Review of the Balance of Payments of the Republic of Lithuania in 2003

Current account. According to preliminary data, in 2003 the Balance of Payments current account deficit was negative and made up LTL 3.67 billion. Compared to 2002, in 2003 the current account deficit (CAD) widened by one billion litas and, according to preliminary estimates, amounted to 6.6 per cent of the GDP (9.5% of GDP in the fourth quarter). In 2002 the CAD made up 5.2 per cent of GDP.

The widening of the CAD was determined by more than a two-fold increase of the negative income balance. The exceptional characteristic of the income balance in 2003 was a sharp increase in dividend payments to non-residents (on foreign direct investment) and reinvestment. In its turn, the growth of dividend payments was brought about by higher profitability of foreign capital companies in Lithuania, the reduction of the profit tax rate to 15 per cent and the introduction of a favourable dividend taxation scheme in 2002. The widening of the CAD was also influenced by the decline of the positive balance of services.

Foreign trade. According to preliminary data of the Department of Statistics under the Government of the Republic of Lithuania, in 2003, compared 2002, export of Lithuanian goods increased by 8.7 per cent, while import went up by 4.9 per cent. Such developments were mostly determined by the increased exports and imports of intermediate and investment goods. In 2003, import and re-export of passenger motor cars declined considerably. Excluding petroleum products, export of goods grew by 7.6 per cent and import of goods went up by 4.2 per cent in 2003.

Compared to 2002, the structure of the export of goods changed only slightly in 2003. Similar to previous years, mineral products predominated among the exports of goods, accounting for nearly one fifth of total exports of goods. Exports of vehicles made up 15.2 per cent, textiles and textile articles 13.6 per cent, machinery and mechanical appliances 11.1 per cent.

Flows of export of goods mostly went to the current and new EU Member States. Thus, export of goods to and import from the EU, EFTA, CEFTA, Estonia and Latvia accounted for 60.7 per cent of total exports and 65.7 of total imports in 2003. Export to the EU decreased by 5.8 per cent in 2003, while import increased by 4.7 per cent. The decline of export to the EU was primarily related to the peculiarities of accounting of export of mineral products by countries. Until 2003, the United Kingdom was indicated as the main buyer of petroleum products (while in fact these products were mostly exported to other countries). In 2003, Switzerland became the main buyer of petroleum products.

Services. In 2003, compared to 2002, exports of services increased by 2.3 per cent, and import of services grew by 8.1 per cent. The total positive balance of services amounted to LTL 1.84 billion (LTL 1.99 billion in 2002).

The export of transport services increased by 19.1 per cent during the review period. The export of road transport services saw the largest increase of 56.4 per cent, pipeline transport of 11.5 per cent and air transport of 5.1 per cent. Export of sea and coastal water transport and railway transport services declined by 9.9 per cent and 21.1 per cent, respectively. Import of transport services went up by 45.5 per cent over the review period (mostly due to the increase in the import of railway transport services of 87.3 %).

Compared to 2002, in 2003 the number of foreigners visiting Lithuania declined by 9.1 per cent, while the number of Lithuanian residents leaving the country by 2.3 per cent. The number of EU residents visiting Lithuania increased by 55.7 thousand (19.7%) in 2003, as compared to 2002, while the number of CIS visitors declined by 423.2 thousand (22.4%), of which the number of those coming from Russia went down by 286 thousand (24.4%). Because of these changes the positive travel balance declined by LTL 135.6 million to LTL 488.7 million (LTL 624.3 million in 2002).

Transport and travel services accounted for 51.6 and 31.3 per cent of the total export of services, respectively, and 42.8 per cent and 33.7 per cent of import, respectively.

Income. The negative income balance made up LTL 1.49 billion in 2003. Compared to 2002, the negative income balance increased by LTL 851.2 million, i.e. a factor of 2.3. Over the review period, the income of Lithuanian economic agents from investment abroad went up by 8.7 per cent, while income of non-residents from their investment in Lithuania increased by as much as 63.3 per cent (LTL 803.9 million). Compared to 2002, dividends to non-residents (on foreign direct investment) went up by LTL 383.4 million, i.e. 3.8 times, and 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) grew by LTL 422.5 million, i.e. 2.6 times.

Current transfers. The balance of current transfers was positive in 2003 and stood at LTL 889.6 million (LTL 851.8 million in 2002).

Capital and financial account. The capital and financial account balance made up LTL 2.99 billion in 2003 (of which LTL 1.13 billion in Q4).

Investment abroad. Investment abroad by Lithuanian economic entities went up in 2003 when such investment flows made up LTL 613.5 million (in 2002 investment abroad declined by LTL 155.8 million). The balances of domestic commercial banks in deposit and correspondent accounts with foreign banks increased by LTL 534.7 million in 2003, while other bank investment went down by LTL 239.9 million. Foreign investment by other domestic economic entities increased by LTL 318.8 million.

Foreign investment in Lithuania. Total foreign investment flows in 2003 were positive making up LTL 5.05 billion. Compared to 2002, foreign investment flows increased by LTL 1.69 billion. The rise in foreign investment was determined by increased portfolio investment and other investment in Lithuania.

Foreign direct investment flows were LTL 552.2 million in 2003 in Lithuania. Compared to 2002, foreign investment flows declined 4.8 times. Foreign direct equity investment declined by LTL 1.24 billion, and other capital flows were negative (declining, in comparison with 2002, by LTL 1.29 billion). The negative flows of other capital were determined by the fact that loans were repaid to direct investors and, because of changes of shareholders, a loan obtained earlier from a foreign investor was reclassified from foreign direct investment to other foreign investment. In addition, inflows classified as foreign direct investment from privatisation in 2003 made up only LTL 21.6 million (LTL 188.3 million in 2002). A positive indicator of foreign direct investment last year was an increase in reinvestment of LTL 422.5 million (up 2.6 times).

On 31 December 2003, accumulated foreign direct investment in Lithuania stood at LTL 13.7 billion (EUR 3.94 billion), or LTL 3,976 (EUR 1,152) per capita.

Largest foreign direct investment flows were directed to monetary intermediation (LTL 215.1 million), electricity, gas and water supply activities (LTL 119.1 million), wholesale and retail trade (LTL 109.1 million), telecommunications (LTL 119.1 million) and the production of wood and articles of wood (LTL 87.2 million).

On 31 December 2003 the manufacturing industry accounted for 31.1 per cent of total foreign direct investment in Lithuania, retail and wholesale trade for 17.9 per cent, transport, storage and telecommunications for 17.1 per cent and financial intermediation for 15.7 per cent.

The largest investors by country were Denmark (17.3% per cent of total investment), Sweden (14.7%), Germany (9.7%), the USA (8.5%) and Finland (8.6%). EU investors accounted for 63 per cent of total investment, EU candidate countries for 13.8 per cent.

Portfolio investment. Portfolio investment flows in Lithuania in 2003 stood at LTL 747.4 million. These investment inflows were determined by the distribution of a new Government Eurobond issue in Q1 2003.

Other foreign investment. Other investment flows were LTL 3.9 billion in 2003 in Lithuania. Compared to 2002, these investment flows increased by as much as LTL 3.66 billion. Trade credit from non-residents amounted to LTL 816.7 million, and non-resident deposit flows in domestic commercial banks made up LTL 256.8 million. 2003 saw a significant increase in foreign loan flows which made up LTL 2.99 billion (of which LTL 1.7 billion in Q4). Loans received by commercial banks (LTL 2.04 billion) and loans received by other sectors (LTL 1.2 billion) comprised the largest share of these flows. The flows of loans received on behalf of the state were negative (more foreign loans were repaid).

Reserve assets. Reserve asset flows were positive (LTL 1.65 billion) in 2003. The increase was determined by Bank of Lithuania operations with central government institutions that increased the reserves by LTL 804.8 million. The reserves were also increased due to the net purchase of foreign exchange of LTL 699.7 million from commercial banks, growing commercial bank required reserves in foreign currencies and the net income from Bank of Lithuania investment of foreign exchange. The reserves were pushed down by the repayment of the remaining balance of the IMF loan by the Bank of Lithuania of LTL 175.6 million. These funds had been allocated to the Bank of Lithuania under the IMF Extended Fund Facility.

Balance of international investment position of the Republic of Lithuania. On 31 December 2003, total foreign financial assets of the country made up LTL 16 billion, and total international financial liabilities amounted to LTL 35.6 billion. The negative international investment balance made up LTL 19.5 billion. In 2003, total foreign assets increased by LTL 2.04 billion, international financial liabilities went up by LTL 4.5 billion, and the negative international investment balance increased by LTL 2.5 billion. At the end of December 2003 the international financial liabilities of the country were distributed as follows: other investment 45.2 per cent, foreign direct investment 38.5 per cent, portfolio investment 16.1 per cent and financial derivatives 0.08 per cent.