INTERVIEW: Lithuania's "contractionary expansion" shows Greece the way

By bne IntelliNews May 3, 2010

Mike Collier in Riga -

Lithuanian Finance Minister Ingrida Simonyte recently had to endure a bus ride all the way back to Vilnius from an EU meeting in the Spanish capital, but while making every penny of state money count has become a priority in Lithuania, this was down to the volcano rather than taking austerity measures to extremes. Even so, within hours of pulling into Vilnius' decidedly non-business class bus station, Simonyte was back at her desk and fielding bne's questions.

It is the latest example of the stoicism that has served all three Baltic states well through the financial crisis. Their broad policy of cutting costs, penny-pinching and resisting the temptation to devalue stands in stark contrast to the spend, spend, spend approach of fiscal stimulus favoured by the west and the dodgy accountancy that has landed Greece in so much bother. If Lithuania's recession was one of the worst - 15% in 2009 - its turnaround could serve as a great advertisement for its labour flexibility and business culture. In a typically paradoxical Lithuanian turn of phrase, Simonyte describes the overall strategy as "contractionary expansion" - slimming down in order to grow.

Following its decade-long boom as a "Baltic tiger," Lithuania's situation does have some parallels with where Greece finds itself today, most notably in terms of its unsustainable budget deficit. "Fiscal consolidation measures taken in the budgets of 2009 and 2010 amounted to 12% of GDP. This allowed us to reduce the year 2009 deficit to 8.9% of GDP - without the measures taken it would have reached up to 18% of GDP in 2009," Simonyte says. "The strict fiscal consolidation allowed us to successfully return to financial markets in 2009."

It was the decision to risk going to the markets in a big way that really set Lithuania apart from Estonia and Latvia. While Estonia chose to use the reserves it had cannily stockpiled during the boom years, Latvia was forced to throw itself on the mercy of the International Monetary Fund (IMF) and EU for a €7.5bn bailout that seemed shocking in 2008, but now looks rather modest compared to the money pit opening up in Athens. "The need for fiscal tightening and structural reforms was evident," Simonyte says. "Lithuania chose to use the IMF's experience in some public finance areas, while retaining the flexibility to choose its own measures to achieve the needed result. The aim was to earn a reputation as a country that is capable of solving its financial challenges on its own."

"Higher interest rates in the short run will be outweighed by the savings in the long run," she insists.

Following a successful $2bn, 10-year bond issue in February and tax revenues for the first quarter of the year exceeding expectations, giving the government an €80m windfall, Simonyte says there is "no immediate need" to return to the international markets. However, she doesn't rule out the possibility. "The lower borrowing need is also conditioned by outperforming budget revenue and strong demand for local-currency bonds. However, we closely monitor the markets and we would not rule out one more public bond issue on international markets if market conditions appear favourable," she says.


Like Estonia and Latvia, Lithuania has trumpeted its eagerness to join the Eurozone ever since being admitted to the EU in 2004. Lithuania came tantalisingly close to achieving that goal in 2007, missing out thanks to inflation that was a mere 0.1% above the level dictated by the Maastricht criteria. Given the Eurozone's current strife, what at the time seemed like a heartbreaker could now seem like a close shave.

The lita's peg to the euro remains and as the euro tumbles, Lithuanian competitiveness improves particularly among neighbours Belarus and Russia. But Simonyte insists Lithuania remains enthusiastic about monetary union, possibly in 2014, while suggesting that existing members might think about following their own rules. "Lithuania committed to join Eurozone in the EU accession treaty and this goal remains as important as it was from the very beginning. The importance of control over public finances is independent from being a member of the Eurozone. Eurozone membership does not solve the deficit and debt issues, only country policies can do so," she says. "However, our participation in the European monetary union with the temporary derogations obliges Lithuania to comply with the same EU fiscal discipline rules, but does not allow us to use all the benefits that Eurozone membership provides. That is why the ultimate factual membership is both important and desirable."

"Neither the global nor regional economic situation is certain yet," she warns. Her ministry's budget plans are based on "cautions macroeconomic scenarios" with budget revenues based on 1-3% growth scenarios over the medium term, though the 2010 budget is still based on a GDP contraction of more than 4%.

However, foreign direct investment inflows could accelerate growth to 4-5% over the long term, she says. "We expect that the second quarter will bring some robust evidence on the success of our 'contractionary expansion' strategy."

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