The Lithuanian Free Market Institute (LFMI) has completed a fifth survey of macroeconomic variables in Lithuania, covering estimates for 1999 and forecasts for 2000. This edition continues a series of publications on the LFMI survey of macroeconomic variables, which was launched in 1997 and is based on the estimates and forecasts of market participants. Approximately 50 experts took part in each stage of the survey. The data obtained from the expert survey was systematised and analysed in comparison with available official statistics and presented in each survey.

 

The main goals of the survey are to provide estimates of economic indicators that are based on the opinion of market participants (experts) and used in planning business activity; to provide an opportunity to compare these estimates with official statistics; and to offer interpretations of the most distinct differences. The survey of macroeconomic variables is based on the expert consensus paradigm originating from the theory of rational expectations.

 

The survey participants were asked to evaluate the following indicators: the growth of gross domestic product, the share of the shadow economy in GDP, inflation, the producer price index, unemployment, wages and salaries, household income, investments as a share of household income, savings as a share of household income, earnings as a share of household income, unrecorded imports and exports, the profit margin, return on equity, invested profits, nominal interest rates on loans and deposits, the share of non-bank loans in the credit market, the expected interest rate on government securities, and the expected exchange rate of the litas to the U.S. dollar. The study is written in Lithuanian and English. Vilnius Bank, Omnitel, and Lietuvos Telekomas funded the project.

 

Each new stage of the survey has enhanced its quality and value. The data obtained from the surveys can be analysed from a temporal perspective and certain trends can be discerned.

 

The year 1999 was not an easy period for economic agents and analysts who forecast its development. Gross domestic product, which had grown steadily for several years, slumped in 1999. In early 2000, the experts put the 1999 GDP growth at –1.8 percent. According to the Lithuanian Department of Statistics (LDS), GDP dropped by 4.1 percent in 1999. So changes in the expert and official estimates of GDP growth in 1998 and 1999 show that the experts, who recorded the outset of the crisis quite accurately, did not expect the economic decline to be so severe and to last so long.

 

The experts polled forecast a 1.5 percent growth of GDP in 2000. The official prognosis in early 1999 was 2.0 percent. Later it was revised and ranged between 1.3 and 2.0 percent. Most of foreign banks and international institutions predict a growth in GDP of more than 2 percent in Lithuania. The export, production, and transportation statistics for the first quarter of 2000 give reason to believe that the economy is picking up. However, the situation in state finances and the business environment reduces the optimism created by the first signs of recovery.

 

Both the expert estimates and the official sources indicate that inflation went down in 1998 through 1999. But in absolute terms the average estimate from the experts is much higher than the official figure. This gap widened from 1.3 times higher in the 1997 survey to eight times higher in the latest survey (the experts estimated inflation in 1999 at an average of 2.4 percent, and the LDS put it at 0.3 percent). This difference is caused mainly by differences in the methodologies used: the LFMI survey participants assess a general increase in the average level of goods and services, while the official statistics present a weighted average increase in the prices of a basket of goods and services. Both the experts and the Ministry of Economy believe that the level of inflation will grow this year: the experts think that a general increase in prices will reach 4.2 percent, while the official figure was 3.5 percent when the LFMI survey was conducted and the revised prognosis was 1.6 percent.

 

The experts think that the shadow economy has shrunk in the past two years. In 1998, the shadow economy comprised 27.4 percent and in 1999, 22 percent of GDP. A number of factors affected this decline. One of them was the crisis in Russia (which results in a reduced demand for shadow production). On the other hand, the worsening economic situation in Lithuania increased incentives to use cheap services provided by the informal sector. It is clear that the informal sector will shrink only when conditions for “formal” business activity have been improved.

 

According to the expert estimates, personal earnings* rose more slowly in 1998 and 1999 than the official average indicator, and the latter grew more slowly than projected by the Ministry of Economy. According to the latest survey, monthly average earnings in the second half of 1999 fell from 984 litas to 969 litas. Interestingly, in all of the surveys ex post estimates were lower than the forecasts made a year before. The experts forecast that average personal earnings will grow by 1.5 percent in 2000. It is less than the Ministry of Economy predict (3.9 percent).

The expert estimates and forecasts of household income in 1998 and 1999 declined, except in mid-1999. Although the gap between the expert and official figures slightly narrowed, the expert estimates were 1.6 times higher than the official figures at the beginning of 2000. In 2000, average household income is forecast to grow by only 1 percent.

 

The experts think that household savings and investments rose from 1998 until mid-1999. In the second half of 1999, household investments continued to grow slightly, but savings remained at the same level. The experts predict that the volume of household savings and investment will not change in 2000.

 

The share of earnings in household income in 1999 was estimated at an average of 86 percent in cities, 76 percent in towns, and 40 percent in rural areas (the city and town indicators taken together remained the same, while the rural indicator fell by 4 percentage points). The experts predict no changes in this indicator in 2000.

 

In the second half of 1999, the Labour Exchange reported a sizeable increase in unemployment. This came as no surprise to the experts. According to the LFMI survey results, from 1998 through 1999 the unemployment rate in cities and towns rose from 10.2 to 12.4 percent. The experts also think that unemployment grew more rapidly in 1999 than in 1998. Three basic trends can be discernded here. First, as opportunities to earn in the informal sector declined, more people registered with the Labour Exchange, so its reported level of unemployment became similar to the indicators from the LFMI and LDS surveys. Second, a sharp rise in unemployment at the end of 1999 reflected the consequences of delayed structural reforms, rather than the effects of the Russian crisis. Third, the growth of unemployment was definitely influenced by excessive employment regulations, which impeded the mobility of the labour force and the establishment of new businesses. Entrenched bureaucracy and a heavy tax burden also significantly influenced the rise in unemployment. In 2000, the experts forecast a 13.7 percent growth of unemployment.

 

The difficulties facing the Lithuanian economy in 1998 and 1999 are reflected best in enterprise indicators. The average profit margin and return on equity fell during that period. The average profit margin went down more than double: from 12.3 percent in 1997 to 5.7 percent in 1999. The average return on equity decreased 1.7 times: from 18.8 to 11 percent. The experts see no positive changes in 2000: they believe that the average profit margin and return on equity will continue to dicrease.

 

According to the experts, the share of invested profits reached 57 percent in 1998 and remains the same. In 2000, it is forecast to grow and be 59 percent. Interestingly, although the profits have been shrinking, the invested share of profits has not reduced. This suggests that growing competition forces businesses to retain the current level of investments. Increased differentiation among separate enterprises is another result of intense competition. The reasons why competition has intensified on the local market are a shrinking demand on the foreign markets and reduced purchasing power of Lithuanian residents. Still, both winning and losing companies are plagued by unfavourable business conditions.

 

During the period under analysis, interest rates on loans in litas rose slightly according to both the LFMI survey and the Bank of Lithuania. The experts estimated that the average interest rate on 6 to 12-month loans in litas increased by one percentage point over a period of two years. The average interest rate on analogous loans in US dollars grew by only 0.4 percentage points.

 

As the LFMI survey results indicate, interest rates on 1 to 3-month deposits were lower in 1998 and 1999 than those on loans: they were estimated to be 0.7 percentage points lower on deposits in litas and 0.1 percentage points lower on deposits in US dollars. Thus, the experts think that interest rates were stable on loans and deposits in US dollars but increased slightly for loans and deposits in litas. Given the size of the recorded changes in these indicators, the price of money may be said to have remained quite stable in Lithuania. Such changes in the price of money could be considered to be natural during an economic decline.

As was the case in the previous surveys, the experts believe that the exchange rate of the litas to the US dollar will remain the same in the coming year. In the latest survey, a striking 85 percent of respondents said so (in the previous surveys, 60 percent, 78 percent, 68 percent, 72 percent of those polled respectively). At the start of 2000, when this survey was conducted, speculations about litas devaluation were much less explicit than in the autumn of 1999. This was largely due to a clear position of the Bank of Lithuania in favour of the current monetary policy, the Kubilius Administration’s plans to sign a memorandum with the IMF, which also envisioned preservation of the currency board, and measures that were taken to reduce the budget deficit and to improve the administration of state finances.

 

The experts predict that the average interest rate on one-year T-bills will stand at 12.5 percent in 2000. If the government fulfils its promise to reduce borrowing on the domestic market, interest rates on T-bills will not be likely to rise. However, government borrowing had increased to a dangerous level: in the first quarter of 2000, state debt grew by more than one billion litas, while interest rate on T-bills is increasing again. The approaching parliamentary election is another factor that may affect interest rates on T-bills. This may raise doubts about the continuity of the current policies of the government and so “push up” interest rates on T-bills.

 

The LFMI survey participants believe that the share of non-bank loans comprises 20 percent of total loans drawn by economic agents. Economic agents are believed to borrow, on average, one-fifth of their funds from sources other than banks. The experts do not predict any changes in this indicator in the year 2000.

 

Although the experts predict that GDP will grow in 2000, other prognoses do not show any clear signs of economic recovery. It should be admitted that external factors affecting the economy in Lithuania inspire optimism: the economic upturn in Germany, Latvia, and Russia provide conditions for Lithuania’s foreign trade to pick up. However, the internal factors are not favourable as the conditions are still not conducive to economic growth. Economic prognoses are negatively affected by the approaching parliamentary elections, as it is unclear what economic policies a newly elected political power will choose to pursue.

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** In the LFMI survey, average personal earnings do not include rural earnings.