Balance of Payments the Republic of Lithuania in the Second Quarter and First Half of 2002

The development of the CAD during Q2 and first half of 2002 was mostly determined by the increased foreign trade deficit. The impact of other factors (e.g. improved services and income balance) was significantly lower, while the balance of current transfers exerted influence in the opposite direction by widening the CAD, albeit only slightly.

The widening of the CAD was determined by the changing trends in both domestic and external development. Slow economic growth in European Union Member States had a negative impact on exports of Lithuanian goods (EU countries account for over a half of Lithuanian exports of goods). Meanwhile, import growth was faster than export growth. The difference was especially evident in Q2 2002.During that period, imports on (new) cars increased significantly.The process was facilitated by the planned changes in the VAT refunding arrangements (effective from 1 July).

Compared to EU and neighbouring countries, economic growth in Lithuania was significantly faster. At the same time, changes occurred in the factors that determined growth. Compared to a year ago, the impact of the export of goods diminished, while the larger influence was exerted by growing domestic investment that encouraged import of goods. This is proved by a significant increase of imports of investment goods.

Foreign Trade. Significantly increased re-export of cars, exports of prepared foods and consumer durables (furniture) determined the general improvement of the export of goods, while higher imports of investment goods and cars had a major impact on increased imports of goods. Meanwhile, export of mineral products (mostly refined petroleum products), which account for the largest share of exports, declined.

During the first half of 2002, compared to the same period in 2001, exports of mineral products declined by 16.4 per cent. Compared to total exports, export mineral products went down from 25.8 per cent to 20.9 per cent. A sizeable increase of exports of vehicles pushed up the share of these goods from 8.1 per cent to 11.8 per cent of total exports.

During the first half of 2002, compared to the same period last year, export of goods to the EU went up by 8 per cent (26.7 % increase in the first half of 2001). However, disregarding exports of petroleum products, exports to the EU increased by a mere 1.1 per cent. Compared to total Lithuanian exports, export to the EU grew from 48.2 per cent to 50.4 per cent. Export to the CIS increased by 25.5 per cent, including Russia (as much as 55.2 per cent), over the review period. Increased exports of vehicles (re-export of cars) to Russia accounted for nearly two thirds of the total value of export growth to Russia. Compared to total Lithuanian exports, export to the CIS increased from 17.4 per cent to 21.2 per cent.

Import of goods (imported goods were classified by the country of origin) from the EU increased by 24.5 per cent, and imports from the CIS contracted by 13.6 per cent. Compared to total imports, the share of imports from the EU made up 51.0 per cent, and imports from the CIS countries accounted for 24.0 per cent.

Services. During the first half of 2002, compared to the same period in 2001, export of services increased by 12 per cent (16.3 % in Q2). The largest increase (39.6 %) was recorded in the export of other business services, including advertising, management and consulting, trade intermediation and other services.

During the first half of 2002, compared to the same period in 2001, export of transport services increased by 13 per cent (17.7 % in Q2), export of travel services by 7 per cent and 12 per cent, respectively, while export of construction services went up by a factor of 2.1. Transport and travel services accounted for 49.8 and 29.4 per cent of the total export of services, respectively.

During the first half of 2002, compared to the same period in 2001, the number of foreigners visiting Lithuania increased by 0.6 per cent, while the number of Lithuanian residents temporarily leaving the country went up by 6.3 per cent. The positive travel balance made up LTL 251.5 million (LTL 167.1 million in Q2).

During the first half, the income received for transit cargo transportation increased by 11 per cent and made up 40.8 per cent of the total export of transport services (41.5 % in the first half of 2001).

Compared to the same period in 2001, import of services increased by 12.3 per cent during the first half of 2002 (12.9 % in Q2). The total positive balance of services in the first half increased by LTL 98.7 million.

Income. The negative income balance in the first half of 2002 made up LTL 505.4 million and was LTL 4.1 million lower than in the first half of 2001.Compared to the first half of 2001, interest payments to non-residents for Government securities increased (LTL 69.3 million), while interest payments on foreign loans received in the name of the state and with Government guarantees went down by LTL 65 million.Compared to Q1 2002, the negative income balance increased by LTL 116.6 million in Q2 2002 .Dividends to non-residents for foreign direct investment went up by LTL 117.3 million, reinvestment (which is recorded in the current account of the balance of payments as payments to non-residents, and is reflected in the financial account as part of foreign direct investment) went down by LTL 32.6 million in Q2 2002.

Current transfersThe balance of current transfers was positive during the first half of 2002 and stood at LTL 358.6 million (LTL 457.2 million during the first half of 2001).The amount of current non-repayable transfers declined because of a sizeable increase of non-repayable capital transfers, i.e. contributions to various investment projects in Lithuania (e.g. funds from EU structural adjustment funds (SAPARD and ISPA)). Data on capital transfers are presented in the capital account of the balance of payments.

Capital and Financial Account. During the first half of 2002, compared to the same period in 2001, the balance of the capital and financial account increased by LTL 301.1 million. This development was mostly influenced by the inflows of other investment and foreign direct investment in Lithuania that increased during Q2.

Investment Abroad. Investment by Lithuanian economic entities abroad increased by a mere LTL 10.2 million in the first half of 2002.Domestic commercial banks increased their investment in non-resident debt securities (LTL 395.8 million), while deposits and correspondent account balances of other domestic economic entities with foreign banks went up by LTL 352.9 million.On the other hand, bank loans to non-residents declined by LTL 975.3 million.

Foreign Investment in Lithuania. Total foreign investment flows in the first half of 2002 were LTL 2.8 billion (of which LTL 2.7 billion in Q2). Compared to the first half of 2001, foreign investment flows increased by nearly LTL 1.2 billion.The financing of the current account with foreign capital investment that does not increase foreign debt (equity investment and reinvestment) made up 65.2 per cent of the current account deficit (78.1 % in the first half of 2001). Although the consolidated state budget deficit slightly widened in Q2 2002, this did not have a large impact on the CAD.

Foreign direct investment flows in the first half of 2002 were nearly LTL 1.6 billion (of which LTL 1.28 billion in Q2).Compared to the same period of 2001, these flows increased by LTL 515 million, i.e. 47.7 per cent.The increase was determined by the successful privatisation of the Agricultural Bank and Lithuanian Gas and investment of the Russian Jukos Oil Corporation in Mažeikių Nafta.Inflows classified as foreign direct investment from privatisation made up LTL 187 million in the first half of 2002, and reinvestment made up LTL 131.7 million.

On 30 June 2002, total foreign direct investment in Lithuania stood at LTL 12.07 billion (EUR 3.49 billion, USD 3.47 billion),or LTL 3,478 (EUR 1007, USD 1000) per head of population.

The largest foreign direct investment was directed into the production of petroleum products (LTL 801.6 million), financial intermediation (LTL 153.5 million), food, drinks and tobacco production (LTL 133.6 million), transport, storage and long distance communication (LTL 108.5 million).

On 30 June 2002 processing industry accounted for 29.8 per cent of total foreign direct investment in Lithuania, financial intermediation for 19.6 per cent, food, retail and wholesale trade for 17.7 per cent, transport, storage and long distance communication for 17.3 per cent.

The largest investors by country were Denmark with 16.6 per cent of total investment, Sweden (16.2 %), USA (10.2 %), Germany and Estonia (9.6%). EU investors accounted for 60.6 per cent of total investment, EU candidate countries for 13.5 per cent.

Portfolio Investment. During the first half of 2002 portfolio investment inflows made up LTL 1.39 billion.Such sizeable investment flows were caused by the successful distribution of Government Eurobond issue among non-residents which resulted in LTL 1.25 billion of receipts.

Other Foreign Investment. Trade credit increased in the first half of 2002 by LTL 334.4 million, of which by LTL 379 million in Q2.Non-resident deposits in domestic commercial banks increased by LTL 10.9 million and LTL 50 million, respectively.Same as last year, total foreign loan flows were negative (more foreign loans were repaid) and stood at LTL 410 million.

International Reserves. International reserve flows in the first half of 2002 were positive (LTL 1.79 billion). In Q2 2002 these inflows amounted to LTL 1.57 billion. The marked increase of the international reserves was determined by the Eurobond issue. In addition, net purchase of foreign exchange by the Bank of Lithuania from commercial banks was LTL 660.5 million. On 30 June 2002, import coverage by net international reserves (excluding gold) was 3.4 months (2.9 months at the start of the year).

Errors and omissions in the balance of payments of the first half of 2002 made up LTL 416.5 million.

Balance of the International Investment Position of the Republic of Lithuania. On 30 June 2002, total foreign financial assets of the country made up LTL 13.98 billion, and total international financial liabilities amounted to LTL 31.1 billion.The negative international investment balance made up LTL 17.12 billion.In the course of the first half of 2002, total foreign assets decreased by LTL 1.47 billion, international financial liabilities went up by LTL 1.77 billion, and the negative international investment balance went up by LTL 297.7 million.The major part of international liabilities at the end of the first half of 2002 consisted of foreign direct investment (38.8 %), foreign loans (24.4 %), portfolio investment (20.6 %) and other investment (16.2 %).