US embassy cable - 04VILNIUS1445

UNCLAS SECTION 01 OF 04 VILNIUS 001445 
 
SIPDIS 
 
STATE FOR EB/IFD/OMA, EB/IFD/OIA, EUR/NB, AND EUR/ERA 
COMMERCE FOR ITA/MAC/DAS/EUR (JBURGESS) 
HHS FOR WSTEIGER 
WARSAW FOR AG ATTACHE WMOLSTEAD 
 
E.O. 12958: N/A 
TAGS: EINV, ECON, PGOV, LH, HT3 
SUBJECT: LITHUANIAN PRIME MINISTER'S VISION FOR NEW TERM 
 
 
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SUMMARY 
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1. (SBU) The Lithuanian parliament (Seimas) re-elected 
Prime Minister Algirdas Brazauskas November 25.  In a 
speech to the Seimas November 24, Brazauskas outlined a 
broad vision for his new term.  He promised to utilize EU 
funds to promote development in priority areas, such as the 
use, and export, of high-tech products.  He committed to 
increasing the GOL tax collection rate, raising the minimum 
wage, and working to attract more greenfield investments. 
Brazauskas said his new government would promote much- 
needed reforms in health, education, and pensions, and 
would work to make Lithuanian agriculture more competitive. 
Brazauskas's emphasis on social issues, which his Labor and 
Peasant coalition partners will no doubt enthusiastically 
endorse, should promote Lithuania's development, and help 
ensure its continued strong economic growth.  But all will 
be contingent on the stability of this new coalition, which 
is far from assured.  End summary. 
 
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BACK IN THE SADDLE 
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2. (U) The Seimas, as expected, re-elected Algirdas 
Brazauskas as the country's Prime Minister November 25. 
Brazauskas's election came after meetings with Seimas and 
party leaders November 22-24.  The Prime Minister now has 
15 days in which to get presidential approval of his 
cabinet and present it, and the government's policy agenda, 
to the Seimas.  Thus far, we are aware of the following 
likely cabinet nominees: 
- Zigmantas Balcytis (Social Democrat), Communications; 
- Algirdas Butkevicius (Social Democrat), Finance; 
- Gediminas Kirkilas (Social Democrat), Defense; 
- Arunas Kundrotas (Social Democrat), Environment; 
- Vilija Blinkeviciute (New Union), Social Affairs; 
- Antanas Valionis (New Union), Foreign Affairs; 
- Zilvinas Padaiga (Labor), Health; 
- Vladimiras Prudnikovas (Labor), Culture; 
- Viktoras Uspaskich (Labor), Economy; and 
- Kazimiera Prunskiene (Peasant Party), Agriculture. 
The following three nominees have proved controversial, and 
may not make the final list: 
- Gediminas Vaitkus (Social Democrat), Education; 
- Gintautas Buzinskas (Labor), Justice; and 
- Viktoras Muntianas (Labor), Interior. 
 
Brazauskas, in a speech before the Seimas November 24, 
outlined his vision for the new government soon to take 
office. 
 
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P.M. EXPECTS OVERALL GROWTH TO CONTINUE 
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3. (U) The Prime Minister observed that Lithuania had 
realized its principal foreign policy goals, NATO and EU 
membership, during his previous term.  Lithuania's economy 
had made great progress, with per capita GDP rising to 46 
percent of the EU average, from 35 percent in 2000.  During 
his just completed term, Lithuania's GDP had grown by 37 
percent compared to when he took office, and he added that 
he anticipated GDP growth of 20-25 percent over the next 
four years.  Lithuania, observed Brazauskas with 
satisfaction, counts among Europe's leaders in this area. 
 
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GOL TO PUT EU FUNDS TO WORK IN PRIORITY AREAS 
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4. (U) Brazauskas, observing that Lithuania will receive 
2.6 billion euros (USD 3.4 billion) in EU support from 
2004-2006, remarked that his government would focus on 
infrastructure and energy projects.  Lithuania's national 
strategy to implement structural funds in 2004-2006 
earmarks almost 39 percent of incoming EU support to 
improving infrastructure in the transport, energy, health, 
education, research, labor and social affairs sectors.  The 
government will try to make Lithuania more competitive, per 
the EU's Lisbon strategy, by using EU funds and government 
grants, subsidies, and credits, to increase the use of high 
technologies in industry beyond the current 20 percent, and 
to augment high tech exports by more than the 35 percent 
that they grew in 2003.  The GOL intends to do this by 
creating industry parks, where scientists and businesses 
can work together to develop new products. 
5. (U) Brazauskas said that a GOL working group is trying 
to help craft a definition of Lithuania as a single EU 
region that would accurately reflect the huge differences 
in unemployment and infrastructure development levels 
within the country.  (The EU considers Lithuania to be a 
single region for purpose of its funding.) 
 
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P.M.: GOL WILL NOT BREACH MAASTRICHT CRITERIA 
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6. (U) Brazauskas suggested that the GOL might borrow from 
financial institutions to promote reforms in healthcare, 
pensions, education, and culture, since, in his view, the 
current fiscal deficit, at 2.5 percent of GDP, is not very 
high, and the national debt has decreased from 27 percent 
to 21 percent.  The context for the Prime Minister's 
statement is concerns previously expressed by President 
Valdas Adamkus and various analysts that the country's 
fiscal deficit is very close to the Maastricht Criteria's 
three percent limit in order to qualify for European 
monetary union.  In recent macroeconomic reviews, the IMF 
has stressed the importance of Lithuania not exceeding the 
Maastricht fiscal deficit limit. 
 
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TAX REFORM A PRIORITY 
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7. (SBU) Brazauskas observed that the GOL's tax yield is 
low relative to the pace of the economy's growth. 
Lithuania's tax collections amount to only 30 percent of 
GDP, in contrast to the EU average of 41 percent, and 
distinguish Lithuania for its low tax burden, second only 
to Ireland.  The government intends to rectify this problem 
by cracking down on businesses that evade taxes and workers 
who don't pay taxes on salaries they receive in cash, and 
by introducing a pollution tax preferentially affecting old 
vehicles and a new real estate tax.  At the same time, 
Lithuania will stand by its low corporate profit tax (15 
percent), despite pressure from France and Germany to raise 
it, and in addition, the GOL intends to reduce personal 
income taxes, starting 2006, to 30 percent from the current 
33 percent. 
 
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UNEMPLOYMENT DOWN, MINIMUM WAGE TO GO UP 
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8. (U) Brazauskas expressed satisfaction that the 
unemployment rate has declined by 1.2-2 percentage points 
during each year of his recently completed term.  He 
regretted, however, that growth in salaries (7 percent this 
year) lags behind economic growth, and expressed his 
government's intention to increase the minimum monthly wage 
from LTL 500 (USD 192) to at least LTL 600 LTL (USD 230). 
The incoming coalition has promised to increase the average 
wage from LTL 1222 (USD 436) to up to LTL 1800 (USD 690). 
 
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GOL SEEKS MORE GREENFIELD INVESTMENTS 
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9. (U) Brazauskas expressed satisfaction that Lithuania is 
doing quite well in attracting investments, which grew by 
75-78 percent from mid-2001 to 2004.  In particular, he was 
pleased that re-investments constitute one third of all 
investments in Lithuania, in contrast to two thirds in 
Estonia.  The World Bank, Brazauskas recalled, described 
Lithuania as a world leader in its investment climate. 
Nonetheless, the Prime Minister said much more could be 
done.  The GOL intends to attract more greenfield 
investments by improving the business climate.  It will do 
so by introducing business-friendly legislation, providing 
one-stop services to potential investors, and promoting the 
use of E-government. 
 
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NEW GOVERNMENT TO INCREASE AGRICULTURE'S COMPETITIVENESS 
--------------------------------------------- ----------- 
 
10. (U) Noting that 40 percent of all incoming EU funds 
(LTL 1.8 billion or USD 689.7 million) will go toward the 
agricultural sector, Brazauskas expressed his new 
government's intention to use these funds efficiently.  The 
GOL intends to use the funds to make direct payments to 
farmers, promote exports, and hand out subsidies to 
increase agricultural competitiveness and improve the 
efficiency of Lithuanian farming. 
 
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EDUCATIONAL REFORMS IN THE OFFING 
--------------------------------- 
 
11. (U) Brazauskas said he would strive to improve the 
nation's educational system.  The GOL will try and ensure a 
quality education for students; increased opportunities for 
teachers to expand their professional competencies; 
equipment upgrades, including modern teaching aids, in 
classrooms; and buildings renovations.  He noted that a 
high proportion (80 percent) of high school graduates 
pursue undergraduate studies. 
 
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HEALTHCARE REFORMS AS WELL 
-------------------------- 
 
12. (U) Noting that his government had increased healthcare 
funding by LTL 500 million (USD 191.6 million) annually, 
Brazauskas promised that the new government would fund this 
sector with an additional LTL 340 million (USD 130.3 
million) in 2004 and 2005.  The healthcare sector is one of 
Lithuania's least reformed sectors, and the GOL intends to 
use its own, as well as EU, funds to modernize hospital 
facilities, institute energy saving programs, and increase 
public access to quality healthcare services.  Turning his 
attention to the plight of the nation's 15,000 physicians, 
Brazauskas noted that their salaries are 15 percent below 
the average salary in the country, and he said that the GOL 
had allocated LTL 65 million (USD 24.9 million) to increase 
doctors' salaries in 2004.  Nevertheless, he observed, this 
money did not reach the physicians.  He urged the new 
management of the healthcare sector to ensure transparency 
in the distribution of healthcare funding.  Brazauskas also 
remarked that the GOL intends consolidating the large 
number of the country's medical institutions, which would 
make it possible for the GOL to support them all, and would 
increase the efficiency of their operation. 
 
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GOL TO CONTINUE WITH PENSION REFORM 
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13. (U) Brazauskas noted that his government has 
successfully begun to implement pension reform, increasing 
the average pension by LTL 90 (USD 34.5) during his last 
term.  He stated that the GOL would need an additional LTL 
300 million (USD 114.9 million) for further reform in 2005, 
which should result in an average pension increase of LTL 
650 (USD 249).  Brazauskas promised that his new government 
would focus on the needs of the handicapped and families 
with children. 
 
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SECURE BORDERS 
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14. (U) Brazauskas said the GOL would use 136 million euros 
(USD 179.5 million) in EU funding in 2005-2007 to 
strengthen the control system along the approximately 570 
miles of the EU's external border for which Lithuania is 
responsible.  In his last term, he noted, state investment 
in customs, border, and tax information systems had 
increased five times.   Brazauskas expressed confidence 
that Lithuania would join the Schengen space in around 
2007. 
 
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COMMENT 
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15. (U) Brazauskas's vision for his new term, with its 
heavy economic emphasis, and stress on investment in 
infrastructure, health, education, agriculture, and an 
increase in salaries, should help promote Lithuania's 
development, and continue its strong economic growth.  His 
Labor and Peasant coalition partners will no doubt work to 
ensure that the new government does not lose its 
sensitivity to social concerns.  By strengthening these 
comparatively neglected areas, the Prime Minister would lay 
the foundation for continued strong socio-economic growth. 
 
16. (SBU) Of course, the key to success for this ambitious 
agenda is the stability of the coalition between the Social 
Democrats and Social Liberals on one side and the neophyte 
Labor Party and the troublemaking Peasants' party on the 
other.  It seems a strong possibility that the ambitions of 
the latter will sooner or later bring the coalition, and 
these ambitious plans, to an untimely end. 
 
MULL