21 Oct 54 views

Why is Lithuania's economy doing better than Estonia's?

In a generally sluggish European economy, Lithuania is performing well – its economy is growing, and incomes are rising faster than prices. Economic analyst Žygimantas Mauricas has used metaphors to describe Lithuania's enduring economic "summer" and success amid the "tornado."

"It's as if there's a tornado around us, and we're in the middle of it, not feeling it," said Mauricas, chief analyst at Lithuania's Luminor Bank. "It's actually a small miracle because we must admit that our economic performance has consistently exceeded forecasts."

The seemingly miraculous state of Lithuania's economy, analysts say, is actually the result of several factors. These include a diverse export market – both in terms of target markets and products – and a strong industrial sector.

"Our export structure is much more diverse – from the metal, plastic and chemical industries to a much stronger food industry. During economically challenging times, a larger share of the food industry helps because it is more stable," said Tadas Povilauskas, chief analyst at Lithuania's SEB Bank.

Electronics manufacturer Teltonika is one example of an ambitious and successful Lithuanian company.

Secondly, Lithuania's IT and technology sector has finally gained momentum.

"Our high-tech services have also seen significant growth. Last year, in terms of exporting such services, we surpassed Estonia. Again, it was a very substantial increase," Mauricas explained.

Examples include the second-hand clothing platform Vinted, cybersecurity company Nord Security and fintech firm Revolut. The relocation of Belarusian IT companies to Lithuania has also played a crucial role.

The third factor is large renewable energy projects.

"Four years ago, we produced about 15-17 percent of our electricity from wind and solar; now it's nearly 50 percent, a threefold increase," Mauricas noted.

The fourth reason is Lithuania's proximity to Poland.

"It is one of our main export partners, and the Polish economy is doing much better than Finland's or Sweden's. This is one of the key reasons why we are performing better," said SEB Bank chief analyst Povilauskas.

In addition, Poland's low prices have played a significant role in slowing inflation.

The fifth reason is that tax increases have been relatively modest, and instead of austerity measures, the government has kept its purse strings fairly loose.

"The political cycle is now culminating here, and understandably, the current government does not want to raise taxes or talk about it, as it would dampen consumer sentiment," said Luminor Bank's chief analyst, Žygimantas Mauricas.

Now that the elections are over, there may be some tax increases that could affect consumer sentiment. Lithuanian business leaders have encouraged politicians to take this step to strengthen national defense.

"We see the need for this because the threat is very clear and present," said Emilis Ružele, director-general of the Lithuanian Confederation of Industrialists. "The business community is united; we were one of the initiators of the initiative to raise defense spending to 4 percent of GDP. The business community takes security and stability very seriously, and we believe it's time to act."

However, business leaders argue that the recently imposed banking tax has harmed the business environment in Lithuania.

So, who is wealthier and living better at the moment – Estonians or Lithuanians?

"Estonians are still wealthier, but we are catching up. When we talk about purchasing power – how much we can buy, especially when shopping in Poland – Lithuanians have a higher purchasing power," Mauricas explained.

"A meal at a restaurant in Estonia is more expensive than in Lithuania, and an average Lithuanian wage earner can afford more. But the differences aren't that large, and I think we are simply following Estonia's path, just as you had rapid IT sector growth in the last decade," Povilauskas added.

More important than friendly rivalry, however, is ensuring that our region, situated along the borders of Russia and Belarus, remains a good and secure place to do business and that investors continue to see it as such.

"It's like the Latin saying: 'If you want peace, prepare for war.' That's what we need to do, and at the same time, we need to promote our region as a competitive and high-tech area, which we increasingly are," said Mauricas.

There is an energy among those walking along Gediminas Avenue. The sixth and seventh reasons for Lithuania's newfound prosperity could also be attributed to growing consumer confidence and the fact that many Lithuanians who had previously moved abroad are starting to return home.

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