LB improves forecasts: we are approaching a favorable scenario, wages will rise 6.3 percent.

In the baseline scenario, GDP is projected to grow 2.9% this year and 5.1% next. That is about 1 percent. better forecast than the one announced last December.

“The service sector, which is the most affected, continues to feel the weight of the restrictions imposed to stop the spread of the virus, but the industry and exporters are increasing their momentum, contributing significantly to a faster economic recovery. Changes in the structure of exports and the evident increase in the share of exports of higher value-added products, such as reagents used in the production of vaccines, were particularly gratifying ”, says Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.

GDP will be further driven by lagged demand, and both households and businesses will postpone part of their purchases due to various constraints.

The Finance Ministry forecast last week that GDP growth will be 2.6 percent this year and the expected 3.2 percent next year. growth.

If economic development advances as we forecast, then I see a sufficiently successful scenario in the medium term ”, says V. Vasiliauskas.

Last year, public spending injections accounted for more than 9 percent. gross domestic product, causing the economy to contract just 0.8% last year. and it was one of the best indicators in the European Union.

The resilience of the economy and the expected acceleration in the vaccination of the population allow the Bank of Lithuania to forecast that the economy will start to recover faster this year.

In the main economic development scenario of the Bank of Lithuania, restrictions are expected to restrict economic activity in 2021. They will be announced, but some of them will remain in effect for the next few quarters. As various constraints ease, private consumption should increase markedly.

“Latvia was more prepared in the sense that the institutional structure was established and the aid measures started much faster. Well, we got a bit more stagnant, it took a bit of time in the composition of the institutional structure. On the other hand, the Economic structures are slightly different in Lithuania, Latvia and Estonia, the tourism sector has a smaller component in our economy ”, said V. Vasiliauskas about last year.

He highlighted that although the economic contraction in Lithuania last year was less than in neighboring countries, public spending was higher.

The public debt currently stands at around 50 percent. GDP. According to V. Vasiliauskas, it will continue to grow, but the same trend is registered throughout Europe

“Both last year and this year are expected to be in deficit and with a significant deficit, it is natural, because it is necessary to finance various support measures. The level of public debt tends to increase. Lithuania does not stand out here: in other countries, as well as in the EU member states, the euro area member states, debt ratios are increasing due to support and stimulus measures, ”noted V. Vasiliauskas.

Criticized the tax system: a fundamental overhaul is needed

V. Vasiliauskas assured that Lithuania needs to review its tax system.

“We need to do our homework, do personal hygiene and review the tax system itself. And I’m talking here about systemic things, not individual fees, not reviewing individual items, but the entire system. I would especially highlight GPM ”, said V. Vasiliauskas.

According to him, the current system allows tax arbitration and systemic solutions are already mature.

“The biggest problem when it comes to the higher level of tax revenue is related to the VAT gap, so any decision that would increase the VAT gap, both as it should collect and collect, would be incorrect,” V Vasiliauskas pointed out.

He assured that the desire to establish a reduced VAT rate for restaurants or cafeterias would contradict the essence of the VAT tax, such a proposal was presented this Monday by the president of the Budget and Finance Commission of Seimas Mykolas Majauskas.

“In my opinion, a systematic approach would be important and one of the main problems is the VAT gap. Such solutions would increase that VAT gap. VAT is essentially a consumption tax. The focus of the debate that we are hearing in the public sphere it is subsidizing companies through a lower VAT rate. In my opinion, this contradicts the essence of VAT as a consumption tax “, says V. Vasiliauskas.

Salary growth: 6.3 percent. this year

Wages are expected to rise faster than prices by 6.3%. this year it is 5.5 percent. next year.

“Salaries grew in all sectors in 2020, and the average in the economy was double digits, exceeding 10% (12.2%), both in the public and private sectors,” said V. Vasiliauskas.

He explained that the bonuses were received by the doctors, the salaries rose in the education sector, in the civil service, which had pushed up the salaries of the public sector.

“The gap between people with the lowest and highest incomes has widened. The wages of the least qualified salaries increased less than those of the highest salaries,” says V. Vasiliauskas.

The situation in the labor market changes relatively little during the second wave of the pandemic: there is no increase in the number of short-term unemployed who have been unemployed for less than 1 month. Much of the business has adapted to working in a pandemic, and state aid measures have helped save jobs.

The export situation is exceptional

V. Vasiliauskas appreciates that the export situation is exceptionally good.

“The approach really increased and the individual export components were satisfied with the excellent results,” says V. Vasiliauskas.

According to him, the structure of the Lithuanian economy is different from that of the surrounding countries, and here the areas most affected by the pandemic, such as hotels or tourism, occupy a relatively smaller share in the economy compared to the Baltic neighbors. .

“We see that the green color is the reagents. This is a direct correlation with the situation of the pandemic; in fact, the export of reagents has significantly changed the number of exports in Lithuania. Also agricultural products, here for the harvest, both cereals and tobacco, because tobacco is also classified as a food product. These components drove exports ”, says V. Vasiliauskas.

He questioned the sustainability of exports, whether the changing structure would survive, but he saw the preconditions for it.

“I think the need for reagents will continue. And when it comes to agricultural production, it has to do with seasonal things, some years are better, others worse. (…) I think the ability of our companies to compete in foreign markets , at least for the moment, it is not in doubt ”, affirmed V. Vasiliauskas.

Observe a high degree of uncertainty

However, uncertainty remains high, so economists at the Bank of Lithuania have developed alternative scenarios for economic development. At worst, the pandemic would be managed only to a limited extent in the near future, with GDP growth of 1.1%. this year it is 3.5 p roc. next year. In a favorable scenario, the pandemic would be relatively successful in the near future, with GDP growth of 3.8%. 2021 and 6 percent. 2022

High inflation is not expected

The Bank of Lithuania forecasts that inflation will remain relatively low: in 2021. – 1.6 percent. (previous forecast 1.1%) and in 2022 -1.9 percent

“We do not expect high inflation. When I speak of high inflation, I mean the price stability objective, which should be around 2%,” explained V. Vasiliauskas. He does not expect inflation to significantly exceed 2 percent.

You noticed that the categories of individual goods and services differed – some became more expensive, others became cheaper: “Naturally, the services, whose provision is more limited, have decreased, they have been reduced.”

Better global economic prospects and limited production have caused oil prices to rise sharply in recent months.

“Higher inflation can be expected in the euro area this year. In some months, especially in autumn, we may see inflation in the euro area approaching 2%. This is mainly due to commodity prices. premiums, particularly oil, which has recently risen in response to knowledge about vaccines. Well, the demand has also increased, “said V. Vasiliauskas.

The Bank of Lithuania forecasts that inflation in the euro area will fluctuate around 1.5% in 2022 and 2023.

Bank profits fell by a fifth

The banking sector remains stable. To ensure the stability of the banking sector, the Bank of Lithuania reduced certain capital requirements, provided that the released capital must be used to amortize potential losses and stimulate economic growth. The sector has successfully weathered the challenges of the pandemic so far, with a capital adequacy ratio remaining high and liquidity exceeding minimum requirements nearly 8 times at the beginning of the year.

Deposits in banks in 2020 grew almost 30 percent. – up to EUR 32 billion. Deposits from individuals increased by one fifth and those from companies by more than one third. This trend was largely due to the effects of the pandemic, as residents and businesses were in no rush to spend due to uncertainty and the tendency to save money. Credit trends were highlighted.

The retail loan portfolio grew 6.6 percent during the year. – up to EUR 11 billion. It was dominated by mortgage loans, which grew 7.7 percent. – up to EUR 8.8 billion. The corporate loan portfolio was down 15 percent. – up to EUR 7.8 billion. It is true that the need for corporate borrowing has been reduced by state aid measures, internal corporate reserves and suspended development plans.

Bank assets grew by more than a fifth to $ 38 billion. However, the largest increase was recorded in the Bank of Lithuania or other credit institutions. They accounted for almost 41 percent. bank assets. It cost the banks nearly $ 43 million. Interest expense in euros, which, compared to 2019, increased by up to 65%.

Basically, this reason, together with the doubling of expenses due to the deterioration in the quality of the loan portfolio (57 million euros), caused the profit of the banking sector to fall by almost a fifth to 280 million euros. EUR.