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

  • 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 quarter.

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 cheaper.

"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 economy."

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 stability.

"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 year."

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.