COUNCIL OFBrussels, 24 January 2008
THE EUROPEAN UNION
5648/08
UEM 27
COVER NOTE
from:
Mr Erikas PETRIKAS, Deputy Permanent Representative of Lithuania to the European Union
date of receipt: 7 December 2007
to: Mr Grégoire BROUHNS, Director-General, Council of the European Union
Subject: Convergence Programme of the Republic of Lithuania for 2007
We have the honour to enclose for your attention the Convergence Programme of the Republic of
Lithuania for 2007 which was published in the Official Journal on 28 December 2007, publication
N° 137-5582.
(Complimentary close.)
Official translation
23 January 2008
GOVERNMENT OF THE REPUBLIC OF LITHUANIA
RESOLUTION No 1358
of 19 December 2007
ON THE CONVERGENCE PROGRAMME OF LITHUANIA OF 2007
Vilnius
Acting pursuant to Article 7 of Council Regulation (EC) No 1466/97 of 7 July 1997 on the
strengthening of the surveillance of budgetary positions and the surveillance and coordination of
economic policies (OJ, 2004, Special Edition, Chapter 10, Volume 1, p. 84), as last amended by
Council Regulation (EC) No 1055/2005 of 27 June 2005 (OJ L 174, p. 1), which lays down a
multilateral surveillance procedure of the European Union Member States carried out in the form of
stability and convergence programmes, the Government of the Republic of Lithuania h a s
r e s o l v e d :
-
1.To approve the Convergence Programme of Lithuania of 2007 (as appended);
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2.To charge the Ministry of Finance with the task of submitting the Convergence
Programme of Lithuania of 2007 to the European Commission.
APPROVED
by Resolution No 1358 of 19 December 2007 of
the Government of the Republic of Lithuania
CONVERGENCE PROGRAMME OF LITHUANIA OF 2007
I. FINANCIAL POLICY OVERVIEW
-
1.Lithuania's economic policy serves the goal of ensuring a rapid and sustainable real
convergence, i.e. approximation to the high level of productivity and income within the Economic
and Monetary Union. The Convergence Programme of Lithuania of 2007 (hereinafter referred to as
the Programme) gives projections of the economic policy outlined in the 2008 Law on Approval of
Financial Indicators of the State Budget and Municipal Budgets (Valstyb÷s zinios (Official Gazette)
No. 132-5356, 2007).
-
2.The entire Programme is geared towards the development of measures aimed at achieving
the above-mentioned goal over the medium term. These measures include:
2.1. a rapid and sustainable real convergence and a stable macroeconomic environment;
2.2. favourable conditions for business development and a successful implementation of
-
structural reforms;
2.3. a transparent public administration and a political consensus regarding the reforms to be
-
carried out;
2.4. improvement of fiscal discipline norms that ensure long-term sustainability of general
2
-
5.This Programme examines and assesses the preconditions for the achievement of the
economic policy goals. The economic development projections given are based on the assumption
that the demand for loans will be based on thorough knowledge of economic perspectives, thus it is
expected that the economy will reduce dependence on borrowed funds. The Programme has been
based on assumptions on euro exchange rate, prices of oil and other raw materials used by the
European Commission in the projections of economic indicators. Preconditions for the
implementation of this Programme have been defined by the Law on Fiscal Discipline of the
Republic of Lithuania (Valstyb÷s zinios (Official Gazette) No 120-4881, 2007) that sets forth that in
2008 general government sector deficit must not exceed 0.5% of gross domestic product
(hereinafter referred to as GDP), obligates over the medium term to pursue close-to-balanced or a
surplus general government, and provides numerical and procedural rules for the achievement of
that.
-
6.The national currency litas (hereinafter referred to as the litas) exchange rate pegged to
the euro under the currency board arrangement ensures that the average multi-annual inflation will
remain close to that in the euro area.
After the acceleration of inflation in 2007-2008 and with the stabilisation of oil and natural
gas prices in 2009 as well as with the harmonization of excises to the EU rates, inflation in
Lithuania will, over time, again come close to inflation in the euro area.
-
7.The growth of exports and investment remains on a fast track in Lithuania, with
unemployment going down at the highest pace among the EU states. Over the past six years (from
the second quarter of 2001 to the second quarter of 2007), the number of the employed has grown
by 12.4%. A rapid growth of investment will ensure Lithuania's competitiveness in the long run and
increase the import of investment goods and the current account deficit (hereinafter referred to as
the CAD) of Lithuania's balance of payments in the short run.
3
as well as maintain market confidence in the continuity of the commitment of an early integration of
Lithuania into the euro area.
Given the need to implement structural reforms securing productivity and the long-term
sustainability of government finances, and in the light of the rapid growth of GDP and the current
low level of debt, the medium-term objective - to achieve structural deficit below 1% of GDP
remains. For later periods, the MTO will be tightened to take into account the Commission's latest
estimates suggesting that general government debt will approach to 114% of GDP in 2050, unless
fiscal policy is tightened. Therefore, once major structural reforms have been completed, in 2009-
2010 the objective would be a structurally balanced or a surplus general government, depending on
the economic cycle and following the Law on Fiscal Discipline of the Republic of Lithuania.
-
11.Currently, Lithuania's possibilities to reduce fiscal deficit and general government
deficit more than expected are restricted by temporary budgetary difficulties associated with tax
reduction and necessity to save the present quality of education and health care. Fiscal discipline
will be maintained by applying numerical and procedural Lithuania's fiscal discipline rules set forth
in the Law on Fiscal Discipline of the Republic of Lithuania, reducing GDP share that consists of
government current expenditure and maintaining a higher share of social expenditure, close to 10%
of GDP. The successful implementation of the pension reform will pave the way for the reduction
of the national debt in the long run and will encourage private persons to save funds to supplement
their old-age pension. Tax revenues to be allocated in 2008 for the pension reform will account for
about 1% of GDP. The reduction of the rate of personal income tax which determines a balance
between labour and capital taxation will contribute to the successful implementation of the
objectives of the National Lisbon Strategy Implementation Programme, approved by Resolution
No. 1270 of 22 November 2005 (Valstyb÷s zinios (Official Gazette) No 139-5019, 2005), in the
labour market, to increase employment and potential GDP, and to mitigate the effects of an ageing
4
of pensioners and the decreasing number of employed people in the third decade as a result of the
low birth-rate and high emigration.
II. ECONOMIC OUTLOOK
Assumptions
-
13.The projections for Lithuania's economic indicators are based on recent economic
development trends and assumptions about economic growth.
Economic projections are based on the assumption that the Seimas of the Republic of
Lithuania, when passing legal acts regulating general government expenditures and tax rates, will
take into account the principal provisions of the Stability and Growth Pact and will further
collaborate with the Government of the Republic of Lithuania in implementing measures aimed at
stabilising inflation at below 3%. Law on Fiscal Discipline of the Republic of Lithuania and
political agreement on the implementation of education reform provisions reinforces confidence of
financial markets in long-term sustainability of general government finances, and contributes to
ensuring price stability in long-term perspective.
The key assumptions about the external economic environment in implementing the EU
fiscal monitoring procedure and in seeking to ensure the comparability of economic forecasts
correspond to the external environment assumptions published by the European Commission.
Table 1. Key assumptions
Indicator 2006 2007 2008 2009 2010
Short-term interest rates 3.7 5 4.6 4 4.9
5
Sources: Ministry of Finance, European Commission
GDP growth projections are particularly dependent on frequently and radically changing
credit increase projections made by commercial banks. As recent year experience shows that
commercial bank credit increase forecast used to be surpassed and credit increase in the first three
quarters of 2007 was 5.1 percentage point of GDP higher than a year ago; credit increase in the
fourth quarter of 2007 is also probable. Euro area interest rates increased by the European Central
Bank (hereinafter referred to as ECB) in the first half of 2007 provided liquidity sufficient for
economy stimulation, and the credit lending process of the second half of the year is predetermined
by previously concluded contracts. International financial market turbulences in August
strengthened assumptions made in early 2007 that a higher deceleration of credit increase is
assumed to start in 2008-2009, marking the start of a natural cyclical slow-down of GDP growth.
Globalisation-driven competition and possible changes in real estate prices will have no
effect on real production volumes only if labour force is flexible enough and manage to shift among
different sectors of the economy. Labour market flexibility may be achieved at the expense of
wages: in the medium term, competition intensified by globalisation and a credit change cycle in
certain sectors may prompt not only a slow-down of the growth of wages but also their reduction.
The assumption about labour market flexibility ensures that the rapid growth of average wages is
balanced with potential development divergences among sectors of the economy of Lithuania. If the
assumption of labour force flexibility proves false, employment will be lower and real GDP growth
will be slower.
A medium-term growth of economy is particularly dependant on the assumption that
business community will manage to meet financial markets expectations for a rapid and sustainable
approximation of Lithuania's productivity to the EU-average and to generate profits even with a
6
fiscal discipline standards may also manage interest risk spreads and create conditions for even and
fast economy development.
In case economic environment deviates from assumptions, projections of economic
indicators for 2007 2010 or projection outlook would be adjusted accordingly.
Monetary and exchange rate policy
-
14.Lithuania pursues monetary policy under the conditions of a fixed exchange rate for the
litas. Such exchange rate regime increases confidence in Lithuania's economic policy and together
with competitive economic environment allows pursuing relative long-term price stability.
Openness of the economy, relative flexibility of prices and wages, litas exchange rate importance
for the price stability are those features of Lithuania's economy that contribute to the successful
application of the fixed exchange rate strategy. By becoming a EU Member State Lithuania has
undertaken to replace the litas with the EU currency euro (hereinafter referred to as the euro).
Lithuania has been participating in the ERM II since 28 June 2004, by implementing a unilateral
commitment to maintain a fixed exchange rate regime and a fixed national currency exchange rate
vis-ŕ-vis the euro.
-
15.Lithuania's monetary and exchange rate policy goals remain unchanged. Lithuania will
further maintain a strictly fixed litas exchange rate vis-ŕ-vis the euro, and will seek to join the euro
area as soon as economic convergence criteria are met.
Lithuania's resolution to adopt the euro is supported by:
15.1. successful application of the fixed exchange rate and ability to withstand a shock
without changes of nominal exchange rate of the litas;
15.2. Lithuania has pegged the litas to the euro but it has not been gaining full advantage of
7
Goods and services markets
-
17.Lithuania's economy has been growing at a very high pace: Over 2006, real GDP has
grown by 7.7%, followed by a growth of as much as over 9% in three quarters of 2007. Domestic
demand remains the main driver of economic development, stimulated by intensive borrowing and
rapidly growing nominal income. Results of the first three quarters of 2007 confirm that the
slowdown in the economic development in the second half of 2006 was not related to the cooling of
the economy or return to the balanced growth. The negative impact of net exports on the economic
growth has intensified although clear signs of decreasing competitiveness are not visible.
Considering negative impact of high activity in oil refining, very high activity in construction and
construction maintenance, the economy growth in the recent quarters has mostly depended on the
growth of closed sectors.
A positive gap between the actual and potential GDP raises certain concerns related to a
growing tension in the labour market and an increasingly high impact of domestic demand on prices
and the current account deficit of the balance of payments of Lithuania. It is expected, however, that
a very rapid growth of domestic demand will slow down as the rate of growth of bank loans (which
seems to be quite inert) become more responsive to the continued tightening of monetary policies
by the ECB and uncertainty in the real estate market.
GDP growth was driven mainly by the growth of household consumption expenditure. The
empiric analysis confirms that private consumption in the country depends not only on the current
quarter but also on the income of approximately twelve months. In the recent four quarters nominal
wages have been rapidly growing (on the average 20% per year), while growth of net wages was
even more rapid after income tax rate was reduced in July 2006; employment has also been
reasonably growing, which rather increased household disposable income.
8
The still relatively favourable conditions of external financing of enterprises, high
profitability of investment projects and good financial situation of enterprises, EU financial support
to infrastructure and commercial projects determined that in the first half of 2007 the growth of
investment has risen considerably. In the first half year of 2007, the trend of rapid growth in the
investment into transport vehicles has emerged.
In the environment of high domestic demand and shortage of labour force, investments play
a particularly important role in promoting sustainable economic growth: they are expected to ensure
a growth of the economic potential and to avert the danger of economic "overheating". Effective
investments will be promoted by allocating EU structural funds support.
Real import growth exceeding export growth resulted in the increased negative impact of
export on GDP. The still increasingly growing import is mostly associated with much stronger
domestic demand, while disruption of oil refining activity had a temporary negative impact on
export. Relatively fast nominal export growth shows that a potential drop of competitiveness of
Lithuanian producers is still maintained irrespective of growing prices of raw materials and rising
labour demand in the market.
As a result of a negative impact of oil refining activity, manufacturing industry has been
slowly growing but the level of private sector economic activity stimulated by other types of
domestic demand kept rapidly raising. Construction has become the most important sector of the
economy growth, as due to very favourable weather conditions in early 2007 and an insignificant
impact of growing interest rates in 2007 its development was very fast.
Figure 2. Contributions to real GDP growth (production approach)
Percentage points %, year-on-year change
9
Future capacity of producers to satisfy the high domestic demand will largely depend on
sufficiency of labour force as one of the most important factors of production. In the past quarters,
labour market has been very dynamic, with the overall situation in the market being very tense. An
increasing number of vacant jobs and rising wages that outpaced efficiency gains evidence the lack
of labour. On the other hand, economically inactive population that enters into the labour market
due to rapidly growing wages and high pressure in the labour market in the second half of 2007 will
be an stimulus of the economy growth. The gap in the growth of wages between the private and
public sectors has become very wide. Owning to shortage of employees and declining share of
illegal wages, wages in the private sector have been growing well faster than in the public sector.
Sticking to the Lithuania's fiscal discipline rules set forth in the Law on Fiscal Discipline of
the Republic of Lithuania would in the medium-term mitigate risks related to internal and external
differences and would allow even development of the economy using relatively low interest.
The medium term economic growth will depend on the country's capacity to get prepared for
natural economic cycles in time and rationally. It is advisable to assessment of financial liquidity
and solvency indicators of both private and public sector ground not only on nominal values but
also on the temporary nature of the cyclical income spike.
Table 2. Macroeconomic prospects
2006 2006 2007 2008 2009 2010
ESA
rate of rate of rate of rate of rate of
10
-
11.External balance of goods and services B.11 -2 -6 -1,7 -1,6 -1,6
Stability of prices
-
18.In 2007, prices in Lithuania were increasing at a faster pace. In the first ten months of
2007, the average annual inflation measured on the basis of the Harmonised Index of Consumer
Prices (hereinafter referred to as HICP) reached 5.2%. Headline inflation accelerated mainly due to
increasing growth rates of prices on processed foodstuffs and services. With the prevalence of
imported manufactured goods in the consumer's basket, the impact of the increasing Lithuanian
producer prices on headline inflation remained limited.
In the first ten months of 2007, increased prices on food products accounted for nearly two
thirds of headline annual inflation. In the middle of 2007, prices on foodstuffs and beverages were
on average about 10% higher than a year before. During all this period, there was a marked increase
in prices on bread and cereal products, while in the second half of 2007, the prices on milk and meat
products saw a faster rise. Cigarette prices also went up as a result of increased excises on
cigarettes.
Figure 3. Annual HICP inflation and contributions*
percentage points%, annual change
6 6
55
44
33
11
prices in Lithuania with West European prices, the prices of agricultural products in Lithuania went
up by several dozen per cent. As wage costs constituted an almost fixed part in producer prices,
food prices were steadily increasing. The growing wage costs were also included in producer prices.
It is believed that a more significant increase of unit labour costs in the food production sector
started in 2007, which had an additional impact on food prices. Moreover, as production costs
increased and food producers maintained nearly stable profit margins, the absolute value of their
profit was also growing. This boosted food producer prices.
An analogous situation was also observed in the food trading sector, however, here, unlike
in the food production sector, the increase in consumer prices was largely driven by unit labour
costs, which had been rising already since the beginning of 2006. The increase in consumer prices
was also caused by growing trader profits.
The impact of administered prices on headline inflation in 2007 changed slightly. The
largest contribution to the growth in headline annual inflation came from raising heating prices
since autumn 2006 and electricity prices since the beginning of 2007. The rise in heating prices in
July-August 2007 in Vilnius and some other Lithuanian cities also caused a slight increase in
headline inflation. In August 2007, there was a small increase in headline inflation due to higher
prices on public transport services (in Kaunas and Panev÷zys).
Fig. 4. Impact of administered prices on headline annual
inflation
percentage points
1,2
1,0
0,8
12
in a decreasing negative annual change in fuel prices and their impact on headline annual inflation
in the first eight months of 2007, and later this impact changed to positive.
The impact of prices of manufactured goods on headline inflation also remained negligible.
Such price developments are mainly determined by changes in prices on imported goods, rather
than rising prices of Lithuanian producers. The price rise of manufactured goods of Lithuanian
producers is due to increasing prices on imported gas, other raw materials (e.g. timber) and wage
growth exceeding labour productivity growth; however, with the prevalence of imported goods
(excluding food products and liquid fuels) in the consumer's basket, there was no increase in
consumer prices of manufactured goods.
In the first ten months of 2007, the impact of prices of services on headline inflation was
steadily increasing from 1.3 percentage points to 2 percentage points, which showed the increasing
effect of aggregate demand on price change. The prices of market services have been for some time
greatly influenced by growing wage costs. Though labour productivity growth in the market
services has been increasing, the increase in the value added per employee has been substantially
lower than wage growth.
In the market services sector, the greatest impact on headline inflation in 2007 was caused
by the rising prices of restaurant, café and canteen services. The price increase of these services is
determined not only by high demand and growing wage costs, but also by higher food prices.
The average monthly gross earnings in the country have continued to grow rapidly as a
result of labour market tensions and other factors (administrative decisions, presumably declining
share of illegal earnings). The annual wage and salary growth in the third quarter of 2007 was
17.9% (19.9% in the third quarter of 2006).
Fig. 5. Change of wages and productivity in the market services sector
13
Table 3. Price indicators
ESA Rate of change, %
Indicator Level in 2006
code 2006 2007 2008 2009 2010
-
1.GDP deflator 114.3 6.6 6.1 6.7 3.2 2.3
-
2.Private consumption deflator 105.7 2.9 5.2 5.5 2.5 2.2
-
3.HICP (average annual change) 103.8 3.8 5.8 6.5 5.1 3.6
-
4.Public consumption deflator 119 14.5 9.3 9.4 4.9 3.9
-
5.Investment deflator 109.7 6 6.5 6.5 5 3.3
-
6.Export price deflator (goods and
services) 112 5.2 4.9 4.1 2 2.2
-
7.Import price deflator (goods and
services) 105 8 3.1 4.2 2.5 2.5
Sources: Statistics Lithuania, Ministry of Finance
In the medium term, the price increase for services will have a crucial impact on underlying
inflation, as increasingly expensive labour will account for an increasingly large share of the cost of
services, and the global competition and rapid development of production will continue to push the
prices of clothes, footwear and household appliances down.
The increased natural gas prices for regulated consumers and heat supplying enterprises may
cause an upsurge in inflation by 1.5 percentage points.
The exchange rate of the litas against the euro, fixed under the currency board arrangement,
14
Lithuania's labour market increasingly integrates into the EU single market, which makes it
possible to expect that labour market developments will be beneficial for employees.
Table 4. Labour market indicators
ESA Level in Rate of change, %
Indicator
code 2006
2006 2007 2008 2009 2010
-
1.Employment, persons (thou) 1499 1.7 2.3 0.3 0.1
-
2.Employment, hours worked 2757133 0.9
-
3.Unemployment rate (%) 5.6 4.5 5.2 6 5.9
-
4.Productivity (real GDP per person
employed) 47798 5.9 7.3 5 4.4 5.2
-
5.Labour productivity (real GDP per hour
worked), LTL 26.8 6.6
-
6.Compensation of employees, LTL million D.1 34966.8 18.9 23.2 19 7.6 7.2
-
7.Compensation per employee 23326.7 16.9 20.4 18.7 7.6 7.2
Sources: Statistics Lithuania, Ministry of Finance
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*Value of indicator is shown. Projections of the unemployment level for 2008 2010 are based on the
assumption that increasingly higher wages may enhance the activity of labour force and change migration flows; if the
activity of labour force and migration changed, unemployment, according to the recent trends, would stand at some
15
shift of labour force from less productive sectors of the economy to those which are currently very
active yet are affected by larger cyclical fluctuations (e.g. construction, real estate, trade).
Re-training and re-allocation of labour from low productivity sectors to higher productivity
sectors will become an important GDP growth factor capable of preventing a shortfall of labour in
the medium term.
Balance of Payments
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20.In 2007, the trend of a widening current account deficit of Lithuania's balance of
payments continued: in the first quarter it went up to 13.2% of GDP, while in the second quarter up
to 16.1% of GDP. According to the data for the second quarter, the four-quarter moving sum of the
CAD rose to 13.4% of GDP. Such development of external accounts essentially means that the net
financial flows from foreign trade and other current transfers are negative, large and tend to
increase, which in turn results in a rapid increase in foreign debt.
The balance of savings and investment shows that the growth of the CAD over the past two
years was also determined by growing investment, the annual moving sum of which went up to
28.3% of GDP (cf. 26.6% a year ago) as well as a decline in savings, the annual moving sum of
which fell to 14.9% of GDP (from 18.1% a year ago).
The development of the current account of the balance of payments of Lithuania greatly
depends on the lending policies of foreign banks. As foreign banks are being more cautious about
the economic prospects of the Baltic countries, the CAD is likely to fall, thus affecting GDP
growth.
Fig. 6. Components of the current account balance
16
The recent widening of the CAD has been mostly inspired by the increasing deficit of the
balance of goods, which, in the first half of 2007, was 45.3% above the figure for the corresponding
period in 2006. About a third of the annual growth of the balance of goods in the first half of 2007
as compared to the same period of 2006 is associated with the developments in oil refining activities
the interruption of oil supplies via the pipeline from Russia in July 2006 and the severe fire in the
oil refinery of AB "Mazeiki nafta" in October 2006 had a hugely detrimental impact on the
development of foreign trade. This impact is still felt today, though the situation in the sector is
gradually stabilizing. The total exports of petroleum products in the first half of 2007 were 47.3%
below the figure a year ago, while imports were 26.1% down. It is notable, that Lithuania is a net
importer of oil and the profit of foreign investors controlling AB "Mazeiki nafta" is essentially
treated as foreign direct investment (hereinafter referred to as FDI) inflows in Lithuania. Thus, oil
prices or the growth of earnings of AB "Mazeiki nafta" contribute to the increase in the CAD. In
the second quarter of 2007, the average oil price in litas was some 9% below the figure a year ago,
which had a positive effect on the development of the current account.
In the first half of 2007, the positive balance of services was decreasing and fell by 29.7% as
compared to the same period in 2006. This decline was mainly due to the decreased volume of
exports of intermediation services and worsened travel balance. The positive balance of transport
services, which is the main component of the services balance, declined only slightly. Over the
year, a substantial decrease in the import of pipeline transport services was partially offset by the
rise in import of sea transport services. Given a rapid growth of foreign trade, a significant increase
in the volume of rail and road transport (in both import and export of these services) was recorded.
The income balance was deteriorating during the first half of 2007 and stood 45% below the
figure a year ago. Although there was a moderate improvement of the balance of labour income,
17
2007, with investment in oil refining and other industries being intense, while in the second quarter
the FDI processes saw a slow down. Apart from the sale of the stocks of AB "Mazeiki nafta", the
reinvestment of profit earned by companies usually constituted the largest part of investment. In the
first half of the year, the FDI in Lithuania financed 42.2% of the CAD.
Fig. 7. FDI trends in Lithuania Fig. 8. FDI financing sources
%, four-quarter moving sums %, four-quarter moving sums
compared to GDP compared to GDP
8 8 30
6 6
20
4 4
10
2 2
-2 -10
2004 2005 2006 2007 -2
2004 2005 2006 2007
Other capital Capital account
Reinvestment Foreign direct investment
Share capital Investment portfolio
Other investment
FDI in Lithuania (right-hand scale)
Official international reserves
Errors and ommissions
CAD
Bank of Lithuania Bank of Lithuania
The net foreign borrowing of commercial banks remained the most important and stable
source of CAD financing: the net financial inflows to the commercial banking sector covered 62.5%
of the CAD in the first half of the year. Such large injections of financial resources into the
country's economy greatly encourage economic development; moreover, as these resources boost
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473.2 billion, or 2% of GDP. These repayments of loans are direct economic costs incurred by the
country's economy for the possibility to finance the current economic development with foreign
funds. To achieve stability in the administration of foreign debt, it is necessary to ensure continuous
refinancing flows from foreign banks whose strategic aim to enter Lithuania's financial market
directly or through their subsidiaries is an important risk-reducing factor.
In the first half of 2007 foreign trade grew rapidly. When compared to the same period of
the last year, the nominal export of goods has increased by 7,2 % and import by 15,6 %. Nominal
export of goods excluding trade in oil and oil products has increased by 33,4 % and import by
30,3 %.
Demand in raw materials backed by high activity of manufacturing industry encourages to
import intermediate goods of industry. In the first half of 2007 this resulted in the growth of
nominal import by 12,8 % or more than half of the total nominal import (excluding oil and oil
products). Since the year 2006 the direct impact of imported vehicles on the nominal import has
significantly increased, which accordingly was strengthened by increase in prices of imported
vehicles.
Rapid growth of export (excluding oil and oil products) is to the great extent related to the
intensive export of chemical industry as well as plastics industry products. Rate of vehicle export
growth is also very high, however, the impact on total export growth in 2007 has declined. Due to
differences between prices in Lithuania and in main export markets the export of production of
animal origin live animals, meat and milk is rapidly increasing: during ten months in 2007 such
export increased by 43 %. When Russia and Belarus, the main exporters of wood, increased custom
duties on exported produce, the demand for wood in other EU countries has increased. This resulted
in increased prices of wood and made positive impact on the nominal export of Lithuanian wood,
part of wood being exported to the EU countries.
19
Percentage points %, annual change Percentage points
45 45 35 %, annual change
35
4040 30 30
35 35
30 30 25 25
252520 20
20 20 15 15
15 15 10 10
10105 5
5 5
-5 -5 -5
2004 2005 2006 2007 -5
-10
2004 2005 2006 -10
2007
Food products Food products
Chemicals and plastics Chemicals and plastics
Wood and wooden Wood and wooden
Metals
Machinery and equipmentMetals
VehiclesMachinery and equipment
Other Vehicles
Import (right-hand scale) Other
Import, excl. mineral products (right-hand scale)Import, excl. mineral products (right-hand scale) Export (right-hand scale)
Export, excl. mineral products (right-hand scale) Export, excl. mineral products (right-hand scale)
Sources: Department of Statistics, Bank of Lithuania, Sources: Department of Statistics, Bank of Lithuania,
calculations of the Bank of Lithuania calculations of the Bank of Lithuania
In the end of the 2nd quarter of 2007 the real effective exchange rate of the litas was higher
by 1,3 % than a year ago. The real effective exchange rate of the litas increased vis-ŕ-vis trade
partners of the euro zone and the Commonwealth of Independent States, but declined vis-ŕ-vis the
new EU Member States (mainly because of higher inflation in the neighbouring Baltic states). The
effective exchange rate of the litas based on deflationary factor of export prices has increased by 2,1
20
the rest of the world
of which:
-
-balance of goods and services -10,4 -13,5 -14,2 -15,4 -16,3
-
-balance of primary incomes and -0,3 -0,5 -0,1 -0,6 -0,6
transfers*
-
-capital account* 1,2 1,5 1,6 1,5 1,5
-
2.Net lending/borrowing of the -8,9 -11,6 -12,2 -14,7 -16,2
private sector
-
3.Net lending/borrowing of the B.9N -0,6 -0,9 -0,5 0,2 0,8
general government
-
4.Statistical discrepancy
Sources: Ministry of Finance, *Bank of Lithuania
Risk related factors of economic development
-
21.In the medium and long-term the risk stems from the imbalances existing in the real
estate market of the country, potential correction of asset prices and a significant slowdown in the
growth of the national economy. The potential GDP growth will remain close to 6 %, however, the
existing risk factors may unnaturally retard economic growth in the medium-term and the future of
the economic sectors which have recently experienced a boom will depend on their flexibility with
regard to changes in real estate prices. The risk remains, especially in 2008, that the return of real
estate prices back to economically justified levels might slow down the GDP growth by several
percentage points. The presence of such a risk is supported by the start in the USA of the correction
of the real estate market that still is going on. The correction of the real estate market would allow
21
several percentage points. Growth of wages and nominal GDP could also be several percentage
points higher if credit growth went up rather than down.
-
25.If because of concerns about the state of regional economy the commercial banks will
change their credit supply policies too quickly, Lithuania's economic growth in the years of
correction would be several percentage points slower, but would subsequently come equal to the
high potential GDP growth.
-
26.Due to repair works at the Mazeikiai oil refinery in 2007 the Lithuania's total exports
experienced a sudden slowdown, but export of products of Lithuanian origin maintained its recent
stable nominal growth of 6-9 %. In case the supply of raw materials for the refinery will be restored
to the previous capacity, Lithuania's general export may significantly increase in 2008.
III. PUBLIC FINANCES
Strategy of financial policy
-
27.The medium-term objective is the reduction, by ensuring the implementation of
economic policy priorities, of the structural deficit down to 1 % GDP or below after 2008 and
further down in later years up to a structurally balanced deficit or structural surplus. Stricter fiscal
policy goals have been set in the light of faster-than-projected trends of nominal GDP growth and
committed limitation of expenditure growth as set by the Fiscal Discipline Law of the Republic of
Lithuania.
-
28.The medium-term fiscal policy (macroeconomic policy) will be geared towards the
implementation of the following priorities:
28.1 to match the fiscal policy with the priorities of social policy;
-
28.2 to continue the tax reform aimed at balancing labour and capital taxation;
22
28.8 to apply quasi-monetary measures, such as tax subsidies influencing demand of credits,
for the implementation of active monetary policy aiming to ensure stability of prices and acceptable
level of employment;
28.9 to rise confidence in sustainability of long-term finances of the general government and
improve the planning framework for the state budget of the Republic of Lithuania for a mid-term
period.
-
29.Seeking to maintain confidence in the currency board arrangement, Lithuania will, as
part of its fiscal policy, further create favourable conditions for improving labour efficiency,
improve tax administration, encourage investment, create favourable business environment and
ensure rational use of public funds allocated for investment. Any additional general government
revenue and unspent expenditure allocations will be used for the achievement of the fiscal deficit
objectives and for measures aimed at ensuring long-term sustainability of government finances.
Actions planned for 2008 to 2010 aimed for the implementation of fiscal deficit objectives
-
30.Once personal income tax reform has been implemented, i. e. a better balance is
achieved between capital and labour taxation, there will be better conditions to develop human
capital intensive industries and to implement Lisbon strategy goals in the labour market by
promoting job creation. Efforts will be made to ensure that the balance between labour and capital
taxation is achieved without increasing the fiscal deficit and that it creates conditions to enhance
business competitiveness.
In 2005 2007, Lithuania successfully mitigated negative effects of the shadow economy on
general government finances. In the mid-term, tax collection will continue to be further improved;
therefore, the structural revenue is expected to increase by more than 1,5 % of GDP in 2008; any
extra revenues will be used to achieve fiscal deficit targets. Taking account of present possibilities
23
31.1 measures for the implementation of fiscal deficit targets in the period of 2008 2010:
31.1.1 making further efforts to mitigate the adverse impact of the shadow economy on
general government finances and seeking to ensure that the planed increase of structural revenue by
more than 1,5 % of GDP in 2008 is outperformed at least by 0,3 % of GDP.;
31.1.2 seeking to ensure rational spending of general government expenditure;
-
31.1.3 using unspent expenditure allocations for the achievement of fiscal deficit target;
31.1.4 present to the Seimas of the Republic of Lithuania draft laws on the approval of
financial indicators of the state budget and municipal budgets of 2009 2011 implementing the
norms of Fiscal Discipline Law of the Republic of Lithuania that require to limit the increase of
expenditure to such an extent that fiscal deficit when compared with the pervious year improves at
least by 1 % of GDP or the expenditure increase of the state budget of the Republic of Lithuania
expressed in per cents is not higher than half of revenue increase during the previous five years
expressed in per cents;
31.1.5 solving the issue on the risk concerning the increase of fiscal deficit stemming from
renovation of residential houses by means of public and private sectors partnership or targeted
financing of international institutions; reducing the risk of fiscal deficit to the risk of temporary debt
increase;
31.1.6 reconsidering the principles for financing the health care system, determining (after
evaluation of purposefulness) independent source of financing that is independent of population
income tax;
31.1.7 preparing by the end of 2008 and presenting if necessary to the Seimas of the
Republic of Lithuania relevant proposals following the evaluation by the Government of the
Republic of Lithuania of the analysis of purposefulness of tax exemptions;
31.2 with a view to achieve long-term stability of prices in 2008, consider the possibilities to
24
Strengthening of fiscal discipline by improving the state budget medium-term planning
framework of the Republic of Lithuania
Overview
-
32.The Constitution of the Republic of Lithuania, the Organic Budget Law of the Republic
of Lithuania, the Law on State Debt of the Republic of Lithuania (Valstyb÷s zinios, (Official
Gazette) 1996, Nr. 86-2045; 2005, Nr. 83-3041), the Law on State Control of the Republic of
Lithuania (Valstyb÷s zinios, (Official Gazette) 1995, Nr. 51-1243; 2001, Nr. 112-4070), Treaty
establishing the EU, regulations of the Stability and Growth Pact, opinions of the Economic and
Financial Affairs Council of the EU and conclusions of the European Council as well as the Law on
Fiscal Discipline of the Republic of Lithuania help to ensure fiscal discipline in Lithuania.
The Law on Fiscal Discipline of the Republic of Lithuania supplemented the planning
framework for the state budget of the Republic of Lithuania by commitments that will allow to use
sound general government finances as means for strengthening conditions for price stability and
sustainable growth that are favourable for employment growth. The fact that fiscal discipline is
enshrined in the law strengthens confidence in effect of fixed rate of litas on long-term price
stability. Strict compliance with budget discipline (aiming at structurally balanced or surplus
general government finances) will allow the economy of Lithuania to overcome cyclic fluctuations
and to preserve deficit of the general government not exceeding 3 % of GDP.
The Law on Fiscal Discipline of the Republic of Lithuania lays down algorithm of fiscal
discipline that was formed taking account of the results of econometric study presented in the report
on public finance by the European Commission in 2007 (in English: EUROPEAN ECONOMY.
25
Republic of Lithuania submits it to the Seimas of the Republic of Lithuania. The second rule allows
to receive each year timely and clear advice of the economists concerning the implementation of
anti-cyclical fiscal policy in Lithuania taking account of the so called `indicator of potential
economic development'. The third rule lays down quantitative restrictions on expenditure: during
periods of rapid growth of economy and in cases when there are no other justifying circumstances
expenditure cannot be increased by more than half of long-term revenue increase expressed in per
cents. This rule performs the role of a sanction in those cases when a discrete optimal fiscal policy
is not implemented in time. The law sets a number of conditions for suspension the application of
the rules.
The operation of the fiscal discipline algorithm could be described in one sentence: in periods of
rapid growth the expenditure of general government grow slower than revenues; therefore, revenues
exceeds the expenditure in the long term ensuring the sustainable balance of the state budget of the
Republic of Lithuania; when forming the budget each year account is taken of suggestions of the
EU experts on the discrete optimal fiscal policy.
Goals and tasks when improving norms of fiscal discipline
-
33.Areas that need to be improved:
33.1 to make the norms for accountancy of indicators of the state budget of the Republic of
Lithuania stricter by applying as many principles of the European account standards ESS'95 as
possible; to reconsider the terminology of laws related to the definition of net borrowing of the
Government of the Republic of Lithuania taking account of the principles of the European account
system ESS'95.
33.2 to regulate the key parameters for macroeconomic indicators and budget revenue
planning ensuring to avoid over optimistic prognosis of budget revenue of the Republic of
26
-
35.It is foreseen to set in the laws the provision stating the rejection to provide in the name
of the Government of the Republic of Lithuania new state guarantees concerning loans used to
finance state investments.
-
36.It is foreseen to prepare draft laws of the Republic of Lithuania on preparation of the
budget that would include:
36.1 defined economic indicators that are considered to be tax bases for planning budget
revenues;
36.2 limits for maximum values used when planning economic indicators: maximum value
of potential GDP growth, maximum GDP deflator, maximum annual change of GDP share of
taxation bases expressed in percentage points;
36.3 limits for maximum elasticity of tax revenue in relation to taxation bases; budget
-
revenue should be planned only taking account of changes in taxation bases;
36.4 higher standards for submission to the Seimas of the Republic of Lithuania of
conclusions of the Government of the Republic of Lithuania necessary for the formation of optimal
discrete fiscal policy as prescribed in the Law on Fiscal Discipline of the Republic of Lithuania;
-
37.It is foreseen to prescribe that the Government of the Republic of Lithuania when
submitting the draft law on approval of financial indicators of the state budget of the Republic of
Lithuania and municipal budgets of a certain year to the Seimas of Republic of Lithuania should
submit information prescribed in the Law on Fiscal Discipline of the Republic of Lithuania that is
necessary for the formation of optimal discrete fiscal policy in a medium-term that included:
37.1 description of key corrections necessary for calculation of general government deficit
on the basis of the European account standards ESS'95 and list of possible divergences, that could
appear due to assessed fiscal risk;
37.2 proposed medium-term structural deficits of the general government calculated on the
27
40.2 it is expected that in the context of further rapid economy growth the structural fiscal
deficit will decline by more than 0,5 % of GDP each year until the medium-term goal to achieve
structural balanced budget is reached.
-
41.The results of the long-term period:
41.1 more favourable evaluation of international institutions for finance supervision;
41.2. better credit ratings granted to Lithuania by international credit rating institutions,
-
more favourable interest rates, a more stable tax revenues;
41.3. created preconditions for stable improvement of the living standards;
41.4. building stronger preconditions for price stability and rapid and sustainable economic
growth that increases employment;
41.5. a more successful implementation of the fiscal policy ensuring long-term sustainability
-
of national public finances;
41.6. stronger convergence: catching up with other EU members, ensuring the stability of
the prices and finances of the general government; preparation for full membership in the European
Monetary Union.
41.7. increasing confidence in the effect of the fixed exchange rate of the litas on long-term
stability of prices.
Implications of the budget on medium-term goals
-
42.The rapid development of the Lithuanian economy is a proof that the fiscal policy
pursued has helped to win confidence of local and foreign investors.
28
2006 2007 2008 2009 2010
Net lending (EDP B.9) by sub-sector
-
1.General government S.13 -483 -0.6 -0.9 -0.5 0.2 0.8
-
2.Central government S.1311 -755.3 -0.9 -0.9 -0.5 0.2 0.8
-
3.State government S.1312 N.A. N.A. N.A. N.A. N.A. N.A.
-
4.Local government S.1313 -288.5 -0.4 -0.1
-
5.Social security funds S.1314 560.8 0.7 0.1
General government (S13)
-
6.Total revenue TR 27396.9 33.4 35.5 37.4 38.6 39.4
-
7.Total expenditure TE 27879.9 34 36.4 37.9 38.5 38.6
-
8.Net lending/borrowing EDP B.9 -483 -0.6 -0.9 -0.5 0.2 0.8
-
9.Interest expenditure EDP D.41 613.1 0.7 0.8 0.8 0.7 0.6
-
10.Primary balance 130.1 0.2 -0.1 0.3 0.9 1.4
-
11.One-off and other temporary
measures -0.6
Selected components of revenue
-
12.Total taxes
(12=12a+12b+12c) 17138.6 20.9 21.7 23.4 23.6 23.7
12a. Taxes on productions and imports D.2 9194.8 11.2 12 13.6 13.5 13.5
12b. Current taxes on income, wealth, etc D.5 7939.6 9.7 9.7 9.8 10.2 10.2
29
Level in % of GDP
ESA code 2006 (LTL
million) 2006 2007 2008 2009 2010
-
18.Social payments (18=18a+18b) 8158.2 10 10.8 11.9 12.4 12.3
18a. Social transfers in kind supplied via D.6311,
market producers D.63121,
D.63131 1124.5 1.4 1.4 1.5 1.6 1.5
18b. Social transfers other than in kind D.62 7033.7 8.6 9.4 10. 4 10.8 10.7
19=9. Interest expenditure EDP
D.41 613.1 0.7 0.8 0.8 0.7 0.6
-
20.Subsidies D.3 584.7 0.7 0.8 0.8 0.7 0.7
-
21.Gross fixed capital formation** P.51 3408.5 4.2 4.5 5.1 5.3 5.3
-
22.Other 2174.2 2.7 3.8 3.1 3.2 3.3
23=7. Total expenditure TE 27879.9 34 36.4 37.9 38.5 38.6
p.m.: Government consumption
(nominal) P.3 14779.5 18 17.9 18.3 18.3 18.4
Sources: Statistics Lithuania, Ministry of Finance
-
*Due to rounding, the sum of revenue and expenditure components may be different from the amounts given
under "total revenue" and "total expenditure".
In the medium term, general government revenue (as a percentage of GDP) will grow:
30
went up 0.6 percentage points of GDP. The commitment under the Stability and Growth Pact to
reduce the structural deficit by approximately 0.5 percentage points of GDP annually does not
affect the plans to improve government finances. Gross fixed capital formation is expected to grow,
owing to the absorption of EU support, from 4.2% of GDP in 2006 to 5.3% of GDP in 2010.
The Law on Fiscal Discipline of the Republic of Lithuania imposes an obligation for the
medium-term to limit the increase of the national budget expenditure of the Republic of Lithuania.
Consistent implementation of the provisions of the Law on Fiscal Discipline of the Republic of
Lithuania would make it possible to maintain a small share of the general government expenditure in the
GDP. The implementation of the projects approved is expected to increase social expenditure from 10%
of GDP in 2006 to more than 12% of GDP in 2010.
Successful implementation of the pension reform will make it possible to prepare for the
reduction of government debt projected for 2050 and encourage private persons to individually save
funds for the old-age pension. Tax revenues to be allocated in 2008 for the pension reform will
settle at 1 percentage point of GDP.
Growing support for agriculture and implementation of the tax and pension reforms call for
additional funds. To be able to reach medium-term general government fiscal deficit objectives,
collective consumption expenditure will have to be cut from 7.7% of GDP in 2006 to 7% of GDP in
2010. Support to agricultural entities financed from national resources in 2007 will be increased by
0.1% of GDP compared with 2006, to account for over 0.8% of GDP.
Borrowings for repayments under previous commitments will increase interest expenditure
from 0.7% of GDP in 2006 to 0.8% of GDP in 2007-2008.
-
44.One-off and short-term measures. The Law on the Payment of a Part of the State Social
Insurance Pensions of Retirement and Disability of the Republic of Lithuania of 6 November 2007
(Valstyb÷s zinios (Official Gazette) No 120-4880, 2007) provides that all the persons who were
31
Despite better-than-planned collection of municipal revenues in 2006 owing to better tax
administration and faster growth of wages and employment, the overall local government subsector
balance ran deficit. In 2006, local government subsector deficit was below 0.4% of GDP. In the
medium term, a close-to-balance local government subsector balance is projected in accordance
with the Organic Budget Law of the Republic of Lithuania.
As a result of the structural and tax reforms carried out in recent years, the total general
government deficit consisted of the central government subsector deficit, which accounted for 0.9% of
GDP in 2005. In part, it resulted from the subsidies transferred to the social insurance funds subsector:
0.3% of GDP was transferred in 2006, and the plan for 2007 is to transfer 0.4% of GDP.
Owing to growing social payments and decreasing central government subsector subsidies,
the surplus of the State Social Insurance Fund will decrease in 2008; however, the growth of
employment and wages promises larger social contributions.
A reduction of the central government subsector deficit in 2008-2010 will mean a reduction
of the total general government deficit in the medium term.
Table 10 shows the reduction of general government structural deficit until achieving
structural balanced budget (by about 0.4% of GDP annually) in the period 2007-2010.
Structural deficit and continuity of fiscal policy
-
46.The cyclically-adjusted general government deficit, which amounted to 0.9% of GDP in
2006, is expected to temporarily depart from the medium-term target because of the payment of
unpaid pensions to working pensioners, which should be followed, however, by a substantial
structural improvement of the condition of the general government finances in 2009-2010. The
32
unemployment, which, under the NAIRU approach, might be treated as permanent. Second, the
European single labour market will affect cyclical fluctuations of employment: integration will
reduce cyclical unemployment as a part of unemployed people may choose emigration. Cyclical
unemployment might develop into permanent reduction of labour force.
Table 7. Cyclical developments
ESA
% of GDP 2006 2007 2008 2009 2010
code
-
1.Real GDP growth, % 7.7 9.8 5.3 4.5 5.2
-
2.Net lending (+)/borrowing (-) of general EDP
-0.6 -0.9 -0.5 0.2 0.8
government B.9
-
3.Interest expenditure EDP
0.7 0.8 0.8 0.7 0.6
D.41
-
4.One-off and other temporary measures* -0.59
-
5.Potential GDP growth, % 7.2 7 6.6 6.3 5.9
of which:
labour N.A. N.A. N.A. N.A. N.A.
capital N.A. N.A. N.A. N.A. N.A.
total factor productivity N.A. N.A. N.A. N.A. N.A.
-
6.output gap 1.1 3.8 2.4 0.7
33
taxes with respect to tax bases. If the risk is realized, the errors of the structural deficit calculated
using the two approaches may be more than one percentage point.
In the period 1995-2003, only one-third of the cyclical GDP fluctuation would turn into
general government deficit. This feature of general government finances can be explained by a low
elasticity of revenues in the presence of GDP fluctuations and a historically very low level of
expenditure associated with unemployment in Lithuania.
Relying on the actual quarterly figures of general government budget revenues for the period
1995-2002 (period of observation is 7 years), elasticity was estimated for customs duties, value
added tax, excise, personal and corporate income taxes, and current expenditure.
Table 8. Elasticity of the Lithuanian general government budgetary revenues
ESA'95 code Cyclical elasticity values
-
1.D.212 Duties 0.84
-
2.D.211 VAT 0.97
-
3.D.214 Excises 1.36
of which:
alcohol 1.09
tobacco
fuel 1.57
34
Debt levels and developments
-
48.General government debt has been continuously decreasing in recent years to account
for 18.2% of GDP at the end of 2006.
Government borrowing volumes are strictly regulated by annual laws on the approval of
financial indicators of the state budget and municipal budgets, which set annual limits on the net
borrowing by the Government of the Republic of Lithuania, on municipal borrowing and on
government-guaranteed liabilities of guarantee-issuing institutions
The largest part of the general government debt consists of central government debt (about
95%), whereas the municipal and social insurance funds' debts account for about 5%.
The central government debt has a rather conservative structure: 15% of the total debt
consists of short-term liabilities (by outstanding maturity), and 1% consists of the floating interest
rate debt. The central government debt is 100% denominated in the litas and the euro. This structure
of the debt portfolio poses low risks on public finances.
-
49.The key objective of the medium-term government debt management policy is to finance
the Government borrowing requirement, as laid down in the laws of the Republic of Lithuania, at
the lowest possible cost and with acceptable risk in the medium term, without exceeding the limits
placed on government debt and on new borrowing and in line with the requirements imposed on the
EU Member States seeking to adopt the euro.
Table 9. General government debt projections
% of GDP
35
% of GDP
Indicator
2006 2007 2008 2009 2010
-
6.Liquid financial assets 14.6 - - - -
-
7.Net financial debt (7=1-6) 3.6 - - - -
Source: Ministry of Finance
-
*Calculated as the difference between the general government debt change and primary balance.
-
50.The borrowing strategy of the Government of the Republic of Lithuania in 2007 has not
changed from that in 2006.
The largest share of the Government's borrowing requirement will consist of the repayment
of foreign and domestic debt, cash flow management and state budget deficit financing.
-
51.In the medium term, the Government envisages implementing the following borrowing
policy measures:
51.1. financing the Government's borrowing requirement in the litas and the euro or other
currencies to be converted to the litas or the euro using derivatives;
51.2. gradually reducing debt liabilities undertaken on behalf of the state and denominated in
those foreign currencies the fluctuations of which vis-ŕ-vis the litas and the euro might cause
adverse fluctuations in debt servicing costs;
51.3. financing the Government's borrowing requirement mainly by issuing Government
-
Securities (hereinafter referred to as "GS") on the domestic and foreign markets;
51.4. consolidating GS to be issued both domestically and on foreign markets into large
-
issues, thus enhancing their liquidity;
36
GDP on average over 2007-2010. The required additional financial resources may be available
through better tax administration and the implementation of expenditure limitation rules.
Table 10. General government structural and cyclical fiscal deficit projections
% of GDP
Indicator
2006 2007 2008 2009 2010
-
1.General government fiscal deficit target -0.6 -0.9 -0.5 0.2 0.8
-
2.Temporary revenues owing to economic cycle (-) 0.33 1.18 0.77 0.22
-
3.Fiscal deficit, taking into account the temporary revenues
owing to economic cycle -0.92 -2.09 -1.23 0,8
-
4.Co-financing requirement 0.47 0.5 0.8 0.81 0.53
-
5.Pension repayment 0,59
-
6.Pension reform 0.65 0,9 1 1,1 1,1
-
7.Structural deficit less pension repayment to working
pensioners, structural reform expenditure, co-financing
requirement, and loss of revenue or temporary revenue.
-0.3 -0.6 -0.3 1 1.9
-
8.Structural measures implemented annually in general
government to fulfil the commitments under the Stability and
37
between the demand and the medium-term output potential. If this is the case, GDP, prices, and
wages will grow faster than estimated, to be followed by a faster cyclical slowdown.
The increase of credit levels has reached a magnitude when the utilization of EU financial
support is no longer an adequate means of fully compensating cyclical fluctuations of economy;
therefore, the continuity of setting prudent general government fiscal objectives and their consistent
implementation is a very important economic risk management factor. It seems likely that in the
event of sudden external balancing of Lithuania's economy or disinflationary processes, the
revenues share will decrease by more than one percentage point of GDP.
In the middle term, strict adherence to fiscal discipline will mitigate a risk rising from CAD,
will lead to the balanced development of economic potential by using relatively low interest and
establish conditions for consideration of additional structural measures for economic risk
management. If financial markets assessed the impact of Lithuanian fiscal discipline rules on the
public finances as insufficient, high interest rates in Lithuania would stay for a few years even if the
major central banks started reducing interest rates worldwide.
-
56.If concerns voiced about the likely correction in neighbouring economies proved true
and commercial banks changed their credit supply policies too quickly, Lithuania's economic
growth in the years of correction would be several percentage points slower, but, in the long run,
would come equal to the rapid potential GDP growth. In times of unexpected slowdowns of GDP
growth, increase of nominal fiscal deficit in the presence of favourable borrowing conditions and
without prejudice to the provisions of the Stability and Growth Pact could be possibly used as an
economic stabiliser. Nominal GDP growth might also be slowed down by several percentage points
due to a return of real estate prices back to economically justified levels.
A risk of strong cyclical fluctuations is inherent not only in the acceleration of annual credit
increase up to 15% of GDP but also in unexpected, sharp and too fast slowdown of credit increase
38
-
57.The major projected sources of fiscal risk include deposit insurance, restitution of real
estate ownership rights, debt of state-owned enterprises, decommissioning of the Ignalina Nuclear
Power Plant (hereinafter referred to as Ignalina NPP).
Financial commitments in regard to housing renovation, energy supply plans following the
closedown of the Ignalina NPP, Lithuania's obligations and commitments in regard to the increased
costs of partially EU-financed plans are increasingly becoming new sources of financial risk.
According to preliminary estimates, the housing renovation programme might entail the financial
resources of the government sector that make up to 6% of GDP. Preliminary estimates forecast that
some energy supply alternatives could make up to 30% of GDP in terms of general (private and
government sector) financial resources.
The risk of the fiscal deficit growing due to housing renovation or energy supply continuity
projects will be addressed by applying private-public partnership, therefore, the risk of the fiscal
deficit might be reduced to the provisional risk of the growth of public debt. Also, this risk can be
partially managed by utilising finance limits and targeted financing of international institutions.
In the medium term, Lithuanian financial commitments owing to the increased cost of EU
partially funded projects will entail up to 0.6% of GDP in terms of additional national sources; to
this end, the utilisation of these funds may results in some corrections to the fiscal deficit targets set
for the 2008-2010 period. To ensure better efficiency while using EU financial support in 2008,
more national funding than originally planned will be necessary, accordingly, this fact will increase
fiscal deficit by few percentage points of GDP.
The 2008 Law on Approval of Financial Indicators of the State Budget and Municipal
Budgets of the Republic of Lithuanian provides for financing from the Privatisation Fund in the
amount of 0.4% GDP; those funds may be allocated by the Resolutions of the Government of the
Republic of Lithuania. The financial general government projections for 2008 were made on the
39
Government allocations for restoration of savings amounted to LTL 223.8m in 2006, LTL 1135m in
2007, and will amount to LTL 267.6m in 2008.
-
60.Restitution of real estate ownership rights.
In 2006, total payments made from the national budget of the Republic of Lithuania for the
land, forest area and bodies of water repurchased by the state amounted to LTL 137m. In 2007,
budget allocations for compensation totalled LTL 171m.
The financing requirement for compensation to be paid for the land, forest area and bodies
of water repurchased by the state will total LTL 175.3m in 2008. As provided in Article 7 of the
Law of the Republic of Lithuania on the Amounts, Sources, Terms and Procedure for Payment of
Compensation for Real Estate which is Repurchased by the State as well as on Government
Guarantees and Privileges Provided in the Law on the Restoration of the Rights of Ownership of
Citizens to Existing Real Estate (Valstyb÷s zinios (Official Gazette) No 61-1728, 1998; No 102-
4582, 2003) compensation for the land, forest area and bodies of water repurchased by the state
must be paid by 1 January 2009.
In 2006, budget allocations of the Republic of Lithuania for the restoration of ownership
rights to citizens for surviving residential houses, parts thereof or apartments, and for
compensations to be paid to religious communities for the real estate repurchased by the state
totalled LTL 200m., and, in 2007, amounted to LTL 72m.
The financing requirement for the restoration of ownership rights to citizens for surviving
residential houses, parts thereof or apartments, and for compensations to be paid to religious
communities for the real estate repurchased by the state will total LTL 215m in 2008. As provided
in Article 7.11 of the Law of the Republic of Lithuania on the Amounts, Sources, Terms and
Procedure for Payment of Compensation for Real Estate which is Repurchased by the State as well
as on Government Guarantees and Privileges Provided in the Law on the Restoration of the Rights
40
budget of the Ignalina NPP Decommissioning Fund total LTL 52.5m (0.1% of GDP) for 2006, LTL
59m (0.1% of GDP) for 2007, and 66.15m (0.1% of GDP) for 2006.
Under the Treaty of Accession Protocol No. 4 EU allocated LTL 1100.5m (EUR 319m)
during the period of 2004 2006; this sum being committed in equal annual tranches. According to
the data of the Ministry of Economy, the amount of LTL 372.9 (EUR 108m) was earmarked for
2006.
To that end, Lithuania should receive LTL 2891.3m (EUR 837.4m) in current prices within
the new EU Financial Perspective for 2007-2013:
LTL 390.2m (EUR 113.02 m) in 2007;
-
LTL 394.3m (EUR 114.2 m) in 2008;
-
LTL 402.2m (EUR 116.5m) in 2009;
LTL 413.9m (EUR 119.9m) in 2010.
-
62.Government guarantees. No new government guarantees have been extended since
2003, except where they were needed for the repayment of the existing government-guaranteed
loans.
As of 31 August 2007, government-guaranteed loan portfolio accounted for about 1% of
GDP projected for 2007. This figure is expected to remain at 1% of GDP over the medium term.
-
63.On-lending of the loans taken on behalf of the state and government-guaranteed loans.
With a view to improving credit risk management, loans issued or guaranteed by the state are
classified into 5 risk groups (in line with commercial banking practices). The risk group is
determined on the basis of the borrower's performance assessed with reference to the regularity of
repayments, instances of debt restructuring or refinancing, the borrower's financial and economic
position, and the actual implementation of investment projects.
As of 30 June 2007, borrowers of the fifth risk group collectively had LTL 190.062m worth
41
Table 11. Change in GDP, general government deficit and general government debt projections
compared to the Convergence Programme of Lithuania of 2007
ESA`95 % of GDP
Indicator
code 2006 2007 2008 2009 2010
Real GDP growth
Previous update 7.8 6.3 5.3 4.5 N.A.
Current update 7.7 9.8 5.3 4.5 5.2
Difference -0.1 3.5 N.A.
General government net lending(+)/borrowing(-)
(% of GDP) EDP B.9
Previous update -1.2 -0.9 -0.5 N.A.
Current update -0.6 -0.9 -0.5 0.2 0.8
Difference 0.6 0.2 N.A.
General government gross debt (% of GDP)
Previous update 18.4 19.2 19 17.7 N.A.
Current update 18.2 17.6 17.2 15 14
Difference -0.2 -1.6 -1.8 -2.7 N.A.
Sources: Statistics Lithuania, Ministry of Finance
V. QUALITY OF GENERAL GOVERNMENT FINANCES
42
June 2002 of the Government of the Republic of Lithuania (Valstyb÷s zinios (Official Gazette) No
57-2312, 2002; No 23-879, 2007). The systemic planning of the specific institution's performance
related with funding allows analysis and evaluation of the institution as a system for the
achievement of goals set, its guidance on result-oriented activity and more rational distribution of
financial, material and work resources.
It is worth noting that the setting of performance priorities of institutions and organisations
during the period 2001-2007 has picked up speed; institutions have adopted a three-level
assessment criteria system that clearly shows not only services rendered or performance records, but
also implementation of strategic and programme goals.
The development of evaluation criteria for the performance of budgetary institutions creates
conditions for moving on to qualitatively new opportunities of evaluating goals set, programme
implementation results as well as better assessing the expedience of utilisation of funds for public to
meet public needs. Interior audit offices, with account assessment criteria being available, have
good possibilities to analyze the situation, evaluate risks, forecast possible problems, to present
conclusions on the financial and administrative performance of the relevant institution. Information
on evaluation criteria makes it possible to decide whether the programmes are efficient, if they are
to be continued or if it is expedient to use of budgetary funds for public needs.
The survey of appropriations managers carried out by the National Audit Office in early
2007 show that: 78% of those questioned think the setting of performance priorities of government
institutions and organisations and following thereof have improved; 72% think that accountability
for performance has also improved; 59% think activity funding has become clearer, and 69% think
performance has become more result-oriented.
With a view to introducing further improvements of the planning and audit system of state
budget allocations of the Republic of Lithuania, the measure plan was drafted; it was approved by
43
Table 12. General government expenditure by function
% of GDP
Indicator COFOG Code
2005 2010
-
1.General public services 01 4.4
-
2.Defence 02 1.4
-
3.Public order and safety 03 1.8
-
4.Economic affairs 04 3.6
-
5.Environmental protection 05 0.6
-
6.Housing and community amenities 06 0.3
-
7.Health 07 4.3
-
8.Recreation, culture and religion 08 1
-
9.Education 09 5.5
-
10.Social protection 10 10.5
-
11.Total expenditure 33.5 38.6
Sources: Statistics Lithuania, Ministry of Finance
General government expenditure
44
67.1. improving welfare of the population, strengthening family values, reducing poverty
and social exclusion, enhancing good-quality employment, ensuring healthy and safe living
environment, seeking further rural economic and social development;
67.2. enhancing productivity in all sectors of the economy, developing economic
-
infrastructure, creating favourable business climate, and strengthening economic security;
67.3. promoting scientific and technological progress in the country, developing information
-
and knowledge society, improving financing of education, culture, science, and health-care;
67.4. strengthening public administration and self-governance, ensuring public order,
-
improving performance in the legal system, seeking to curb corruption;
67.5. seeking to become a full member of the Economic and Monetary Union as early as
-
possible, and integrating into the Schengen area;
67.6. pursuing a coordinated foreign policy, actively participating in the European Union's
activities, and developing the national defence system as part of NATO's collective security and
defence system.
-
68.With a view to ensuring a more efficient use of EU support, the 2008 Law on Approval
of Financial Indicators of the State Budget and Municipal Budgets authorises the Government of the
Republic of Lithuania, or another institution authorised by the Government, to reallocate EU
support and national co-financing designated for programmes and projects as well as funds
designated for paying value added tax under these programmes and projects, also other expenditure
related to these projects and provided for in legal acts, among appropriations managers, areas of
investment and items of economic classification. Moreover, the above law also provides that
temporarily idle EU financial support funds may be employed, with an obligation to pay them back,
to finance the budgetary needs of the Republic of Lithuania, thereby ensuring timely financing by
the Republic of Lithuania of EU financial support special programmes.
45
79/3-99 of 20 February 2004 of the Ministers of Finance, Environment, and Transport and
Communications (Valstyb÷s zinios (Official Gazette) No 33-1071, 2004). The EU Structural Funds
and the Cohesion Fund, as financial instruments of EU structural policy, are employed to co-finance
priority projects in the EU Member States. Lithuania's Single Programming Document for 2004-
2006 defines the strategy, priorities and measures for the use of EU Structural Funds and the
respective national co-financing, and the Cohesion Fund Strategy for 2004-2006 defines the
strategy for the use of the Cohesion Fund and the respective national co-financing as well as the
projects financed.
The Government of the Republic of Lithuania also drafts a policy paper about Lithuania's
strategy for 2007-2013 for the use of EU structural support which sets goals and priorities of the use
of structural support, in line with strategic guidelines of the European Community Cohesion Fund,
European Community priorities and national policy priorities.
The National Strategy for 2007-2013 consists of four Action Programmes: the Human
Resources Development, Economic Growth, Cohesion Promotion and Technical Assistance. The
Economic Growth Action Programme was endorsed by the Decision of the European Commission
No K(2007)3740 of 30 July 2007, adopting action programme "Economic Growth" regarding EC
funding from the European Regional Development Fund and the Cohesion Fund under the
convergence objective in the Republic of Lithuania; the Cohesion Promotion Action Programme
was endorsed by the Decision of the European Commission No K(2007)3738 of 30 July 2007,
adopting action programme "Cohesion Promotion" regarding funding from the European Regional
Development Fund and the Cohesion Fund under the convergence objective in the Republic of
Lithuania; The Human Resources Development programme was endorsed by the Decision of the
European Commission No K(2007)4475 of 24 September 2007, adopting action programme
regarding funding from the European Social Fund under the convergence objective in the Republic
46
-
70.Public financial management is continuously improved according to the methodology
applied by EU Member States in the area of public finance accounting and assessment of financial
performance and forecasting, by upgrading technical base and enhancing labour skills.
Budgetary resources continue to be tuned up to EU funding.
It is envisaged that unused planned government expenditure should be used for fiscal deficit
decreasing.
Government revenue
Tax reform
-
71.Originally, the tax reform was carried out in accordance with the tax policy provisions of
the Government Action Programme 2004 2008, approved by Resolution No X-43 of 14 December
2004 of the Seimas of the Republic of Lithuania (Valstyb÷s Zinios (Official Gazette) No 181-6703,
2004). Currently, the reform is subject to the respective provisions of the Government Action
Programme 2006 2008.
-
72.To gradually reduce personal income tax (PIT) burden, achieve better balance between
labour and capital taxation, cut on labour costs, and create more favourable conditions for the
growth of competitiveness, the PIT rate was reduced from 33% to 27%, coming into effect as of 1
July 2006. The first of January 2008 will see a further PIT reduction to 24%. Due to PIT reform, the
government budgetary revenues fell short by LTL 490 m (0.6% of GDP) in 2006. In 2007, the
reduction of PIT to 27% will translate into the budget revenue loss of LTL 1264 m (1.3% of GDP),
while a further reduction of PIT to 24% in 2008 is to cut the government budget revenues by LTL
47
owned by other company was established on 19 October 2006 in pursuance of the Law of the
Republic of Lithuania on Corporate Income Tax (Valstyb÷s zinios (Official Gazette) No 110-3992,
2001): with effect from 1 January 2007, income received from transfer of shares held by a company
which controls for an uninterrupted period of at least 2 years 25% of voting shares at another
company which pays corporate or equivalent tax and is established in a state inside the European
Economic area or a state which is a party to Double Taxation Avoidance Agreement, will be tax
exempt.
The Government of the Republic of Lithuania by Resolution No 1176 of 31 October 2007
on the submission to the Seimas of the Republic of Lithuania of Draft Law Amending Articles 2, 5,
12, 13, 17, 18, 21, 22, 23, 26, 28, 30, 31, 381, 47, 50 and Supplementing Annex 3 of the Law of the
Republic of Lithuania on Corporate Income Tax and the Draft Law Amending Articles 2, 5, 6, 17,
24, 27, 30, 31, 32, 33, 36 and Amending and Supplementing Annex of the Law on Personal Income
Tax (Valstyb÷s zinios (Official Gazette) No 116-4746, 2007), approved and submitted to the Seimas
the Draft Law Amending and Supplementing the Law of the Republic of Lithuania on Corporate
Income Tax, in an attempt to simplify recognition of allowable deductions reducing taxable profit
and alleviate administrative burden as regards relevant regulation. Also, with a view to providing
more favourable conditions for running small business, the said draft law proposes a higher
corporate income limit which, if not exceeded, does not incur an obligation of advance income tax
payment. Furthermore, the draft law seeks that certain income received by a non-profit entity from
activities aimed at serving public interest should not be attributed to the category of income
received from economic-commercial activities.
Furthermore, to further encourage companies to additionally invest in R&D aimed at
creation of new materials and technologies which should generate high added value, the
Government of Lithuania, by Resolution No 1347 of 17 December 2007, approved the Draft Law
48
payable by legal persons on their taxable profits as calculated in the manner prescribed in the Law of
the Republic of Lithuania on Corporate Income Tax, at the rate of 4% for the tax reference year 2006
and 3% for the tax reference year 2007. In 2006, this tax contributed with revenues of LTL 365.5 m.,
in 2007, it is projected to generate LTL 470 m, while in 2008, LTL 44.6 m.
-
75.The Law of the Republic of Lithuania on Real Estate Tax (Valstyb÷s zinios (Official
Gazette) No 76-2741, 2005) aims at establishing a sustainable real estate taxation system, with
effect from 1 January 2006, providing equal business conditions for commercial-economic entities,
i.e. expands the real estate tax base to cover not only real estate owned by legal entities, but also
real estate owned by natural persons and used for commercial-economic purposes, also real estate
put to the disposal of legal persons for an unlimited period or for a period exceeding one month.
This has brought additional governmental budgetary revenue of LTL 20 m.
The new Law on Real Estate Tax has enabled application of principles of property valuation
for tax purposes operative in the international real estate taxation market: i.e. real estate taxable
value is the average market value of the property, as established by way of mass valuation (except
specific cases).
However, having regard to the fact that taxable value of property in attractive regions has
increased following the application of the universally acclaimed methods of property valuation for
tax purposes, and aiming at continuous encouragement of municipal financial independence, the
Law Amending Articles 6, 8 and 15 of the Law on Real Estate Tax (Valstyb÷s zinios (Official
Gazette) No 65-2384, 2006) was adopted on 25 May 2006, establishing a transition period allowing
for gradual approximation (through application of value reduction factor) of tax base for immovable
property with new taxable value, and enabling municipal councils to set specific rate of real estate
tax, within the range prescribed by the Law (from 0.3% to 1% of the taxable value of the real estate
49
Furthermore, with a view to implementing the Council Directive 2004/74/EC of 29 April
2004 amending Directive 2003/96/EC as regards the possibility for certain Member States to apply,
in respect to energy products and electricity, temporary exemptions or reductions in the levels of
taxation (OJ Special Edition, 2004, Volume 02, Chapter 09, p. 16), as of 1 January 2008, in
Lithuania, excise rate on petrol has to be at least EUR 323, diesel fuel and kerosene at least EUR
274 per 1000 litres; as of 1 January 2008, petrol excise rate is set to be at LTL 1116, diesel fuel and
kerosene at LTL 947 per 1000 litres. Calculations on changes in sales, prompted by higher excise
rate on fuels, project additional budgetary revenues of LTL 106 m in 2008.
The Seimas of the Republic of Lithuania adopted the Law Amending Articles 8, 9, 11, 21,
22, 23, 24, 28, 33, 34, 35 of the Law on Excise Duty (Valstyb÷s zinios (Official Gazette) No 132-
5358, 2007). It lays down the amendments to the Law on Excise Duty (Valstyb÷s zinios (Official
Gazette) No 98-3482; No 26-802, 2004) providing for an increase in the rate of excise duty on ethyl
alcohol and alcoholic beverages, with effect from 1 January 2008:
beer (1hl of product) from LTL 7 to LTL 7.7 for 1% of actual alcoholic strength by
volume);
wines and other fermented beverages, having an actual alcoholic strength (in case of other
fermented beverages achieved by way of fermentation) by volume of 8.5% or more and where
fermented drink constitutes 100% by volume from LTL 150 to LTL 180 ( 8,5 % and less from
LTL 40 to LTL 48) for product hectolitre ;
intermediate products, having actual alcoholic strength by volume of 15% and more from
LTL 230 to LTL 276 ( 15% and less from LTL 150 to LTL 180 ) per hectolitre.
ethyl alcohol from LTL 3200 to LTL 3840 per hectolitre of pure ethyl alcohol.
An increased rate of excise duty on ethyl alcohol and alcoholic beverages is projected to
generate additional budgetary revenues of LTL 190 m in 2008.
50
of the range of land lease fee (from 0.1% to 4%) enabling municipalities to establish specific rates,
within these limits, taking into account their social and economic situation and strategic goals.
Once the transition is made to the state land lease fee calculation based on the average land
market value as established by way of mass valuation, a possibility of calculating land tax based on
average land market value will be discussed.
-
79.In 2006 and on, both direct and indirect taxation policies have been and will be pursued
taking account of the actual economic and social environment in Lithuania, primary goals of
Lithuania's tax system, developments in the EU tax policies, court practice of the European Court
of Justice, results of activities of the European Commission's working groups, and the worlds' best
practice in the field of taxation. This tax policy will guarantee that taxes in Lithuania are calculated
in accordance with universal taxation principles that are equally interpreted both in Lithuania and
other Member States, which will help to create more uniform conditions for business (as far as taxes
are concerned), thus making a positive impact on the competitive environment.
VI. SUSTAINABILITY OF PUBLIC FINANCES
-
80.In the long term, sustainability of public finances will be influenced by changes in the
demographic structure of population. In 2005, Lithuania prepared an integrated budgetary projection
of sustainability of public finances (hereinafter referred to as the Projection) that makes it possible to
assess the impact of demographic developments on the long-term sustainability of the pension system,
health care system, and education system, and to provide for appropriate actions ensuring the stability
of these systems in the future.
The Projection is based on the demographic projection for Lithuania for the period until 2050,
51
benefits included in Table 13 under "Other age-related spending" has been calculated using the
methodology employed for analogical projections for EU-15 in 2003.
Table 13 Long-term sustainability of public finances
% of GDP
Indicator
2000 2005 2010 2020 2030 2050
-
1.Total expenditure 39,13 33,64 38,62 38,24 39,59 41,65
of which: age-related expenditure 13,73 16,8 15,98 15,6 16,95 19,01
Pension expenditure 7,8 6,67 5,99 6,37 7,22 8,65
Social security pensions 7,8 6,67 5,99 6,37 7,22 8,65
Old-age and early pensions 6,9 5,7 5,04 5,42 6,28 7,66
Other pensions (disability, survivors) 0,94 0,98 0,95 0,95 0,94 0,99
Occupational pensions (if in general government)
Health care 4,26 4,47 4,67 4,86 5,24
Long-term care 0,54 0,55 0,55 0,63 0,86
Education expenditure* 5,7 5,25 4,88 3,88 4,11 4,12
Other age-related expenditure** 0,19 0,09 0,09 0,13 0,13 0,13
Interest expenditure 1,74 0,82 0,52 0,34 0,44 1,8
52
% of GDP
Indicator
2000 2005 2010 2020 2030 2050
Population aged 65+ over total population (beginning
of the year) 13,7 15,1 16,1 17,5 21,4 26,7
Sources: Statistics Lithuania, Ministry of Finance, Ministry of Social Security and Labour, Ministry of Health,
Ministry of Education and Science
*Excluding spending on payments to households and private entities and direct capital spending on education
establishments.
**Unemployment benefits.
***Financial assets in private pension funds of Pillar II of Tier of I of the pension system.
****if the level of labour force activity and migration change according to observed recent trends,
unemployment rate should be down in 2010.
Table 13 gives expenditure on social security pensions: social insurance pensions and state
pensions (including social benefits and excluding private pension funds administered by pension
accumulation companies), and revenues from social insurance contributions.
-
82.According to the projections, as the number of children and working-age people decreases
and the number of elderly people increases, general government budgetary expenditure on pensions
and health care, as a share of GDP, will go up and expenditure on education will come down: in 2005-
2050; expenditure on pensions will grow by 1.98% GDP, health care 1% GDP, while education
expenditure is to come down by 1.12% GDP. Unemployment benefit expenditure is most likely to
follow the current trend. In general, population ageing-related expenditure will account for 2.21%
53
reform will reach 0.84% GDP in 2008, 0.87% in 2009, and 0.89% in 2010. Costs related to the
transition period of the pension reform, which will reach the maximum of 1%GDP around 2010,
will be funded from the surplus accrued in social insurance sector due to interim demographic and
economic recovery, as well as from privatisation proceeds, the state budget of the Republic of
Lithuania, and other funding sources. The costs are expected to come down around 2030, when
about half of the retired are put on reduced state social insurance pensions of old age
(supplementary part of old-age pension is reduced in proportion to accumulated contribution)
together with annuities, accrued from accumulated pension.
-
85.The Lithuanian National Report on the Strategy for Sufficiency and Stability of Pensions
2005, approved by the Government of the Republic of Lithuania on 11 July 2005, and submitted to
the European Commission on 15 July 2005, envisages measures to be taken by the Government of
the Republic of Lithuania, which would allow for the relative size of pensions to be raised and
financial sustainability of the pensions system to be ensured. It is planned that social insurance
pensions will be raised gradually during the period 2005-2015, in such a manner that (gross)
replacement rate grows continuously from 31.3% to 42% and that the retirement age is increased,
over 2012-2026, by 4 months a year for women and 2 months a year for men, until the retirement
age reaches 65 years for both men and women in 2026. With the retirement age being increased,
additional employment promotion measures must be introduced to allow older people remain active in
the labour market.
-
86.Due to demographic developments, spending on education is projected to come down to
4.1% GDP in 2050. The risk, however, exists that the implementation of political goals of the
National Education Strategy might result in education spending increase to 6.7% (GDP) in 2050.
-
87.Over the period covered, the total general government expenditure will increase by 8
percentage points of GDP, from 33.64% of GDP in 2005 to 41.65% of GDP in 2050. Non-age-
54
Table 14. Ratio of pension recipients and contributors
Indicator 2006 2010 2020 2030 2050
Ratio of pension recipients and contributors, if the
retirement age is 60/62,5* years 1,67 1,81 1,61 1,34 1,07
Ratio of pension recipients and contributors, if the
retirement age is 65/65* years 1,67 1,81 1,77 1,54 1,24
Source: Ministry of Social Security and Labour
-
*The first figure indicates the retirement age for women, the second one for men.
VII. INSTITUTIONAL IMPROVEMENT OF GENERAL GOVERNMENT FINANCES
-
89.Private public partnerships (PPP). To ensure a more efficient use of state budget and
EU funds, efforts must be made to create legal, institutional, and administrative conditions for
promoting private-public partnerships as an additional source of financing for state and municipal
investment projects.
-
90.Audit. The National Audit Office of Lithuania (NAOL) is the supreme public audit
institution. Its main function is to supervise the lawfulness and effectiveness of the management and
use of the state property and the implementation of the state budget. NAOL carries audits of the
following areas: state budget implementation; use of state funds; management, use and disposal of
the state property; implementation of the budget of the state Social insurance Fund and the
55
plans directly related to the state budgeting process. With certain amendments, the Methodology
integrates into one whole the key national strategic documents (Lithuania's Single Programming
Document for 2004-2006, the National Strategy for Sustainable Development), thus contributing to
the improvement of strategic planning.
Preliminary state budget for 2007 was publicly assessed by experts of the independent Free
Market Institute, universities, and commercial banks.
VIII. STRUCTURAL REFORMS
Education sector reform
-
92.On 14 June 2007 several political parties signed an Agreement on the principles of science
and education system reform.
The Agreement provides for the study financing, which is comprised from a share funded by
the state, a student's personal contribution (tuition fee) and funding from other sources. Higher
education institutions will establish the level of tuition fees, within the limits established by the state,
themselves.
During the period of 2008-2006 (the first stage of the reform), it is planned to directly
distribute the funding provided by the state to higher education institutions, as a basic financing, in
accordance with the agreement obligated to be drafted by a higher education institution, which shall
provide for the minimum number of students.
It is planned to pilot state funding for study programmes with especially high demand under a
principle of a study basket (i. e. state funding follows a student). By 2013 (the second stage), this
56
-
93.On 26 October 2007, the Strategic Planning Committee of the Government of the Republic
of Lithuania approved the Guidelines for the reform of the system of science and education. This
approval of the Committee is important with a view to achieve further goals related to the reform.
The aim of the reform of science and education system is to achieve that the system of higher
education and scientific research meets the needs of the country's economy, society, and a person, and
that it ensures the state's sustainable development and international competitiveness.
The major areas of the reform are as follows: improvement of the quality of studies,
reorganisation of the study funding and financial support for students as well as funding for scientific
research, strengthening of the autonomy and accountability of science and education institutions,
improvement of the internal management, streamlining of the infrastructure of these institutions, and
human recourses development in the science and education system.
The Government of the Republic of Lithuania has approved the provision in the Guidelines for
the reform of the science and education system to markedly increase the state funding with a view to
improve the quality of studies and promote the development of the scientific research.
In order to improve the quality of studies, internal quality assurance mechanisms are going to
be created and external assessment of study programmes and implementation thereof is going to be
improved.
In the area of science, attention is going to be focused on the development of the programme
competitive funding as well as the streamlining of the science and education infrastructure. The basic
funding for higher education and scientific research institutions is going to be reformed.
The first stage of the science and education system reform starts as of the beginning of 2008; it
is planned to increase salaries for teachers and researches by 20 percent and to create better working
conditions for them. Special support measures are going to be arranged for raising teacher
qualifications. Additional funding is going to be granted for the Study Loan and Bursary Fund. It will
57
-
95.The development of the health insurance system must aim at improving the quality of
health-care services and access thereto for everybody, enhancing the efficiency of the health
system, and introducing more efficient forms of use of the resources allocated for this purpose.
-
96.It has been estimated that the state budget expenditure of the Republic of Lithuania on
insurance contributions for persons insured at the state's cost will total LTL 781.618 m in 2008,
which is 15,95% more than in 2007 (a contribution per person will increase from LTL 353.2 in
2007 to LTL 428.1 in 2008).
Table 15. The projected budget income and expenditure of the Mandatory Health Insurance
Fund (hereinafter in the table referred to as MHIF), 2006-2010
2006 2007 2008 2009 2010
Indicator MHIF, % of MHIF, % of MHIF, % of MHIF, % of MHIF, % of
m LTL GDP m LTL GDP m LTL GDP m LTL GDP m LTL GDP
-
1.Income 3032 3,7 3620,4 3,9 4366,8 4,1 4658 4 5057,1 4,1
-
2.Expenditure 3090,5 3,8 3620,4 4 4366,8 4,1 4658 4 5057,1 4,1
Source: Ministry of Health.
-
97.One of the key elements of the health system reform is the restructuring of personal and
public health care, to be achieved by upgrading the network of health-care institutions and
streamlining the structure of services, ensuring a better response to health-related needs of the
58
the second stage was started and proceeded in 2006, by implementing the Healthcare Institutions
Restructuring Strategy approved by Government Resolution No 647 of 29 June 2006 (Valstyb÷s
zinios (Official Gazette) No 74-2827, 2006). Measures of the second stage include further
development of the primary level of health care, by shifting most of the services over to family
physicians who have contracts with territorial patients' funds; treatment of widespread diseases in
health care institutions that are closer to people, with the most advanced technologies being
concentrated in university hospitals or largest hospitals that have the largest number of patients;
development of the system of medical nursing and long-term palliative treatment services, by
integrating these services into general hospitals and starting to provide them together with care
services; improvement of the quality and speed of first medical aid, by integrating dispatcher
services into the Emergency Response Centre that operates within the system of the Ministry of the
Interior and by renewing, from time to time, the ambulance fleet. At the same time, efforts will be
made to develop ambulatory rehabilitation, improve the system of prices of health care services and
asset management of health care institutions, and develop and promote supplementary (voluntary)
health insurance. Aiming at implementation of these goals, the second stage Restructuring Strategy
plans for district health-care institutions have been harmonised with regional development councils
and approved by the orders of the Minister of Health.
Furthermore, with the view to initiate a coherent and purposeful health system reform, create a
more viable and more competitive health system, by following the major state objectives that had
been formulated through the mission, vision, and major principles of the health system, a draft
Framework for Health Care System Development 2007-2015 has been drafted, which outlines the
principal directions for the development of the health system of Lithuania as well as the
implementation strategy thereof.
59
investments are used to implement continued and new health programmes, to introduce new
medical technologies, to renovate health-care institutions, and to develop the national e-health
system. Budget of the Mandatory Health Insurance Fund is drawn on to finance national and
municipal projects aimed at restructuring health-care institutions.
Housing renovation programme
-
101.Housing renovation programme was approved by Resolution No 1213 of 23 September
2004 of the Government of the Republic of Lithuania (Valstyb÷s Zinios (Official Gazette) No 143-
5232; 2005, No 78-2839). It takes account of the EU directives directly related with the increase of
energy consumption efficiency in buildings: Council Directive 93/76/EEC of 13 September 1993 to
limit carbon dioxide emissions by improving energy efficiency (SAVE) (OJ 2004 Special Edition:
Chapter 12, Volume 1, P. 163) and Directive 2002/91/EC of the European Parliament and of the
Council of 16 December 2002 on the energy performance of buildings (OJ 2004 Special Edition:
Chapter 12, Volume 2, P. 168). Housing renovation programme works towards implementation of
the goal established in the Lithuanian Housing Strategy, approved by the Resolution No 60 of 21
January 2004 of the Government of the Republic of Lithuania (Valstyb÷s Zinios (Official Gazette)
No 13-387; 2004), namely, to ensure the efficient use, maintenance, renovation and modernization
of the existing housing, as well as energy efficiency. The implementation period of the above-
mentioned Programme is 2005-2020.
-
102.The Lithuanian Housing Strategy establishes that by 2020 multi-apartment buildings
and heating systems thereof that had been constructed on the basis of the construction permits
issued by 1993 will be renovated and, based on the potential and economic expedience, modernised.
60
-
104.Major repairs or reconstruction of heating facilities and heating systems, replacement
of windows and entrance doors, renovation of roof structures by additional insulation, including
construction of the new pitched roofs (except for the construction of premises in an attic), balcony
(loggia) glazing in accordance with the common project, and insulation of the external walls are
covered by the state-aid measures for multi-apartment building modernisation. According to the
programme, state support is going to be provided for the owners of multi-apartment buildings: up to
50 percent of investment, covered by the state-aid measures, that had been used for the
modernisation of these buildings will be reimbursed on the basis of the energy efficiency of the
investment project. It is planned to provide additional support for low-income families
(individuals): to cover the major part of expenses related therewith.
-
105.Funds for the modernisation of a multi-apartment building are comprised from the own
funds of the multi-apartment building owners, long-term credits extended by commercial banks,
municipality funds, targeted state-aid, and other funds.
The multi-apartment building owners, pursuing investment projects in accordance with the
Housing renovation programme, must pay an initial contribution of at least 5 percent from the sum
of the planned investment. Banks offer credits for the implementation of investment projects.
State aid is offered by the following means: by covering part of the investment for the
modernisation of a multi-apartment building, on the basis of energy efficiency of the investment
project; or, by covering expenses for low-income families.
It is planned that by 2020, during the process of implementation of the Programme, at least
LTL 20bn is going to be invested; out of them, up to 25-30 percent can fall on the budget of the
Republic of Lithuania in order to provide the state aid in accordance with the law. The 2006 state
budget of the Republic of Lithuania allocated LTL 7 m appropriations to fund the above-mentioned
Programme, or 0.01 percent of GDP 2006. In 2007, LTL 15.7 m were allocated, while it is planned
61
106.5. at the end of the medium-term period, with the completion of renovation, reduction of
household heating expenses by 25-30 percent; as a result, less impact from the energy products
prices on the current account deficit and demand dynamics.
Agriculture, food industry, and rural development
-
107.Production volumes and productivity in the agricultural sector have been increasing in
recent years, although agriculture's share of the gross value added has been consistently decreasing
(in 2002, this indicator amounted to 6.4 percent, while in 2005, 5 percent). These changes show that
the structure of Lithuania's economy has been approaching proportions characteristic of the
developed countries. The value added created by the food, drinks, and tobacco industries amounted to
4 percent of the gross value added in 2006. Agriculture and food industry has become an important
export sector. More active trading and larger financial support for agriculture and rural development
determined the growth of income for economic entities.
In order to ensure the implementation of the EU common agricultural policy, to develop a
competitive agricultural and food sector, and to promote sustainable economic and social
development of rural areas, the following actions are taken:
107.1. measures aimed at securing income for entities engaged in agricultural activities, and
market regulation measures (one-off payments for crop areas, systems of quotas, intervention
procurements, private storage, import/export mechanisms, standards for supply of products to the
market, etc.) are being implemented;
107.2. measures set forth in the Rural Development Plan 2004-2004 approved by the
Commission Decision No C(2004)2949 of 3 August 2004, rural development measures, and Priority
"Rural Development and Fisheries" of the Single Programming Document of Lithuania for 2004-
62
allocations for the following areas: 41.15 percent, for the development of modern and competitive
agri-food and forestry sectors, 36.48 percent, for the improvement of environment and landscape,
12.19 percent, for the improvement of the quality of life and increase the employment of rural
population in rural areas;
107.4. state aid measures harmonised with the European Commission are being applied
(support for acquisition of breeding animals and certified propagating material of plants, animal
breeding, compensation of credit interest and insurance premiums, development of production of
quality products and the system of quality testing, research, training and advisory services to
farmers, disposal of animal by-products, promotion of production of bio-fuels, and other measures).
Risk management system for agriculture is being developed;
107.5. the process of restitution of ownership rights to land, forest, and bodies of water is
approaching the end, to be followed by the next stage of land management process associated with a
promotion of an efficient use of land, by preserving the ecological stability of the landscape and by
developing a required rural infrastructure. The issue of selling agricultural land to Lithuanian legal
persons and foreign citizens has been solved. Favourable conditions are being created to young
farmers who wish to purchase land from the state on a hire-purchase agreement;
107.6. the development of a competitive food sector is being promoted, the food sector is
being restructured, it is ensured that only safe food is supplied to the market, and food control in the
whole chain "from stable to table" is being exercised;
107.7. Making use of funds from the Financial Instrument for Fisheries Guidance, by
matching fishing capacities to fisheries resources, fishing capacities have been reduced in the Baltic
sea (31 fishing vessels have been scraped), aquaculture and fish-processing companies have been
modernised, and fishery products auction has been established. State aid measures are being applied
with a view to develop environmentally-friendly fishing and to improve wellness in the fish farms;
63
national premiums of direct payments, the amount of which is set annually by the Government of
the Republic of Lithuania, also fund state aid measures for agriculture approved by the European
Commission, and such measures as land reform, land reclamation, market development,
infrastructure, quality management, science and education, information and other needs, and that
structural assistance and rural development measures will be co-financed.
Table 16. Projected measured to achieve strategic goals of the agricultural policy
Funding
Measures 2006 2007 2008 2009 2010
m LTL % of m LTL % of m LTL % of m LTL % of m LTL % of
GDP GDP GDP GDP GDP
-
1.Implementation of
Common Agricultural
Policy measures
B. Net direct effect on
the budget -399,2 -0,5 -670 -0,7 -512,5 0,5 -611,1 -0,5 -571,3 -0,5
B.1. Income 739 0,9 701,6 0,7 658,9 0,6 777,5 0,7 886,5 0,7
B.2. Expenditure 1138,2 1,4 1371,7 1,4 1171,5* 1,1 1388,6* 1,2 1457,9* 1,2
-
2.Restructuring of
the agricultural and
64
Funding
Measures 2006 2007 2008 2009 2010
m LTL % of m LTL % of m LTL % of m LTL % of m LTL % of
GDP GDP GDP GDP GDP
B. Net direct effect on
the budget -98,3 -0,1 -122,2 -0,1 -132,5 -0,1 -121,2 -0,1 -115,2 -0,1
B.1. Income 8 9,8 10 10,5 10,6
B.2. Expenditure 106,3 0,1 132 0,1 142,5 0,1 131,7 0,1 125,8 0,1
-
5.SAPARD
B. Net direct effect on
the budget -5,8
B.1. Income (EU funds) 12,2
B.2. Expenditure (EU
funds and national co-
financing) 18
-
6.Structural support
and rural
development
measures
B. Net direct effect on -
the budget -214,5 -0,3 1294,2 -1,4 -210,7 -0,2 -279,5 -0,2 -267,2 -0,2
| publication date | 24-01-2008 |
|---|---|
| reference | 5648/08 |
