Publication: Monitor Volume: 6 Issue: 230

Although economic growth in Lithuania this year lags behind growth in Estonia and Latvia, car sales in Estonia and Latvia are soaring, as consumers once again enjoy the rapid growth in incomes and spending they knew before the August 1998 Russian financial crisis. Although car sales have been flat in Latvia this year, many Latvians seem to be purchasing cars in Lithuania to avoid high taxes at home.

Estonia has once again emerged as the Baltic growth leader: GDP during the first half of 2000 was reported up 6.4 percent, following a 1.1 percent decline in 1999. The strong recovery has triggered robust growth in new car sales. Through the first three quarters of this year, new car sales rose nearly 50 percent. In 1999, by contrast, they dropped 15 percent. Peugeot sales have surged over the past three years, due in part to the increasingly prevalent practice of purchasing and registering Peugeot cars in Estonia for re-export to France as used vehicles.

Recovering transit trade with Russia (the backbone of Estonia’s transportation sector) has combined with stronger business confidence to boost demand for trucks, following a sharp fall last year. But while medium and heavy truck sales rose 29 percent during the first three quarters of 2000, truck sales remain far below the levels recorded prior to August 1998.

Lithuania reported only 2.2 percent GDP growth in the first half of 2000, after a 4.2 percent decline in 1999. Nonetheless, car sales in Lithuania are also booming this year: sales during the first three quarters were up 29 percent. While this growth has stemmed in part from accelerating growth in real wages and private consumption, it also reflects increased purchases by Latvians who have been buying cars in Lithuania in order to avoid higher domestic taxes on automobiles. But while growth in Lithuanian car sales slowed substantially after the Latvian parliament repealed the tax in April 2000, growth rates remained above 20 percent in the second and third quarters, attesting to stronger Lithuanian incomes and consumer confidence. Sales of Western makes are growing rapidly as growth in real wages has encouraged Lithuanian consumers to purchase higher-quality cars. Still, sales of Russian-built Lada, which surged in 1999 as Lithuanian consumers sought less-expensive cars, continue to boom this year, rising 41 percent through September.

In contrast to Estonia and Lithuania, car sales in Latvia have been flat this year. This is somewhat surprising, as GDP rose 5.1 percent during the first half of 2000 after meager 0.1 percent growth last year. Through the first three quarters, new car sales were reported down 0.5 percent. This slight decline in sales stems in part from the fact that Latvian new car sales grew by 5 percent in 1999, while sales in the other two Baltic countries fell precipitously. Additionally, in June, the Latvian parliament amended the customs tax, eliminating a 300 lats (US$500) exemption from value added taxes paid on imported cars. Moreover, Latvians seem to be choosing quality over quantity. Sales of Lada cars, which grew rapidly last year as consumers gravitated toward less expensive Russian models, dropped 38 percent during the first three quarters of 2000. By contrast, sales of higher-quality Western autos have grown sharply this year (Bank of Finland, PlanEcon’s East European Automotive Monitor, December 2000).