The Lithuanian Free Market Institute (LFMI) presents the results of the seventh stage of a survey of macroeconomic variables in Lithuania, covering estimates for 2000 and forecasts for 2001. The survey was launched in 1997 and is based on the estimates and forecasts of market participants. Fifty-two experts representing prospering Lithuanian enterprises took part in the latest survey.

The LFMI survey of macroeconomic variables is based on the expert consensus paradigm originating from the theory of rational expectations. The main goals of the survey are to reflect market participants' valuations of economic variables, to compare these estimates with official statistics and to offer interpretations of the most noticeable differences.

In the present edition the estimates for 2000 (ex post) are compared with official statistics as well as with the forecasts the experts made a year ago (ex ante). The continuity of the project has made it possible to analyse patterns and trends of expert estimates and forecasts during a relatively long period of time.

The survey covers the following variables: the growth of gross domestic product, the share of the shadow economy in GDP, inflation, the producer price index, unemployment, personal earnings, household income, household investments, household savings, 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, the expected exchange rate of the litas to the U.S. dollar, and the tax burden as a ratio of GDP.

Survey Results

The seventh edition of the LFMI survey shows that the experts firmly agree about improvements in most economic indicators and are quite optimistic about the future.

The start of 2000 saw a watershed in the country's economy, as it moved from economic recession to an economic upturn. Both the LFMI survey participants and official sources (LDS) reported that GDP grew more in 2000 than was expected. The experts estimated that GDP grew by 2.2 percent, which is slightly less than the official indicator (2.9 percent).

Positive expectations about economic growth in 2001 are related to rising exports, increased effectiveness of Lithuanian enterprises, new technologies, modern methods of management and developed marketing. The experts think that GDP will grow by 3.2 percent in 2001. The forecast of the Ministry of Economy is the same.

Although the country's economy started to pick up in 2000, high taxes, heavy regulations and entrenched unemployment and poverty forced enterprises and individuals to under-report their income and to engage in shadow business undertakings. The LFMI respondents do not anticipate any noticeable changes this year: the shadow economy is expected to comprise one-fifth of GDP and unrecorded foreign trade, one-tenth of GDP.

According to the experts polled, inflation was 2.3 percent in 2000, or the same as in 1999. It is expected to reach 3.4 percent at the end of 2001. These forecasts may be related to likely price increases for infrastructure services, euro's likely appreciation against the U.S. dollar, more expensive imports and tax hikes. Economic recovery is also likely to bolster local demand, a factor that may stimulate inflation in the future.

The LFMI survey participants continue to think that the rate of inflation is and will remain higher than official sources indicate. According to the Ministry of Economy, inflation stood at 1.4 percent in 2000 and will be two percent in 2001.

An upsurge in oil prices on international markets was the main reason for an increase in the producer price index in 2000. The LFMI respondents reported that PPI was 102.4 in 2000 but they predict a smaller rise in 2001, 100.7.

According to the experts polled, the level of unemployment hit its record high of 14.1 percent in the first half of 2000 and did not change until the end of the year. LDS estimated it to be as high as 16.1 percent. The rate of unemployment was affected by the start of economic recovery and over-extensive employment regulation.

The LFMI respondents think that unemployment will not rise in 2001, but they do not forecast any noticeable downward trends. In late 2000 the Ministry of Economy revised its forecasts for economic growth but did not change the 10.7-percent prognosis for unemployment. Given the present level of unemployment, such a forecast seems to be over-optimistic.

Despite rampant unemployment, the LFMI survey participants have reported an increase in net personal earnings and household income for the first time since mid-1999. However, their forecasts are rather controversial: the experts think that personal earnings will grow but household income will shrink in 2001.

Although household income is expected to decline, the experts think that household savings and household investments will show a slight growth. It is estimated that household savings and investments constitute almost one-fourth of household income.

In 2000 business restrictions, shrinking foreign investments, protracted privatisation and falling euro negatively affected enterprise profitability. At the end of late 2000 the profit margin was 5.3 percent (lower than in 1999). According to the LFMI survey participants, in mid-2000 the profit margin hit a low and started to rise gradually afterwards. Upward trends are forecast for 2001 as well.

Underperformance and growing equity of Lithuanian enterprises resulted kept return of equity on a downward trend. It was estimated to be 8.6 percent in 2000. However, optimistic prognoses regarding the profit margin are reflected in the forecasts indicating an increase in return of equity.

According to the experts polled, the average share of invested profits was gradually increasing and stood at 62 percent in 2001. Increased competition is likely to uphold such trends in the future.

As in the previous surveys, most of the experts think that the exchange rate of the litas to the U.S. dollar will remain the same in 2001. This survey was the last one when the experts estimated the exchange rate for a period when the litas is still linked to the U.S. dollar. Expert forecasts are likely to vary more after the litas is re-pegged to euro.

According to the expert estimates, interest rates on loans and deposits in national and foreign currencies went down last year. A further decline is predicted in 2001. Although a shrinking interest margin is indicative of increased competition in the banking sector, it is believed that interest rates on loans are still too high relative to financial capacities of enterprises and individuals.

A fall in interest rates was also affected by a shrinking yield on government securities. The experts think that interest rates on T-bills will continue to fall in 2001, although the projected yield of 8.9 percent is much higher than the interest rates that were recorded in spring 2001.