Review of the Balance of Payments of the Republic of Lithuania in Q4 and 2006

Current account.

In Q4 2006, the Balance of Payments current account deficit (CAD) amounted to LTL 2.63 billion (11.6% of GDP) and to LTL 8.88 billion (10.8% of GDP) in 2006. Year on year, it rose by LTL 3.77 billion (73.7%).

The widening of the CAD in 2006 was determined by higher deficits in the foreign trade balance and the income balance.

Foreign trade. In Q4 2006, the increase in the export of goods, compared to the respective period in 2005, amounted to a mere 0.5 per cent, while compared to Q3 2006 it decreased by 3.6 per cent.

Meanwhile, the rates of change in the import of goods were markedly higher (an increase of
9.4 % and 0.4% respectively).

The foreign trade performance in Q4 also lowered the annual rates of change. According to the data of the Department of Statistics under the Government of the Republic of Lithuania, export of goods increased by 18.4 per cent and import of goods by 23 per cent in 2006 year on year (over
9 months of 2006, export and import of goods went up by 25.9 % and 28.7% respectively). With a stronger growth in the imports of goods (compared to exports) the foreign trade deficit widened by LTL 3.88 billion (37.3%) in 2006.

Lithuania’s export of goods to the EU25 countries increased substantially less than that to the CIS countries. Meanwhile the import of goods from the EU Member States grew much stronger than that from the CIS countries.

This dynamics of the export and import of goods in 2006 resulted in changes in the geographical structure of Lithuania’s foreign trade. Compared to the total volume of the country’s export of goods, export to the EU25 countries decreased while export to the CIS and other countries increased. The share of import from the EU countries in the composition of import of goods increased, while the share of import from the CIS countries declined (mainly as a result of lower import from Russia).

The total foreign trade deficit vis-ą-vis the EU Member States widened 2.1 times in 2006 year on year (stood at LTL 8.6 billion), whereas the trade balance deficit vis-ą-vis the CIS countries narrowed by 13 per cent (made up LTL 6.6 billion). The largest foreign trade deficit was recorded in respect to Russia, Germany, Poland, Finland and China, while the largest trade surplus was recorded in respect to Latvia, Estonia, the USA and Canada.

Export growth was mainly driven by an increase in the export of vehicles, plastics and articles thereof, as well as machinery and mechanical appliances. The growth of import of vehicles, machinery and mechanical appliances, and mineral fuel accounted for over a half of the total increase in the import of goods. Export of mineral products increased by a mere 4.3 per cent, and import of these products by 13.8 per cent in 2006 year on year. Despite that, trade in these products, compared to the total volume of foreign trade, has remained the strongest (to make up about 24%).

Services. In Q4 2006, the growth in the export of services continued to be significantly weaker than the growth in the import of services, and the positive trade surplus of services contracted by LTL 16.2 million. In 2006, the export of services made up LTL 9.94 billion (an increase of 15% year on year) and the import of services made up LTL 6.96 billion (an increase of 21.8%). The positive trade surplus of services made up LTL 2.98 billion in 2006, increasing by just LTL 54 million year on year.

Like in previous years, changes in the export and import of services were mainly brought about by transport and travel services. Transport services accounted for 53.6 per cent and 43.7 per cent of the total export and import of services. Export and import of these services expanded almost to the same extent in 2006 compared to 2005, whereas the positive trade surplus of services increased by LTL 375.8 million. Export and import of road services and other auxiliary transport services were characterised by the strongest growth among all types of transport services. The surplus in the balance of road transport services accounted for 57.8 per cent of the total positive trade surplus of services and for three quarters of the total trade surplus of transport services.

Among other services, the strongest growth was in financial lease and rent (business lease) services. In addition, an increasingly stronger growth in the import of construction services for a second consecutive year should be noted (an increase of 41.4% in 2006).

In 2006, the number of foreigners visiting Lithuania increased by 17.7 per cent year on year (22% in Q4), while the number of Lithuanian residents travelling abroad went up by 20.2 per cent (18.4% in Q4). Travel income made up LTL 2.84 billion (an increase of 11.1%) and travel expenditure made up LTL 2.49 billion (an increase of 20.6%) in 2006. The total surplus of the travel balance decreased by 28.8 per cent.

In 2006, the export of services to the EU25 countries made up 53.3 per cent of the total export of services, while the import of services from the EU25 countries accounted for 58.4 per cent. The share of the CIS countries in the overall composition of the export and import of services accounted for 31.6 per cent and 27.1 per cent respectively.

Income. The income balance deficit made up LTL 294.4 million in Q4 2006 and LTL 2.28 billion in 2006 (1LTL 1.73 billion in 2005). The largest contribution to the widening of the income balance deficit came from higher non-resident reinvestment (which is recorded in the Balance of Payments current account as payments to non-residents, and is reflected in the financial account as part of direct investment). Reinvestment increased by LTL 1.02 billion to make up more than three quarters of the total income balance deficit in 2006 year on year, whereas dividend payments to foreign direct investors declined by LTL 588.1 million during the period under review.

The surplus of compensation of employees in the income balance increased by merely LTL 33.8 million during the period under review.

Current transfers. The positive surplus of current transfers made up LTL 373.2 million in Q4 2006 and LTL 1.83 billion in 2006 (LTL 399.7 million and LTL 1.83 billion, respectively, in 2005). The size of the flow of current transfers to Lithuania was determined by transfers from the EU support funds and private transfers. In 2006, transfers from the EU support funds made up LTL 1.3 billion (an increase of LTL 168.4 million or 15.3% year on year). Private transfers amounted to LTL 1.0 billion (an increase of LTL 153.6 million or 17.7 %). Whereas transfers by legal entities made up LTL 322.5 million in 2006 (a decline of LTL 224.9 million), as a result the total balance of current transfers remained at the level of 2005.

Capital and financial accounts.

Excluding official reserve assets, in 2006 the total investment flow in the capital and financial accounts of the country’s Balance of Payments reflected net inflows of LTL 13.6 billion (of which LTL 6.1 billion in Q4). The total size of the flow of net inflows resulted from the net inflows of other investment (mostly loans received by MFIs and other sectors from non-residents), which made up 67.4 per cent of the total flow of net investment inflows and were the main source of CAD financing. As for CAD financing, the significance of foreign direct investment increased substantially in 2006. The net flow of non-repayable capital transfers made up LTL 963.6 million in 2006, increasing by LTL 40.5 million year on year.

* Including errors and omissions.

Investment abroad. The flow of investment abroad by domestic economic entities made up LTL 2.37 billion in Q4 2006 and LTL 5.1 billion in 2006. Compared to 2005, the flow of investment abroad contracted by LTL 151.9 million. In 2006, the flow of investment abroad by Lithuanian MFIs accounted for 53.2 per cent of the total flow of investment abroad, and the flow of investment abroad by other domestic sectors for 46.8 per cent.

Foreign investment in Lithuania. The total flow of foreign investment in Lithuania made up LTL 8.14 billion in Q4 2006 and LTL 17.69 billion in 2006 (LTL 11.5 billion in 2005).

Direct investment.

The flow of foreign direct investment (FDI) in Lithuania made up LTL
2.81 billion in Q4 2006 and LTL 4.92 billion (6 per cent of GDP) in 2006. Compared to 2005, this flow increased by a factor of 1.7. Taking into account direct investment abroad by domestic economic entities, net direct investment inflows made up LTL 4.16 billion in 2006.

Direct investment was used to finance 46.8 per cent of the CAD and 57.7 per cent of the CAD in addition to non-repayable capital transfers.

On 31 December 2006, accumulated FDI in Lithuania stood at LTL 28.8 billion (EUR
8.3 billion) or LTL 8,503 (EUR 2,463) per capita.

Portfolio investment. The net flow of this investment was positive in Q4 at LTL

223.1 million, while in 2006 it was negative (-LTL 673.1 million), i.e. the flow of this investment abroad was higher than in Lithuania. Domestic MFIs were the largest investors abroad, and the portfolio investment inflows increased mostly due to the new Eurobond issues placed by the Government in Q1 and Q4 of the year.

The net flow of other investment was positive in Q4 2006 at LTL 2.73 billion and LTL
9.14 billion in 2006. The main impact came from the loans received by MFIs from non-residents.

Official reserve assets. Q4 2006 saw an increase in official reserve assets, their flow in the Balance of Payments made up LTL 3.1 billion. Such a large flow resulted mainly from an increase in the central government deposits with the Bank of Lithuania of LTL 1.98 billion and an increase in currency outside the Bank of Lithuania by LTL 664.2 million.

In 2006, official reserve assets rose by 36.7 per cent to make up LTL 15.2 billion (EUR
4.4 billion) at the end of the year. Import of goods and services coverage by official reserve assets was 3.1 months (2.8 months in 2005). The flow of official reserve assets in the Balance of Payments stood at LTL 4.1 billion in 2006. The increase in official reserve assets in 2006 was brought about by an increase in central government deposits with the Bank of Lithuania and in currency outside the Bank of Lithuania of respectively LTL 2.0 billion and 1.3 billion. The official reserve assets also grew due to increased deposits of other IMFs with the Bank of Lithuania and the Bank of Lithuania’s external liabilities by respectively LTL 381.5 million and LTL 208.5 million, as well as due to an increase of LTL 118.7 million because of other contributions.

International investment position of the Republic of Lithuania. On 31 December 2006, the country’s total foreign financial assets made up LTL 35.8 billion and total international financial liabilities amounted to LTL 75.9 billion. The negative international investment position made up LTL 40.1 billion, i.e. Lithuania was a debtor vis-ą-vis the rest of the world. During 2006, total foreign assets increased by LTL 9.2 billion (34.7%) and international financial liabilities went up by LTL 18.5 billion (32.3%).

With an increase in Lithuania’s international financial liabilities its gross foreign debt grew as well.

Over 2006 this debt rose by LTL 13.2 billion to amount to LTL 49.8 billion (60.7 per cent of GDP) at the end of the year (LTL 36.6 billion or 51.3% of GDP at the end of 2005).