Review of the Balance of Payments the Republic of Lithuania in the First Quarter of 2005

Current account.

In Q1 2005, the Balance of Payments current account deficit (CAD) amounted to LTL 828.9 billion (5.6% of GDP). Year on year it declined by LTL 153.2 million, i.e. 15.6 per cent.

The contraction of the Q1 2005 current account deficit was mostly determined by the lower foreign trade deficit, while the main factor increasing the CAD was a lower positive surplus in the balance of services and a higher deficit of the income balance.

Foreign trade. According to the data of the Department of Statistics, in Q1 2005 export of Lithuanian goods increased by 22.2 per cent, while import went up by 14.1 per cent year on year.

The general results of the Lithuanian export of goods were increasingly affected by the European Union (EU) markets, which has been reflected in the growth rate and volume of the export of goods to the EU Member States. In Q1 2005, year-on-year export of goods to the EU Member States grew by 43.8 per cent and amounted to 70.8 per cent of the total export (60.2 % in Q1 2004). The growth in the import of goods was mostly affected by the rising import of goods from the CIS countries and the new EU Member States. Compared to total import, import from the EU slightly declined and made up 59.1 per cent.

In Q1 2005, the total deficit of foreign trade with the EU Member States contracted by as much as LTL 1.1 billion down to LTL 132.8 million year on year. Lithuania had a positive foreign trade balance last year vis-ą-vis thirteen EU Member States (out of 25) in the first quarter. These included the United Kingdom, France, Spain, Sweden, Estonia and Latvia. However, the high trade deficit vis-a-vis Germany, Poland and Finland determined the overall negative foreign trade deficit against EU Member States.

Export of goods to the countries of the CIS increased by 40.3 per cent during the reporting period. This was mostly determined by the fast increase of export to Russia (67.3%). Import of goods from the CIS increased by 25.2 per cent, and the foreign trade deficit with respect to the CIS went up by LTL 210.7 million in Q1. Export of Lithuanian goods to the CIS countries accounted for 15.5 per cent of total export, while import made up 30.6 per cent of total import.

The increase in the export of goods was mostly affected by the sales of mineral products to foreign partners. During Q1 2005, sales of mineral products to foreign partners increased by 25.5 per cent to make up 28.8 per cent of the total increase of exports of goods. Nearly one quarter of the total growth of export of goods consisted of export of agricultural produce and prepared foodstuffs.

Services. During Q1 2005 exports of services increased by 11.4 per cent year on year, while import of services grew by 23.4 per cent. The total positive surplus of the balance of services amounted to LTL 456.8 million (LTL 513.6 million in Q1 2004). 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 86.5 per cent of the total export of services and 79.3 per cent of the total import of services.

Export of air and rail transport services exhibited the strongest growth among all kinds of transport to account for 51.9 per cent of the increase in the export of transport services. The growth in the import of road transport services made up 50.7 per cent of the total growth in the import of transport services, and the positive surplus of these services accounted for 40.6 per cent of the positive balance of all transport services.

The total number of visitors to Lithuania in Q1 2005 was 760.7 thousand. Year on year the total number of visitors to Lithuania increased by 136.7 thousand people (21.9%). The total number of visitors to Lithuania from the EU increased by 81.5 thousand people (23.4%). The number of visitors from the CIS grew by 12.4 per cent.

Owing to a larger number of visitors from the EU and other countries, income from the export of travel services increased by LTL 90.5 million in Q1 2005 year on year.

The number of Lithuania residents travelling abroad increased by 18.7 per cent over the reporting period (the total number in Q1 2005 made up 910.6 thousand). The higher number of Lithuanians travelling abroad increased the expenditure on the import of travel services by 18.7 per cent resulting in a increase of the positive travel balance in Q1 2005 by only LTL 21.1 million year on year (to LTL 63.2 million).

Compared to the total export of services, export to the EU (25 Member States) made up 54.6 per cent, and to the CIS 33.1 per cent. Compared to the total export of transport services, export of these services to the EU accounted for 52.3 per cent and to the CIS for 37.2 per cent. Export of travel services to the EU stood at 56.6 per cent, and other services at 59.6 per cent. The largest positive balance of services in the first quarter was recorded with respect to Russia, Belarus and Latvia (making up over a half of the total surplus of the balance of services).

Income. The income balance deficit made up LTL 503.3 million in Q1 2005. Year on year the income balance deficit increased by LTL 58.3 million. The income balance deficit was worsened by increased non-resident reinvestment which grew by 45.2 per cent (its flow in the balance of payments made up LTL 353.1 million). 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. The increase of reinvestment was offset by the decline of dividend payments to non-residents on their investment in Lithuania (LTL 99.6 million). The increase of the income balance deficit was determined by a lower surplus of compensation of employees. This decline was related to the fact that a larger part of compensation is attributable to private transfers to Lithuania which are reflected in the balance of current transfers.

Current transfers. The positive surplus of the balance of current transfers stood at LTL 336.3 million in Q1 2005 (LTL 303.3 million in Q1 2004). Current transfers to Lithuania increased over the reporting period by LTL 33 million. Year on year, amounts from EU support projects increased by LTL 223.3 million, while private transfers went up by LTL 72.9 million. On the other hand, Lithuania’s contribution to the EU budget made up LTL 243.1 million (there were no such contributions in Q1 2004), and the positive surplus in the balance of current transfers increased by as little as 10.9 per cent year on year.

Capital and financial accounts.

Excluding international reserves, the total investment flow in the country’s balance of payments reflected net inflows of LTL 1.01 billion in Q1 2005. Net inflows of portfolio investment made up 98.5 per cent of the CAD, net foreign direct investment for 52.3 per cent of the CAD, amounting to 86.1 per cent including capital transfers from EU support funds.

Investment abroad. Foreign investment by domestic economic entities made up LTL 1.03 billion in Q1 2005, decreasing year on year by LTL 242.7 million. The largest part of investment abroad consisted of investment by Lithuanian commercial banks of LTL 711.6 million (mostly accounted for by an increase of deposits and balances on correspondent accounts with foreign banks). Foreign investment flow by other domestic economic entities made up LTL 322.5 million, of which foreign direct investment made up LTL 132.7 million and the investment flow by pension funds was LTL 37.7 million.

Foreign investment in Lithuania. Total foreign investment flow in Lithuania made up LTL 1.77 billion in Q1 2005, decreasing year on year by LTL 389.9 million.

* including errors and omissions

Foreign direct investment in Lithuania. Foreign direct investment flow in Lithuania made up LTL 566.5 million in Q1 2005 (LTL 716.8 million in Q1 2004). Equity investment was LTL 278 million, and reinvestment LTL 353.1 million. Inflows from privatisation classified as foreign direct investment made up LTL 21.1 million in Q1 2005, i.e. 3.7 per cent of the total direct investment flow in Lithuania.

On 31 March 2005, accumulated foreign direct investment in Lithuania stood at LTL 17.53 billion (EUR 5.08 billion), or LTL 5,128 (EUR 1,485) per capita.

The largest foreign direct investment flow in Q1 2005 was recorded in the manufacturing industry (LTL 234.2 million), electricity, gas and water supply activities (LTL 178.4 million), and financial intermediation (LTL 174.4 million).

On 31 March 2005, investment in the manufacturing industry accounted for 32.8 per cent of total foreign direct investment in Lithuania, retail and wholesale trade for 14.7 per cent, financial intermediation for 14.4 per cent, and transport, storage and telecommunications for 13.3 per cent.

The largest investors by country were Sweden (14.2%), Denmark (13.7%), Germany (12.9%), Russia (12.6%), Finland (7.6%), and Estonia (7.1%).

Investment from the EU (25 Member States) accounted for 72.7 per cent of total investment, of which investment of old EU Member States (15 countries) accounted for 61.7 per cent, while investment of the CIS countries made up 12.9 per cent.

Portfolio investment. Portfolio investment flow in Lithuania made up LTL 1.11 billion over the reporting period, of which LTL 1.05 billion were inflows from the new Government Eurobond issue in the first quarter of 2005.

Other investment

flow was LTL 127.7 million in Q1 2005 in Lithuania. Year on year, other investment flow was lower by LTL 197.8 million. The positive flow of other investment in Lithuania was determined by an increase of trade credit, as the negative flow of loans granted to commercial banks by non-residents offset the positive flow of non-resident deposits in domestic commercial banks.

Reserve assets. The reserve asset flow was positive in Q1 2005 (LTL 462.8 million), resulting in total reserve assets of LTL 9,576.2 million (EUR 2,773.5 million) at the end of March.

Reserve assets grew due to the increase of central government deposits at the Bank of Lithuania (LTL 436.1 million), a net increase of other liabilities of the Bank of Lithuania (LTL 68.9 million) and higher foreign liabilities of the Bank of Lithuania (LTL 1.4 million).

Reserves were pushed down by the lower balances of credit institutions with the Bank of Lithuania (LTL 28.1 million) and a decline of currency outside the Bank of Lithuania (LTL 11.0 million).

International investment position of the Republic of Lithuania. On 31 March 2005, total foreign financial assets of the country made up LTL 20.47 billion, and total international financial liabilities amounted to LTL 43.22 billion. The negative international investment balance made up LTL 22.75 billion, i.e. Lithuania was a debtor vis-ą-vis the rest of the world. In Q1 2005 total foreign assets increased by LTL 1.7 billion, international financial liabilities went up by LTL 2.78 billion, and the negative international investment balance increased by LTL 1.09 billion. At the end of Q1 2005 the international financial liabilities of the country were distributed as follows: foreign direct investment accounted for 43.4 per cent, other investment for 40.6 per cent, and portfolio investment for 19.1 per cent.