OREANDA-NEWS. On April 10, 2008, Mr. Reinoldijus Sarkinas, Chairman of the Board of the Bank of Lithuania, delivered a Bank of Lithuania report on the implementation of its primary objective, the performance of its functions and the situation of the banking system in the second half of 2007 and the beginning of 2008 to the Seimas of the Republic of Lithuania. The report also gave an overview of the Lithuanian economy and price developments, reported the press-centre of Bank of Lithuania.

In his speech, Mr Reinoldijus Sarkinas analysed the trends of inflation development in Lithuania and in the world. He answered the questions of the members of Seimas on this and other topics.

The report stated that the economy of Lithuania grew rapidly in 2007. The increase in the disposable income of households stimulated by the fiscal policy and supported by the intensive flow of crediting encouraged private consumption, while the absence of the rise in real interest rates and high profitability of enterprises promoted investment. In the second half of the year, a large contribution to the change of the GDP resulted from short-term impact factors related to the change in the value added in agriculture and oil refining activities.

Economic activity and thus employment of the population grew in the second half of the year. A historically high number of vacancies confirms that tension in the labour market does not subside. Owing to this tension and administrative decisions, the average wage continues to rise in the country. After the processed food prices started to rise in the autumn of 2007, the overall annual inflation increased significantly. The rise in the prices of milk and its products, bread and meat products was especially high.

The increase in the prices of food reflects the global trends of growing food prices, which are mostly determined by a larger demand for agricultural production and food. The demand was driven by a rapid economic development in less developed countries and the increased production of biofuel. Higher fuel prices had a substantial impact on overall inflation from September 2007. They are directly related to significantly higher global oil prices. The prices of services continue to rise rapidly, pushing up overall inflation. The rise in the prices of services was caused by growing demand, as well as by rising wages and other costs.

In 2007, foreign reserve assets continued to grow robustly. Despite large shocks experienced by the global financial markets, the Bank of Lithuania retained a low risk level, while the return on investment was significantly higher than in 2006.

The year 2007 was very successful for banks operating in Lithuania and was marked by a rapid development and increased profits. The assessment according to most key indicators shows that both relative and absolute development of the domestic banking sector was more rapid than in 2006. The loan portfolio made up the largest share of bank assets.

The conditions for the expansion of the loan market remain favourable, while various comparative indicators show that its potential may be not fully utilised yet, however, an increasing number of signs emerge that suggest that the further growth of the loan market may be less robust. Although bank loan portfolio quality indicators remained good, the share of overdue loans in the loan portfolio increased slightly over the year; moreover, the ratio of loans to specific provisions declined.

The Chairman of the Board of the Bank of Lithuania delivers reports at the Seimas of the Republic of Lithuania twice a year.