The Lithuanian government has put together a plan on alleviating the effects of inflation, with the parliament expected to vote on them before Easter. Observers say more effort may be needed within months – and it may include measures that the government rejects today.
Epigone, a company that sells merchandise linked with Lithuania, says the last two years have been the most difficult in its history. As pandemic restrictions began to recede, the war in Ukraine led to a sharp drop in buyers – people got scared and started to save.
“Even the 2008 economic crisis didn’t hit so hard,” Ernestas Paulauskas, the head of Epigone, said.
The company already has to pay for its merchandise at higher price.
“The increase in the price of raw materials, fuel, it has an effect, but we don’t take it into account yet, the prices in the shops haven’t changed that much, but we can already feel it ourselves,” according to Paulauskas.
Prices go up every month. In March, annual inflation in Lithuania stood at 15.6%.
“In the eurozone, inflation is somewhere around 7%, in the US it’s around 8%. On both continents, people are panicking that this is a very high inflation rate, and so 15.6% is really beyond belief,” says Rimantas Rudzkis, a professor at Vilnius University.
Water, gas, electricity, housing, food and transport are becoming more expensive. However, economists say prices have risen less than average wages since the pandemic began.
“The average income in Lithuania has grown a lot. The bad news is that, unfortunately, not at the same rate for everyone. For some, it has grown 1.5-fold, and by 60% in a couple of years, particularly in IT sector and so on. But in other areas it might not have grown at all,” says Rudzkis.
“For people whose incomes have not grown, of course, a 15-16% inflation is very high, because, let’s not forget, this is an average price growth. If we look at the essentials, there will be an increase of more than 20%,” he adds.
“Now the cost of meeting basic needs – heating, food – is rising. This is especially critical for people with lower incomes. Simply put, if you could barely make ends meet at the older prices, now you are completely out of options,” says Vytautas Snieska, professor at the Faculty of Economics and Business of Kaunas University of Technology (KTU).
The government has announced its plans to increase pensions, social benefits, tax-exempt income and child allowances. It is also offering subsidies on heating and for household electricity consumers.
“The government is presenting a package worth more than 2 billion euros. At this difficult time, we want to protect and strengthen people’s purchasing power. These solutions are certainly very expensive, but if nothing is done, the shock to the population would certainly be too great,” said Finance Minister Gintare Skaiste.
“We are not going down the fragmented, isolated route of distributing money, but indexing certain essential amounts of social support, on which benefits, allowances, compensations, pensions and so on depend,” added Monika Navickiene, Minister of Social Security and Labour.
Most of the inflation comes from outside Lithuania: producers buy raw materials on world markets, and there is a new round of price increases. This means that new goods will be more expensive.
“Then, when they see prices rising, workers demand wage increases, which sets off a wage-price spiral. This is what inflation spikes are like now, they cause inflation expectations, and inflation expectations lead to actual inflation,” says Janina Seputiene, an associate professor at Vilnius University’s Siauliai Academy.
Double-digit inflation is now reported when comparing a given month with the same month last year. The Ministry of Finance forecasts that the average annual inflation rate will also approach double digits, which means that it will be close to 10% for all 12 months. Previously, inflation forecast was half as high.
Some economists say the package of measures presented at the moment may soon look outdated.
“This is just the beginning. We are seeing the beginning of inflation. We should not relax too much, in fact the consequences of all the sanctions on Russia are only just starting to be felt. There will be more to come,” says Snieska.
“Last year, the year before, the year before that – all these years have been very successful for the Lithuanian economy. Unfortunately, this may change and we should already be thinking about it now – the reduction of VAT on essential goods, and I consider essential goods to be certain foodstuffs and medicines. These are certainly worth considering,” according to Rudzkis.
However, he believes, tax cuts should not be extended to excise duties on fuel.
“So far, the declared indexation of pensions and other measures have been somewhat targeted, but, of course, this is only the beginning, and I think additional and monetary measures will be needed,” says Snieska.
In March, the parliament rejected a proposal by President Gitanos Nauseda to offer one-off payments of 100 euros for low-earners. The ruling coalition then said such a measure would have a zero impact.
“How can there be a zero impact on a person if they receive money?” objects Rudzkis. “Clearly, it will make their life easier. We are talking about people, not about abstract macroeconomic indicators.”
Economists say there are enough resources to mitigate the impact of the price hike – government revenue target was exceeded by a billion euros last year. Moreover, as long as interest rates are low, it is possible to borrow, if necessary. (LRT/Business World Magazine)