Review of the Balance of Payments of the Republic of Lithuania in Q4 and 2005

In Q4 2005, the Balance of Payments current account deficit (CAD) amounted to LTL 1.44 billion (7.3 per cent of the GDP). The CAD increased by LTL 46.8 million or 3.4 per cent, as compared to Q3 2005. The CAD in the previous year as a whole amounted to LTL 4.94 billion or 7 per cent of the GDP (LTL 4.8 billion or 7.7% of the GDP in 2004).

As a result of an increase in foreign trade balance deficit, the current account deficit increased in the course of 2005. However, such an increase was fairly well offset by an increase in the positive balances of services and current transfers.

Foreign trade

. The growth in the export and import of goods increased in Q4 2005, as compared to Q3. However, the growth rate of the import of goods, compared to the export of goods, was higher by 0.5 per cent. This contributed to a still higher increase in foreign trade deficit in Q4 and 2005 as a whole. According to the data of the Department of Statistics under the Government of the Republic of Lithuania, the export of goods increased by 27.1 per cent and the import of goods went up by 25 per cent in 2005, as compared to 2004. The foreign trade deficit widened by LTL 1.6 billion over the period under review (LTL 853 million in Q4 2005). According to the available data for nine months of 2005, the increase in the export and import of goods was mainly driven by a rise in the value of goods (especially in the prices for petroleum and petroleum products) relative to their volume.

In 2005, the export of goods to the new EU countries and the CIS countries grew much faster than to the old EU countries. These developments were partly determined by the depreciation of the euro against the US dollar in Q2 to Q4 2005. In 2005, exports to the EU countries accounted for 65.4 per cent of Lithuania’s total exports (66.9 % in 2004). The share of export of goods to the CIS countries expanded from 16.3 per cent to 17.7 per cent. The increase in the import of goods in 2005 mainly resulted from a rise in the import of goods from the CIS countries, while imports from the CIS countries, as compared to total imports, went up from 26.7 per cent to 31.3 per cent. The share of the imports from the EU countries slightly declined to 59.1 per cent of total imports.

The total deficit of the balance of foreign trade with the EU countries decreased by LTL 538 million and stood at LTL 3.95 billion, while the deficit of trade with the CIS countries widened by LTL 2.66 billion and stood at LTL 7.6 billion in 2005, as compared to 2004. The largest deficit of Lithuania’s foreign trade was recorded in respect to Russia, Germany and Poland, while the largest trade surplus was recorded in respect to Latvia, France and Estonia.

The increase in the export and import of goods was significantly affected by trade in mineral products. The export of mineral products grew by 38.4 per cent to account for nearly 36 per cent of the total increase in the export of goods, whereas the import of mineral products increased by as much as 61.9 per cent to account for 48.8 per cent of the total increase in the import of goods in 2005, as compared to 2004. The increase in the export and import of goods would account for, respectively, 23.2 per cent and 15.9 per cent, while the deficit of foreign trade would be smaller by nearly 2 billion over the period under review. The composition of export goods changed insignificantly over the period under review, whereas the composition of the imports of goods saw a decrease in the share of capital goods and an increase in the share of intermediate goods (mainly as a result of developments in mineral product prices).

Services.

The export of services decreased by 0.4 per cent and the import of services grew by 1.8 per cent in Q4, as compared to Q3 2005. Compared to 2004, the export of services increased by 27.1 per cent and the import of services by 25.9 per cent in 2005. The positive surplus in the balance of services improved by LTL 671 million over the period under review.

Travel and transport services accounted for over three quarters of the total export and import of services. The export and import of transport services expanded during all the quarters of 2005 to increase by respectively 17.4 per cent and 35.2 per cent, as compared to 2004.

Among individual types of transport, the export of sea and road transport services, as well as the import of pipeline, air and sea transport services grew most rapidly, while the surplus in the balance of road transport services accounted for nearly 40 per cent of the surplus in the balance of total services and 60.6 per cent of the surplus in the balance of total transport services.

The number of foreigners visiting Lithuania increased by 20.2 per cent and the number of Lithuanian residents temporarily leaving the country went up by 18.7 per cent in 2005, as compared to 2004. Travel-related income increased by 18.4 per cent and travel-related expenditure went up by 16.8 per cent in 2005. The total surplus in the travel balance rose by LTL 100.5 million. Compared to transport and other services, the surplus in travel-related income and expenditure had little impact on the total increase in the export and import of services.

In 2005, the fastest growth was recorded in the export of commercial intermediation and trade-related services (more than sevenfold increase) and in the export of business leasing (renting) services (more than threefold increase). On the other hand, the share of the said services, compared to the overall scale of services, is insignificant.

Income.

The income balance deficit made up LTL 263.2 million in Q4 2005 and LTL 1.72 billion in 2005. In Q4, as compared to Q3 2005, it narrowed by LTL 324.7 million (55.2%). In 2005, as compared to 2004, the deficit widened by LTL 15 million (0.9%). A decline in non-resident reinvestment (which in the current account of the Balance of Payments is recorded as part of foreign investment) and payments of dividends to non-residents on foreign direct investment had the major impact on the decrease of the income balance deficit in Q4. In 2005, as compared to 2004, reinvestment shrank by LTL 298 million and payments to non-residents (in the financial account recorded as part of direct investment) rose by LTL 438.2 million.

The surplus in the compensation of employees of the income balance increased by LTL 123.7 million in 2005, as compared to 2004, slightly widening the total income balance deficit.

Current transfers

. The surplus in the balance of current transfers stood at LTL 404 million in Q4 2005 and LTL 1.79 billion in 2005 as a whole. The size of the current transfers flow to Lithuania was determined by transfers from EU support funds and private transfers the majority of which consisted of transfers by individuals having left Lithuania and working abroad. The said flows made up respectively LTL 1.1 billion and LTL 866.2 million in 2005. The surplus in current transfers increased mainly on account of an increase in the transfers from EU support funds. Such transfers expanded by LTL 457.1 million and private transfers by LTL 418.2 million in 2005, as compared to 2004.

Capital and financial accounts.

Excluding official reserve assets, in 2005 the total investment flow in the country’s Balance of Payment’s capital and financial accounts reflected net inflows of LTL 6.64 billion, of which LTL 1.78 billion in Q4. The size of the flow of net inflows resulted from the net inflows of other investment ? mainly loans received from non-residents, as well as from an increase in the balances of non-resident deposits and correspondent accounts with domestic commercial banks. The largest flow of net inflows was recorded in respect to monetary financial institutions (MFIs).

Investment abroad.

The flow of investment abroad by domestic economic entities made up LTL 1.87 billion in Q4 and LTL 5.14 billion in 2005. Compared to 2004, it went up by LTL 2.1 billion. It should be noted that all types of investment increased in 2005. Nearly half of the flow of total investment abroad consisted of investment by Lithuanian commercial banks (mainly investment to non-resident debt securities and time-deposits with foreign banks). Direct investment abroad by domestic economic entities accounted for 17.9 per cent of the total flow of investment abroad.

Foreign investment in Lithuania.

The total flow of foreign investment in Lithuania stood at LTL 10.8 billion in 2005 (LTL 6.2 billion in 2004), of which LTL 3.24 billion in Q4.

*including errors and omissions

Foreign direct investment in Lithuania.

The flow of foreign direct investment in Lithuania made up LTL 577.2 million in Q4 and LTL 2.79 billion in 2005, increasing by LTL 635 million (29.5 per cent), as compared to 2004. The overall increase in the flow of foreign direct investment during the period under review was the main contributor to an increase in the other capital and equity capital flows. Considering direct investment abroad by domestic entities, the net inflows of foreign investment made up LTL 1.86 billion (or just 2.6% of the GDP) in 2005. Despite the fact, foreign direct investment covered 37.7 per cent of the current account deficit. Together with the capital account balance, foreign direct investment covered 57.8 per cent of the CAD.

CAD.

On 31 December 2005, accumulated foreign direct investment in Lithuania stood at LTL 18.8 billion (EUR 5.45 billion). Foreign direct investment per capita stood on average at LTL 5.525 (EUR 1.603).

In 2005, most foreign direct investment went to manufacturing (LTL 711.8 million) and financial intermediation (LTL 624.5 million).

On 31 December 2005, investment in manufacturing accounted for 33.1 per cent, financial intermediation for 15.7 per cent, wholesale and retail trade for 13.9 per cent, and transport, storage and telecommunications for 12.5 per cent of total foreign direct investment in Lithuania.

The largest investors by country were Denmark (15.2 %), Sweden (13.6 %), Russia (12.9 %), Germany (11.6%), Estonia (8.2%) and Finland (8.1 %).

Investment by the EU (25 Member States) accounted for 74.8 per cent of total investment, of which investment by the old EU Member States (15 countries) accounted for 60.9 per cent and by the CIS countries 13.2 per cent.

Portfolio investment.

The net portfolio investment flow in Lithuania was negative in both Q4 and throughout 2005, standing at respectively LTL 884.7 million and LTL 1.062,8 million, i.e. the increase in the portfolio investment foreign assets was above the increase in liabilities to non-residents. The growth of the portfolio investment foreign assets was mainly driven by investment by monetary financial institutions, whereas an issue of general government debt securities resulted in an increase in liabilities to non-residents.

The net flow of other investment was positive. It amounted to LTL 1.87 billion in Q4 and LTL 4.81 billion over 2005. The flow of other investment in Lithuania during the reporting period made up respectively LTL 2.54 billion and LTL 6.93 billion, determining the total positive flow of this investment. In 2005, compared to 2004, the flow of other investment in Lithuania increased by LTL 3.91 billion. Such a large increase in this investment flow resulted from the flow of loans received from non-residents by MFIs and from the increased debt of domestic economic entities for goods and services due to higher imports of goods.

Official reserve assets. In 2005, Lithuania’s official reserve assets expanded by nearly LTL 2 billion, of which the flow of these reserve assets made up LTL 1.93 billion, whereas due to other contributions (revaluation of gold, developments in the prices of securities, exchange rate fluctuations, etc.) they increased by another LTL 68 million. The official reserve assets grew in all quarters of the previous year to stand at LTL 11.1 billion (EUR 3.22 billion) at the end of December.

The growth of official reserve assets was mainly driven by an increase in the currency in circulation (in 2005 its amount grew by LTL 1.1 billion, of which by LTL 501.2 million in Q4) and an increase in the funds of other monetary financial institutions with the Bank of Lithuania by LTL 815.5 million. The reserve assets also grew as a result of a net increase in the Bank of Lithuania’s remaining liabilities by LTL 113.3 million and an increase in external liabilities by LTL 15.5 million.

Whereas the developments in the central government deposits with the Bank of Lithuania in 2005 reduced the official reserve assets by LTL 69.3 million.

International investment position of the Republic of Lithuania.

On 31 December 2005, the country’s total foreign financial assets made up LTL 26.34 billion and total international financial liabilities LTL 51.5 billion. The negative international investment position made up LTL 25.16 billion, i.e. Lithuania was a debtor vis-ą-vis the rest of the world. In 2005, total foreign assets grew by LTL 7.55 billion (of which by LTL 2.28 billion in Q4) and international financial liabilities by LTL 11.06 billion (of which by LTL 3.08 billion in Q4). At the end of 2005, the distribution of the country’s international financial liabilities was as follows: other investment 47.5 per cent, foreign direct investment 36.5 per cent, and portfolio investment 16 per cent.