Lithuania economy briefing: An outlook of Lithuania's steps towards a higher added value economy - China-CEE Institute

ISSN: 2560-1601

                                                                                     Vol. 36, No. 2 (LT)

                                                                                          January 2021

                                     Lithuania economy briefing:
      An outlook of Lithuania’s steps towards a higher added value
                                              economy
                                           Linas Eriksonas

                                                             1052 Budapest Petőfi Sándor utca 11.

                                                             +36 1 5858 690
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                                                             office@china-cee.eu
Szerkesztésért felelős személy: Chen Xin
Kiadásért felelős személy: Huang Ping                        china-cee.eu

2017/01

An outlook of Lithuania’s steps towards a higher added value economy

      On 20 January the European Commission released the opinion on the draft budgetary plan
of Lithuania for 2021. The EC has flagged up two issues to keep the economy planners busy
for the rest of the year. Firstly, the Commission brought to attention that Lithuania’s general
deficit in 2020 would exceed the 3 per cent of the GDP Treaty reference value. However, a
decision to place a Member State under the Excessive Deficit Procedure was not be taken “in
light of the assessment of all relevant factors created by the outbreak of COVID-19 and its
extraordinary macroeconomic and fiscal impact”. Secondly, the EC noted that based on an ad
hoc forecast plan, the Lithuanian economy would contract by 1.8 per cent in 2020 and expected
to grow by 2.9 per cent in 2021. The Commission, therefore, recommended Lithuania this year
“to pursue, when economic conditions allow, fiscal policies to achieve prudent medium-term
fiscal positions and ensure debt sustainability while enhancing investment to fulfil the expected
economic development scenario”.

      However, the worsening economic situation adversely impacting the labour market might
put at risk of fulfilling the scenario upon which the forecast was made. As of January, 16.1 per
cent of the workforce has been registered as unemployed; the EC forecast indicated that the
unemployment rate was to reach 9 per cent in 2020. Though some of this unemployment is
short-term, there is a real danger that the rising unemployment will continue until the economy
restructures and adjusts to the new normal under the quarantine and the period that would follow
it.

      Below is an outlook of some of the main steps planned in the key policy areas and the
initiated projects that aim to facilitate the country’s transition towards a higher added value
economy over the next few years

      The new government that came to power at the end of last year has confirmed the
ambition inherited from the previous government to make Lithuania “a higher added value-
producing country” that “according to the parameters of economic innovation would compete
with the leading European countries in this field”. The government’s programme boldly
declared that “we are committed to achieving a major economic breakthrough, moving to a
higher economic added value than the economic value that is now. We will promote
productivity growth and increasing foreign direct investment, expand digitization and
implement a public open data policy.” To that end the four-year programme defined several

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indicators to achieve, namely, to increase until 2024 the current level of productivity from 75
per cent to 85 per cent of the EU average, to increase the share of high-value technology
production from 3,6 per cent to 7 per cent of GDP and, more modestly, to increase the ranking
of Lithuania in the Global Innovation Index from the 40th to 35th place.

      The concrete indications of what the country's economic policy could be focused on could
be gleaned from the policy briefs of the respective ministries. Three ministries are directly
responsible for the policy areas which have the utmost relevance for the state of the economy,
namely the Ministry of the Economy and Innovation in charge of industrial policies, the
Ministry of Energy responsible for the policies governing fuel, electricity, thermo-energy
production and supply and the Ministry of Transport and Communications overseeing the
functioning of the transportation system and the development of all-mode transport
infrastructure as well all other state-owned infrastructures covering transport, transit and
logistics, post and electronic communications.

      The three ministries provide the institutional framework for defining the prerequisite
policies for putting particular enablers in place to facilitate the economic actors generating high
value-added outputs. One such enabler is the increasing capacity to unleash the innovation
potential across multiple sectors and local value chains by connecting the local entrepreneurial
talent with the markets globally. In practical terms, the Ministry of the Economic and
Innovation aim to achieve that by stimulating the entrepreneurship in the regions, attracting
investment in high-value generating segments of the economy and supporting export initiatives.
The energetic new Minister Aušrinė Armonaitė reiterated that “we already need to find ways
of encouraging long-term growth, increasing economic and social resilience and preparing for
digital restructuring - for this it is important to encourage exports and, at the same time, attract
investment. If Lithuania does not want to remain in the middle-income trap, we need to refocus
on the creation of high-added value and digital and innovative industry, and to work towards
more collaboration between science and business”.

      Another enabler for increasing and sustaining the high value-added economy is the
availability of affordable energy sources at competitive prices for consumers and enterprises.
Lithuania aims to achieve it by continuous diversification of energy sources (first of all, the
increased renewable energy generation, storage and a balanced transmission), deleveraging the
dominant energy providers' position and looking for new innovating ways to manage the energy
supply chain, including saving the costs on energy storage, transmission and more value from
its use. The maintenance of Klaipėda Liquefied Natural Gas (LNG) terminal, which stores 3,9
TWh worth of gas annually, is one of the critical issues that has occupied the government. The

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floating terminal is rented until the end of 2024, and the evaluations will be carried about
alternatives to the existing solutions to generate more value from operating the terminal. The
Minister of Energy Dainius Kreivys has vehemently stated that "our aim is to ensure the
efficient terminal operation and the best price for consumers, but this can only be achieved by
completely depoliticizing the process of determining the minimum quantity and by entrusting
it to that regulator".

      The construction of the gas interconnection Poland-Lithuania (GIPL) to be completed by
the end of this year will significantly contribute to the energy system. GIPL will connect the
natural gas transmission systems of Latvia, Estonia and Finland with the EU system, making
Lithuania an essential node in this emerging new regional, transnational gas transmission
system. Simultaneously, a 700 MW electric interconnector "Harmony Link" connecting
Lithuania's and Poland's grids will be started to be constructed under the Baltic Sea.

      An essential step towards making the transmitted energy more effective is introducing
smart electric meters implemented by the state-owned enterprise that owns and operates all
electrical and heating businesses in Lithuania. The consumers will also benefit from the
liberalization of the energy market. The individual energy users consuming more than 1000
kWh electricity per year will be required to choose an energy provider independent from the
electricity grid owner this year.

      The third enabler that the government will address through the Ministry of Transportation
is the efficient planning and implementation of the large transportation projects that would
ensure the multi-modal transportation nodes and enable a new generation of the communication
network. The most important project is the construction of the trans-national railway line “Rail
Baltica”. The project on the Lithuanian side should be completed by 2026 and would require
almost 2 billion euros.     Another infrastructure project essential for the economy is the
electrification of the main railway line that connects Vilnius with the port city Klaipėda. These
infrastructure projects will be complemented with the development of the 5G network, which
the government plans to deploy nation-wide by 2025.

      However, the enablers face the challenge of the structural weaknesses of the economy.
According to the country risk ranking provided by the French international credit insure Coface,
Lithuania's business default risk is assessed as corresponding to the category A3
("satisfactory"), yet the economy suffers from several weaknesses; Coface has identified five.

      Firstly, it is a tight labour market characterized by a shrinking workforce (caused by the
emigration of skilled young people and the ageing society) and high structural unemployment,

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which has been exacerbating during the pandemic. Secondly, a sizeable part of the economy
remains unaccounted depriving the budget of a certain amount of the tax revenue; Coface refers
to it as “underground economy” corresponding to some 26 per cent of GDP. Thirdly, there is a
high-income disparity between the capital and the regions, particularly in the northeast parts of
the country, where poverty persists. Fourthly, the limited value-added exports (mineral
products, wood, agricultural produce and food, furniture, electrical equipment) contribute to the
negative trade balance. Fifthly, competitiveness suffers from insufficient productivity gains.

      When considering whether the government's immediate plans for the development of
critical infrastructures and strengthening the capacity for innovation can outweigh the
economy's structural weaknesses as noted above, the following observations could be made.

      Firstly, the development of the large infrastructure projects will undoubtedly raise the
local demand for the skilled workforce and might stem the country's economic migrants'
outflow, especially given the high barriers of a free movement of people across the EU
quarantine measures. Secondly, the shadow economy could be indirectly tackled due to the
decrease of energy costs for consumers and small businesses. It can achieve that by
disincentivizing the activities that contribute to the shadow economy by removing some of the
causes for that – the high cost of labour due to the relatively low productivity levels in the
sizable segments of the economy. Thirdly, by tackling the shadow economy, the state can
simultaneously decrease the income disparity, contributing to a more distributive economy
model that can lower poverty and release more productive workforce into the economy. Thirdly,
the added value of products might increase due to the further digitalization of the services and
innovative technology deployment as part of the extensive development of critical
infrastructure and communication networks. If pursued in a complimentary manner, the
combined efforts could lead to the creation of the systemic preconditions for overcoming the
existing deficiencies of the economy and contributing to the country's transformation from the
economy dominated by high energy costs and low labour costs to the economically advanced
country with lower energy costs and higher earnings spread across the society more evenly.

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References:

        1.        Ministry of the Republic of Lithuania, “Europos Komisija skelbia atnaujinto
 2021 metų Lietuvos biudžeto projekto vertinimą” (The European Commission publishes the
 evaluation      of       the    2021      draft    budget     update),    20      Jan.    2020;
 https://finmin.lrv.lt/lt/naujienos/europos-komisija-skelbia-atnaujinto-2021-metu-lietuvos-
 biudzeto-projekto-vertinima
        2.        Delfi.lt, BNS, Roma Pakėnienė, “Prognozės: svarbiausi Lietuvos ekonomikos
 ir verslo įvykiai 2021-aisiais” (Forecasts: 2021 Lithuanian economic and business major
 events), 4 Jan. 2021; https://www.delfi.lt/verslas/verslas/prognozes-svarbiausi-lietuvos-
 ekonomikos-ir-verslo-ivykiai-2021-aisiais.d?id=86145501
        3.        Delfi.lt, BNS, Vytautas Budzinauskas, “Lietuvos energetika 2021-aisiais:
 elektros rinkos pokyčiai, dujotiekis, Astravo AE” (Lithuanian energy in 2021: changes in the
 electricity     market,       gas     pipeline,    Astravets     NPP),     5      Jan.    2021;
 https://www.delfi.lt/verslas/energetika/lietuvos-energetika-2021-aisiais-elektros-rinkos-
 pokyciai-dujotiekis-astravo-ae.d?id=86153919
        4.        Ministry of the Economy and Innovation, “A.Armonaitė: svarbu pasirengti
 geram ekonomikos startui po karantino” (A.Armonaite: it is important to prepare for a good
 economic start after quarantine), 22 Jan. 2021; https://eimin.lrv.lt/lt/naujienos/a-armonaite-
 svarbu-pasirengti-geram-ekonomikos-startui-po-karantino
        5.        Coface, “Lithuania: Major Macro Economic Indicators”, May 2020;
 https://www.coface.com/Economic-Studies-and-Country-Risks/Lithuania

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