Economic transformation process in Lithuania

1. Economic transformation process in Lithuania Strengths, Weaknesses, Advantages & Threats Jekaterina Rojaka Senior Analyst October 6, 2008. Sofia, Bulgaria

2. The economic backlog shrank over a last couple of years Source:Eurostat

3. Technological level in EU old-timers remains several times higher than in new member states Source:Eurostat

4. Earnings in the Baltics still lag behind those in the Western Europe *2007 September ** 2006 m. industry Source: national statistics offices

5. Lithuania enjoyed the sharpest drop in unemployment rate Source:Eurostat

6. Productivity growth lags behind that of labour costs Source:Eurostat

7. Lithuania enjoyed spectacular economic growth… Source:Eurostat, DnB NORD Bankas

8. Share of employed in industry dropped from 22 percent in 1998 to 19.5 percent last year Source: Statistics Lithuania

9. Structure of economy has changed slightly Source:Eurostat

10. Exports growth has lost its steam Source: Statistics Lithuania, DnB NORD Bankas

11. About 55 percent of all manufacturing products are exported Source: Statistics Lithuania, DnB NORD Bankas

12. Share of high-tech exports in Lithuania remains negligible Source:Eurostat

13. ... since low and medium-low technologies dominate in manufacturing Source:Eurostat, DnB NORD Bankas estimates

14. Nearly a third of all machinery and equipment, as well as food products is exported to Russia Source: Statistics Lithuania

15. Lithuania does not seem attractive for foreign investors Source:Eurostat

16. Manufacturing accrued the most of FDI, however new injections drain off Source: Bank of Lithuania

17. US investments account for just a mere share of total FDI Source: Bank of Lithuania

18. Unfortunately, Lithuania fails in attracting FDI - the key stimulus to robust long-term economic growth Source: Bank of Lithuania

19. RE developers have skimmed off the largest share of issued loans Source: Bank of Lithuania

20. Energy intensity in the new member states is extraordinary high Source:Eurostat

21. The optimism of economic agents lost momentum Source: Statistics Lithuania

22. Flat rate introduction – one of the most successful policies TOP statutory personal income tax, % of income in 2006 Adjusted top statutory tax rate on corporate income, % of income in 2007 • Early implementation – attracted foreign investments • Easy administration • Boost in tax collections Source:Eurostat

23. The list of less successful policies is longer… • Among the least successful policies: • Inability to maintain robust FDI inflows • “Resting on laurels” strategy: no policies to combat swelling prices, especially on property; no actual reform of education system, postponing investment

24. Weaknesses Opportunities • The trade flows through Lithuania are expected to intensify – favourable prospects for transport sector; • Considerable potential in exports of tourism services; • Positive impulses from mounting Eastern markets; • Opportunities to magnify investment flows to the country remain robust; • Benevolent trends in global markets for agriculture and food industry; • Promising engineering industry; • Enough room for expanding exports of IT, trade-related, financial and construction services. • Worsening macro conditions, pessimistic expectations; • Decreasing competitiveness of individual export-orientated industries. • Slower productivity growth compared to that of wages; • Deteriorating attractiveness for foreign investors; • Rising costs of finance; • Tight public finances; • Strong inflationary pressure and potential hikes in energy prices; • High energy consumption intensity; • Low quality of public sector services; • Scarce share of value added created in the higher technologies sectors.

25. The new Government will have toroll up their sleeves • KEY Economic policy directions: • To improve business conditions (ensure higher quality of Governance, depress corruption, fine rule of law, etc.) • To increase attractiveness of investment climate (eliminate bureaucratic barriers, liberalize labour market, tax system reforms, development of public services for business, promote industrial parks, render active cooperation with potential investors, enhance of Government support for exports activities, etc.) • To refine Lithuanian economic structure (introduce essential investment promotion system, enhance clusterisation processes, Increase financing for (R&D) and establish effective incentives for innovations). • To bridge social differentiation and combat inflation.

26. Thank you for your attention! DnB NORD Bankas Economic Research Publications are available at: http://www.dnbnord.lt/en/about/reviews/

27. KEY FOREIGN INVESTORS IN LITHUANIA back | print version

28. Bureaucracy and corruption are the key obstacles for businesses Source: DnB NORD bankas, 2007

29. The situation has worsened substantially Source: authors calculations, Competitiveness Project

30. Other new member state are more attractive Source: authors calculations, Competitiveness Project

31. EU-11 rankings by ease of doing business in 2008 • Lithuania: drastic slump in EoDB from 16th position in 2006, and still among the average by ease of doing business index • Most of categories fall behind though • Positive changes in 2009 Source: World Bank, authors calculations

32. EU-11 rankings by global competitivness • Slovakia’s macro stability under the question, while that of Lithuania - among the best country's indicators • Higher education: quantity versus quality • Institutions: the longest list of imbalances Source: World Economic Forum,authors calculations

33. World Bank: tax rates is the key obstacle to business Source: World Bank

34. WEF: taxes again lead the anti-ranking The Most Problematic Factors for Doing Business, percent of respondents Source: World Economic Forum, Global Competitiveness report

35. The prices of necessities picked up most significantly Source: Statistics Lithuania