Robert Anderson in Tbilisi -

Lithuania still aims to balance its budget by 2017, despite historically low interest rates in the Eurozone that makes it cheap for states to borrow to finance public investment projects to boost economic growth.

“We still plan to reach balance by 2017,” Rimantas Sadzius, finance minister and a senior figure in the ruling Social Democrats, told bne IntelliNews in an interview at the European Bank for Reconstruction and Development Annual Meeting at Tbilisi last month. According to government data, the deficit was just 0.7% of GDP in 2014, down 1.9 percentage points from the previous year.

In a report this week, the Organisation for Economic Co-operation and Development called for more global investment to accelerate growth. Yet Lithuania, like its Baltic neighbours Estonia and Latvia, is prioritising fiscal cuts, despite relatively low public debt and a legacy of crumbling Soviet infrastructure that needs investment. 

“We entered the 2008-09 crisis with public debt of 15% of GDP,” explained Sadzius. “It then jumped above 40%. At some time we will have to refinance this money, when interest rates may be quite different. We also spend €600mn a year on servicing this debt – this is money that could be spent elsewhere.”

There is a broad consensus on fiscal austerity across the political spectrum in the Baltic countries – excluding leftwing Russian ethnic parties such as the Centre Party in Estonia and Harmony in Latvia. Instead, Lithuania will rely on the private sector for investment.

Ball in Greek court

This means the Balts have little sympathy for the Greek government’s drive to restructure its debts without undertaking deep fiscal reforms. Greece and the EU are battling to reach a compromise on the reform programme by the end of this week, in order to release funds so that Athens can make a €300mn loan repayment to the International Monetary Fund.

“In these negotiations we lack a good base. The ball is in the court of the Greek authorities,” said Sadzius, pointing to the list of measures that the EU has asked for.

Sadzius highlighted the deep reforms that Lithuania and fellow Balts have been forced to push through, not just since the 2008 crisis, which hit them all hard, but during the whole period since the collapse of Communism almost 25 years ago. Living standards in Lithuania – and social benefits – are still lower than in Greece. 

“We are ready to express our solidarity, but politically it would be very difficult to persuade our people that we are doing the right thing if the money [for Greece] only goes on welfare spending, not on structural reform,” Sadzius said. “We are ready to show solidarity, but we need real proof of that.”

Export switch

Despite prioritising budget cutting, Lithuania has enjoyed strong growth since the financial crisis, achieving 2.9% growth last year. However, the government has revised down its forecast for economic growth this year from 3.4% to 2.5%, in part because of its exposure to the economic downturn in neighbouring Russia.

Sadzius admitted that Russia’s economic problems and its blockade of EU food products have dealt a serious blow, with Russian demand for Lithuanian exports falling by between 60% and 100% depending on the sector. Nevertheless, he argued that the country’s overall exposure to the Russian economy was exaggerated by the freight re-export business. The bulk of the country’s exports to Russia were not of Lithuanian origin, and half of the lost exports had been successfully redirected to the Eurozone and elsewhere. Exports to Russia represented 21% of the total in 2014, but only 13.7% in the first quarter, and only 1.2% of exports were Lithuanian-origin exports to Russia.

Sadzius said that the Russian downturn could reduce Lithuanian GDP by 1 percentage point this year, but lower energy prices could boost it by 0.6pp. “These influences almost balance, so it’s not so tragic for us,” he said.

What was more significant was the impact of Russia’s aggressive foreign policy on the budget, he said, given that the government had now committed to spend the Nato target of 2% of GDP on defence by 2020. In 2013 Lithuania spent just 0.8% of GDP on defence. Lithuania is reintroducing conscription and boosting defence spending by 38% this year, and will hike it by a similar amount next year to climb towards this target. 

The shift of Lithuania’s exports westwards – 46% of exports went to to the Eurozone last year – has been assisted by the country’s adoption of the euro on January 1. Sadzius said the country had benefited greatly from Eurozone membership already, with lower interest rates and better investment ratings. There was also much greater confidence in the stability of the banking system since the European Central Bank became the main regulator.

As well as exports, Lithuanian workers have been streaming westwards since the collapse of Communism, giving the country the most serious emigration problem in the EU.  

However, Sadzius said there was little Lithuania could do to address this problem, except to develop the economy. “Just the fact that living conditions are rapidly improving attracts people to go back. We see such people,” he said.