Lithuania will stick to its guns and shun IMF funds, prime minister Andrius Kubilius has said, as new numbers this week revealed a ferocious economic contraction that threatens to savage public finances.
“We can avoid the IMF and stick to our own actions, by cutting spending,” Kubilius told Emerging Markets in an interview.
Data released Monday showed that Lithuania’s economy shrank by 12.6% in the first quarter – far in excess of analyst expectations – compared with the same period of 2008, as exports, investment and consumption collapsed. Kubilius said large-scale spending cuts in June would avert a financing crunch.
But calls for an urgent IMF loan package have rung louder this month as the Baltic region faces a deeper than expected recession.
Nerijus Udrenas, an analyst at SEB Bank in Vilnius, argued that Lithuania faces a balance of payments crisis. “It is increasingly likely and necessary for Lithuania to seek IMF assistance as soon as possible”, he said. A stand-by agreement would boost market confidence and help consolidate the budget before further spending cuts are announced in June.
But Kubilius denied that shocking GDP figures increased the likelihood Lithuania would go to the IMF – though he would not rule it out entirely. He argued that the figures highlighted the dire state of the economy, and would help get a new round of spending cuts through parliament. “There is now more understanding of the steps we need to take, because of these figures.”
Kubilius was unsure that market confidence in neighbouring states that have recently sought a lifeline from the IMF had been boosted as a result. “To say in advance [that] an IMF programme would bring very positive results for the market, I am not able to agree...I don’t think this was the result we saw in Latvia or Hungary.”
Kubilius also said policy flexibility would be hindered by an IMF deal. He was concerned that the lender could veto costly social welfare policies, and cash subsidies for young families in particular. “You can’t avoid some effects which quite often agreements with the IMF bring into the social stability of society.”
But pride may also be a factor in the decision to snub IMF cash, Udrenas said. “If Lithuania is able to take drastic measures to cut spending and just about avoid going to the IMF, it would be a good boost to Kubilius’s personal reputation domestically.”
The government slashed spending by 3% of GDP in April but still targets a budget deficit of 3% this year, compared with the European Commission’s estimate of a 5% shortfall.
Kubilius argued the government would seek to ensure a 3% fiscal deficit this year – a condition for euro entry – but no formal target date for euro adoption could be announced “due to the ongoing global volatility”. In May 2006, the European authorities rejected the country’s bid to join the eurozone after missing the inflation target by a hair.
Kubilius called for western Europe to make more effort to help eastern countries. “We are really suffering, and we would be very glad if a more co-ordinated and more effective approach from Brussels was implemented with respect to expanding the eurozone.”