C O N F I D E N T I A L VILNIUS 000166
E.O. 12958: DECL: 03/25/2019
TAGS: ECON EFIN LH
SUBJECT: ECONOMIC DISTRESS INTENSIFYING IN LITHUANIA
REF: A. VILNIUS 97
Â¶B. VILNIUS 95
Classified By: Ambassador John A. Cloud for reasons 1.4 (b) and (d).
Â¶1. (C) The economic situation is worsening in Lithuania.
Devaluation of the Polish zloty and Russian ruble, rising
unemployment, and decreasing revenues are some of the
challenges Lithuania faces. Local analysts recently revised
growth forecasts for 2009 to negative nine to ten percent.
Unfortunately, the EU, according to our interlocutors,
adheres to a rosier than reality picture of its eastern
frontier and is unlikely to set aside sufficient funds to
steady economies in Eastern Europe. An IMF aid package may
be in Lithuania's future and another round of budget cuts,
including public sector layoffs, is likely by June.
International borrowing is likely to be more difficult for
the GOL with the recent downgrade of its sovereign debt by
Standard and Poor's.
THE NUMBERS DON'T LIE
Â¶2. (SBU) The Polish and Russian currencies have devalued
between twenty and thirty percent relative to the Lithuanian
lita. Lithuania is therefore losing exports in two of its
largest markets, as well as VAT and excise revenue, as
Lithuanians travel to neighboring countries to stock up on
cheaper goods. The discrepancy in prices is so great that
Lithuanian trucking companies are instructing their drivers
to fill up in Poland, Russia or Belarus. In doing so, a
company operating 10 trucks can save between 3,200 and 4,000
euros per month, depending on where it fills its tanks.
Â¶3. (C) Unemployment continues to worsen. A source told us
that desperate job applicants are queuing in front of Labor
Exchanges before they open at 7 a.m. The Exchange reports
148,900 job seekers in February 2009, 77.8 percent more job
seekers in January 2009 than January 2008, and unemployment
in the double digits in some regions.
Â¶4. (U) The government's budget deficit is growing, despite
earlier budget cuts and tax increases, as revenues decline.
The GOL slashed spending by approximately 15 percent at the
beginning of the year, and is now seeking another 3 billion
LTL in cuts (about 11 percent of the original budget), even
as analysts revised growth forecasts for the year to negative
nine to ten percent. The details are not yet clear, but cuts
likely will include eliminating many public sector employee
perks (bonuses, entertainment budgets, government owned
vacation accommodations, etc.), reducing the number of state
programs, consolidating government functions, and decreasing
the salaries of the top management of state enterprises (by
as much as 25 percent). In addition, PM Kubilius recently
said that the GOL would consider laying off 4,000 public
sector employees or approximately twenty percent of total
Â¶5. (SBU) External borrowing, already a challenge, should
become more difficult following Standard and Poor's lowering
its sovereign credit ratings on Lithuania to BBB/A-3 from BBB
EU NOT HELPING
Â¶6. (C) Mykolas Majauskas, economic advisor to the prime
minister, told us that the EU is not likely to help Eastern
Europe with extra aid and said that what is now set aside is
insufficient for the prospective need. Ramunas Vilpisauskas,
economic advisor to the president, alleged that the EU has a
"rosier view" than the economic situation in Eastern Europe
Â¶7. (C) Majauskas said that the EU is unlikely to advance
Lithuania's euro accession. He told us that PM Kubilius had
not expected the requirements for euro accession to be
lowered, even under the current extreme circumstances, but
said that the GOL had at least hoped for some "positive
signals" to come out of the March 1 Informal Meeting of Heads
of State or Government in Brussels. Instead, the President
of the Euro Group, Prime Minister Jean Claude Juncker of
Luxembourg, made a statement emphasizing that the euro
aspirant countries should not expect anything different or
unusual. This, Majauskas said, sounded more like a negative
Â¶8. (C) Lithuania's economy hasn't driven off a cliff but the
economic situation is worsening. PM Kubilius still prefers
to take tough measures without turning to the IMF to help.
Lithuania continues "technical talks" only with the IMF.