Review of the Balance of Payments of the Republic of Lithuania in 2004

Current account.

In 2004, the Balance of Payments current account deficit (CAD) amounted to LTL 4.44 billion (7.2% of GDP). Year on year it rose by LTL 587.5 million, i.e. 15.2 per cent.

The widening of the 2004 current account deficit was mostly determined by the increased foreign trade deficit, while the main factor reducing it was a higher positive surplus in the balance of services. Fast economic development of the country, increasing income and favourable borrowing terms fuelled domestic demand, which accelerated imports of consumption goods and worsened the foreign trade deficit.

Foreign trade. According to the data of the Department of Statistics, in 2004 export of Lithuanian goods increased by 21.0 per cent, while import went up by 15.8 per cent year on year. The growth of the export of goods in 2004 was determined by a relatively high level of competitiveness of domestic economic entities, efficiency and a stable level of export prices vis-a-vis the main trading partners.

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

Geographically, Lithuanian foreign trade performance was influenced to the largest extent by EU markets. Year on year export of goods to the EU Member States grew by 28.6 per cent and amounted to 66.4 per cent of total export, while import increased by 11.9 per cent to 63 per cent of total import. The total foreign trade deficit with respect to the EU contracted over the reporting period by LTL 1.5 billion. Lithuania had a positive foreign trade balance last year vis-a-vis ten EU Member States (out of 25). They included the United Kingdom, France, Spain, Sweden, Estonia and Latvia. Nevertheless, large trade deficits vis-a-vis Germany (LTL 3.1 billion), Poland (LTL 1.34 billion) and Finland (LTL 934.5 million) had an impact on the total foreign trade deficit vis-a-vis EU Member States.

Export of goods to the countries of the CIS increased by 29.1 per cent during the reporting period. This was mostly determined by the fast growth of export to Russia and Belarus (23.7% and 37.5%, respectively). Import of goods from the CIS increased by 26.4 per cent, and the foreign trade deficit with respect to the CIS went up by nearly one billion litas in 2004. The positive balance of trade with other countries (all trade partners excluding the EU and the CIS) declined over the reporting period.

The increase in the export of goods was mostly affected by the sales of mineral products to foreign partners. In 2004 it went up by 49.9 per cent year on year and accounted for nearly one half of the total export growth. Exports of goods excluding mineral products expanded by 13.6 per cent. Export of machinery and mechanical appliances went up by 39 per cent and accounted for one fifth of the total export growth.

Year on year import of intermediate goods and consumption goods saw the fastest growth in 2004 (respectively 21.5% and 20.5%), while import of capital goods increased by as little as 3.4 per cent.

Services. Year on year export of services increased by 20.4 per cent in 2004, while import of services grew by 13 per cent. The total positive balance of services amounted to LTL 2.56 billion in 2004 (LTL 1.89 billion in 2003). The growth in the export of services accelerated over the three quarters of 2004 and was especially evident in Q3 (26.6%), slowing down to 23 per cent in Q4. The highest growth in the import of services was recorded in Q1 2004 (18.3%). Import growth then decelerated over the other three quarters. The highest positive surplus in the balance of services was recorded in Q3 2004 (LTL 847.1 million). The overall changes in the export and import of services were determined by the development of transport and travel services. These two kinds of services made up 87.4 per cent of the total export of services and 81.6 per cent of the total import of services.

Railway transport services exhibited the strongest growth among all kinds of transport to account for 43.2 per cent of the increase in the export of transport services and 33.6 per cent in the increase of total export of services. The growth in the export of road transport services made up 27.8 per cent of the total growth in the export of transport services, and the positive surplus of these services amounted to LTL 1.02 billion, i.e. 51.2 per cent of the positive balance of all transport services.

The total number of visitors to Lithuania in 2004 was 4 million. The largest number of foreign visitors was recorded in Q3 (1.49 million people), and the lowest in Q1 (624 thousand). Year on year the total number of visitors to Lithuania increased by 388.5 thousand people (10.7%). The number of visitors from the EU Member States increased by 709 thousand in 2004 (34.2%), and the number of visitors from the CIS countries declined by 316.6 thousand (21.6%) because of a lower number of one-day tourists (mostly coming from Russia and Belarus). Owing to a larger number of visitors from the EU Member States and other countries, income from the export of travel services increased in 2004 by LTL 488.5 million year on year, while the lower number of visitors from the CIS countries reduced travel income by LTL 159.3 million.

The number of Lithuania residents travelling abroad increased year on year by 18 per cent in 2004 (the total number made up 4.13 million). The higher number of Lithuanians travelling abroad increased the expenditure on the import of travel services by 23.9 per cent resulting in a decline of the positive travel balance in 2004 by LTL 13.7 million year on year (to LTL 497.3 million).

Compared to the total export of services, export to the EU (25 Member States) made up 51.6 per cent, and to the CIS 36.1 per cent. Compared to the total export of transport services, export of these services to the EU accounted for 53 per cent and to the CIS for 39.3 per cent. Export of travel services to the EU stood at 45.5 per cent, and other services at 61.5 per cent.

Income. The deficit in the income balance made up LTL 1.48 billion in 2004. Year on year the income balance deficit declined by LTL 12.7 million. The income balance deficit was worsened by increased non-resident investment which grew more than one and a half times (its flow in the balance of payments made up LTL 1.14 billion). Reinvestment 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. Dividends to non-residents (on foreign direct investment) increased in 2004 by 23.5 per cent year on year. Over the period under review, the income of Lithuanian economic agents from investment abroad went up by 13.3 per cent, while income of non-residents from their investment in Lithuania increased by 24.8 per cent.

The income balance deficit was offset by the fast growth in the surplus of compensation of employees. Year on year the transfer of compensation of employees to Lithuania increased by LTL 433.8 million (2.7 times) in 2004. Such development developments emerged as Lithuania became an EU Member State, after which the number of people leaving to EU Member States increased (including the individuals who had left earlier and now acquired a legal employment or residence status).

Current transfers. The positive balance of current transfers stood at LTL 930.9 million in 2004 (LTL 889.6 million in 2003). Current transfers to Lithuania increased by LTL 445 million over the reporting period, of which LTL 370.9 million was an increase of support funds from the EU. On the other hand, Lithuania’s contribution to the EU budget made up LTL 411.9 million in 2004 (there was no such contribution in 2003), and the positive surplus in the balance of current transfers increased by as little as 4.6 per cent year on year. The final result of this balance was influenced by 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).

Capital and financial account.

Excluding international reserves, the total foreign investment flow in the country’s balance of payments reflected net inflows of LTL 3.6 billion. The current account deficit was mostly financed by foreign direct investment; its net inflows made up 32 per cent of the CAD, 49.7 per cent of the CAD including capital transfers from EU support funds. Net portfolio investment inflows made up 13.2 per cent, and other investment inflows accounted for 18.0 per cent of the CAD.

Investment abroad. Foreign investment by domestic economic entities made up LTL 3.12 billion in 2004, increasing year on year by LTL 2.88 billion. Most of this foreign investment, i.e. LTL 2.13 billion, consisted of investment by Lithuanian commercial banks (of which LTL 1.16 billion were loans to non-residents). In addition, commercial bank investment in non-resident debt securities and money market instruments amounted to LTL 450.9 million. Foreign investment flow by other domestic economic entities made up LTL 982.7 million in 2004, of which foreign direct investment made up LTL 730.6 million. Year on year foreign direct investment flow by domestic economic entities increased by a factor of 6.3.

Foreign investment flow by pension funds established in the country amounted to LTL 89.2 million in 2004.

Foreign investment in Lithuania. Foreign investment flow in Lithuania made up LTL 5.93 billion in 2004, increasing year on year by LTL 887.1 million.

* including errors and omissions

Foreign direct investment in Lithuania. Foreign direct investment flow in Lithuania made up LTL 2.15 billion in 2004 (LTL 552.2 million in 2003). Equity investment made up LTL 874.7 million, and reinvestment LTL 1.14 billion. Inflows classified as foreign direct investment from privatisation made up LTL 114.8 million in 2004, i.e. as little as 5.3 per cent of the total foreign direct investment flow.

On 31 December 2004, accumulated foreign direct investment in Lithuania stood at LTL 16.19 billion (EUR 4.69 billion), or LTL 4,727 (EUR 1,369) per capita.

The largest foreign direct investment flow in 2004 was recorded in the manufacturing industry (LTL 1176.1 million), electricity, gas and water supply activities (LTL 261.4 million), wholesale and retail trade (LTL 246.4 million) and monetary intermediation (LTL 221.1 million).

On 31 December 2004, investment in the manufacturing industry accounted for 34 per cent of total foreign direct investment in Lithuania, retail and wholesale trade for 16 per cent, financial intermediation for 14.4 per cent, and transport, storage and telecommunications for 14.3 per cent.

The largest investors by country were Denmark (15.2%), Sweden (15.0%), Germany (11.4%), Russia (8.4 %), Finland (7.8 %) and Estonia (7.6 %).

Investment from the EU (25 Member States) accounted for 76.3 per cent of total investment, of which investment of old EU Member States (15 countries) accounted for 63.7 per cent, and investment of the CIS countries for 8.7 per cent.

Portfolio investment. Portfolio investment flow in Lithuania made up LTL 1.2 billion in 2004.

93.4 per cent of the portfolio investment flow consisted of inflows from the new Government Eurobond issue in Q1 2004.

Other investment

flow was LTL 2.74 billion in 2004 in Lithuania. Year on year other investment flow decreased by LTL 1.18 billion. Loans received by commercial banks and non-resident deposits in domestic commercial banks (LTL 2,441.39 million) accounted for the largest share of this investment. The flow of loans received on behalf of the state was negative as more foreign loans were repaid (LTL -923.5 million).

Reserve assets. The reserve asset flow was negative in 2004 (LTL -342 million) and made up LTL 9,108.9 million (EUR 2,638.1 million) at the end of the year.

Reserve assets were decreased by the decline of central government deposits with the Bank of Lithuania (LTL 742.9 million) and the contraction of Bank of Lithuania repurchase transactions with non-residents (LTL 185.4 million).

Reserve assets were affected in the opposite direction by the increase of the volume of currency issued by the Bank of Lithuania (LTL 457.4 million) and increased other net liabilities (LTL 41.6 million).

International investment position of the Republic of Lithuania. On 31 December 2004, total foreign financial assets of the country made up LTL 18.78 billion, and total international financial liabilities amounted to LTL 40.43 billion. The negative international investment balance made up LTL 21.65 billion, i.e. Lithuania was a debtor vis-a-vis the rest of the world. In 2004, total foreign assets increased by LTL 2.99 billion, international financial liabilities went up by LTL 5.69 billion, and the negative international investment balance increased by LTL 2.71 billion. In 2004 the international financial liabilities of the country were distributed as follows: other investment 42.3 per cent, foreign direct investment 40.1 per cent and portfolio investment 17.6 per cent.

The published balance of payments data for 2004 represent a revision of published data for individual 12-month balances of payments. Quarterly and annual balance of payments data are revised due to the availability of adjusted annual data covering a larger number of respondents.