Review of the balance of payments of the Republic of Lithuania for Q2 and H1 2007

Current Account.

In Q2 2007, the deficit in the current account of the country?s balance of payments (CAD) amounted to LTL 3.82 billion accounting for 16.1 per cent of GDP. CAD increased by LTL 1.2 billion or 45.8 per cent compared to Q1 2007. In January - June 2007 CAD was LTL 6.44 billion or 14.8 per cent of GDP. The year-on-year increase of CAD made up 84.9 per cent.

The growth of the deficit on foreign trade and income balances was responsible for the increase of CAD in Q2 and H1 2007.

Foreign trade. In Q2 2007, the country?s exports of goods grew by 13.4 per cent compared to Q1, while imports of goods grew by 16.1 per cent. In January-June this year, compared to the corresponding period in 2006, the exports and imports of goods went up 7.2 and 15.6 per cent, respectively. Trade in mineral products have contributed a lot to the growth of the Lithuanian exports and imports of goods. In H1 2006, this group of products accounted for 29.1 per cent of the country?s total exports and 27.1 per cent of its imports, while in H1 2007, they made up 14.5 and 17.7 per cent, respectively. During the reported period under review (excluding exports and imports of mineral products) this led to a 29.3 per cent increase of the country's exports of goods and a 30.5 per cent increase in the imports of goods.

Export growth was mainly driven by an increase in exports of plastics and plastic articles, and ground vehicles. The imports of goods was driven mainly by an increase in the imports of ground vehicles, products of chemical industry, base metals and articles thereof, as well as machinery and mechanical appliances.

There were actually no big changes within the structure of the exports and imports of goods, except for a decrease in the imports of intermediate goods as a result of contracted imports of crude oil. In H1 2007, consumer goods accounted for 19.1 per cent and investment goods for 17.7 per cent of total imports compared to 15.6 and 16.2 percent in H1 2006. Starting with the second half of 2006, the structure of the exports of investment goods has been changing because of an increase of the growth rate of imports of industrial transport equipment, which was 42 per cent in 2006 and 70.4 per cent in the first half of 2007, and an increase in its share within total imports. Meanwhile, the growth rate of other investment goods slowed down from 39.7 to 15 per cent in H1 2007.

Compared to H1 2006, Lithuania?s exports of goods to EU member states was growing slower than to CIS countries; the growth was by 11,1 and 32,8 per cent, respectively. In the meantime, the imports of goods from EU countries climbed by 30.5 per cent, while the imports of goods from CIS countries fell by 17.3 per cent. In Q2 2007, compared to Q1, the growth rates have changed: the exports of goods to EU member states went up by 7.8 per cent, while the exports to CIS countries increased by 24 percent, of which exports to Belarus accounted for 45.2 per cent. The imports of goods from EU countries grew by 13 per cent and the imports from CIS countries grew by 34.1 per cent.

Such dynamics of the exports and imports of goods in H1 this year determined changes within the geographical structure of Lithuania’s foreign trade. Exports to EU member states compared to total exports went up from 63.5 to 65.8 per cent, while exports to CIS countries increased from 18.7 to 23.1 percent. Within the imports structure, imports from EU countries grew from 59.8 per cent to 67.4 per cent, while imports from CIS countries went down from 31.8 to 22.8 per cent.

In H1 2007, total foreign trade deficit increased by 42.7 per cent compared to H1 2006. The deficit in the balance of trade with EU countries climbed 2.1 times to LTL 6.1 billion while the deficit in trade balance with CIS countries narrowed 2.4 times to LTL 1.88. The largest foreign trade deficit was recorded in respect to Russia, Germany, Poland, China and Finland, while the largest trade surplus was recorded in respect to Latvia, Norway and Estonia.

Services. In Q2 2007, compared to Q1, the export of services increased by 22.8 per cent, while import of services grew by 23.7 per cent. Fast growth of services in Q2 was driven by seasonal changes related to rapid increase in the scale for travel services (travel services excluded, the export and import of services respectively made up 14.5 % and 11.5 %). During H1 2007, export of services increased by 3.7 per cent year on year, while import of services grew by 18.6 per cent compared to H1 2006. This big difference in the growth rate of service export and service import led to a significant decrease o the total surplus in total positive balance of services (by LTL 421.2 million) and a boost of CAD for H1.

The overall changes in the export and import of services were determined by the development of transport and travel services. During H1 2007, the export of services increased by 11.3 per cent year on year, while import of services grew by 20.1 per cent. The exports and imports of travel services went up respectively by 11.4 and 25.1 per cent in the period under review. Transport service exports accounted for 55.9 per cent of total exports of services, while imports accounted for 44.7 per cent. The exports and imports of travel services respectively made up 29.4 and 36.6 percent.

Exports and imports of railway and road transport services were characterized by the fastest growth among all types of transport services.

In H1 2007, the exports of services to EU countries accounted for 58 per cent of total exports of services, while imports of services from EU countries made up 62.8 per cent. The share of CIS countries in the total exports of services was 33.5 percent and in the total imports of services made up 27.4 per cent.

Income. In Q2 2007 income balance deficit was LTL 1.16 billion, an increase of LTL 354.9 million compared to Q1. In January-June 2007, the deficit on balance of income was as high as two billion litas. In H1 2007, the income balance deficit increased by 45 per cent year on year. The largest contribution to the widening of the deficit on the income balance came from higher non-resident investment income, i.e. reinvestment (which has been recorded in the current account of the Balance of Payments as payments to non-residents and as part of direct investment in the Financial Account), which increased by 30.5 per cent during the reported period, payments of dividends, which climbed by 41.6 per cent, and interest on loans to direct investment companies.

Over the period under review, the surplus of compensation of employees in the income balance grew by 27.2 per cent to LTL 192.1 million.

Current transfers. The positive surplus of current transfers in Q2 2007 made up LTL 606.1 million and LTL 1.36 billion in H1 (in H1 2006 it stood at LTL 1.16 billion). The size of the current transfers flow to Lithuania was determined by transfers from EU support funds and private remittances, which made up respectively LTL 1.02 billion and LTL 1.2 billion in the first half this year.

In H1 2007, transfers from EU support funds increased by 3.1 per cent, while private remittances grew by 37.9 per cent compared to H1 2006.

Capital and financial accounts.

In Q2 2007, total investment flow in Capital and Financial Accounts in the Balance of Payments, excluding official reserve assets, reflected net inflows of LTL 5.2 billion and LTL 7.78 billion in H1 2007. Total volume of net inflows resulted from net inflows of other investments, which were the main source of CAD financing. As for CAD financing, the significance of foreign direct investment increased substantially in H1 2007. Direct investment was used to finance 35.2 per cent of the CAD and 44 per cent of the CAD in addition to non-repayable capital transfers.

The net flow of non-repayable capital transfers (the major source of which is the EU Cohesion Funds) made up LTL 568.9 million in the first half this year, a year-on-year increase by 49.1 per cent.

* Including errors and omissions.

Investment abroad. In Q2 this year, the flow of foreign investment by domestic entities made up LTL 622.4 million, while in January - June it was LTL 1.53 billion (in January-June of 2006 it was LTL 2,5 billion). Investments into non-resident debt securities and money market instruments by the country’s economic entities accounted for the largest share of the investment flow to other countries.

Foreign investment in Lithuania. In Q2 2007, total foreign investment flow in Lithuania was LTL 5.44 billion, while in January - June it was LTL 8.74 billion compared to LTL 6.02 billion in January-June 2006.

Direct investment. The flow of foreign direct investment (FDI) in Lithuania made up LTL 851.2 million in Q2 2007 and LTL 2.72 billion in H1. When compared to H1 2006, FDI flow to Lithuania grew by 90 per cent. Taking into account direct investment abroad by domestic economic entities the net inflows of foreign investment made up LTL 2.27 billion or 5.2 per cent of GDP in H1 this year.

On 30 June 2007, accumulated FDI in Lithuania equalled to LTL 32.69 billion (EUR 9.46 billion). Foreign direct investments per capita stood at LTL 9,688 (EUR 2,806).

In H1 2007, most foreign direct investment went to manufacturing (LTL 924.3 million), financial intermediation (LTL 913.3), real estate, leasing and other business activities (LTL 283.3 million).

As indicated by the data as of 30 June 2007, investment into the manufacturing industry accounted for 39.1 per cent of the total FDI in Lithuania, financial intermediation for 17.4 per cent, transport, storage and telecommunications for 12 per cent, retail and wholesale trade for 10.3 per cent, and electricity, gas and water supply for 9.3 per cent.

Biggest investors in Lithuania were Poland (21.3 %), Denmark (12.5 %), Sweden (10.9 %), Germany (8.9 %), Russia (8.4 %), and Estonia (5.9 %).

Investment by the EU27 Member States accounted for 81.9 per cent of total investment, of which investments by the old EU Member States (15 countries) accounted for 47.1 per cent, and by the CIS countries for 8.6 per cent.

Portfolio investment. In Q2 2007, net portfolio investment flow was negative at LTL 177 million. In the first half of the year negative flow reached LTL 1.57 billion. Domestic pension funds and monetary financial institutions were the largest investors abroad. The decline of investments by non-residents into equity securities led to a negative portfolio investments flow in Lithuania either.

Other investments.

Net flow of these investments in Q2 2007 was LTL 4.24 billion, while in January-June it stood at LTL 6.51 billion. Net flow of other investments grew 2.3 time compared to H1 2006. Loans from non-residents to MFIs constituted the biggest share of the investment flow.

Official reserve assets. In Q2 and H1 2007 the country?s official reserve assets increased while their flow in the Balance of payments respectively amounted to LTL 1.14 billion and LTL 560.9 million. At the end of June, official reserve assets made up LTL 15.74 billion litas (EUR 4.56 billion).

The increase of official reserve assets in the first half of 2007 was driven by the growth of the central bank?s external liabilities and currency in circulation by LTL 950 million and LTL 519.9 million, respectively, as well as a rise of LTL 194.6 million in the deposits of other MFIs with the Bank of Lithuania and a hike of LTL 63 million in other factors.

Official reserve assets were pushed down by LTL 1.17 billion because of a contraction of the central government deposits with the Bank of Lithuania.

International investment position of the Republic of Lithuania. As of 30 June 2007, the country’s total foreign financial assets made up LTL 37.59 billion and total international financial liabilities amounted to LTL 86.18 billion. The negative international investment balance was LTL 48.59 billion, i.e. Lithuania was a debtor vis-ą-vis the rest of the world. In Q2 2007, total financial foreign assets of the country climbed by LTL 1.88 billion and its international financial liabilities increased by LTL 5.46 million (6.8 %). In H1 this year, total foreign assets increased by LTL 2.2 billion (6.2 %), while international financial liabilities went up by LTL 10.08 billion (13.2 %).

With an increase in Lithuania’s international financial liabilities its gross foreign debt grew as well. In Q2 2007, this debt rose by LTL 4.61 billion to form LTL 58.19 billion at the end of the quarter, accounting for 65.8 per cent of GDP (at the end of 2006, it was LTL 49.86 billion or 60.9 % of GDP).