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Lithuania under pressure, may turn to IMF

Lithuania's increasingly desperate economic situation may make it the next country in Eastern Europe to ask the International Monetary Fund for emergency loans.

business Updated: Aug 08, 2009 14:23 IST

Lithuania's increasingly desperate economic situation may make it the next country in Eastern Europe to ask the International Monetary Fund for emergency loans. Stunningly bad growth numbers for the second quarter the economy shrank 22 per cent compared with the same three months a year ago were significantly worse than most analysts' expectations and have led them to think the small Baltic country of 3.4 million will soon follow its neighbor Latvia in seeking a bailout.

Revenues are falling short as the recession dampens economic activity and tax receipts, and the center-right government is being forced to borrow on international capital markets and raise taxes to fill a widening budget gap.

"I'm really surprised that the government has not gone to the IMF yet and instead is borrowing money at a much higher interest rate from other sources," Rimvydas Valatka, an analyst at Lietuvos Rytas, Lithuania's leading daily, said Thursday.

He said it was "unacceptable" that the government had issued a euro500 million, five-year Eurobond in June with an annual interest of over 9 percent instead of borrowing from international lenders at a much lower rate.

Kestutis Glaveckas, chairman of parliament's finance committee, said it was "unlikely" that Lithuania would avoid seeking a bailout loan.

"We may have to turn for a loan, but it would be significantly smaller amount than Latvia's," he said, estimating the possible loan size at 10 billion-12 billion litas ($4.2 billion-$5 billion). Latvia agreed to a euro7.5 billion ($10.5 billion) economic stabilization loan with the IMF and the European Union in December. Lithuania, despite deteriorating conditions, has managed to hold out thanks to a more diversified economy, but rapidly falling exports _ down 30 percent year-on-year in the first half of 2009 _ are making the prospects of a quick recovery increasingly remote.

The recession follows several years of stellar growth sparked by cheap credits and a real estate boom. In Lithuania, where growth was more moderate than in Estonia and Latvia, the downturn has turned out to be worse than expected since several of its key export markets _ Russia, Belarus and Ukraine _ have gone into economic slumps and devalued their currency.

Lithuania has stuck with its currency peg to the euro, which makes exports less competitive.

"If financial assistance becomes necessary because of the worsening economy, we will resort to the IMF," Finance Minister Ingrida Simonyte told reporters last week. "I see this as pragmatic."

The Finance Ministry has said that revenues in the first half of the year were 11.3 percent short of target. Parliament has already amended the 2009 budget by raising the value-added tax from 19 to 21 percent and cutting public sector wages and pensions. Also, the need to roll over maturing debt might force Lithuania to resort to international lenders. In a recent interview with The Associated Press before she was elected president, Dalia Grybauskaite, a former budget commissioner for the EU, said an IMF loan might be necessary if external conditions did not allow Lithuania to refinance state debt.

The third Baltic economy, Estonia, is also seeing its economy enter a freefall, but has so far said it will not need to turn to international lenders for emergency funds. In fact, the tiny nation has pledged euro100 million in financial support to neighboring Latvia. The three Baltic states have the worst economies in the 27-member European Union. All three are likely to see GDP fall by double-digit figures this year.

The IMF has also come to the aid of Hungary, Romania, Belarus, Serbia and Ukraine.