing coalition, led by the centre-right Homeland Union-Lithuanian Christian Democrats (TS-LKD), despite solid support in parliament, is likely to face fractures over the forecast period.
• The TS-LKD aims to cut expenditure and boost revenue in order to narrow the budget deficit, but revenue collection will suffer from the slump in economic activity, and budget targets will continue to be overshot slightly.
• Tight lending conditions and declining consumer confidence will lead to a slump in private consumption and investment in 2009. We forecast that real GDP will fall by 3.5% in 2009 and by 0.2% in 2010.
• A fall in domestic demand, together with lower commodity and oil prices, will bring down average annual inflation to 4.5% in 2009. We expect a slight increase, to just under 5%, in 2010, as commodity and power prices rise.
• Sluggish 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 7.3% of GDP.

Monthly review

• On December 9th the Seimas (parliament) approved the new government and its policy programme. The government commands the support of 83 deputies in the 141-seat Seimas.
• Early doubts as to the durability of the coalition arose in the first vote in the Seimas, for the election of parliamentary speaker. The ruling coalition's nominee was at first rejected, before being elected in a second ballot.
• The new government has proposed a revised budget for 2009. This targets a deficit of 2.1% of GDP, significantly lower than the draft budget put forward by the outgoing coalition.
• The government's package of anti-crisis measures includes steps to raise tax revenue by increasing the rates of profit tax to 20% (from 15%) and value-added tax (VAT) to 19% (from 18%). Personal income tax will fall to 20% (from 24%).
• The anti-crisis package also includes expenditure cuts, by reducing public-sector wages, cutting social security benefits and the minimum wage, and reducing budgeted defence expenditure.
• Real GDP growth, of 3.1% in the third quarter, was held back by a fall in gross fixed capital formation. Private and public consumption growth held up well.
• Unemployment rose to 5.9% in the third quarter of 2008, an increase of 2percentage points year on year. Third-quarter data also showed a fall in job vacancies, by 11%, largely owing to a slowdown in the construction sector.

This report covers the following industry codes:
SIC Code: 60;48;49;53;59;37;1;15
NAICS Code: 52;517;22;44;336;11;23

This report covers the following industry codes:
SIC Code: 60;48;49;53;59;37;1;15
NAICS Code: 52;517;22;44;336;11;23