Review of the balance of payments of the Republic of Lithuania in Q1, 2007

Review of the balance of payments of the Republic of Lithuania in Q1, 2007

Current account.

In Q1 2007, the Balance of Payments’ Current Account deficit (CAD) amounted to LTL 2.62 billion, accounting for 13.2% of GDP. CAD increased by LTL 853.1 million or 48.3 per cent compared with Q1 2006.

CAD and CAD to GDP ratio
	CAD (LTL million)	CAD to GDP ratio (%)
2006	-8,884.45	-10.8
Q1	-1,765.42	-10.4
Q2	-1,848.82	-9.0
Q3	-2,636.17	-12.1
Q4	-2,634.04	-11.6
2005
Q1	-2,618.55	-13.2

Changes in Current Account balance and composite balances. Contributions to the current account changes
	Q1 2007 (LTL million)	Q1 2006 (LTL million)	Change (%)	Contributions (%)
Current Account balance	-2,618.55	-1,765.42	48.3	48.3
Trade balance	-3,023.07	-2,183.68	38.4	47.5
Service balance	455.18	594.60	-23.4	7.9
Income Balance	-805.46	-552.87	45.7	14.3
Current Transfers balance	754.80	376.53	100.5	-21.4

The widening of the CAD in Q1 this year was determined by growth of the deficit on foreign trade and income balances.

Foreign trade. In Q1 2007, the country's exports of goods grew by 6.5 per compared with the corresponding period in 2006 and 0.1 per compared with Q4 in 2006. Meanwhile, the imports of goods went up by 13.8 per cent year on year, while compared to Q4 2006 decreased by 3.5 per cent.

Compared to Q1 2006, Lithuania?s exports of goods to EU27 was growing slower than to the CIS countries accounting for 9.5 per cent and 36.7 per cent, respectively. In the meantime, the imports of goods from the EU countries climbed by 32.6 per cent, but the imports of goods from the CIS countries fell by 26.3 per cent.

Such dynamics of the exports and imports of goods in Q1 this year determined the changes in the geographical structure of Lithuania’s foreign trade. Compared with the country?s total exports of goods, exports to the EU countries grew by 1.8 percentage point, while exports to the CIS countries rose 4.9 percentage point. By contrast, imports from the EU countries grew by 9.7 percentage points while imports from the CIS countries (mainly as a result of the imports decline from Russia) went down by 11.5 percentage point.

Total foreign trade deficit grew by 37.6 per cent compared with Q1 2006. The deficit in the balance of trade with the EU27 countries climbed 2.7 time to LTL 2.7 billion, while the deficit in trade balance with the CIS countries narrowed by 3.2 times to LTL 710.4 million. 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.

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

Changes in export and import by main commodity groups and contributions to the total changes Q1 2007compared to Q1 2006 ( %)
	Exports		Imports
	change	contributions	change	contributions
Total goods	6.5	6.5	13.8	13.8
Capital goods	31.5	2.6	33.5	5.0
Intermediate goods	0.6	0.3	0.7	0.4
Consumer goods	24.7	6.3	32.2	5.7
Motor spirit	-50.7	-5.0	-53.8	-0.2
Passenger motor cars	62.4	1.9	49.3	2.7
Other goods	155.3	0.4	119.9	0.2

Services. During Q1 2007, exports of services increased by 1.6 per cent year on year, while service imports grew by 11.4 per cent. As a result positive surplus on trade in services fell by LTL 139.4 million. Exports and imports of services compared with Q4 2006 decreased by 21.7 per cent and 13.1 per cent, respectively.

Like in previous years, changes in exports and imports of services were mainly determined by changes in transport and travel services. Compared with Q1 2006, exports of this type of services rose 13 per cent and 11.4 per cent, respectively, while imports climbed 19.3 per cent and 14.6 per cent. Transport and travel services, accounted for 58.5 per cent and 48.2 per cent of the total exports and imports of services, respectively. Exports and imports of railway and road transport services were characterized by the fastest growth among all types of transport services. As balance on trade in some services was with a deficit or with a slight positive surplus, the surplus of balance on the mentioned two types of transport services made up as much as 95.6 per cent of total positive surplus of all services.

Exports and imports of computer and IT-related services, as well as financial services were characterized by the fastest growth among other services.

According to the data of the Bank of Lithuania, in Q1 2007, the number of foreign visitors in Lithuania rose year on year nearly by one fourth, while the number of Lithuanian residents that left the country temporarily grew by 17.3 per cent. Travel income made up LTL 570.1 billion (an increase of 11.4 %) and travel expenditure made up LTL 555.7 billion (an increase of 14.6 %) in Q1 2007. Total surplus of the balance of travel made up LTL 14.4 million (declined by 46.2%).

In Q1 2007, exports of services to the EU27 countries made up 56.5 per cent of total exports of services, while imports of services from the EU27 countries accounted for 61.1 per cent. The share of the CIS countries in the overall composition of exports and imports of services made up 34.2 per cent and 26.7 per cent, respectively.

Changes in exports and imports by main service groups and contributions to the total changes Q1 2007compared to Q1 2006 ( %)
	Exports		Imports
	Change	contributions	change	contributions
Total services	1.6	1.6	11.4	11.4
Transport services	13.0	6.8	19.3	8.7
Travel services	11.4	2.8	14.6	4.7
Other services	-34.7	-8.0	-8.6	-2.0
Total transport services	13.0	13.0	19.3	19.3
Sea transport	-7.8	-1.0	32.6	7.3
Air transport	9.2	0.3	48.8	2.2
Railway transport	28.9	5.1	70.1	7.8
Road transport	21.8	10.2	60.7	17.7
Pipeline transport	-66.0	-1.3	-77.8	-15.1
Other transport services	-1.8	-0.3	-4.9	-0.6

Income. In Q1 2007, the deficit on income balance made up LTL 805.5 million (in Q1 2006 it was LTL 552.9 million). In Q1 this year, the largest contribution to the widening of the deficit on income balance came from higher non-resident reinvestment (which is recorded in the Balance of Payments’ Current Account as payments to non-residents and as part of direct investment in the Financial Account). During the period under review, reinvestment rose by LTL 267.8 million to account for over three quarters of total deficit on income balance. Meanwhile, dividend payments to foreign direct investors fell during the period under review by LTL 87.2 million.

The surplus of compensation of employees in the income balance decreased during the period under review by LTL 17.1 million.

Current transfers. In Q1 2007, the positive surplus on balance of current transfers stood at LTL 754.8 million (in Q1 2006, it was LTL 376.5 million .

The size of the current transfers flow to Lithuania was determined by transfers from EU support funds and private remittances. In Q1 2007, transfers from EU support funds amounted to LTL 713.4 million, (an increase of LTL 265.1 million compared with a corresponding period in 2006, or 59.2 %). Remittances of private persons equalled to LTL 233.7 million while remittances of legal persons made up LTL 80.3 million. Non-repayable remittances of both private and legal persons rose more than twofold.

Capital and Financial accounts.

In Q1 2007, total investment flow in Capital and Financial Accounts in the Balance of Payments, excluding official reserve assets, reflected net inflows of LTL 2.38 billion. Total volume of net inflows resulted from net inflows of other investments and foreign direct investments, which were the main source of CAD financing. As for CAD financing, the significance of foreign direct investment increased substantially in Q1 2007. In Q1 2007, net flow of non-repayable capital transfers amounted to LTL 214.1 million, a decrease of LTL 27.3 million compared to the corresponding period of 2006.

Changes in Balance of Capital and Financial Accounts and composite balances. Contributions to Capital and Financial account changes.
	Q1 2007 (LTL million)	Q1 2006 (LTL million)	Change (%)	Contributions (%)
Capital and Financial Accounts*	2,618.55	1,765.42	48.3	48.3
Capital Account	214.13	241.43	-11.3	-1.6
Direct investments	1,479.15	472.03	213.4	57.1
Portfolio investments	-1,427.45	537.90	-365.4	-111.3
Financial derivatives	-1.95	-5.77	-66.2	0.2
Other investments	2,334.41	936.21	149.3	79.2
Official reserve assets	582.01	-328.98	-276.9	51.6
Errors and omissions	-561.75	-87.40	543.4	-26.9

* Including errors and omissions.

Investments abroad. In Q1 this year, flow of investments abroad by other domestic economic entities made up LTL 832.3 million (in Q1 2006 it was LTL 1.07 billion). Investments into debt securities of non-residents by the country’s economic entities and money market instruments accounted for two thirds of the investment flow abroad. Direct investments abroad accounted for the rest of this flow.

Foreign investments in Lithuania. In Q1 2007, total foreign investments flow in Lithuania made up LTL 3.2 billion (in Q1 2006, it was LTL 3 billion).

Direct investments. During the period under review, foreign direct investment flow in Lithuania reached LTL 1.78 billion, an increase of 1.17 billion or nearly threefold compared with the corresponding period in 2006. Taking into account direct investment abroad by domestic economic entities, the net inflows of foreign investment made up LTL 1.48 billion or 7.4 per cent of GDP in Q1 this year.

Direct investment was used to finance 56.5 per cent of the CAD (64.7 per cent including non-repayable capital transfers).

According to the data as of 31 March of 2007, accrued foreign direct investment in Lithuania amounted to LTL 31.7 billion (EUR 9,2 billio). Foreign direct investments per capita stood at LTL 9,388 (EUR 2,719).

In Q1 2007, most foreign direct investments was directed into financial intermediation (LTL 678.8 million ), manufacturing industry (LTL 507.9 million ), and transport, storage and long distance communication (LTL 244.8 million).

According to the data as of 31 March 2007, investments into manufacturing industry accounted for 38.3 per cent of the total foreign direct investments in Lithuania, financial intermediation for 16.7 per cent, transport, storage and long distance telecommunications for 13.7 per cent, retail and wholesale trade for 9.9 per cent, and electricity, gas and water supply for 9.4 per cent.

The largest investors by country were Poland (21.4 %), Denmark (12.5 %), Sweden (10.7 %), Germany (8.8 %), Russian (8%), and Finland (6.5 %).

Investment by the EU 27 Member States accounted for 82.8 per cent of the total investment, of which investments by the old EU Member States (15 countries) accounted for 48.3 per cent, and by the CIS countries for 8.2 per cent.

Portfolio investment. Net portfolio investments flow was negative in Q1 2007, at LTL 1.43 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.

The net flow of other investments was positive in Q1 2007 standing at LTL 2.33 billion, of which investments in Lithuania flow made up LTL 2.2 billion. The loans received by MFIs from non-residents was the major reason behind this.

Official reserve assets. In Q1 2007, the country?s official reserve assets contracted while and flow in the Balance of Payments made up LTL 582 million. At the end of March, they amounted to LTL 14.6 billion (EUR 4.2 billion).

The decrease of international reserves was affected by a decrease in the central government deposits with the Bank of Lithuania and the Bank’s external liabilities by LTL 475.2 and LTL 177.6 million, respectively as well as a fall of deposits of other MFIs with the Bank of Lithuania pushed official reserve assets down. Meanwhile, a growth of currency in circulation by LTL 93.5 million and an increase of LTL 92.1 million as a result of the impact of other factors pushed the official reserve assets up.

International investment position of the Republic of Lithuania. According to the data as of 31 March 2007, the country’s total foreign financial assets made up LTL 35.97 billion and total international financial liabilities amounted to LTL 80.8 billion. The negative international investment position made up LTL 44.84 billion, i.e. Lithuania is a debtor vis-ą-vis the rest of the world. In Q1 2007, total financial foreign assets of the country climbed by LTL 188.5 billion, and its international financial liabilities increased by LTL 4.9 million (6.4%).

Composition of the balance of the international investments of the Republic of Lithuania (%)
	31-12-2006	31-03-2007
A. Foreign assets	100.0	100.0
1. Direct investments	8.7	9.5
2. Portfolio investments	18.5	20.1
3. Financial derivatives	0.5	0.7
4. Other investments	29.9	29.0
5. Official reserve assets	42.4	40.7
B. Liabilities	100.0	100.0
1. Direct investments	37.9	39.3
2. Portfolio investments	15.8	14.2
3. Financial derivatives	0.1	0.1
4. Other investments	46.3	46.4

Following the increase in Lithuania’s international financial liabilities, gross foreign debt of the country grew as well. In Q1 2007, this debt rose LTL 3.76 billion to LTL 53.52 billion and at the end of Q1 accounting for 57.8 per cent of GDP (at the end of 2006, it was LTL 49.76 billion or 60.7% of GDP).