Rene — Lithuania: Make Way For The New European Economic 'Tiger'

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RFE/RL Lithuania: Make Way For The New European Economic ‘Tiger’
By Mark Baker
Move over, Ireland — the European Union will soon have a new economic
“tiger”: Lithuania. When the Baltic country joins the EU next year,
it’s likely to be the bloc’s fastest-growing economy. Growth is
expected to reach an annual rate of around 7 percent this year.
Inflation is nonexistent and debt levels are low — not bad for a
former Soviet republic with few wealthy friends and no natural
resources to speak of. RFE/RL talked to analysts to find out what’s
driving the boom.
Prague, 13 August 2003 (RFE/RL) — It’s an economic success story in
what some would consider the unlikeliest of places: Lithuania. A
former Soviet republic with no significant natural resources,
Lithuania’s economy is growing at around 7 percent a year. This at a
time when global economic growth has slowed to a crawl and Europe’s
biggest national economy, Germany, is on the verge of recession.
It’s a remarkable showing — one that prompted Britain’s “The
Economist” magazine last month to dub Lithuania the “Baltic Tiger.”
The new arrival threatens to outshine Europe’s other economic “tiger,”
Ireland, which in recent years has profited from EU development funds
and the high-tech boom to become Europe’s fastest-growing economy.
Lithuania’s numbers are certainly impressive. Growth in the first
quarter of the year reached an annual rate of 9.4 percent. That’s
expected to slow later in the year, but still remain around 6
percent-7 percent this year and next. That compares to near-zero
growth in Germany and just 0.8 percent in Ireland in the first
Additionally, inflation is nonexistent. And unemployment, while still
relatively high at around 10 percent, is dropping.
Vidmantas Saferis, an analyst at Hansabank in Vilnius, said Lithuania
is benefiting from low worldwide interest rates, which have stimulated
direct investment. “There is one thing…Lithuania is kind of lucky,
talking about the external environment, especially the monetary one,”
Saferis said. “Lithuania can enjoy low interest rates, thus helping to
boost its economy internally.”
In order to promote growth, the U.S. Federal Reserve, and the EU’s
European Central Bank have drastically lowered interest rates on the
dollar and euro respectively. Lithuania, whose currency, the litas, is
pegged to the euro, has seen its interest rates slide as well.
Saferis said foreign and domestic investors have responded, borrowing
money at the lower rates to generate relatively high returns. “There
are not so many good opportunities in the world to invest in the
sluggish economies, so to say. Then Lithuania looks quite attractive,
with the fast growth of the economy — attractive in all senses,
meaning attractive as a market for demand for consumer products, as
well as attractive for production,” he said.
Anna Walker of the Economist Intelligence Unit in London said the
country has also enjoyed more than a little bit of luck — the happy
coincidence of this year’s rise in the value of the euro and increased
Russian oil deliveries to the Mazeikiai refinery, one of the country’s
largest exporters.
The Russian firm Yukos recently took over operation of the refinery
from a U.S. company, Williams International. Walker said that Yukos
has been able to guarantee oil deliveries, which are much greater this
year than last year. Exports of refined oil products have boomed, and
the rising euro has made the dollar-denominated Russian oil inputs
“They certainly benefited from stable oil deliveries to the Mazeikiai
refinery since Yukos took over from Williams of the U.S. last year —
they have maintained pretty steady supplies, which has certainly
helped exports,” Walker said. “Exports have led growth really for the
last year or so. Domestic demand has also picked up quite strongly.”
It’s not clear yet how much of the growth is due to sound policies and
how much to good fortune. Lithuanian officials since the mid-1990s
have favored a strong currency policy — first tying the currency to
the dollar and then in 2002 to the euro. They have also recently
improved tax collection and cut the budget deficit.
Both Saferis and Walker credit the consistent economic policies — and
stable exchange rates — as accounting for a large part of the boom.
“There are things that can be controlled, [put into place] and
duplicated [in other countries, such] as the stable political
environment and controlled and [reliable] exchange rates,” Saferis
said. Such policies “create trust in the currency and trust in the
One cloud on the horizon could be price deflation — the opposite of
inflation. Officials in Japan and Germany are already grappling with
falling prices, which in turn could lead to falling wages and a feared
downward spiral in economic activity. Consumer prices in Lithuania
have dropped about 1 percent in the past year and are not expected to
start rising again soon.
However, Saferis said, deflation is not yet a serious concern in
Lithuania. He explained that in contrast to Germany and Japan, it’s
not weak demand that is causing the drop in prices but rather the rise
in the euro. This has made many of the country’s imports — from
places like Russia and other Commonwealth of Independent States
members — relatively cheaper.
Ironically, it could be the country’s entry into the EU next year that
puts the brakes on rapid economic growth. Walker said many of the
benefits of the country’s coming accession have already been felt in
the form of rising investor confidence and enhanced perceptions of
“Most of the accession benefits have really [been received] already,”
she said. “Foreign direct investment has already been growing quite
strongly the last few years. It will certainly benefit from further
transfers from the EU and structural funds. We are expecting a slight
slowdown in growth next year, partly because of the strong growth this
Walker said accession will, on balance, be positive, but analysts
caution that EU entry will expose the economy to greater competitive
pressures that could ultimately slow its growth.