Lithuania considers IMF lifeline

One year ago Lithuania was year among the fastest growing economies in Europe. Now its economy is plunging due to for example, the burst of a real estate bubble.

Other factors affecting Lithuania's economy were the tightening of global credit, and a loss of export markets.

The country wants to avoid an unmanageable budget deficit and painful cuts that could deepen an already severe economic downturn and avoid, In order to do so the government is considering a step many want to avoid: joining neighbors Latvia and Belarus as a recipient of an International Monetary Fund (IMF) loan.

A new flexible credit line program unveiled by the IMF in March is one possibility if the country qualifies. Poland is joining as the program gives developing countries credit to help them strengthen their currencies against possible collapse.

Poland recently asked for $20 billion from the IMF to halt the decline of its currency.

One event Lithuannia wants to avoid is the devaluation of the lita so it can stay on track for eurozone accession, as well as prevent the defaults of mortgages taken out in euros but paid in litas, a common practice before the crisis.

Lithuania's finance ministry says that the government will try to stabilize its finances before seeking IMF funds.

"While such an option remains, it's not something that we should treat as not possible. But currently there is no such need," says Giedrius Sniukas, a spokesman for the finance ministry.

The government iwants to avoid a large deficit that could lower its credit rating and also delay the country's eurozone entry. Last December, it increased value-added and excise taxes and cut public employee wages.

The plan was passed when the official prediction for Lithuania's 2009 GDP decline was 4.8 percent, and the economy has deteriorated faster than expected.

Data released Tuesday shows that the nation's gross domestic product plunged at a faster-than-expected 12.6 percent in the first quarter.

Standard & Poor's lowered the country's credit rating on March 24, and unemployment is skyrocketing, as businesses lay off employees and close doors.

In the capital, Vilnius, abandoned construction projects stand haunt the landscape as the tap of credit that spurred the flurry of growth during the "Baltic Tiger" years has run dry.

"Companies badly need cash from the bank for their day-to-day business, but the banks, they have their own rules and are much more restrictive now," says Aldas Kikutis, director of the Association of Lithuanian Chambers of Commerce, Industry, and Crafts.

Lithuania's ruling coalition is considering tax increases such as ;implementing a progressive income tax, a real estate tax increase, and further government wage reductions.

"The government will then be forced to keep expenditure strictly within the limits of its diminished revenue and the limited amount of funds it can raise from other sources. This would help to sharpen the slowdown in the Lithuanian economy," says Roger Wessman, an economist for the Swedish-owned Nordea Bank.

Wage and service cutbacks are a potential source of unrests; in January, Vilnius was rocked with a violent protest that left the windows of its parliament building riddled with holes from bricks.

"They can resort to lowering salaries and lowering benefits, but that would be very unpopular and could spark social unrest," says Nerijus Udrenas, an economist at SEB, Lithuania's largest bank.

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