Deficit becoming major risk to Lithuania's euro ambitions

By bne IntelliNews May 24, 2013

bne -

As the Bank of Lithuania lowered its forecast for economic growth, officials warned on May 23 that Lithuania risks missing its professed target date of 2015 to join the euro due to the growing budget deficit.

Bank of Lithuania's deputy chairman, Raimondas Kuodis, told reporters that the budget deficit has become a bigger hurdle than inflation to adopting the euro in 2015, with slowing economic growth hitting tax revenues, reports Bloomberg. "The main obstacle, as we now see it, is the budget," Kuodis said at a news conference, citing "serious problems with value-added tax collection" this year and high rates of tax evasion.

The central bank dropped its forecast for economic growth in 2013 to 2.8%, citing slowing exports and investment, the latter particularly from the state. Export growth, a major driver of 2012's growth of 3.7%, are now expected to grow slower than thought due to weak external demand and the depletion of last year's harvest's reserves, the report said. It added that the central bank hopes domestic demand can take up some of the slack.

However, due to the slowdown, "the risk is very big" that the deficit won't shrink below the euro-adoption limit of 3% of GDP, central bank economist Ruta Rodzko said.

Meanwhile, the inflation target - previously seen as the main risk to Lithuania's Eurozone ambitions - is now within reach, she added. The Bank of Lithuania report dropped its inflation forecast by 0.4 percentage points, to 2%, for the year. "If global price trends continue to be favourable, it can be expected that inflation will be significantly less than in the past few years," it commented.

The 2013 government budget adopted in December is based on a forecast of 3 percent GDP growth, with plans to cut the deficit to 2.5% of economic output from 3.2% last year.

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