LONDON (Reuters) – Lithuania’s budget deficit will be higher than originally forecast this year, but it still expects to meet the criterion for joining the euro zone, the country’s finance minister said on Tuesday.
Lithuania hopes to join the euro in 2015, and to qualify its deficit must not exceed 3 percent of gross domestic product. The deficit should come in just below that, Rimantas Sadzius said in interviews with Reuters Insider television and Reuters.
“I think chances are almost close to 100 percent the deficit is under control,” Sadzius said. “The central target is 2.9 percent.”
(For link to Insider interview, see reut.rs/1b5fbQ3)
Neighboring Latvia will become the 18th member of the euro zone. Estonia was the first Baltic state to join, in 2011.
Lithuania has raised its deficit forecast from 2.5 percent, Sadzius said, but expects the budget gap to narrow to 1.9 percent of GDP next year. The IMF in September also raised its forecast to 2.9 percent this year, warning there was “virtually no room” for the budget to slip.
Membership of the euro zone is likely to add 0.2-0.3 percentage points to Lithuania’s annual inflation, but inflation is currently benign, Sadzius said. He expects annual inflation of 1.3-1.5 percent this year and up to 1.8 percent in 2014.
Inflation in the euro countries fell unexpectedly last month, raising concern that the euro zone would put deflationary pressure on central Europe. But Lithuania’s annual inflation rate stood at 0.4 percent in October, below the euro zone’s 0.7 percent.
“We can foresee not very high inflation, but there is no risk of deflation because there is no reason for deflation – we have economic growth,” Sadzius said.
However, Sadzius said Lithuania’s economy probably would not meet its original forecasts of 3.7 percent expansion this year. Growth slowed to an annual 2 percent rate last quarter.
“We had disappointing results in the third quarter, which makes me believe 3.7 percent could be unattainable,” he said. The government now forecasts growth of 3.4 percent next year, less than the European Commission’s 3.6 percent forecast.
Lithuania is likely to issue two bonds next year totaling around 2 billion euros, said Sadzius, who is also meeting investors in London. The bonds, to refinance maturing debt, will be issued in the spring and in the autumn. The currency has not been decided, he said.
A number of sovereign borrowers have sold international debt in recent weeks, taking advantage of low interest rates as the Federal Reserve keeps up its bond-buying program.
As current chair of Ecofin, Sadzius has focused on European banking union. European countries pledged at an Ecofin meeting on Friday to stand by banks that are found to be struggling after health checks next year. But Germany insisted investors bear the brunt of repairing lenders, to spare the use of euro zone funds.
“It is oversimplification to put that there are Germans on one side and the rest of Europe on the other side,” Sadzius said. “The positions of countries are different but they converge.”
Sadzius echoed recent comments by European Central Bank officials that the Single Resolution Mechanism to wind down or restructure failed banks should be in place by 2015.
“There is a huge pressure on member states and everyone agrees we must fit into this timetable.”
(Reporting by Carolyn Cohn- Editing by Larry King)
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