The Lithuanian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued No. 1 • 8 February2013
introduced, and the majority of nonfood productscontinued to be sold unofficially and not taxed.Even though these ratios are only approximate, asthe exact tax base is not calculated, there are other signs that the shadow economy might not bedecreasing in some areas. Overall tax revenue as apercent of GDP and as a share of domesticdemand decreased in the third quarter last year.
General government balance and tax revenues
10152025200720082009201020112012-12-606121824General government balance, % of GDP (rs)Tax revenue, % of domestic demandTax revenue, % of GDPSources: Ministry of Finance and Swedbank.
Moreover, according to the Nielsen “empty-pack”survey, the share of smuggled cigarettes inLithuania increased significantly in the last quarter of 2012 after decreasing for one-and-a-half years.
A share of smuggled cigarettes in Lithuania, %
12.621.341.543.034.630.829.335.410152025303540452009Q22010Q22011Q22012Q2Source: Nielsen empty pack survey.
Public finances will continue to improve
This year, income tax revenue will be supported byfurther increases in employment and fastergrowthof wages. Revenues from VAT and excise dutiesare to a large extent dependent on householdsentiment and consumption growth, the latter of which is forecast to fall from a growth of 4% lastyear to 3% this year. This is mainly due to risingprices of necessities and the probability that thesavings rate will not decrease much further.We expect Lithuania will maintain fiscal disciplinethis year. The budget deficit will decrease to 2.5%,and public debt is estimated to fall from its peak of 40.9% of GDP in 2012 to 38.4% of GDP in 2013.Still, borrowing needs for 2013 are estimated at LTL7.3 billion. It is planned that the main part (75-80%)will be raised in the domestic market. Interest ratedevelopments have been favourable. At the end of January, Lithuania borrowed EUR 400 million for five years at 2.63% annual interest--one of thelowest rates in its history.
Lithuania’s credit default swaps (CDS), basis points
D e c - 1 1 J a n - 1 2 F e b - 1 2 M a r - 1 2 A p r - 1 2 M a y - 1 2 J u n - 1 2 J u l - 1 2 A u g - 1 2 S e p - 1 2 O c t - 1 2 N o v - 1 2 D e c - 1 2
CDS (USD, 5 year)CDS (USD, 10 year)Source: Bloomberg.
Reducing the size of the shadow economyshould be a priority
The current excess liquidity in financial markets willnot be permanent, nor will the low interest rates.One way to alleviate the borrowing needs of thegovernment would be to reduce the size of theshadow economy. In 2012, the shadow economy inLithuania was measured to account for about 26%of the GDP.
More efficient tax collection wouldstrengthen public balances and ease the pressurearisingfrom decreasing support from EU structuralfunds. Therefore, one of the main priorities of thegovernment should be to increase its efforts tomake the shadow economy official and, thereby,reduce tax evasion.The size of the shadow economy not only affectspublic finances through lost tax income but alsoincreases the tax burden for those who operatelegally. Therefore, in order to compensate for thelost tax revenues from decreased labour taxation,
Lithuanian Free Market Institute, “Lithuanian ShadowEconomy,”,2012.