Reinoldijus Sarkinas presents report of the Bank of Lithuania in Seimas

The report underlined a robust growth of the Lithuanian economy in 2006, especially in Q1, and a slowdown in H2 (mostly due to some temporary factors). As a robust economic development has prompted a gradual increase of the labour demand, the unemployment hit historically low levels. Growing pressure in the labour market made the wages run at the rates well above growth of labour productivity.

The Lithuania’s current account deficit continued increasing in the second half of the year either. In the context of the declining saving rates and rapid growth of investments, a buoyant growth of the domestic demand led to huge imbalances within the foreign trade. Despite of the fact that a number of domestic producers are successfully competing in export markets, the wages which have kept increasing faster than the labour productivity in medium term may have a negative effect on the competitiveness of the domestic exporters.

In 2006, a noticeable growth of annual HICP inflation was a result of the pressure by the supply factors such as poor harvest and rising gas and energy prices. The impact of the growing foodstuff prices was especially huge - their increase accounted for more than half of the annual inflation last year. Convergence with the prices in Western European countries contributed to the growth of the foodstuff prices in Lithuania either. In short-run, growing food prices are likely to be among the major factors behind inflationary pressures. The latter are to be supported by expected growth of gas prices and intended increase of excise tax on cigarettes. The bottlenecks in the labour market and growing compensation of employees may boost the pressure by the demand factors on price developments.

Also, the report to the Seimas mentioned that the plan on the institutional preparation by the Bank of Lithuania for the adoption of the euro was resumed in the second half of 2006. The Bank of Lithuania is to build institutional capacities for the introduction of euro required to ensure fast changeover whenever the macroeconomic situation is favourable for it. According to the latest forecast, the most favourable situation for Lithuania to join the euro zone may begin in 2010.

Also, the report of the Bank of Lithuania noted that previous year was very successful and profitable for domestic banks. The main reason for the banks to earn big profits in 2006 was further growth of banking activities which led to respective increase of their income base and operational effectiveness. All domestic commercial banks complied with the established capital adequacy requirement. Having evaluated the risks related to strong growth of borrowing, the Bank of Lithuania said commercial banks must be more conservative when performing evaluation of the financial situation of their clients. Moreover, with the aim of limiting the possibility for commercial banks to boost their loan portfolio at the expense of the current year profit, the Bank of Lithuania imposed restrictions on inclusion of commercial bank profit for current year into Tier II capital.

During 2006, currency in circulation grew by LTL 1.3 billion - a record high amount of the currency in circulation since the introduction of the litas in early 1993.

Reinoldijus Sarkinas answered the questions of members of the Seimas.

The Chairman of the Board of the Bank of Lithuania twice a year delivers reports before the Seimas of the Republic of Lithuania.