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

Current Account. A widening in the foreign trade deficit and the decreased surpluses of the services and current transfer balances resulted in a sizeable increase in the current account deficit (CAD) of the Balance of Payments in the first half of the year. According to preliminary data, in Q2 2004 the Balance of Payments current account deficit made up LTL 1.66 billion, up by 40.2 per cent quarter on quarter. The CAD for the first half of the year amounted to LTL 2.84 billion. Compared to the first half of 2003, the current account deficit widened by LTL 1.2 billion to make up 10 per cent of GDP according to preliminary estimates. The CAD for the first half of 2003 was 6.2 per cent of GDP.

Foreign trade. The growth rate of the export and import of goods was higher in Q2 2004 compared to Q1 and determined fast development of Lithuania’s foreign trade in H1 2004. According to the preliminary data of the Department of Statistics under the Government of the Republic of Lithuania, in Q1 2004 export of Lithuanian goods increased by 16.2 per cent, while import went up by 15.6 per cent year on year. While export growth outpaced import growth in H1, in Q2 2004 the growth of import of goods exceeded that of export compared to Q1, and the foreign trade deficit for H1 increased by half a billion litas year on year.

Import growth was fuelled by increased domestic demand. The fastest growth was recorded in consumer goods (24.1%) in H1 year on year, while the import of consumer durables (household electronics, TVs, refrigerators, etc.) increased over the period under review by as much as 51 per cent. The growth of these imports was encouraged by increasing borrowing as borrowing terms improved significantly due to competition in the banking sector and the decline in external interest rates. This is proved by a nearly three-fold increase in the amount of consumer loans granted to natural persons by banks. The abolition of customs duties on food products and alcoholic beverages imported from the EU pushed down the prices on these products and increased their consumption in Q2, which resulted in a 32 per cent import growth of these goods in H1 2004 year on year.

Fast development in the scope of construction fuelled imports of corresponding goods (paints, other finishing materials and sanitary ware).

In the first half of 2004 export of mineral products increased by as much as 41.1 percent year on year, from 19.2 per cent to 23.3 per cent of total exports. These developments were determined by higher prices for raw mineral products and, even on a larger scale, mineral products, while the volume of import and export of mineral products increased as well. The period under review saw an even larger growth in the export of machinery and mechanical appliances (43.6%). Export of prepared foodstuffs and products of chemical industries saw a much lower growth. While export of textiles and articles of textiles declined only slightly, the share of these products went down from 14.8 per cent to 12.7 per cent of total exports.

Import of machinery and mechanical appliances made up 18.6 per cent of total imports in H1 2004, and import of mineral products made up 17.7 per cent.

Excluding petroleum products, export of goods grew by 10.3 per cent and import of goods went up by 16.1 per cent in H1 2004.

Export of Lithuanian goods to the current EU countries (25 Member States) increased over the reporting period by 15.1 per cent, while import of goods grew by 13.6 per cent. Export of Lithuanian goods to the current EU accounted for 62.4 per cent of total export, while import made up 64.4 per cent of total import. Export to the CIS increased by 18.5 per cent, and import went up by 20.2 per cent. Compared to total export, the share of export to the CIS made up 15.7 per cent, and imports from the CIS countries accounted for 25.3 per cent of total import.

Services. During H1 2004 exports of services increased by 11.9 per cent year on year, while import of services grew by 25.5 per cent. The total positive balance of services amounted to LTL 910.1 million (LTL 1 billion in H1 2003). Export of services saw slower growth in the second quarter (17%) due to seasonal factors.

Changes in the export and import of services during the period under review were determined by the development of transport and travel services. Transport services accounted for 56.2 per cent, and travel services for 30.3 per cent of the total export of services, respectively. These services accounted for 41.9 per cent and 38.3 per cent of the total import of services.

During H1 2004 exports of transport services increased by 20.4 per cent year on year, while import of these services grew by 28.8 per cent (27.6% and 20% in Q2 2004, respectively). Export of railway transport services accounted for nearly two thirds of the growth of transport services export value (export of this kind of transport services increased in H1 by as much as 95.1%, while freight services went up over 1.5 times). Export of road transport services increased by as little as 4.6 per cent over the first half, and export of sea and coastal water transport services declined by 25.2 per cent. The largest increase was recorded in the import of sea and coastal water transport services (47.5%).

Compared to H1 2003, the number of foreigners visiting Lithuania declined by 3.1 per cent in H1 2004, while the number of Lithuanian residents travelling abroad went up by 7.5 per cent. While the number of EU residents visiting Lithuania increased by nearly 71 thousand (7.9%) over the reporting period, the number of CIS visitors declined by 130.2 thousand (17.4%). The number of CIS visitors declined to a large extent because of the fewer so-called one-day tourists (coming mostly from Russian and Belarus). Owing to a larger number of visitors from the EU countries (while the total number of visitors declined), income from the export of travel services made up LTL 929.1 million in H1 2004, up by 12.8 per cent year on year. Expenses on the import of travel services, on the other hand, increased by 32.1 per cent due to a larger number of Lithuanian residents travelling abroad. Because of these changes the positive travel balance declined by nearly LTL 95 million to LTL 104.2 million (LTL 199.1 million in H1 2003).

Compared to the total export of services, export to the EU (25 Member States) made up 50.2 per cent, and to the CIS 41.2 per cent. Compared to total export of transport services, export of these services to the EU accounted for 50.5 per cent and to the CIS for 42.7 per cent. Export of travel services to the EU stood at 44.1 per cent, and other services at 62.3 per cent.

Income. The income balance deficit made up LTL 1.1 billion in H1 2004. Year on year the negative income balance increased by LTL 91.2 million, i.e. 9 per cent. Compensation of employees by Lithuanian economic entities increased by LTL 72.8 million (57.6%), and income from investment abroad declined by LTL 20.3 million over the period under review. Income of non-residents on investment in Lithuania grew by LTL 165.2 million (12.2%). Dividends to non-residents (on foreign direct investment) went up by LTL 18.5 million, 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 204.4 million.

Current transfers. The balance of current transfers was positive in H1 2004 and stood at LTL 285.8 million (LTL 480.7 million in H1 2003). The decline of the positive balance was influenced by Lithuania’s contributions to the EU budget following Lithuania’s EU accession and lower payments from EU support funds (PHARE, ISPA, SAPARD). No inflows from the EU structural funds were received yet (the first payments from these funds were received in July).

Cash transfers of private individuals grew by LTL 71.7 million in H1 2004.

Capital and financial account.

Excluding official reserve assets, the total investment flows abroad made up LTL 1.36 billion, and foreign investment flows in Lithuania stood at LTL 3.82 billion. The current account deficit was mostly financed by foreign direct investment which made up 42.1 per cent of the CAD. Net portfolio investment made up 32 per cent, and other investment inflows accounted for 12.5 per cent of the CAD.

Investment abroad. The largest part of investment abroad consisted of investment by Lithuanian commercial banks of LTL 863.2 million, of which LTL 616.6 were changes in deposits and balances on correspondent accounts with foreign banks. In addition, commercial bank investment in non-resident debt securities amounted to LTL 343.8 million. Foreign investment by other domestic economic entities made up LTL 365.9 million, of which trade credit to non-residents made up LTL 268.5 million.

Foreign investment in Lithuania. During H1 2004 foreign investment flows increased by LTL 2.2 billion year on year.

It should be noted that foreign direct investment rebounded. Foreign direct investment flows made up LTL 1.3 billion in H1 2004, increasing by LTL 374.7 million year on year. Inflows classified as foreign direct investment from privatisation made up LTL 114.5 million in H1 2004, i.e. 8.6 per cent of total foreign direct investment flows.

On 30 June 2004, accumulated foreign direct investment in Lithuania stood at LTL 14.7 billion (EUR 4.25 billion), or LTL 4,260 (EUR 1,234) per capita.

The largest foreign direct investment flows were recorded in the manufacturing industry (LTL 700.9 million), electricity, gas and water supply activities (LTL 165.7 million), wholesale and retail trade (LTL 142 million) and monetary intermediation (LTL 141.1 million).

On 30 June 2004, investment in the manufacturing industry accounted for 33 per cent of total foreign direct investment in Lithuania, wholesale and retail trade for 16.8 per cent, transport, storage and telecommunications for 15.5 per cent, and financial intermediation for 15.5 per cent.

The largest investors by country were Denmark (15.8% of total investment), Sweden (14.0%), Germany (9.3%), the USA and Finland (8.5% each).

Investment from the EU (25 Member States) accounted for 75 per cent of total investment, of which investment of old EU Member States (15 countries) accounted for 61.4 per cent.

Portfolio investment. Portfolio investment flows in Lithuania made up LTL 1.3 billion in H1 2004. Similar to the previous years, the largest part of portfolio investment inflows consisted of the new Government Eurobond issue distributed abroad.

Other investment flows

were higher by as much as LTL 1.2 billion than a year ago (total LTL 1.28 million). Loans received by commercial banks and non-resident deposits in domestic commercial banks accounted for 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 negative in the first half of 2004 (LTL -229.5 million). The main reason behind the decrease was net purchase of foreign exchange by commercial banks from the Bank of Lithuania of LTL 975.1 million. A significant impact on the litas and anchor currency exchange transactions with commercial banks was made by a sizeable decrease in charges on foreign exchange transactions.

Bank of Lithuania operations with central government institutions amounted to LTL 692.7 million in H1 2004 and was the largest factor increasing reserve assets. Reserve assets were also increased by growing commercial bank required reserves in foreign currencies.

Balance of the international investment position of the Republic of Lithuania. On 30 June 2004, total foreign financial assets of the country made up LTL 17.1 billion, and total international financial liabilities amounted to LTL 38.5 billion. The negative international investment balance made up LTL 21.4 billion. In H1 2004 total foreign assets increased by LTL 1.3 billion, international financial liabilities went up by LTL 3.8 billion, and the negative international investment balance increased by LTL 2.4 million. At the end of June 2004 the international financial liabilities of the country were distributed as follows: other investment 43.4 per cent, foreign direct investment 38.1 per cent and portfolio investment 18.6 per cent.