Lithuania can weather economic downturn without bailout: IMF

‘We don’t see any need for Lithuania to appeal for aid from the IMF,’ Catriona Purfield, the head of an International Monetary Fund delegation to Vilnius, told reporters after meeting Prime Minister Andrius Kubilius.

There had been growing speculation that Lithuania would join the ranks of ex-communist countries seeking international help.

Kubilius underscored Purfield’s remarks.

‘The IMF gave positive marks to the steps we are taking and to our plans, which allows us to look to the coming year with reserved optimism,’ he said.

Kubilius’ Conservative-led coalition has repeatedly insisted that its current belt-tightening drive means that Lithuania has no need to follow neighbouring Latvia down the path to a bailout from the IMF, European Union and other lenders.

Lithuania is expected to fall heavily into recession next year, with output set to fall by 4.8 percent compared with the level in 2008, according to a finance ministry forecast.

Purfield said that the IMF also foresaw a ‘significant slowdown’, but pointed to a less-drastic 2.0 percent.

Kubilius’ government formally took office last week after having beaten the centre-left Social Democrats in October’s general election, and has set about introducing measures that it says are meant to ward off a financial crisis

Lithuania, a country of 3.4 million people, won independence from the crumbling Soviet bloc in 1991 and joined the EU in 2004.

Along with fellow ex-Soviet EU newcomers Estonia and Latvia, it has enjoyed a reputation as an economic ‘tiger’.

Lithuania’s growth has been powered by exports, as well as robust domestic demand which has in turn been fuelled by rising wages, loans and money sent home by the 300,000 Lithuanians who have left to work abroad, mostly in Britain and Ireland, since EU expansion.

The economy grew 8.9 percent in 2007, after 7.8 percent in 2006.

But once-solid consumption has tailed off in the face of high inflation and tighter domestic credit rules, and the global economic crisis has dented exports.

Lithuania’s economy is expected to grow 3.5 percent this year before contracting 4.8 percent in 2009, 0.2 percent in 2010 and rebounding with 4.5 percent, according to the latest finance ministry forecasts.

Swedish bank SEB, a leading player in the Baltic, forecast that output would grow 5.5 percent this year before shrinking 2.0 percent in both 2009 and 2010.

Latvia and Estonia are already grappling with recession, although Estonia hasn’t asked for a bailout.

Among Kubilius’ measures are a 21-percent single-rate ‘flat tax’ -- personal income tax is currently 24 percent-rather than the 20 percent he had earlier pledged.

Also on the horizon are pay cuts of 12-15 percent for lawmakers and civil servants-except teachers-and reductions in social security payments.

It has decided to raise overall VAT from 18 to 19 percent, and will end the favourable five-percent VAT rate on medicine and home heating in July and December 2009 respectively.

SEB criticised the tax reforms, saying they could hurt businesses and consumers.

Lithuanian officials have said the goal is to save state coffers 5.3 billion litas (1.55 billion euros, 1.96 billion dollars) in 2009, and ward off a yawning deficit.

Under the plan, the 2009 deficit is likely to be equivalent to 2.1 percent of gross domestic product, according to the government.

Without action, the deficit could have ballooned to 5.76 percent of GDP, exceeding an EU limit of 3.0 percent, Finance Minister Algirdas Semeta said.