Lithuania

Politics:

• Analysis

  Lithuania politics: Quick View - LSDP leader is to be nominated prime minis

  Event

  On November 19th the president said that she would nominate Algirdas Butkevicius, the head of the LSDP, as prime minister.

  Analysis

  The president had previously stated that she would not back a government that included the Labour Party, because it has been accused of electoral fraud in the parliamentary vote ending on October 28th. However, the LSDP has agreed to lead a majority four-party coalition government that includes the Labour Party. The planned coalition is between the LSDP, the Labour Party, Order and Justice, and a party representing the Polish minority in Lithuania. It will have a parliamentary majority, with 86 seats out of 141.

  The president had tried to block the formation of a government involving the Labour Party, but has backed down since the country's highest court declared on November 14th that the fraud had no material impact on the election result. This followed the replacement of three Labour Party candidates, who were blocked from taking up their parliamentary seats because of electoral irregularities, by different people from the same party. Although the president has accepted that only a coalition led by the LSDP has enough seats to form the next administration, she has not toned down her attacks on the Labour Party. She said that time will tell whether the coalition's concern will be the welfare of the people or delays of criminal cases and giving money "to the benefit of criminal oligarchic groups". As well as the scandal over the election, the Labour Party and some of its senior members face criminal charges, including tax fraud.

  The centre-left parties campaigned on an anti-austerity message, including promises to cut VAT and increase the minimum wage. However, the new coalition seems to accept that it will have limited scope for such measures if it is to retain market confidence in the country's debt and currency.

  November 20, 2012

• Background

  Lithuania: Key figures

  Andrius Kubilius

  Prime minister since 2008, Andrius Kubilius was a member of the pro-independence Lithuanian Movement for Restructuring (Sajudis), and leads its successor, the Homeland Union-Lithuanian Christian Democrats (TS-LKD; formerly the Homeland Union/TS). He first entered the Seimas (parliament) in 1992. He served as prime minister from November 1999 until October 2000. With the economy suffering from the after-effects of the Russian financial crisis of 1998, he was unable to prevent his party's defeat in the election in 2000. After a spell in opposition (part of which was spent in "constructive opposition", supporting a minority administration), Mr Kubilius revitalised the TS-LKD to win the election in 2008. However, as prime minister at the head of a four-party coalition, he has found it difficult to maintain cohesion within his government, owing to the austerity measures that he imposed as a response to the recession of 2009 and the ballooning budget deficit. Following his re-election as leader of the TS-LKD in May 2011, he is likely to lead his party into the next parliamentary election. However, his popularity ratings are low, and he is likely to be replaced if, as expected, the TS-LKD loses the next election.

  Dalia Grybauskaite

  Dalia Grybauskaite won a convincing victory in the presidential election in May 2009, securing a sufficient share of the vote to avoid a second round. She took office in July 2009. Ms Grybauskaite served as finance minister in 2001-04, and in 2004-09 served as Lithuania's European commissioner, with the financial programming and budget portfolio. She has been instrumental in forging closer ties with the EU, leading the negotiations to win Lithuania a pre-accession free-trade agreement with the EU, and was deputy head of the Lithuanian delegation during EU accession talks. Before her election, Ms Grybauskaite had been vocally critical of Lithuanian economic policy, and, despite the presidency's lack of a formal role in setting economic policy, has exerted a significant influence since taking office, not least because of her strong mandate. She is broadly supportive of the Kubilius government's policy programme, which has helped to shield the prime minister from popular discontent, but she has also exerted considerable influence over the appointment of cabinet members. She has a reputation as a tough negotiator, and consistently leads in polls of politicians' popularity among Lithuanians. This standing will prompt her to continue exerting influence on government appointments and the direction of government policy over the forecast period.

  Algirdas Butkevicius

  Algirdas Butkevicius was elected leader of the opposition Social Democratic Party (LSDP) in 2009, replacing Gediminas Kirkilas, who was prime minister in 2006-08. A former construction engineer, Mr Burkevicius has been a parliamentary deputy since 1996, and served as finance minister (2004-05) and as transport and communications minister (2006-08) in the previous, LSDP-led administration. He came second in the parliamentary election in 2009, with 11.8% of the vote—a respectable result in view of the overwhelming support for Ms Grybauskaite's presidential campaign. Although he is likely to have been disappointed in his party's showing in the local elections in February 2011, when its vote share was unchanged compared with the previous local elections, at 16%, the LSDP won the largest number of local council seats. Given Lithuanian voters' predilection for replacing governments at general elections, and in view of the poor poll ratings of the ruling TS-LKD and Mr Kubilius, Mr Butkevicius would appear to be well placed to become the next prime minister if the LSDP maintains its support.

  June 07, 2011

• Structure

  Lithuania: Political structure

  Official name

  Republic of Lithuania

  Legal system

  On March 11th 1990 parliament voted to restore Lithuanian independence. A new constitution was approved on October 25th 1992

  National legislature

  Unicameral assembly, the Seimas, with 141 members; 71 are directly elected and 70 are elected on a proportional basis; parties need 5% of the vote to achieve representation, with the exception of parties representing national minorities. All Lithuanian citizens over the age of 18 may vote

  National elections

  October 2012 (legislative); May 2009 (presidential). Next legislative election is due by October 2016; next presidential election is due in 2014

  Head of state

  President, elected directly; currently Dalia Grybauskaite, sworn in on July 12th 2009

  National government

  The government formed following the election in October 2012 is a coalition comprising the Social Democratic Party, the Labour Party, Order and Justice, and Lithuanian Poles' Electoral Action. It holds 86 of 141 seats in the legislature

  Main political parties

  Social Democratic Party (LSDP); Labour Party; Order and Justice (formerly the Liberal Democratic Party); Lithuanian Poles' Electoral Action (LLRA); Homeland Union-Lithuanian Christian Democrats (TS-LKD); Liberal Movement (LS); Liberal and Centre Union (LCS); Civic Democracy (PD); Russian Alliance (RA); New Union-Social Liberals (NS-SL); Peasant Nationalists (LVL); Christian Party

  Prime minister: Algirdas Butkevicius

  Key ministers

  Agriculture: Vigilijus Jukna

  Culture: Sarunas Birutis

  Defence: Juozas Olekas

  Economy: Birute Vesaite

  Energy: Jaroslav Neverovic

  Environment: Valentinas Mazuronis

  Finance: Rimantas Sadzius

  Foreign affairs: Linas Antanas Linkevicius

  Health: Vytenis Povilas Andriukaitis

  Interior: Dailis Alfonsas Barakauskas

  Justice: Juozas Bernatonis

  Transport & communications: Rimantas Sinkevicius

  Central bank governor

  Vitas Vasiliauskas

  December 14, 2012

• Outlook

  Lithuania: Key developments

  Outlook for 2013-17

  • A new four-party coalition centred on the Social Democratic Party (LSDP) and the Labour Party has 86 seats out of 141 in the Seimas (parliament). Ideological differences in tough economic conditions could create tensions.
  • Although parties in the incoming government stood on a mildly anti-austerity platform, policy loosening will be constrained by a desire to join the euro.
  • The budget deficit narrowed to 5.5% of GDP in 2011, and a target of 3% of GDP was set for 2012, but this is only likely to be approached towards the end of the forecast period.
  • We estimate a slowdown in real GDP growth in 2012, to 3%, from 5.9% in 2011, although Lithuania has performed well by regional norms for the year. We forecast relatively weak average annual growth in 2013-17, of 3.2%.
  • Following a dip in 2012-13, as global price pressures abate, inflation will pick up a little. Annual average inflation is forecast at 3.2% in 2013-17.
  • Our baseline forecast is that Lithuania will maintain the link of the litas to the euro until it adopts the euro (in 2016 at the earliest). However, the threats to the stability of the euro zone present risks to this assumption.
  • The current account returned to deficit in 2011, and the deficit is likely to have widened in 2012. Subdued domestic demand and a modest strengthening in export demand will help to prevent a dramatic widening in 2012-17.

  Review

  • Following the parliamentary election in October, a new coalition government has been formed, headed by Algirdas Butkevicius of the LSDP.
  • The president, Dalia Grybauskaite, had objected to the inclusion of the Labour Party. A court ruled that the accusations of electoral misconduct against the party made no material difference to the electoral outcome.
  • In October the government filed a claim against Gazprom, the Russian state gas monopoly, in a Swedish arbitration court, alleging that Lithuania had been massively overcharged for gas over a number of years.
  • In a referendum on the construction of a new nuclear-power plant that took place alongside the parliamentary election in mid-October, nearly two-thirds of those who took part voted against it.
  • In July-September real GDP grew by a remarkably strong 4.4% year on year.
  • In the first three quarters of 2012 the current-account deficit shrank to LTL1.5bn (US$560m), from LTL2.5bn in the year-earlier period.

  December 14, 2012

Economy:

• Background

  Lithuania: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	3.3	Population growth	-0.9
  GDP (US$ m; market exchange rate)	42,610	Real GDP growth	0.7
  GDP (US$ m; purchasing power parity)	60,751b	Real domestic demand growth	0.0
  GDP per head (US$; market exchange rate)	13,111	Inflation	5.2
  GDP per head (US$; purchasing power parity)	18,693	Current-account balance (% of GDP)	-4.7
  Exchange rate LTL:US$ (av)	2.48	FDI inflows (% of GDP)	2.9
  a Actual. b Economist Intelligence Unit estimates.

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  Background: Lithuania was annexed by the Soviet Union in 1940, only regaining its independence in 1991; it then moved swiftly to adopt a free-market economy. In each of the six elections since independence the electorate have voted against the incumbent government, primarily as a result of dissatisfaction with the state of the economy, as well as political corruption. Between elections governments have often proved short-lived, and Lithuania has had 16 governments since independence. The political scene has been characterised by a strong post-communist left and a centre-right that is prone to periodic fragmentation. After the general election in October 2012 a four-party coalition was created, centred on the Social Democratic Party (LSDP) and the Labour Party.

  Political structure: Lithuania is a parliamentary republic. The legislature is the 141-seat, unicameral Seimas (parliament), which sits for a four-year term; 71 Seimas deputies are elected directly and 70 are elected on a proportional basis through party lists. The president is directly elected for a period of five years and a maximum of two consecutive terms. The president is the head of state and appoints the prime minister, subject to confirmation by the Seimas, but most governmental powers rest with parliament.

  Policy issues: Privatisation is largely complete, although the government will attempt some further asset sales to bolster the public finances. The main impediment to euro adoption has become the widening budget deficit-a central policy issue is to try to narrow the budget deficit to within the Maastricht limit of 3% of GDP. However, weak economic conditions could also jeopardise euro adoption.

  Taxation: Lithuania has a flat personal income tax; the rate fell from 27% to 24% in 2008 and was reduced to 21% in 2009, where it remains. The government increased the rate of corporate profit tax from 15% to 20% in January 2009, but brought it back to 15% from January 1st 2010, where it is now. Employers pay social security contributions at 31% of salary. Value-added tax (VAT) stands at 21%.

  Foreign trade: In 2011 exports of goods amounted to US$28.1bn and imports of goods amounted were US$30.2bn. A steep drop in trade led to a current-account surplus of US$1.7bn (4.7% of GDP) in 2009. The surplus shrank to 1.5% of GDP in 2010 and turned to deficit in 2011 as economic growth picked up.

  Major exports 2010	% of total	Major imports 2010	% of total
  Mineral products	23.7	Mineral products	33.3
  Machinery & equipment	10.6	Machinery & equipment	12.5
  Chemicals	8.1	Chemicals	11.0
  Transport equipment	7.8	Transport equipment	7.9
  Leading markets 2011		Leading suppliers 2011	% of total
  Russia	16.6	Russia	32.8
  Latvia	10.2	Germany	9.7
  Germany	9.3	Poland	9.1
  Poland	7.0	Latvia	6.6

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  December 14, 2012

• Structure

  Lithuania: Economic structure

  Data and charts: Annual trends charts

  
  

  

  December 14, 2012

• Outlook

  Lithuania: Country outlook

  Lithuania: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: Following the defeat of the centre-right government in the parliamentary election in October, a new coalition administration built around two moderately left-wing parties has been formed. This was held up for a time by the president, Dalia Grybauskaite, who objected to the inclusion of the Labour Party, owing to accusations against it of electoral misconduct. The new government is headed by Algirdas Butkevicius of the Social Democratic Party (LSDP). It includes the Labour Party of Viktor Uspaskich, a consistently controversial figure in Lithuanian politics; the right wing Order and Justice; and Lithuanian Poles' Electoral Action (LLRA), which represents ethnic Poles. The new coalition has 86 seats out of 141 in the Seimas (parliament).

  ELECTION WATCH: After successive rounds of the parliamentary election, held on October 14th and 28th 2012, the LSDP came out on top, taking 38 seats in the Seimas. The Labour Party came second, with 29 seats. Order and Justice took 11 seats and the LLRA gained eight seats. The main party in the outgoing coalition, the centre-right Homeland Union-Lithuanian Christian Democrats (TS-LKD), did better than predicted in the pre-election polls, but its seats were cut to 33, from 45 in the election in 2008. The Liberal Movement (LS) lost only one seat, reducing its total in the new legislature to ten. However, the Liberal and Centre Union (LCS), the other member of the outgoing three-party administration, failed to pass the threshold for entering parliament and did not win any seats.

  INTERNATIONAL RELATIONS: Lithuania will continue to pursue a foreign policy based on its NATO membership and orientation towards the US. Russian relations with Lithuania have usually been better than with Estonia and Latvia, largely because the ethnic Russian minority is smaller in Lithuania. However, ties have become more fraught since 2006, when the Russian state-owned pipeline operator, Transneft, shut down the Druzhba pipeline, which transports oil to the refinery complex in Lithuania. Ms Grybauskaite has called for a more pragmatic approach to relations with Russia, and has had reasonable success in resolving periodic trade disputes. Lithuania is at the centre of an investigation launched in September 2012 by the European Commission into the activities of Gazprom, the Russian state gas monopoly, over potential abuse of its dominant position in the EU market. This has increased tensions between the two countries. However, leading figures in the new government are said to have good contacts in Russian business and political circles, which could work in the opposite direction.

  POLICY TRENDS: During the electoral campaign, the parties at the core of the incoming government stood on mildly anti-austerity platforms. This included promises for greater flexibility in regard to the budget deficit target, including an increase in the minimum wage. In practice, however, policy will be circumscribed by a desire--shared by most parties across political spectrum--to join the euro. A degree of fiscal consolidation will thus remain a central element of economic policy. It will be vital in order to keep public debt on a downward path, and so reduce the drain of debt financing. It is also necessary to maintain the credibility of the litas's peg to the euro and to qualify for adoption of the single currency. However, the Economist Intelligence Unit thinks euro adoption unlikely until 2016 at the earliest. Mr Butkevicius has indicated a probable postponement from the previously preferred date of 2014.

  ECONOMIC GROWTH: Real GDP rose by 5.9% in 2011. Private consumption and investment picked up, and exports continued to grow strongly. The same factors were behind stronger than expected growth in the first quarter of 2012. In the second quarter the picture was complicated by an abrupt downturn in global oil price trends and by the temporary closure for maintenance of the Orlen Lietuva oil refinery. As a result, real GDP growth slowed to 2.2% year on year, as industrial export growth was affected. In addition, the expansion of fixed investment slowed steeply as a worsening outlook for EU growth eroded business confidence. Despite decelerating, household spending was the main stimulant for the economy, backed by rising employment. A remarkably strong bounceback in July-September, to GDP growth of 4.4% year on year, reflected similar factors: a reversion to rising international oil prices and to full production at Orlen Lietuva. This supported a return to rapid industrial and export expansion. An unusually good harvest was also a factor. However, in the remainder of the year economic growth is likely to have weakened markedly, as private investment continued to contract, export growth slowed and growing numbers of consumers lost confidence. This will have weakened domestic trade growth. Nonetheless, because of the stronger than expected third quarter, we have revised up our estimate for growth in 2012 to 3% (from 2.4% previously).

  INFLATION: Annual average consumer price inflation rose to 4.1% in 2011. Inflation was on a downward trend between May 2011 and May 2012, when it sank to a low of 2.5% year on year, mainly reflecting a deceleration in food price growth. Inflation has since risen in each consecutive month, reaching 3.4% in September, but it dropped to 3.1% in October. It was boosted by the increase in local gas tariffs in July, and by a pick-up since then in food price growth. Prices for meat and fruit grew especially rapidly in the second half. Since August inflation has been augmented by a return to year-on-year growth in clothing prices and transport inflation. We estimate a slowdown in average consumer price growth in 2012, to around 3%, and forecast a further slowdown in 2013 as economic growth weakens and inflationary pressures from abroad remain muted. We expect inflation to rise in 2014 and again in the following two years (although weakly), in line with a pick-up in economic growth and global commodity prices. We forecast average annual inflation of 3.2% in 2013-17.

  EXCHANGE RATES: Under the currency board, the monetary base is fully backed by the foreign-exchange reserves of the Bank of Lithuania (BoL, the central bank), and the litas has been pegged to the euro at LTL3.45:EUR1 since February 2002. Our central forecast is that Lithuania will maintain the currency board until it adopts the euro, in 2016 at the earliest. However, there are risks. In the event of a partial break-up of the euro zone, the Lithuanian authorities' commitment to euro adoption, which currently remains firm, could waver. In the event of a complete fragmentation of the bloc, the Lithuanian authorities would need to repeg the litas to a new currency.

  EXTERNAL SECTOR: After a large correction in the external imbalance in 2009-10, the current account went back into deficit in 2011. This was the result of the widening of the trade deficit and a rise in outflows of investment income as the economy grew more strongly. In the first quarter of 2012 strong investment outflows exacerbated a deterioration of the trade deficit, resulting in an alarming widening of the current-account deficit. However, the shortfall on the trade account was less marked in the subsequent six months, and income outflows ameliorated to some extent. Trade patterns in 2012 have been distorted by a brief stoppage at the Orlen Lietuva oil refinery and by sharp reversals in global oil price trends. However, the underlying pattern is for a slowdown in trade growth and a larger trade gap for 2012 as a whole. Export growth is likely to have slowed in the fourth quarter, and inflows on the transfers account are likely to have waned as remittances from host countries weaken further, so the external deficit for the year is likely to have widened. We estimate a deficit of around 2% of GDP. We expect the current-account deficit to remain contained, but widen to just over 3% of GDP by 2017 as domestic demand gradually recovers.

  December 06, 2012

• Forecast

  Lithuania: Country forecast summary

  Country forecast overview: Highlights

  • A new four-party coalition centred on the Social Democratic Party (LSDP) and the Labour Party has 86 seats out of 141 in the Seimas (parliament). Although parties in the incoming government stood on a mildly anti-austerity platform, policy loosening will be constrained by a desire to join the euro. Government policy is expected to remain in favour of an open economy and a pro-Western foreign policy.
  • Relations with Russia have come under increased strain in 2012 owing to developments in the energy sector. For example, in October the government filed a claim against Gazprom, the Russian state gas monopoly, alleging that Lithuania had been massively overcharged for gas over a number of years. However, ties could improve under the new government.
  • The Economist Intelligence Unit expects the budget deficit to exceed the 3% of GDP limit imposed by the Maastricht criterion until later in the forecast period. The poor outlook for economic growth will slow deficit narrowing.
  • After a strong rebound in 2011, to 5.9%, real GDP growth is forecast to slow in 2012, to 3%, owing to a worsening external environment. This is nevertheless a good performance in a regional context. We forecast average annual growth of 3.2% in 2013-17. However, in the light of the ongoing troubles in the euro zone, the risks to our forecast remain tilted to the downside.
  • Following a dip in 2012-13, as global price pressures abate, inflation will pick up, but weakly. Annual average inflation is forecast at 3.2% in 2013-17. Average wage growth in 2013-17 will be much slower than in 2006-08, owing to high unemployment.
  • The current account returned to deficit in 2011. A large current-account deficit in the first quarter of 2012 turned into a small surplus in the second quarter as growth in investment outflows slowed and the trade gap narrowed sharply. However, the underlying pattern is for a slowdown in trade growth and a slightly larger trade gap (and so current-account deficit) for 2012 as a whole. Subdued domestic demand will help to prevent a dramatic widening in 2013-17.
  • Lithuania is unlikely to join the euro zone until towards the end of the forecast period at the earliest. The new prime minister, Algirdas Butkevicius, has recognised that entry is likely to take place later than 2014.
  • In the event of a partial break-up of the euro zone, the Lithuanian authorities' commitment to euro adoption could waver. A complete break-up of the euro zone would be highly destabilising for Lithuania, as the litas is pegged to the euro and the country has a large stock of euro-denominated borrowing.

  

  December 14, 2012

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Country Briefing

Land area

65,300 sq km

Population

3.24m (January 1st 2011)

Main towns

Population in '000 (January 1st 2011)

Vilnius (capital): 554

Kaunas: 337

Klaipeda: 178

Siauliai: 121

Climate

Moderate continental; average temperatures range from -5°C in January to 23°C in July

Languages

Lithuanian is a member of the Baltic group of languages (along with Lettish and the now extinct Old Prussian) and is the first language of over 80% of the population; there are sizeable minorities of native Russian- and Polish-speakers

Weights and measures

Metric system

Currency

The national currency, the litas (plural litai; LTL), which is divided into 100 centas, replaced the transitional talonas (coupon) in June 1993. Average exchange rates in 2011: LTL2.48: US$1; LTL3.45:€1

Time

Two hours ahead of GMT

Fiscal year

Calendar year

Public holidays

January 1st (New Year's Day), February 16th (Independence Day), March 11th (Restoration of Statehood), Easter Sunday and Easter Monday, May 1st (Labour Day), July 6th (Statehood Day), August 15th (Assumption), November 1st (All Saints' Day), December 24th-26th (Christmas)

March 01, 2012