2015-12-21
Vitas Vasiliauskas: First year confirmed that Bank of Lithuania projections for euro adoption impact are coming true
The euro, which became Lithuania’s currency at the beginning of this year, had a significant economic impact: as the rating agencies upgraded Lithuania’s credit ratings, the interest burden on the state, residents and businesses was eased, expenses related to the litas and euro exchange operations disappeared, and cross-border payments in euro became cheaper.
‘While we will be able to assess the overall impact of the euro after several years, this year some indicators have already confirmed projections that we made based on a quantitative assessment carried out prior to the adoption of the euro. As was expected, residents, businesses and the entire economy gained tangible benefits of tens of millions due to lower borrowing costs. Significant amounts have been saved due to vanished foreign exchange costs, cheaper transfers in euro,’ said Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.
One of the major reasons that determined lower borrowing costs for residents, businesses and the state was the upgrading of the country’s credit ratings. The ‘Big Three’ credit rating agencies increased Lithuania’s credit ratings up to a higher investment grade on the grounds of the introduction of the euro.
According to the estimates of Bank of Lithuania economists, in this year only, the residents and businesses saved approximately EUR 40 million due to the impact of the euro on the interest rates. The interest burden eased not only for residents but the state as well. During this year, Lithuania borrowed at record-low costs, whereas overall interest expenditure on debt securities issued in 2015 will be EUR 70 million lower than expenses that would have been incurred if the ratings would not have been upgraded due to the euro.
The adoption of the euro had an impact on the fees for cross-border transfers in euro — they have fallen to the level of domestic transfers. Due to the reduction of the fees alone residents and enterprises saved up to EUR 18.5 million this year.
Once the euro became Lithuania’s currency, the litas and euro exchange costs disappeared, whereas banks’ income from commissions decreased. Over the nine months of this year the bank’s income fell by EUR 10 million and, if such trend continues, over the whole year it will be approximately EUR 14 million lower than last year.
Nonetheless, the adoption of the euro is not only related to benefits but also with additional obligations of the country, i.e. contributions to the capital of both the European Stability Mechanism (ESM) and the European Central Bank (ECB). Lithuania has already made its first contribution to the ESM worth EUR 65.4 million, while over the period of five years it will contribute a total of EUR 327.2 million in equal instalments. The Bank of Lithuania additionally contributed EUR 43.1 million to the ECB capital.
According to the estimates of the Statistical Office of the European Union, Eurostat, the adoption of the euro raised inflation in Lithuania by 0.04–0.11 p.p. Compared to the other Baltic States, the impact of the adoption of the euro on prices was the lowest in Lithuania. In Latvia, the euro raised inflation by 0.12–0.21, in Estonia — 0.2–0.3 p.p.
The adoption of the euro, according to the Eurostat, had a potentially more visible impact on prices of some services, e.g. prices in cafeterias, at the hairdressers, for renting residential buildings and those related to housing repairs and maintenance services.
Nevertheless, the general price level in Lithuania fell this year. According to the latest data, in November this year consumer prices were 0.5 per cent lower than a year ago. Extremely low fuel and gas prices, a drop in heating and administered prices related to it decreased the general price level in Lithuania. The price increases in the services sector mostly stemmed from increasing wages.
Over this year, the cash litas were successfully exchanged into euro; it will be possible to exchange them at the Bank of Lithuania for an unlimited period of time.
A total of almost LTL 5.3 billion (EUR 1.5 billion) were exchanged from the beginning of the year to the end of November, while the residents still have approximately LTL 525 million (EUR 152 million). Currently in circulation there is about EUR 2 billion in cash issued by the Bank of Lithuania, i.e. almost a third less than it usually was in Lithuania. This means that a significant part of funds remained in residents’ bank accounts after they brought them in seeking simpler exchange of money prior to the adoption of the euro.
The next step related to the adoption of the euro is the harmonisation of rules for electronic transfers in euro when Lithuania joins the single euro payments area (SEPA) in 2016. Once Lithuania joins it, one account in any SEPA country (all EU countries, Norway, Iceland, Liechtenstein, the Principality of Monaco, Switzerland and San Marino) will be enough for residents and enterprises to perform or receive payments.
Presentation ‘A Year with the Euro’ can be found here (1.4 MB download icon).
