II Overview of Recent Macroeconomic and Structural Adjustment Policies


The Baltic countries were generally considered to be among the more developed of the economies of the Baltics, Russia, and other former Soviet Union countries (BRO), with a standard of living at the outset of the transition well above the average for the former Soviet republics. On regaining independence in 1991, the governments of the Baltic countries embarked upon comprehensive programs of economic and political reform involving a move away from central planning to reliance on the market and the establishment of a market-based legal framework and institutions for economic activity. In the early stages, the authorities gave priority to eliminating central plan distortions in the economy: the bulk of domestic prices were freed; external trade and the exchange system were liberalized; and the privatization of small and mediumsized enterprises was begun.

The Baltic countries were generally considered to be among the more developed of the economies of the Baltics, Russia, and other former Soviet Union countries (BRO), with a standard of living at the outset of the transition well above the average for the former Soviet republics. On regaining independence in 1991, the governments of the Baltic countries embarked upon comprehensive programs of economic and political reform involving a move away from central planning to reliance on the market and the establishment of a market-based legal framework and institutions for economic activity. In the early stages, the authorities gave priority to eliminating central plan distortions in the economy: the bulk of domestic prices were freed; external trade and the exchange system were liberalized; and the privatization of small and mediumsized enterprises was begun.

The conditions under which these reforms were introduced were hardly propitious. The very large contraction of output during the early part of the transition reflected a number of demand and supply shocks, including major adjustments in the relative prices of tradable goods (in particular energy imports from Russia), sharp reductions in demand in the Baltic countries’ traditional export markets (the former Soviet republics), the impact of disruptions to trade and financial relations among members of the Council of Mutual Economic Assistance (CMEA), as well as the gradual elimination of subsidies associated with the introduction of a more transparent system of prices. At the same time, price liberalization, adjustments in administered prices, and the elimination of the monetary overhang contributed to a surge in inflation, which reached some 1,000 percent in December 1992, sharply eroding living standards. The external current account registered surpluses in the early independence years, reflecting weak domestic demand and the external financing constraint.

Since late 1994 and early 1995, the economies of the Baltic countries have entered upon a period of recovery from the shocks associated with the early part of the transition. Critical to the emergence of a more stable macroeconomic climate was the introduction of stable exchange rate regimes in all three countries (involving currency board arrangements in Estonia and Lithuania). It reduced inflationary expectations and provided a credible institutional underpinning to the authorities’ anti-inflation policies, institutional development of key economic agencies, and the continuation of fairly liberal trade policies. In all countries, economic policies were supported by IMF adjustment programs that provided significant financing as well as technical assistance and policy advice. Recovery has not, by any means, been smooth and has at times been accompanied by setbacks, including banking crises in all three countries that undermined public confidence in the financial system and led to a temporary slowdown in banking reforms. Inflation, however, has continued to decelerate steadily in all countries, and output recovered, fueled in part by significant inflows of foreign direct investment. The current account has moved into growing deficits, but large capital inflows (except in the period surrounding the banking crises) have resulted in balance of payments surpluses and the maintenance of adequate levels of gross foreign exchange reserves. At times, the pace of structural reform has lagged behind the progress achieved in macroeconomic stabilization, but all governments have reaffirmed their commitment to completing the next phase of the structural reform agenda, in particular accelerating large-scale privatization, reforming the legal framework, and strengthening the regulatory environment, with the aim of enhancing growth prospects over the medium term.

Economic developments and policies in the Baltic countries during 1995–97 are reviewed below, with a look at some of the challenges facing governments in the period ahead. The years 1995–97 marked a vigorous recovery in output, notably in Estonia. Also, headway was made in a number of crucial areas to bolster growth prospects, and attempts were undertaken to move forward with reforms on the structural front; in Latvia and Lithuania, these developments took place against a background shaped by the aftereffects of banking crises.

Fiscal Policy

The Baltic countries have relied upon a prudent fiscal policy stance as a key component in a strategy aimed at establishing a foundation for macroeconomic stability. By and large, they have been able to achieve this without recourse to large-scale expenditure sequestration and the associated disruptions and distortions to resource allocation, and while continuing to maintain the essential functions of the state. The main factor that made it possible was avoiding the precipitous revenue decline observed in many other transition economies. This, in turn, reflected a number of mutually supporting policy measures, including the willingness of governments to raise taxes when warranted (e.g., excises, to bring them closer to European Union average levels), limited recourse to tax exemptions or their outright elimination, the introduction of a broad range of initiatives to improve tax administration (e.g., mandatory use of value-added tax (VAT) invoices), and the creation of a credible environment for tax collection through the application of penalties and fines. Moreover, all countries have implemented fiscal policies in the context of predictable budgetary procedures, involving a reasonably clear legal framework and with governments making concerted efforts to operate within the limits provided by the constitution and budget laws.1 It is also thought that pegging the exchange rate (either via currency board arrangements or a straightforward peg) and the associated constraints on central bank credit to the government have provided additional incentives for fiscal discipline. In particular, the banking crises that erupted in each of the Baltics did not have an adverse impact on inflation, which continued to decelerate in their aftermath. By constraining the financing options available to the government, the “hard” currency policies imposed a hard budget constraint that effectively prevented the monetization of budgetary support to problem banks.

In Latvia and Lithuania, and more recently in Estonia, controls—both administrative and rules-based—on local government borrowing may also have played a restraining role. Yet another factor that may have facilitated fiscal adjustment during the early part of the transition is the fact that the Baltic countries were net contributors to the union budget. With independence and the onset of fiscal reforms, a “windfall” emerged, equivalent to some 5 percentage points of GDP in 1991 in Latvia and Lithuania.2

Indirect taxes (VAT and excise taxes) account for a large share of total tax revenue, as does the social tax collected by the social insurance funds. Current spending dominates the expenditure side of the budget, of which wages and salaries and transfers to households are the most important components; investment spending has remained fairly low. All countries have made good progress in establishing the institutions needed for fiscal management in a market economy, such as a treasury system set up to manage central government operations, a public investment program, and a tax system increasingly centered on the needs of a market-based economy.

The governments in all three countries have increasingly begun to cast their fiscal policies in medium-term frameworks geared toward further lowering inflation, fostering stable financial markets, and faster output growth, all with the objective of gradual convergence to Western European standards of living. This approach is also consistent with the authorities’ medium-term plan for exchange rate management, which envisages the maintenance of a pegged exchange rate, though not necessarily in the context of a currency board arrangement in the case of Lithuania. An outstanding issue is the need to maintain high levels of revenue mobilization over the medium term to fund growth-enhancing investment in infrastructure and environmental protection, finance pension reform, and, in some cases, accommodate certain rising pressures for social safety net expenditures. In this context, the agenda for tax reform, supported by continued progress in the reform of tax administration, would allow higher revenue yields for the major taxes without increases in existing rates.

Increased government saving is the principal policy tool available to increase gross domestic saving and to finance a higher rate of investment and growth. A cautious overall fiscal stance would also be an appropriate response to some possible risks that may arise in the medium term, which, to a greater or lesser extent, affect all the Baltics, including (1) contingent liabilities, such as domestic bank deposit guarantees; (2) potentially costly programs to compensate depositors for lost savings deposits in state banks in the early stages of transition, and for land and property restitution; (3) large one-off expenditures without agreed financing sources, such as the decommissioning of nuclear power stations, or clean-ups of contaminated sites; and (4) uncertainties over projections of key variables, including the international economic environment.

Money and Banking

The Baltic countries have moved quickly to establish market-oriented banking systems. They have sought to strengthen money markets, and in the aftermath of banking crises in all three countries, to promote financial deepening and confidence in their banking systems.

Monetary Developments

Since the introduction of their national currencies in 1992–93, the central banks of the Baltic countries have pursued a restrained monetary policy aimed at supporting the exchange rate peg and safeguarding the external position. The range of monetary instruments at the disposal of central banks has differed depending on the institutional arrangements (currency board arrangements (Estonia and Lithuania) versus a conventional central bank (Latvia)). Even when available, monetary instruments have been used sparingly, and in practice, monetary developments have generally reflected balance of payments movements. The money market in all countries remains relatively underdeveloped, in part because of significant differences in the financial condition of individual banks, which acts to hamper normal interbank transactions and therefore the passthrough of monetary policy operations. Nonetheless, activity in the money markets has increased appreciably in the last two years (albeit from a small base), in particular in Estonia.

Financial deepening has proceeded unevenly in the Baltics. Factors that have tended to constrain the process have included banking crises in each of the three countries and the attendant lack of confidence in the banking system (as evidenced by high cashdeposit ratios), as well as weak institutional foundations for well-functioning credit markets (e.g., effective bankruptcy procedures, registry of land and other collateral, transparent regulatory frameworks). Factors that have tended to accelerate the process have included the strengthened financial position of banks that remained in operation after weak banks were closed down and the easy availability of foreign financing.

The financial system has developed most in depth and scope in Estonia, which experienced its banking crises earlier in the transition (see section below). Since 1992, deposits and credit as a percent of GDP have grown steadily, and interest rates have played an increasingly important role as price signals in the market. Financial deepening has unfolded more slowly in the other two Baltic countries, where recent monetary developments have been influenced by banking crises in 1995 (Latvia) and 1996 (Lithuania). Following the closure of several banks, broad money in both countries declined sharply in real terms, and domestic credit fell as well. The banking problems, sometimes in conjunction with fiscal slippages, contributed to a temporary, but very sharp, increase in interest rates. For instance, interest rates on treasury bills in Latvia increased from about 20 percent in March 1995 to a peak of about 40 percent in October 1995. More recently, there has been a resumption in financial deepening with the gradual restoration of confidence in the banking system and strong capital inflows.

Banking Sector

Banking sector crises emerged first in Estonia in late 1992 and early 1993, then in Latvia in 1995, and finally in Lithuania in late 1995 and early 1996. The early stages of each crisis involved government intervention in support of troubled private banks, a central bank moratorium on the operations of some of these banks to address serious capital inadequacy problems, and subsequent closure or liquidation of several large banks. These developments initially gave rise to rapid shifts in deposits within the banking system and created temporary liquidity problems for relatively solid banks that were accompanied by a sharp rise in interest rates and net outflows through the balance of payments.

With delays in some cases, the central banks acted on several fronts to deal with the banking problems, namely (1) implementation of tighter prudential standards;3 (2) stepped-up monitoring of banks through on-site inspections; (3) the closure of banks that are not in compliance with prudential standards; and (4) progress in adopting international accounting standards.4 The use of International Accounting Standards (IAS) (and of Basle methodology for calculating capital adequacy requirements) required the banking systems to make adjustments in several areas, including in the provision for loan losses, the valuation of interbank balances, and the revaluation of fixed assets. Large exposure rules have also been tightened and made consistent with EU standards, and the definition of “borrower” has been broadened to include related individuals and entities. The restructuring of the banks in which the government retains ownership interests has likewise moved forward, albeit at varying speeds, and has involved programs to cut costs and rationalize operations, including through closure of branches. Options for privatization of the state banks are under consideration in Latvia and Lithuania; the five major state banks in Estonia had been either liquidated or privatized by the end of 1995.

Overall, indications are that the authorities’ efforts helped strengthen the banking systems. Bank capital has increased, and total bank assets are recovering, surpassing precrisis levels. Moreover, there has been a process of consolidation in the banking sectors in the Baltics involving mergers, liquidations, and significant retrenchment. As a result, the number of banks in operation has fallen, and the number of “problem banks” has declined markedly, almost all banks being in compliance with the minimum capital requirement and the capital adequacy ratio.


Consistent with the desire to give an early boost to the integration of their economies with the rest of the world, the governments in the Baltics were quick to dismantle the restrictive and inefficient trade regimes inherited from the Soviet Union. This entailed removing quantitative restrictions and phasing out export tariffs for the vast majority of goods. It also involved the elimination of protection for domestically produced goods through the establishment of low or zero-rated import tariffs. There are no import subsidies, and export licenses essentially fulfill a statistical purpose. There are also no export subsidies, and remaining export tariffs apply to a fairly narrowly defined set of goods. Estonia, in particular, maintains one of the most liberal trade regimes in the world. In Latvia and Lithuania, only certain agricultural products continue to be protected; governments there have encountered strong domestic opposition in attempting to reduce tariffs on these goods. All Baltic countries have free trade agreements with the European Free Trade Association (EFTA) members; and trade agreements with the EU. On April 1, 1996, a free trade agreement between all three Baltic countries came into force and was extended to trade in agricultural goods in early 1997 with the aim of eventually establishing a full customs union. All countries have applied for membership in the World Trade Organization (WTO) and expressed their intention of joining the EU. In late 1997, reflecting Estonia's significant progress in establishing the main elements of a modern market economy, it was chosen as part of the first wave of countries in Eastern and Central Europe to start membership negotiations with the EU.


The Baltic countries have made important progress in recent years in privatizing state enterprises, especially small and medium-sized enterprises. The share of the private sector in GDP is estimated to have risen from some 5–10 percent in 1991 to about 65–75 percent by the time the first stage of privatization came to an end during 1995.

In Estonia, virtually all small enterprises, about 1,500 in number, were privatized by the end of 1994, and the bulk of large enterprises were sold by the end of 1996. Privatization was given an early boost by a government decision to privatize all small enterprises by selling them, mainly via auctions and open tenders, to the highest bidder for cash. After some delays, partly because of political opposition, medium to large enterprises were privatized as of late 1992 using the “tender” method, which aimed at selling enterprises as quickly as possible consistent with finding effective owners. Bids were awarded on the basis of price, business plan, investment, and employment guarantees—in short, to investors able to provide both capital and effective corporate governance. Finally, in the privatization process, the government favored strategic investors (domestic and foreign) over management and employees, a policy that encouraged foreign direct investment. Outsiders more often brought modern management and marketing skills as well as an enhanced capacity for capital investment.

Under a separate program in Lithuania a large share of apartments and houses were also privatized early in the transition. In Estonia and Latvia, residential housing privatization has moved more slowly owing to administrative rigidities and problems encountered with restitution issues; for instance, in Estonia, the government is committed to compensate, either via restitution or with vouchers, all pre-1940 property. The fact that rents remain artificially low is also thought to have been a factor.

In Latvia and Lithuania, the privatization of small enterprises moved ahead fairly rapidly, but that of medium to large enterprises has proceeded slowly during the past few years. Many of the initial offerings did not generate sufficient interest, owing in part to the low participation offered and the poor financial condition of some of the enterprises put on the market.5 Gradually, packages of shares in a number of enterprises were auctioned increasingly successfully, and both the size of the interest sold and the relative attractiveness of the enterprises offered increased. Nevertheless, the delays meant that only about ½ of 1 percent of large enterprises in Latvia had been privatized by the end of 1997, and about 30 percent of medium- and large-scale enterprises in Lithuania had been transferred into private hands as of mid-1996.

In the next phase of privatization, Estonia has initiated plans to privatize the remaining large enterprises, which are mostly in energy, telecommunications, and transport. As for Latvia, the authorities have taken steps to accelerate the process, including opening nearly all sectors to foreign participation in privatization. And in Lithuania early in 1997, the new government widened the range of enterprises eligible for privatization by announcing the sale during 1997–98, via international tender, of a number of large enterprises in the transport, energy, and telecommunications sectors, as well as other enterprises in shipbuilding, maintenance, and air transport. The government also decided to abolish negative lists (which had been adopted by parliament in late 1994 to prevent the privatization of some 250 enterprises), including the majority of the enterprises in the energy and transport sectors.

The restructuring of privatized enterprises has been left to buyers, mostly on the basis of business plans submitted at the time of bidding. One factor that is thought to have facilitated a more rapid restructuring of the enterprise sector in Estonia is the presence of an effective Bankruptcy Law since 1992, which made it possible to initiate bankruptcy procedures against several hundred enterprises by the end of 1996. In conjunction with the drying up of budgetary subsidies to state enterprises from the outset of the transition, the Bankruptcy Law had a strong signaling effect vis-à-vis the enterprise sector. In sharp contrast, in Lithuania, not more than six enterprises were declared bankrupt during the period 1992–96, and a revised Bankruptcy Law was approved only in early 1997.

Notwithstanding the significant progress made, a number of challenges in privatization remain. Among them, land reform is perhaps the single most important obstacle to completing the transition to a market economy. While there have been some differences across the Baltic countries, slow progress in land reform has reflected governments’ attempts to accommodate several competing interests simultaneously, in particular the rights of original owners, as well as complex procedures for the transfer and titling of land. The passage of land reform acts early in the transition established the right to private ownership, but at times, preemptive claims on land were granted to the original owners in the form of restitution. To further complicate matters, restitution of the land actually owned by original owners was not made mandatory; compensation in the form of privatization vouchers or comparable land elsewhere was to be possible if either the original owner preferred one of these two options or if the use of the land had materially changed (e.g., by the erection of a factory). Thus, unsettled restitution claims have rendered uncertain the final disposition of a substantial number of land plots. Even where pending restitution cases are not an obstacle, complex and costly procedures for surveying, titling, and securing local government approval for land sales (including questions of zoning and town planning) have also contributed to a slow pace of privatization. Moreover, in many cases, local authorities have responsibility for steps in the process for which they have neither expertise, financial resources, nor motivation to complete. Land reform laws have been amended, including simplifying survey procedures and establishing incentives for municipalities to privatize land (as in Estonia in April 1996), in an effort to overcome some of these problems. Progress will continue to be slow, mainly because the process itself involves the creation of a complex institutional and legal framework. For example, in Lithuania, parliament still needs to approve a constitutional amendment to allow legal entities to own agricultural land. More generally, the extension of land ownership rights to legal entities in the Baltic countries for both agricultural and nonagricultural land should do much to enhance the functioning of land markets and contribute to the development of collateralized mortgage lending. It would also bring the legal framework for the agricultural sector closer to that in EU partners.

Energy Sector

The problems of the energy sector in the Baltics have been closely linked to the large changes in relative producer prices of imported oil and gas in 1992; the difficulties of consumers in accommodating sizable price adjustments for goods with inelastic demand; and the need to return the largely stateowned companies in the sector to profitable operations in advance of privatization, while disengaging the government from tariff policy. Reform of the energy sector in recent years has been driven by three principal objectives: (1) to commercialize the operations of energy companies within a newly created regulatory framework that tries to balance consumer interests against companies’ rate of return, and which also allows for price increases to cost-recovery levels; (2) to strengthen payments discipline for energy and energy products, particularly in respect of public consumption, thereby underpinning the commercialization of producers; and (3) to eliminate budgetary subsidies for energy, replacing them with targeted support for low-income consumers, as necessary. Considerable progress has taken place in most areas of energy reform, although significant delays have been encountered in commercialization of companies and the reduction of overdue bills.

A strengthening of the institutional environment for pricing policy has been a key ingredient in reform of the energy sector. This has involved the introduction of regulatory bodies with broad latitude to propose price increases for electricity and heating in line with a methodology for cost-recovery pricing. Although the recommendations are not always binding, it is anticipated that the threat of legal action against the energy companies will effectively make the recommendations a price ceiling and prevent the reintroduction of cross subsidies from residential to industrial consumers. In agriculture, the regulatory bodies have thus far sought to eliminate preferential pricing of electricity, and for heating, they have proposed raising the overall price level and abolishing preferential pricing for industrial consumers.

To varying degrees, the authorities in the Baltics have had to address the issue of nonpayment of energy bills. This problem has generally led to a cascading of overdue bills, including on external payments for energy inputs. For instance, in Lithuania, nonpayment of electricity bills (where billing did not necessarily reflect cost recovery) led first to arrears from the Lithuanian Power Company (LPC) to Lithuanian Gas and then to delays in payments to the two foreign gas companies and to erratic supplies. Moreover, energy companies in Latvia and Lithuania accumulated large tax arrears, with overdue consumer bills amounting to as much as several percentage points of GDP in 1995–96. In addition, the energy companies were often the largest debtors to the budget, and, in turn, the budget built up delays on payments for its own energy consumption. The authorities in these two countries took several measures in 1996–97 to deal with delinquent customers, notably increased use of cutoffs and improved budgeting in public organizations, which reduced the arrears stock considerably. Also, the 1997 budget in Lithuania explicitly included expenditure allocations (of ¼ of 1 percent of GDP) to clear energy arrears of budgetary organizations and established a netting mechanism to use state transfers to municipalities for direct payment of overdue energy bills. Fines were introduced for the heads of budgetary organizations with unpaid debts in excess of 30 billing days. Together, these measures contributed to a sharp reduction in the stock of unpaid bills during 1997. In Estonia, by contrast, the stock of energy arrears has been quite small, partly as a result of the approach taken by the government, namely, to foster open competition among oil companies, to encourage energy companies to devise systematic and transparent billing and collecting methods, and to depoliticize the process for imposing financial discipline on energy users.

The move to increase energy tariffs to cost recovery levels throughout the Baltics has removed the need for further budgetary subsidies (traditionally paid as producer subsidies). However, as a social safety net measure, governments have introduced payments to consumers when combined electricity and heating bills exceeded a certain percentage of gross income. Governments have also accepted liabilities in respect of past arrears on unpaid production subsidies.


With Estonia leading the way, agricultural policy in the Baltic countries has gone through several phases during the last few years, the broad thrust of which has been to introduce a greater measure of flexibility and market orientation in the sector. With the exception of a limited number of export restrictions initially retained in Latvia and Lithuania to slow down price adjustments on the domestic market, most controls on agricultural marketing were abolished early in the transition. Support prices and subsidies were also eliminated early on in all countries, and during the following years, major agricultural products received no substantial price support. During 1993, state trade monopolies were abolished, and most remaining quantitative import and export restrictions were eliminated or replaced with tariffs and export taxes, with tariffs drifting upward over time, except in Estonia where they essentially remained at zero. In response to a cumulative decline in agricultural output of 40 percent over the period 1991–94 in Lithuania, some support mechanisms were reintroduced in early 1995 for the main agricultural products. More recently, tariff increases in Latvia and Lithuania have been partly reversed and most agricultural export taxes have been eliminated.

The liberalization of the agricultural sector in Lithuania, and to a lesser extent in Latvia, was given a boost in 1997 through policies designed to (1) reduce distortions in the commodity and credit markets; (2) increase targeting and transparency in the allocation of budget resources for agricultural support; and (3) reduce in real terms the claims made by the sector on budgetary resources. The linchpin of the reforms consists of changes to domestic support policies introduced in the context of the creation of rural support funds. Furthermore, the extension of the Baltic Free Trade Area (BFTA) to agricultural products was ratified by parliaments in 1996 and came into force on January 1, 1997. The agreement provides for complete free trade in agricultural and food products of domestic origin and is expected to stimulate competition in the countries’ food industry. And in Lithuania, protection of domestically produced food was reduced considerably on January 1, 1997 with the increase in the VAT rate on domestic food production from 9 to 18 percent, the level applied to imported food.


All Baltic countries have taken initiatives in recent years to improve the legal climate for economic activity and to create a foundation for better governance. New chapters have been introduced in the penal code to deal with a variety of activities for which the legal framework was seen as inadequate, and new institutions within the government apparatus have been created to strengthen the capacity for the prosecution of economic crimes. Centralized data banks that can be accessed by different government agencies are being developed, and the experiences of other countries in dealing with economic crimes in general are being studied (e.g., tax evasion in major industrial countries, money laundering in various international banking centers). Progress has been particularly noteworthy in the area of institutional development, where over a dozen different government agencies in all three countries (e.g., the Ministry of Finance, Customs, the State Tax Service, the Prosecutor's Office) are actively cooperating in the identification and prosecution of economic crimes. Sometimes with donor assistance, customs offices are being computerized and border controls tightened. Laws on money laundering have been approved, and attempts are under way to strengthen the administrative capacities of key institutions to facilitate enforcement.

Among other initiatives that are expected to contribute to an improved climate for economic activity, governments have approved resolutions that call upon government officials (including those at the highest political levels) to publicly declare their assets. In Estonia, the authorities are presently considering plans to establish the office of an ombudsman and introduce an ethics code for the civil service. The former would help secure individual rights, while the latter would improve public knowledge of the rights and obligations of public officials. Lithuania has established a high level interagency Working Group to take the lead role in promoting the government's anticorruption efforts. The tasks of the Working Group are to (1) propose new legislation or amendments to existing legislation and, more generally, to introduce initiatives intended to support the government's efforts to create an environment characterized by the rule of law; (2) draft a Civil Service Ethics Code, the aim of which is to establish statutes for the conduct and exercise of civil servants' official duties and responsibilities; and (3) carry out a comprehensive review of all economic legislation (e.g., legislation on free economic zones, laws adopted in the context of the 1995–96 banking crisis) and examine its consistency with recent changes to the penal code and other decisions taken to deal with economic crimes.


This is reflected, for instance, in rigorous adherence to the timetables provided by the law for budget formulation. There are no instances in recent years of missed deadlines as regards the various stages of the preparation and approval of the budget, notwithstanding considerable political debate during the various stages of its formulation. In Estonia, the state budget (covering the central government plus the Social Insurance and Medical Insurance Funds) is legally constrained to be in balance (though a drawdown in deposits is classified as revenue).


Estonia had already reduced its net transfers from earlier, higher levels to about 2 percent of GDP in 1989. See Tapio O. Saavalainen,“Stabilization in the Baltic Countries: Early Experience,” Road Maps of the Transition, IMF Occasional Paper No. 127 (Washington: International Monetary Fund, 1995).


These requirements, which were aligned with international standards, included tighter limits on insider lending, credit concentration, and foreign exchange exposure, and an increased minimum capital requirement and capital adequacy ratio. Also, stricter rules for loan-loss provisioning have been introduced.


In Lithuania, parliament amended the Civil Code to abolish the full deposit state guarantee for individuals with accounts in state-controlled banks, thereby providing these deposits with the same partial protection that applies to other banks under the deposit insurance law.


In Lithuania, the process of valuation of enterprises on the privatization lists also took longer than anticipated, in part because of inadequate local administrative capacity.