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2020.03.17 13:52

Lithuanian economy could contract up to 2.8 percent, finance minister warns

updated
BNS2020.03.17 13:52

The Lithuanian economy may contract between 1.3 and 2.8 percent due to the coronavirus outbreak, Finance Minister Vilius Šapoka said on Tuesday. To offset the expected drop in tax revenue, the parliament has raised the government's borrowing limit six times.

“Based on assumptions by international institutions, the base scenario derives from the assumption that the EU economy will contact by 1.1 percent in 2020, in which case, in view of our stimulus measures, Lithuania's economy is projected to shrink 1.3 percent in 2020,” he told the parliament on Tuesday.

Read more: Lithuania's economy may shrink 1.2 percent due to coronavirus – central bank

A more pessimistic scenario sees the Lithuanian economy contracting by around 2.8 percent, should the coronavirus crisis carries into the second half of the year, according to Šapoka.

“Since the spread of the virus has not been contained and Europe is its epicentre, assuming that the euro area's GDP can fall about 2.5 percent, Lithuania's economy would shrink by about 2.8 percent,” the minister said.

If the coronavirus crisis “moves into the second half, we'll have different figures,” he said.

Economists from the central Bank of Lithuania said on Monday that the country's economy might contract at least 1.2 percent in an “optimistic scenario”.

The central bank earlier estimated that Lithuania's economy would grow 2.5 percent this year. The European Commission expected the country's economy to expand 2.6 percent, compared to the 2.4 percent growth estimate by SEB bank, and the 2.5 percent growth estimate by the Organization for Economic Cooperation and Development.

Last year, Lithuania's GDP rose 3.9 percent.

Read more: Lithuanian government's business support plan: 10 key measures

Crisis lessons learned

As Lithuania seeks to mitigate the economic impact of the coronavirus epidemic, a presidential adviser says the government has learned from the 2008-2010 crisis.

If the country's economy shrinks 5 percent, the government's economic stimulus plan should soften this fall, Simonas Krėpšta says.

“Lithuania has experience of economic downturn, and the lessons have been learned. Financial reserves have been accumulated over the past years and the budget has been in surplus. It has allowed to draft a plan which is of a fairly major scope, of 2.5 billion euros,” Krėpšta told the Žiniu Radijas radio on Tuesday.

“If the country's economy contracted five percent this year, that plan could neutralize that contraction,” he added.

Lithuania has the resources to deploy counter-cyclical policies, unlike in 2008.

Raising borrowing ceiling

The Lithuanian parliament has agreed to increase the government's net borrowing limit from 904.6 million to 5.4 billion euros in order to offset the expected drop in tax revenue.

The move was backed by 107 lawmakers.

Finance Minister Vilius Šapoka says the government will borrow both in domestic and international markets, adding that 5.4 billion euros is not the final sum.

Accoridng to him, the government has already started looking where to borrow.

“We have turned to international organisations to be the first in line, if that is necessary,” he said.

Media ask for state support

Media organizations have asked the government to defer tax payments and provide subsidies to mitigate the impact of the coronavirus crisis.

In a public statement on Tuesday, media outlets say that advertisers are cancelling orders, as are retailers forced to shut due to quarantine.

This “poses a threat to continuous functioning of both national and regional media,” the statement says.

If the current two-week quarantine is extended and the state provides no assistance, the functioning of the media might be “practically impossible”.

The adverting market may shrink by 60 million euros a year, according to the statement, and “additional losses of 6 million euros are estimated from reduced sales of printed publications at points of sale”.

The media representatives are asking the government to defer tax payments for four months, to provide state subsidies for salary payments, and simplify the public sector's procurement rules for media services.