Country Report Lithuania November 2009

Outlook for 2010-11

• Despite the instability of the ruling coalition, led by the centre-right Homeland Union-Lithuanian Christian Democrats (TS-LKD), the TS-LKD is likely to dominate policymaking over the forecast period.
• The coalition has only a slim majority in parliament, but it will be able to rely on informal support from deputies that have officially left the coalition.
• Spending pressures and poor revenue performance will keep the budget deficit large, at a forecast 6.8% of GDP in 2010. The fiscal position will only begin to improve significantly from 2011, as the economy returns to growth.
• Tight credit conditions and low consumer confidence will lead to a further fall in private consumption and investment in 2010, before a slow pick-up in 2011. We forecast a fall in real GDP of 3.5% in 2010, before growth of 2.8% in 2011.
• A fall in consumer demand and investment spending is forecast to bring down average annual inflation to 1.4% in 2010. Higher global commodity prices will prevent a faster slowdown in inflation.
• The current account is forecast to remain in surplus in 2010 as the trade deficit remains small. It will return to deficit in 2011 as imports rise following a slight pick-up in domestic demand.

Monthly review

• Andrius Kubilius, the prime minister, has continued to face a difficult balancing act between restoring order to the public finances and staving off rising public discontent over austerity measures.
• The increase in the rate of value-added tax (VAT) instituted in September 2009 appears to have brought budget revenue from VAT back on target, following a poor performance earlier in the year.
• The general government budget recorded a deficit of 10.7% of GDP in the second quarter of 2009, following a deficit of 9.6% of GDP in the first quarter.
• The government has successfully addressed its immediate financing concerns with the issue of a US$1.5bn US-dollar-denominated bond, with an annual coupon of 6.75%.
• The draft budget for 2010 envisages a deficit of 6.7% of GDP. Spending on social welfare benefits is around 15% lower than in the 2009 budget, and the government wage bill is set to fall by 10%.
• VAT and excise duty increases pushed up consumer price inflation to 2.7% year on year in September.
• The current account recorded a small deficit, equivalent to 0.2% of GDP, in the second quarter of 2009, following a small surplus in the first quarter.

Source: Country Report