The Bank of Lithuania on the challenges ahead: extremely strong economic contraction will have to be countered

A difficult year awaits

The LAC report presented on the Seimas website of the Republic of Lithuania stated that global economic growth had been hampered by international trade conflicts, prolonged uncertainty about Brexit and the coronavirus outbreak (COVID-19) at the end of the year caused an unprecedented shock and extreme uncertainty.

It was argued that, in light of the aforementioned turmoil, the Eurosystem, which includes LAC, maintained an environment of low interest and favorable debt conditions, and consistently implemented other stimulus measures.

“Lithuanian economy, regardless of global trends in 2019.” It was written, but LAC experts added that, in their opinion, in 2020, the extremely strong economic contraction caused by the coronavirus outbreak and the decline in economic activity due quarantine will have to be countered. “

The report also describes how banks fared in 2019. Their assets topped $ 30 billion for the first time last year. Eur limit.

Such rapid growth was explained by record increases in household deposits.

„2019 Banks increased their resistance to potential losses by strengthening their capital positions. With the onset of the coronavirus crisis, we carried out stress tests in banks. The results showed that they are ready to face even the most difficult economic challenges, “the report said.

It is true that the banks received most of their income from their main activity: loans, but it was written that not all were provided equally: the banks were willing to lend to the population, especially for housing, but loans to companies , especially the little ones, were significantly reduced.

It was also written that in 2019-2020. At the beginning of the 20th century, Lithuania also marked the fifth anniversary of the euro in Lithuania.

“Although its introduction was associated with certain costs, the results of a study by experts from the Bank of Lithuania confirmed that the benefits far outweighed the costs: faster growth of the economy and cheaper income, loans and payments, and the disappearance of the costs of changing litas and euros.

Full membership of the Eurosystem will also pay off in the fight against 2020. “This time, unlike in 2009, we have access to monetary and macroprudential policies and other instruments of financial support for euro area countries that will help boost the economy, “the report said.

With regard to interest rates, it has been argued that interest rates in the euro area have declined in recent years, especially in the mortgage market, to record lows, but the situation has been somewhat different in Lithuania.

“After several years of growth, the average interest rates on new loans in Lithuania have stabilized, although they were still higher than the average in the euro area, especially for non-financial corporations,” reviewed the situation in Lithuania. .

It was also added that higher interest rates in Lithuania may be due to less competition in the banking sector and higher risk of new loans due to higher concentration.

“Interest rates in Lithuania are likely to be even higher if the Eurosystem does not pursue accommodative monetary policy,” the report said.

Coronavirus had a negative effect

It was also written that the coronavirus pandemic and the restrictions imposed by governments on its management will have a particularly significant negative impact on the world economy.

“As the virus began to spread in China, only short-term disruptions to the supply chain were feared, and its impact on the global economy was expected to be relatively limited. However, when the epidemic became a pandemic, it became clear that its negative effects would disappoint throughout the world economy.

Fearing coronavirus damage to the economy, there has been a particularly large negative correction in the financial markets.

Yields on EU government bonds also increased as risks increased and markets prepared for the government’s high borrowing needs. Falling oil demand and the failed OPEC deal to limit oil production have cut the price of oil to $ 25. a barrel – the lowest values ​​in twenty years. The activity of the world economy has been significantly reduced, “it was written.

The service sector was also left out, as was the direct direct negative impact. The negative consequences were explained to be for accommodation, catering, leisure and other activities, as well as non-food retail trade.

It is explained that with the spread of the coronavirus, the Lithuanian economy also did not avoid a particularly significant shock, but its possible size and duration are subject to great uncertainty.

“Lithuania will feel the influence of the coronavirus through several main channels.

The negative effects will be felt mainly through the drop in demand for goods and services. Various restrictions and declining international economic activity will reduce demand for Lithuanian exports and lead to lower demand for transport services. “Measures taken to stop the spread of the virus, prevailing uncertainty, the weaker labor market and consumer confidence indicators will limit domestic consumption,” the report said.

It was also stated that COVID-2019 will also affect the Lithuanian economy through supply channels, and the breakdown of global production and supply chains will have a negative impact on Lithuanian producers importing intermediate products from other countries.

“As the number of sick or quarantined people increases, production may be constrained by labor shortages. The negative consequences for the country’s economy should be mitigated by the LTL 5 billion announced by the Ministry of Finance and the Bank of Lithuania. Eur, or 10 percent. GDP, which is the blueprint for economic and financial measures, “said LB.

V. Vasiliauskas also stated that trends in the labor market are also not optimistic.

“Recent figures show a slowdown in the growth rate of unemployment,” he said. He also said that wages fell more in lodging and food service activities.

“The fact that wages have fallen 11 percent is natural, because most of those who work in the fields have dropped,” he added.

Possible economic scenarios presented

LAC also presented three possible plans for the development of the Lithuanian economy in 2020-2021. script.

They were written to differ in three main assumptions: the extent of the decline in external demand, the duration of quarantine, and the pace of economic recovery.

“Based on the first scenario of a sharp decline and a longer recovery (U-shaped decline), Lithuania’s exports are expected to decline to a degree similar to that of the 2009 global financial crisis, the quarantine would be lifted after 2 months, but household consumption and investment would be slow to recover only in the medium term If this scenario were to materialize, in 2020 the country’s GDP would fall 11.4 and in 2021 it would grow 9.7 percent.

In the worst case scenario, external U-shaped external demand is expected to decrease to a degree similar to that of the global financial crisis, but the duration of the quarantine would be twice, that is, and. 4 months This would lead to a particularly sharp decline in domestic demand, both for consumption and for household investment, which will prevent a more significant economic recovery in 2021.

After the approval of this scenario, in 2020 the country’s GDP would decrease by 20.8% for 2021 and for 2021. – an additional 8.9 percent. However, it is important to mention that compliance with this scenario is unlikely.

Under the Form V recession scenario, foreign demand for Lithuanian goods and services is expected to decrease by almost 4%, quarantine will be lifted after 2 months, and the economy will begin to recover in the third quarter of this year. If these assumptions are confirmed, the country’s GDP will decrease in 2020. It would reach 3.4%, and in 2021 growth would be 6.7 percent, “said the report.

V. Vasiliauskas himself stated that the reference scenario is considered as a U scenario.

Questions asked

After the report, the member of the Seimas Mykolas Maujauskas V. Vasiliauskas, speaking about the support and endless electoral gifts of the rulers, also mentioned the largest budget deficit during the entire period of Independence and asked what consequences it might have for stability. the country’s financial future.

V. Vasiliauskas explained that one should think about the medium-term perspective now, because the additional measures actually increase public debt.

“We are approaching 60 percent.” The selective use of fiscal measures is very important, “he said, saying that money for daily spending may boost the economy in the short term, but it will not contribute to the country’s economic growth in the long term. .

Ask for a budget adjustment

V. Vasiliauskas, President of the LAC Board, said that it is also necessary to review this year’s budget, ELTA announced.

“All measures need to be included in the budget. Without an amending budget, the so-called supplemental budget for this year, we find it difficult to move forward as the scale of additional measures, including the scale of revenue collection, increases. Therefore, without budgetary adjustments, in my opinion, it would be difficult to advance in the parliamentary republic, ”said V. Vasiliauskas at Seimas.

“That is why we say: all measures of expenses and income must be reflected in the adjusted budget,” he added.