Balance of Payments the Republic of Lithuania in the Third Quarter and from January to September 2004

Current account.A much faster growth export of goods, compared to import, in the third quarter of 2004, against Q2, brought about a contraction in the current account deficit (CAD) in the balance of payments by 25.2 per cent. Year on year, the CAD widened by 72.0 per cent in Q3 (LTL 529.1 million), and by 74.9 per cent (LTL 1.77 billion) from January to September.According to preliminary data, in Q3 2003 the CAD accounted for 7.7 per cent, and from January to September for 9.2 per cent of GDP.

From January to September, 2004 the expansion of the CAD was mainly driven by the increasing foreign trade deficit and the growing negative income balance.Fast economic development of the country, increasing income and favourable borrowing terms fuelled domestic demand,which accelerated imports of consumer goods and worsened the foreign trade balance.Structurally, the expansion of the current account deficit was mostly determined by the decline of national savings and only in part by a higher investment level.

Foreign trade.In Q3 2004, export growth outpaced import growth (21.5% and 19.6%, respectively) for a second consecutive quarter.According to the preliminary data of the Department of Statistics under the Government of the Republic of Lithuania, in January to September 2004 export of Lithuanian goods increased by 18.2 per cent, while import went up by 17.1 per cent year on year.The relatively fast growth rate of the export of goods was determined by the generally stable level of competitiveness of domestic economic entities, fast efficiency growth (compared to wages) and a stable level of export prices vis-ą-vis the main trading partners.

In 2004 Lithuania’s export was mostly driven by the EU market.From January to September 2004 export of goods to the EU (25 Member States) grew by 22.4 per cent year on year (23% to EU-15 and 21.2% to the new Member States).Export growth to the EU accounted for slightly more that three quarters of the total export growth.Export of goods to the CIS increased by 24.4 per cent during the period under review.This was mostly determined by the fast growth of export to the Ukraine and Belarus (50.9% and 37.9%, respectively).Export to Russia went up by 10.5 per cent.The growth of export to the CIS accounted for one fifth of the total export growth.

The increase in the export of goods was mostly affected by the export of mineral products,which went up by 44.4 per cent over the review period and accounted for one half of the total export growth.Excluding mineral products, export of goods increased from January to September 2004 by 11.5 per cent.Export of machinery and mechanical appliances went up by 42.1 per cent and accounted for nearly a quarter of the total export growth.

While export growth outpaced import growth, in January to September 2004 the foreign trade deficit increased by LTL 785.5 million year on year.

Import of goods was pushed by increased domestic demand and lower import prices due to the depreciation of the US dollar.

In January to September 2004 the highest growth (23.8%) was recorded in the import of consumption goods, of which import of consumer durables went up as much as 42.0 per cent.

Excluding mineral products, import of goods increased from January to September 2004 by 16.2 per cent year on year.

Export of Lithuanian goods to the current EU Member States accounted for 65.1 per cent of total export, while import made up 63.9 per cent of total import. Compared to total export, the share of export to the CIS made up 16.0 per cent, and import from the CIS countries accounted for 26.2 per cent of total import. 

Services. In Q3 2004 exports of services increased by 22.9 per cent year on year, while import of services grew by 12.8 per cent. In January to September export and import of services went up by 16.0 per cent and 18.8 per cent, respectively. The total positive balance of services in January to September made up LTL 1.76 billion, of which LTL 791.7 million in Q3 2004 (LTL 1.58 billion in January to September 2003). Export of services grew at the highest rate in the third quarter, while import of services in the second quarter. The overall changes in the export and import of services were determined by the development of transport and travel services.

According to the calculated data, the total number of visitors in Lithuania was the highest in Q3, as compared to Q1 and Q2, at 1.5 million people, 3.2 million in January to September, showing an increase of 10.7 per cent year on year.In January to September 2004 the number of Lithuanian residents travelling abroad grew by 18.3 per cent.While the number of EU residents visiting Lithuania increased by 22.1 per cent from January to September 2004, the number of CIS visitors declined by 21.5 per cent.The number of CIS visitors declined to a large extent because of the fewer so-called one-day tourists (coming mostly from Russian and Belarus).Owing to a larger number of visitors from the EU countries, income from the export of travel services made up LTL 1.76 billion from January to September 2004, up by 18.8 per cent year on year.Expenses on the import of travel services, on the other hand, increased by 26.6 per cent due to a larger number of Lithuanian residents travelling abroad.Owing to the above changes, the positive travel balance increased by only LTL 2.4 million from January to September 2004.

Compared to the total export of services, export to the EU (25 Member States) made up 49.6 per cent, and to the CIS 37.5 per cent.Compared to the total export of transport services, export of these services to the EU accounted for 48.6 per cent and to the CIS for 44.1 per cent.Export of travel services to the EU stood at 46.8 per cent, and other services at 61.7 per cent.

Income.The income balance deficit in Q3 2004 made up LTL 530.4 million, LTL 1.67 billion in January to September 2004.The income balance deficit widened by LTL 409.1 million, or nearly one third, year on year.The increase of the negative income balance was determined by nearly a two-fold increase in non-resident 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).In January to September 2004 it made up LTL 907.2 million, of which LTL 472.6 million in Q3.Dividends to non-residents (on foreign direct investment) increased in January to September 2004 by 8.7 per cent year on year.Over the period under review, the income of Lithuanian economic agents from investment abroad went up by a mere 1.9 per cent, while income of non-residents from their investment in Lithuania increased by 28.6 per cent.

The fast growing surplus of compensation of employees did not offset the large deficit increase in the investment income balance.Year on year, compensation of employees grew by LTL 60.2 million (95.9%) in Q3 2004, and LTL 148.3 million (78.4%) in January to September 2004.

Current transfers.The positive balance surplus of current transfers in Q3 2004 made up LTL 153.8 million, LTL 550.0 million in January to September 2004 (LTL 624.0 million in January to September 2003).The contraction of the positive balance surplus of current transfers was influenced by Lithuania’s contributions to the EU budget (after EU accession) and the fact that much more funds from EU support funds were channelled to investment projects (which are reflected in the capital account of the balance of payments).

Year on year, from January to September 2004 private cash transfers went up by LTL 113.5 million.

Capital and financial account.Excluding international reserves, in January to September 2004 the total investment flow in the balance of payments reflected net inflows of LTL 3.8 billion, of which LTL 1.06 billion in Q3.The current account deficit was mostly financed by foreign direct investment; its net inflows made up 37.1 per cent of the CAD, 45.8 per cent of the CAD including capital transfers from EU support funds.Net portfolio investment inflows made up 29.9 per cent, and other investment inflows accounted for 16.3 per cent of the CAD.

Investment abroad.Investment flow abroad by domestic economic entities was LTL 1.75 billion in January to September 2004, of which LTL 483.9 million in Q3.The largest part of the flow of investment abroad in January to September consisted of investment by Lithuanian commercial banks of LTL 1.21 billion, of which LTL 857.1 were an increase in deposits and balances on correspondent accounts with foreign banks.In addition, commercial bank investment in non-resident debt securities and money market instruments amounted to LTL 300.1 million.Foreign investment by other domestic economic entities made up LTL 535.7 million in January to September 2004, of which trade credit to non-residents made up LTL 391.3 million.Year on year, foreign direct investment by domestic economic entities increased in January to September 2004 by LTL 79.6 million.

A new phenomenon was recorded in the country’s balance of payments statistics, i.e. transactions of domestically established pension funds with non-residents.In the second and third quarters of 2004 the investment flow abroad by these funds made up LTL 47.5 million.

Foreign investment in Lithuania.In Q3 2004 the foreign investment flow in Lithuanian made up LTL 1.27 billion, LTL 5.19 billion in January to September.

Foreign direct investment in Lithuania.Reinvestment flow increased significantly in Q3 2004 (amounting to LTL 472.6 million), yet the negative investment flow into equity capital and a comparatively low flow of other investment reduced the total foreign direct investment flow in Lithuanian in the third quarter.This flow made up LTL 421.4 million and was lower against both the first and the second quarters.Nonetheless, from January to September 2004 foreign direct investment flow in Lithuania increased by over LTL 1.5 billion year on year.Inflows classified as foreign direct investment from privatisation made up LTL 114.5 million in January - September 2004, i.e. as little as 6.6 per cent of the total foreign direct investment flow.

On 30 September 2004, accumulated foreign direct investment in Lithuania stood at LTL 14.98 billion (EUR 4.34 billion),or LTL 4,364 (EUR 1,264) per capita.

The largest foreign direct investment flow was recorded in the manufacturing industry (LTL 953.8 million), electricity, gas and water supply activities (LTL 267.8 million), wholesale and retail trade (LTL 251.4 million) and monetary intermediation (LTL 181.0 million).

On 30 September 2004, investment in the manufacturing industry accounted for 33.9 per cent of total foreign direct investment in Lithuania, wholesale and retail trade for 17.1 per cent, transport, storage and telecommunications for 15.3 per cent, and financial intermediation for 15.4 per cent.

The largest investors by country were Denmark (15.8%), Sweden (15.4%), Germany (9.6%), Estonia (8.7 %), Russia (8.6%), Finland (8.4%) and the USA (6.5%).

Investment from the EU (25 Member States) accounted for 75.8 per cent of total investment, of which investment of old EU Member States (15 countries) accounted for 62.5 per cent, and investment of the CIS countries for 9 per cent.

Portfolio investment.In January to September 2004 the portfolio investment flow in Lithuanian made up LTL 1.64 billion, of which LTL 241.7 million in Q3.Over three quarters of the portfolio investment flow consisted of inflows from the new Government Eurobond issue in Q1 2004.

Other investment flow in Lithuania from January to September 2004 made up LTL 1.92 billion, of which LTL 638.1 million in Q3.Year on year, other investment flow was lower by LTL 444.6 million.Loans received by commercial banks and non-resident deposits in domestic commercial banks accounted for the largest share of this flow.The flow of loans received on behalf of the state was negative (more foreign loans were repaid).

Reserve assets.Reserve asset flow in Q3 2004 was positive (LTL 169.4 million), and from January to September 2004 it was negative (LTL -60.1 million).The main reason behind the decrease in reserve assets was net purchase of foreign exchange by commercial banks from the Bank of Lithuania of LTL 1.04 billion from January to September.

Bank of Lithuania operations with central government institutions amounted to LTL 983.8 million in January to September 2004 and was the largest factor increasing reserve assets.Reserve assets were also increased by growing commercial bank required reserves in foreign currencies.

International investment position of the Republic of Lithuania.On 30 September 2004, total foreign financial assets of the country made up LTL 17.74 billion, and total international financial liabilities amounted to LTL 39.03 billion.The negative international investment balance made up LTL 21.29 billion, i.e. Lithuania was a debtor vis-ą-vis the rest of the world.From January to September 2004, total foreign assets increased by LTL 1.95 billion (LTL 632.5 million in Q3), international financial liabilities went up by LTL 4.3 billion (LTL 646.3 million in Q3), and the negative international investment balance went up by LTL 2.35 billion.At the end of September 2004 the international financial liabilities of the country were distributed as follows:other investment 43.2 per cent, foreign direct investment 38.4 per cent and portfolio investment 18.4 per cent.