Rapid growth of the import of goods resulted in a sizeable widening of the current account deficit

Balance of Payments of the Republic of Lithuania in the Third Quarter and January-September, 2006

Current account.

In Q3 2006, the Balance of Payments current account deficit (CAD) amounted to LTL 2.7 billion (12.7% of GDP), and LTL 6.6 billion (11.2% of GDP) over the period from January to September. Compared to the same period of 2005, the CAD went up by LTL 3.1 billion (86.1%).

The widening of the CAD over the nine months of 2006 was determined by the higher foreign trade deficit and the income balance deficit.

Foreign trade. Compared to Q1 and Q2, the growth of the export of goods in the third quarter of 2006 slowed down considerably, which had an impact on the rate of export growth over nine months. Meanwhile, the slowdown in the growth of import of goods was not as marked. According to the data of the Department of Statistics, export of goods increased by 25.5 per cent from January to September 2006, while import went up by 28.3 per cent (export of goods and import of goods increased by 16.3% and 24%, respectively, year on year in Q3 2006). Faster growth of the import of goods, compared to the export of goods, determined a widening of the foreign trade deficit of LTL 2.68 billion (37.2%) in the period from January to September.

As in 2005, the export of Lithuanian goods to the new EU Member States and the CIS countries grew significantly more than the export to the old EU Member States. It was the factor that determined the overall growth size of the export of goods. At the same time, import of goods from the old EU Member States increased more rapidly than import from the CIS countries.

Such development of the export and import of goods from January to September 2006 determined changes in the geographical structure of foreign trade of Lithuania. Compared to the total volume of the export and import of goods, export to the EU Member States decreased while export to the CIS and other countries increased. What concerns the structure of import, the share of EU increased somewhat, while the share of import from the CIS declined.

Year on year, the total foreign trade deficit vis-ą-vis the CIS widened by 11.2 per cent over the period from January to September 2006 (amounting to LTL 6.1 million), while the deficit of the trade balance vis-ą-vis the EU Member States grew more than twice (to LTL 5.2 billion). The largest foreign trade deficit was recorded in respect to Russia, Germany, Poland, Finland and China, while the largest trade surplus was recorded in respect to Latvia, Estonia, the USA and Canada.

Trade in mineral products had the largest impact on the development of export and import of goods because of the rising global prices of oil and petroleum products and because of the fact that mineral products have the largest share in the composition of foreign trade. From January to September 2006, compared to the same period of 2005, export of mineral products increased by 29.1 per cent (0.6% in Q3) to account for 30.4 per cent of the total growth of the export of goods. Import of mineral products grew by 32.2 per cent (15.5% in Q3) and made up 29.1 per cent of the total increase in the import of goods. During the period under review, the export and import of goods (excluding mineral products) grew by 24.2 and 26.9 per cent, respectively.

Services. In Q3 2006 the growth in the import of services significantly outpaced export growth, and the positive trade surplus of services contracted overt the period under review by LTL 204.7 million. From January to September 2006 the export of services increased by 10.4 per cent year on year, while the import of services grew by 20.7 per cent.

While transport and travel services continued to dominate in the composition of export and import of services, marked changes in the development of other services may determine the overall rate of growth of services. Thus, over the period from January to September 2006 export of other services grew significantly faster than export of transport and travel services, which determined the overall increase in the export of services. The variation in the changes in the import of the main types of services was not large, changes in the import of transport and travel services serving as the main reason for the overall increase in the import of services.

Transport services accounted for 47.5 and 41.9 per cent of the total export and import of services, respectively. Export of transport services increased by 4.1 per cent compared to the nine months of 2005, while import of transport services grew by 19.8 per cent, therefore, the positive trade surplus of these services declined by LTL 216 million (15.4%).

Export of road transport services and supporting and auxiliary transport services as well as import of road and railway transport services were characterised by the fastest growth among all types of transport. The trade surplus of road transport services accounted for 41.4 per cent of the total positive trade surplus of services and for more than two thirds of the total trade surplus of transport services.

Over the first nine months of 2006, the number of foreigners visiting Lithuania increased by 639.5 thousand (16.5%) year on year (287.5 thousand, or 19.3%, in Q3), while the number of Lithuanian residents travelling abroad went up by 776.1 thousand, or 20.8% (311.5 thousand, or 17.8%, in Q3). Travel income increased by 9.2 per cent and travel expenditure went up by 21.2 per cent during the nine-month period under review. The total surplus of the balance of travel declined by 33.6 per cent.

Among other services, the volume of trade in insurance and financial services grew at the fastest rate from January to September 2006.

Over the first nine months of 2006 export of services to the EU countries made up 53.6 per cent of the total export of services, while import of services from the EU countries accounted for 56.5 per cent. The share of the CIS countries in the overall composition of the export and import of services made up 29.7 per cent and 28.9 per cent, respectively.

Income. The income balance deficit made up LTL 621.5 million in Q3 2006, LTL 2.1 billion from January to September 2006 (LTL 1.46 billion from January to September 2005). The largest contribution to the widening of the income balance deficit over the first nine months of 2006 was made by the higher 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) and other investment expenditure (interest on loans and deposits paid by banks to non-residents). Reinvestment increased by LTL 1,147.4 million and made up more than three quarters of the total income balance deficit. On the other hand, dividend payments to foreign direct investors declined by LTL 606.6 million during the period under review.

The surplus of compensation of employees in the income balance increase by a mere LTL 6.4 million over the period under review.

Current transfers. The positive surplus of current transfers in Q3 2006 made up LTL 411.9 million, LTL 1.46 billion from January to September 2006 (LTL 441.4 million and LTL 1.43 billion, respectively, in 2005). The size of the flow of current transfers to Lithuania was determined by transfers from the EU support funds and private transfers. Over the first nine months of the year, transfers from the EU support funds increased by LTL 134.2 million (13.6%) and private transfers by LTL 114.8 million (19.1%). On the other hand, transfers by legal entities contracted over the review period by LTL 183.9 million, which resulted in a slight increase of the surplus of current transfers (LTL 22.5 million).

Capital and financial accounts.

Excluding official reserve assets, over the period from January to September 2006 the total investment flow in the capital and financial accounts of the country’s Balance of Payments reflected net inflows of LTL 7.7 billion (of which LTL 3.4 billion in Q3). The total size of the flow of net inflows resulted from the net inflows of other investment (mostly loans received by monetary financial institutions and other sectors from non-residents), which made up 89.3 per cent of the total flow of net investment inflows and were the main source of CAD financing. The volume of net flows of loans from non-residents received by monetary financial institutions varied on average by one third across different quarters, while the flow during the third quarter determined the growth of the net flow of loans in other sectors (financial intermediation activity).

* Including errors and omissions.

Investment abroad. The flow of investment abroad by domestic economic entities made up LTL 170.8 million in Q3 2006, and LTL 2.5 billion over the first nine months of 2006. Year on year, the flow of investment abroad decreased by LTL 848.3 million. Over the period from January to September 2006 the flow of investment abroad by Lithuanian monetary financial institutions accounted for 31.2 per cent of the total flow of Lithuanian investment abroad, and the flow of direct investment abroad by other domestic sectors for 31 per cent.

Foreign investment in Lithuania. In Q3 2006 the total foreign investment flow in Lithuanian made up LTL 3.37 billion, LTL 9.66 billion from January to September (LTL 8 billion from January to September 2005).

Direct investment.

The flow of foreign direct investment (FDI) in Lithuania made up LTL 705.9 million in Q3 2006 and LTL 2.03 billion (3.4 per cent of GDP) during the first nine months of 2006. This flow decreased by 9 per cent year on year. Taking into account direct investment abroad by domestic economic entities, net foreign direct investment inflows made up LTL 1.25 billion in the period from January to September 2006.

Foreign direct investment accounted for only 18.9 per cent of the CAD financing. Direct investment together with capital transfers covered 27.5 per cent of the CAD.

On 30 September 2006, accumulated FDI in Lithuania made up nearly LTL 25 billion (EUR 7.2 billion), or LTL 7,365 (EUR 2,133) per capita.

The largest foreign direct investment flow in the period from January to September 2006 was recorded in financial intermediation (LTL 531.5 million) and real estate activities (LTL 374.3 million) and in the manufacturing industry (LTL 367.4 million).

According to the data for 30 September 2006, investment in the manufacturing industry accounted for 34.5 per cent of the total FDI in Lithuania, financial intermediation for 17.7 per cent, transport, storage and telecommunications for 11.9 per cent, retail and wholesale trade for 11.8 per cent, and electricity, gas and water supply for 11.5 per cent.

The largest investors by country were Russia (20%) Denmark (16.3%), Sweden (11.7%), Germany (10.5%), Finland (7.1%) and Estonia (7%).

Investment by the EU (25 Member States) accounted for 69.3 per cent of total investment, of which investment by the old EU Member States (15 countries) accounted for 57.7 per cent, and by the CIS countries for 20.3 per cent.

Portfolio investment. Net portfolio investment flow was negative in Q3 and the first nine months of 2006 (LTL -880.34 million and LTL -982.82 million, respectively), i.e. the portfolio investment flow abroad was higher than in Lithuania. Domestic monetary financial institutions were the largest investors abroad, and the portfolio investment inflows increased mostly due to the new Eurobond issue placed by the Government in the first quarter of the year.

The net flow of other investment was positive in Q3 2006 at LTL 3.52 billion, and LTL 6.88 billion in January to September. The largest impact was made by the flow of other investment in Lithuania (LTL 6.98 billion).

Official reserve assets. Q3 2006 and the period from January to September saw an increase of official reserve asset flows (of LTL 475.5 million and LTL 937.4 million, respectively). At the end of September official reserve assets made up LTL 12 billion (EUR 3.49 billion).

During the period from January to September 2006, reserve asset growth was mostly determined by increased currency outside the Bank of Lithuania (LTL 675.8 million) and higher Bank of Lithuania external liabilities (LTL 96.2 million), as well as other factors which increased by LTL 63.9 million. The official reserve assets also grew due to the increased central government deposits with the Bank of Lithuania (LTL 56.2 million) and higher deposits of other monetary financial institutions with the Bank of Lithuania (LTL 37.4 million).

International investment position of the Republic of Lithuania. As of 30 September 2006, the country’s total foreign financial assets made up LTL 30.1 billion and total international financial liabilities stood at LTL 66.8 billion. The negative international investment position made up LTL 36.7 billion, i.e. Lithuania was a debtor vis-ą-vis the rest of the world. In the period from January to September 2006, total foreign assets increased by LTL 3.5 billion and international financial liabilities went up by LTL 9.4 billion.

As a result of the increase of international financial liabilities of Lithuania, its gross foreign debt also grew. Over the first nine months of 2006, this debt increased by LTL 7.76 billion and at the end of Q3 made up LTL 44.3 billion, or 54.4 per cent of the projected GDP for 2006 (at the end of 2005, gross foreign debt made up LTL 36.6 billion, or 51.3% of GDP).