Situated in the geographical centre of Europe, Lithuania has moved on from communist rule to recognised independence through social and political reform. The highly literate society’s economy grew between 2004-2008 but suffered a drop of almost 15% in GDP in 2009. How has the country recovered and what does the future hold in store for this Baltic state?
- Official country name:
- Republic of Lithuania
- Litas (LTL)
- Capital city and financial centre:
- Other major cities:
- Kaunas, Klaipeda, Siauliai, Panevezys
- Time zone:
- UTC +2
- 3,535,547 (July 2011 est)
- Population growth rate:
- 0.276% (2011 est)
- GDP per capita (US dollar equivalent):
- $16,000 (2010 est)
- GDP real growth rate:
- 1.3% (2010 est)
- Government type:
- Parliamentary democracy
- Head of State:
- President Dalia Grybauskaite
- Political leader:
- Prime Minister Andrius Kubilius
- Top export partners:
- Russia, Latvia, Germany, Poland, Estonia, Netherlands, Belarus and the UK
- Top import partners:
- Russia, Germany, Poland, Latvia and The Netherlands
Following the country’s entry into the World Trade Organisation and EU membership in 2004, Lithuania’s economy improved steadily, posting GDP growth of approximately 8% per year, leading up to the 2008-09 economic disaster. Despite the optimistic outlook of this new EU relationship, however, Lithuania suffered one of the world’s worst economic declines in 2009 and the country’s current account deficit came under pressure.
Nevertheless, Lithuania’s economy has made a swift recovery from the deep recession it experienced, with current forecasts predicting 5% GDP throughout 2011. Although unemployment rose from 13.7% in 2009 to 17.8% in 2010, that figure is expected to fall to 12.7% by the end of 2012.
The recovery was aided by trade with Lithuania’s eastern European neighbours as well as foreign direct investment in the country, which totalled $13.7 billion by mid-2010. According to the latest economic outlook from the European Commission, “Economic activity is expected to accelerate in 2011 and remain strong in 2012 as domestic demand progressively becomes the main engine of growth.” Private investment is also set to increase on the back of a more favourable business outlook.
With membership of the single currency in its sights, Lithuania pegged the lita to the euro at the beginning of February 2002 at the rate of LTL 3.4528 to EUR 1. Originally, the country was destined to adopt the euro in 2007, but inflationary pressures allayed those plans. Lithuania is aiming to adopt the single currency by 2014. While Prime Minister Kubilius remains adamant of the country’s adoption of the euro by that time, Central Bank Governor Vitas Vasiliauskas has his doubts, saying in July 2011 that: “Inflation is going to be the main obstacle again. The fact is that under our forecasts, 2014 does not look like the year when we can have the euro.”
The banking sector
The Bank of Lithuania is the country’s central bank, which supervises Lithuania’s credit institutions by issuing licences for their operation, monitoring their financial situation and operational risks.
A number of the Nordic banks are very active in the Lithuanian banking sector and according to official figures published in November 2010, the country’s top ten banks by assets were as follows:
||Total assets (€ billion)
||DnB NORD* Bankas
||Nordea Bank Lithuania
*DnB NORD belongs to DnB NOR
Despite recent improvements in the country’s economy, which were also reflected by the banks’ profitability, concerns remain and Moody’s rating agency has the Lithuanian banking sector on a ‘negative outlook’. When presenting the country’s Financial Stability Review 2011 in June, Vasiliauskas commented: “Even operating under unfavourable circumstances, the banking sector remained stable and is beginning to show obvious signs of recovery, however, today’s good news does not provide grounds for relaxing, and banks, in order to maintain sustainability, must adequately assess their losses on impaired loans and attract additional capital”.
Payments and clearing
||High-value, urgent payments in LTL
||Settlement in real-time with immediate finality
||16:00 EET (open from 07:45)
||Retail payment system
||Non-urgent, low value payments in LTL
||Settlement on same-day basis with end-of day finality. There are four payment order processing cycles in the system LITASMMS, which are performed at 9:00, 12:00, 15:00 and 15:30
||15:30 EET (open from 07:45)
|TARGET2-LIETUVOS BANKAS/ LITAS-PHA*
||High-value, urgent payments in EUR
||Settlement in real-time with immediate finality
Cut-off for customer payments = 18:00 EET
Cut-off for interbank payments = 19:00 EET
||Credit unions’ payments
||Settlement on same day basis
* According to the central bank, LITAS-PHA is due to be suspended as a settlement system from 18th November 2011.
Credit transfers are the most popular method of making payments, in terms of value. Electronic credit transfers are increasing, both in terms of value and volume and have in recent years overtaken paper-based transactions.
Cheques are rarely used in Lithuania. Some corporate cheques are used but only very occasionally.
Direct debits are the most rapidly growing non-cash payment format in Lithuania.
Debit and credit cards are both widely used, but debit cards are more prevalent. VISA is the predominant card issuer.
Bank deposits are the most popular short-term investment instrument. Time deposits, with maturities ranging from overnight to
12 months and over are available.
Interest bearing current account and deposit accounts may be opened in Lithuania.
Certificates of deposit (CDs) are available, with maturities ranging from one month to 12 months.
Treasury bills are issued by The Bank of Lithuania (by auction) and the Lithuanian Ministry of Finance (directly). Maturities vary from one to three, six and 12 months.
Money market funds have increased in popularity in recent years and are now one of the most popular short-term investment instruments.
The country’s repo market is fairly liquid.
Tax and legal considerations
The standard corporate tax rate was reduced from 20% to 15% from 2010. Since 2010 companies can apply 5% corporate tax rate,
if the average number of employees does not exceed ten people and income for the taxable period does not exceed 500,000 litas.
Since 1st January 2010 all dividends are eligible for the participation exemption rule (under which the dividends are exempt from corporate income tax if the parent company holds at least 10% of shares for at least 12 months).
Lithuania charges no withholding tax on interest paid to resident or EEA companies but otherwise the levy is 10%. For the most part, 15% tax is charged on dividends – unless the tax treaty reduction or EC directive applies. Withholding tax of 10% is levied by the country on royalties paid to a non-resident company.
Lithuania imposes regulations for transactions based on OECD transfer pricing guidelines, and documentation is required if a company’s – not a financial, credit or insurance institution’s – annual turnover exceeds LTL 10m.
Interest that is paid to controlling entities is subject to thin capitalisation restrictions. A debt to equity ratio of 4:1 applies.