Republic of Lithuania: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
10 Sep 1999
eISBN:
9781451823998
Language:
English
Keywords:
ISCR; CR; government; Russia crisis; EU membership bid; appendix II; currency board arrangement; credit policy; incorporated bank; bank preparedness; portfolio of equities; credit union capital; Loans; Insurance companies; Foreign banks
Download PDF (2.2 MB)

This Selected Issues paper and Statistical Appendix analyzes economic developments in Lithuania during 1996–99. The paper discusses macroeconomic developments and policies in detail. It discusses the importance of fiscal prudence in maintaining sustainable fiscal and external positions over the medium term, and emphasizes that reining in budgetary spending will be a key challenge in the period ahead. The paper reviews external competitiveness and concludes that Lithuania’s competitiveness has remained adequate through early 1999, although there remains little room for further real appreciation and wage rises that are not related to productivity increases.

Abstract

This Selected Issues paper and Statistical Appendix analyzes economic developments in Lithuania during 1996–99. The paper discusses macroeconomic developments and policies in detail. It discusses the importance of fiscal prudence in maintaining sustainable fiscal and external positions over the medium term, and emphasizes that reining in budgetary spending will be a key challenge in the period ahead. The paper reviews external competitiveness and concludes that Lithuania’s competitiveness has remained adequate through early 1999, although there remains little room for further real appreciation and wage rises that are not related to productivity increases.

VI. Structure and Development of the Financial Sector

A. Introduction and Overview

73. This chapter provides an overview of recent financial sector developments, with particular focus on the regulatory framework, and draws some policy conclusions as regards further development of the financial system. Lithuania’s financial sector has undergone dramatic changes since the start of transition, especially following the banking crisis in 1995/96. Financial deepening, measured both by the assets of the commercial banking system and broad money, has increased since 1996, although it is not yet back at pre-crisis levels (Table 8). Commercial bank consolidation has made progress during 1998 and foreign investors have recently shown renewed interest in Lithuanian banks. Major policy initiatives since 1995 have included the establishment of a workout unit for bad loans (Turto Bank) in 1996, setting up a uniform deposit insurance scheme for household deposits in 1997, continued improvements in financial sector supervision, and amendments of laws and regulations in line with EU directives.

Table 8.

Lithuania: Developments in the Commercial Banking System, 1995-99

article image
Source: Bank of Lithuania.

In addition, two foreign banks (Polish Kredyt Bank and Societe Generale) have established branches in Lithuania and four foreign banks (Bank Polska Kasa Opieki SA-Grupa Pekao SA, Kontakt, CA IB Investmentbank Aktiengeschellschaft, and Norddeutsche Landesbank Girozentrale) have established representative offices. In May 1996 the BOL licensed a subsidiary of a foreign bank. There also exist two specialized banks, the Development Bank and Turto Bank (the asset management company for bad loans).

Locally incorporated commercial banks and branches of foreign banks. From December 1997, including claims on other banking institutions. Total assets of the commercial banking system, the two specialized banks, and the credit unions accounted for 27.7 percent of GDP at the end of 1998.

74. This chapter is organized as follows. Section B provides an overview of recent developments in the banking sector. Section C discusses banking supervision and prudential regulations. Section D gives an overview of the deposit insurance. Sections E, F and G discuss the credit unions, insurance sector, and capital markets, respectively. Section H concludes.

B. The Banking System: Recent Developments

75. The commercial banking system has gone through a major consolidation since the banking crisis in 1995-96. The loan to deposit ratio declined from 96½ percent at the end of 1995 to 69 percent at the end of 1997, but increased to 81 percent in April 1999, mainly due to a significant rise in lending in foreign exchange. Following the 1995-96 crisis, the banking system as a whole has succeeded in increasing its capital, and in 1998 all locally incorporated commercial banks reported profits for the first time since the banking crisis.

76. The number of banks more than halved from 28 in early 1994 to 12 at the end of 1995. 57 Private banks ran into difficulties from late 1994, and in 1995 the state banks also experienced liquidity and solvency problems. Under World Bank auspices, and consistent with IMF advice, the authorities closed the smaller private banks. Two banks had their licenses revoked in 1997 and 1998 (Tauro Bank and State Commercial Bank). Ten locally incorporated commercial banks are currently operating in Lithuania. In May 1999, the BOL licensed a subsidiary of a foreign bank. The second largest privately owned bank (Hermis Bank) was given permission to buy the much smaller Industry Bank. In addition, two foreign banks have branches in Vilnius, four foreign banks have established representative offices, and two other banking institutions have restricted licenses.58

77. The commercial banking system in Lithuania is segmented into three distinct groups: the two state-owned banks (Savings Bank and Agricultural Bank) with about 45 percent of total assets of the commercial banking system; the two largest privately owned commercial banks (Vilnius Bank and Hermis Bank) with about 40 percent of total assets; and the remaining six locally incorporated commercial banks and the two branches of foreign banks. Foreign investors play important roles in several of the privately owned commercial banks, including the two largest ones.59 The BOL issued in May 1999 a regulation preventing mergers that might result in one bank having a market share exceeding 40 percent.60

78. The assets of the commercial banking system have resumed their growth following the banking crisis. Bank lending grew by 24 percent in 1998, and after a slowdown towards the end of 1998, it has picked up again, increasing by 32 percent in April 1999 compared with April 1998. The shares of long-term loans and of loans denominated in foreign exchange rose during this period; loans in foreign exchange accounted for 58½ percent of total loans at end- April 1999, compared with about 47 percent a year before. This strong rise reflects generally lower interest rates on foreign exchange denominated loans and the fact that the BOL liberalized lending in foreign exchange in October 1997.

79. On the liabilities side, deposits increased by 20 percent from April 1998 to April 1999. In particular, the share of time deposits and the share of deposits denominated in foreign exchange rose. The loan to deposit ratio thus increased from 73½ percent to almost 81 percent during this period. The loan to deposit ratio in litai, however, declined from 65 percent to 55 percent, while the ratio in foreign exchange increased from 86 percent to 121½ percent.61 This, in part, reflects interest rate developments, the fact that commercial banks have a portfolio of treasury bills (in litai), and the fact that banks moved from having net foreign assets to having net foreign liabilities in early 1998. The banks thus increasingly rely on foreign funding. After the Russian crisis in August 1998, the banking system has continued to succeed in attracting foreign funding, but at higher interest rates, which have been passed on to borrowers (Figure 6).

Figure 6.
Figure 6.

Average Interest Rates on Loans and Spread between Lending and Deposit Rates

Citation: IMF Staff Country Reports 1999, 096; 10.5089/9781451823998.002.A006

Source: Bank of Lithuania.

80. Off-balance sheet liabilities increased substantially, by 26 percent, during 1998, amounting to almost 13 percent of total bank liabilities by the end of the year. The increase during 1998 in part reflects increased activities of state-owned banks in foreign exchange contracts. Foreign exchange contracts account for about 55 percent of all off-balance sheet liabilities, while undrawn credit facilities and guarantees account for approximately 25 percent and 12½ percent, respectively. Foreign exchange sale contracts are to a large extent matched by foreign exchange purchase contracts, thus limiting the net open position in foreign exchange.

81. In 1998, all locally incorporated banks reported profits for the first time since the 1995-96 banking crisis, although external auditors of some banks recommended additional provisions for bad loans. Profits before tax of locally incorporated banks accounted for about’” 0.8 percent of total assets compared to -0.7 percent in 1997 (0.2 percent excluding the State Commercial Bank). The average spread between bank lending and deposit rates has increased since mid-1998, in part reflecting increased credit risk (Figure 6).62

C. Banking Supervision and Prudential Regulations

82. The BOL, which is responsible for supervision of banks and credit unions, has made substantial progress toward effective banking supervision since the banking crisis in 1995-96. The BOL has also come a long way toward compliance with EU requirements (see Box), and the Board of the BOL resolved in December 1998 that the BOL will implement the Core Principles for Effective Banking Supervision approved by the Basle Committee on Banking Supervision.63 Since October 1998, all commercial banks reportedly comply with all prudential requirements.

Banking supervision

83. The capacity and operational autonomy of the BOL’s Credit Institutions Supervision Department have improved over the past two years. The Department currently has 65 staff members compared with 55 at the end of 1997 and 17 at the end of 1993. The Board of the BOL, however, occasionally determines to ease the recommended sanctions. The BOL has established informal contacts with the Securities Commission and the State Insurance Supervisory Authority to facilitate supervision on a consolidated basis. Agreements with a view to share information are currently being negotiated with relevant foreign banking supervisors.

Prudential regulations

84. The Law on Commercial Banks and bank regulations have continuously been amended with a view to ultimately ensure compliance with EU directives and the Core Principles for Effective Banking Supervision. Banks have been subject to International Accounting Standards (IAS) since 1996. Because IAS leave some flexibility to the banks, the BOL requires that banks specify their methodology in an explanatory letter and cannot change their accounting practice without notifying the BOL. The BOL has issued rules for specific provisions, but relies on IAS regarding general provisions.64 If there is a conflict between the credit institution and the BOL regarding the required level of provisioning, the BOL has the authority to require additional provisions. Annual financial statements are audited by internationally recognized auditors, whose statements are published. For the first time, the 1998 annual financial statements had to be audited on a consolidated basis. Banks and their credit undertakings are supervised on a consolidated basis, based on EU sectorial definitions. Supervision on a consolidated basis has become increasingly important since banks have established leasing and insurance subsidiaries.

85. Since January 1997 banks have been subject to a 10 percent capital requirement of risk-weighted assets to cover credit risk, using EU methodology. The BOL expects to adopt the EU capital adequacy directive by the end of 2000.65 Large exposures above 10 percent of own funds are reported to the BOL regularly, and the maximum exposure to one borrower or group of borrowers is 25 percent. However, in contrast to the EU directive on large exposures, there is not yet a cumulative limit on all large exposures. The centralized database for loans, which registers all loans above LTL 50,000, has been expanded to include loans to subsidiaries. The methodology for calculating the liquidity ratio has recently been strengthened.

Banking sector indicators

86. The commercial banking system has succeeded in building up its capital base and improving the quality of its loan portfolio, and has become profitable. The direct effects of the Russian crisis in August 1998 are reportedly limited. The capital adequacy ratio of locally incorporated commercial banks reportedly increased from 10.8 percent at the end-1997 to 23.8 percent at end-1998, and declined only marginally to 22.7 percent at end-March 1999. This reflects an increase in liable capital of some banks. The leverage ratio was reported to be 14.8 percent at end-March 1999 (Table 9).

Table 9.

Lithuania: Prudential Indicators of Commercial Banks, 1996-99

article image
Source: Bank of Lithuania.

Defined as the ratio of total capital to total liabilities; an increase in the ratio indicates an improvement.

The March 1999 figure includes total banking system and credit unions.

Percent of own funds. The State Commercial Bank and the Agricultural Bank were exempted from capital requirements in 1997.

87. The quality of the loan portfolio has increased significantly. The share of nonperforming loans declined from 22.2 percent of total loans at end-1997 (excluding State Commercial Bank) to 12.2 percent at end-March 1999 (Figure 7). Moreover, specific provisions of locally incorporated banks declined from 18.5 percent of total loans to 5.6 percent during the same period. The improvement of the quality of the overall loan portfolio should be seen in context of the robust economic growth during the first half of 1998, the closure of the State Commercial Bank in March 1998, and the transfer of bad loans of the Agricultural Bank to the workout unit. It also reflects the fact that the BOL has reviewed banks’ credit policies for corporate customers and issued rules regarding credit assessment of retail loans. The BOL has also adopted regulations requiring banks to write off loans that have been classified as losses for two quarters (effective January 1, 1999). The exposure to the construction and real estate sector is relatively modest (less than 7 percent of all loans, see Table 10). About 11.5 percent of all loans are collateralized by real estate. Finally, banks reportedly comply with the prudential regulation for large exposures and lending to connected borrowers.

Figure 7.
Figure 7.

Real Interest Rate and Nonperforming Loans

Citation: IMF Staff Country Reports 1999, 096; 10.5089/9781451823998.002.A006

Source: Bank of Lithuania.
Table 10.

Lithuania: Composition of Bank Loans by Economic Activities, 1995-99

article image
Source: Bank of Lithuania.

The quarterly reporting of loans by economic activities was changed, effective January 1, 1999, having regard to the breakdown used in the European Union. The breakdown is thus based on the economic activity the loan is financing rather than the economic entity.

Summary of Prudential Regulations of Commercial Banks

article image

88. The Russian crisis in August 1998 has been reported to have relatively limited direct impact on Lithuanian banks as their direct exposure to Russia (mainly in the form of securities) was 1½ percent of total assets. This low exposure was in part a result of the fact that the BOL requires full risk-weight for claims on CIS countries, including government securities issued by such countries. Furthermore, government support programs offered to enterprises affected by the Russian crisis have so far helped limit the indirect impact on banks. The Russian crisis nevertheless necessitated additional provisions of LTL 54 million, equivalent to about 1 percent of total loans. Although economic activity has remained subdued and real interest rates have increased in the aftermath of the Russian crisis (Figure 7), the BOL is confident that appropriate provisions have been made to cover indirect effects.

89. Available data indicate that commercial banks are very liquid (Table 9). Banks generally have relatively large holdings of treasury bills, which accounted for about 11 percent of total assets in March 1999, The secondary treasury bill market, however, is not particularly deep, and the activity in the money market is also relatively modest.

90. Banks’ direct foreign exchange exposure is limited, since banks typically hedge or pass on their currency risk to borrowers (Table 9). Banks are also potentially exposed to some interest rate risk, in part from their portfolio of treasury bills (although their maturities are short) and other debt securities (about 2½ percent of total assets). On average, banks’ portfolio of equities is relatively modest (about 1½ percent of total assets).

D. Deposit Insurance

91. A limited uniform deposit insurance scheme for individual depositors has been in place since 1997. State-owned banks had a competitive advantage until spring 1997, when Seimas revoked the Civil Code provisions that guaranteed full deposit protection for individual deposits in these banks. In 1998, all deposits at the State Commercial Bank were transferred to the Savings Bank and thus fully covered. The coverage of the deposit insurance scheme is phased, covering up to LTL 45,000 in 1999, and rising to LTL 65,000 in year 2000. Coinsurance is also phased, thus, in 2000 the first LTL 25,000 will be fully covered, 90 percent of the next LTL 20,000 will be covered, and the next LTL 20,000 will be covered by 70 percent. Deposits denominated in foreign exchange (U.S. dollars and currencies of EU member states) are covered as well, but the coinsurance is larger (90 percent, 80 percent, and 60 percent, respectively). The insurance premium is currently 1.5 percent of household deposits, but will be reduced to 1 percent, effective January 1, 2000. The Deposit Insurance Fund has assets available to cover about 2½ percent of all household deposits. An amendment of the law is being considered with a view to change the phasing and coverage, and to allow branches of foreign banks operating in Lithuania to participate.

E. Credit Unions

92. The BOL issues and revokes licenses and supervises credit unions according to the Law on Credit Unions. The minimum capital for a credit union is LTL 15,000, and the number of members must be at least 50. Credit unions must meet the following criteria; (i) credit union capital shall not be less than 13 percent of risk-weighted assets; (ii) a liquidity ratio of 30 percent; and (iii) limits on open positions in foreign exchange (20 percent of credit union capital in one currency and 30 percent in total exposure). Credit unions need the BOL’s permission to carry out operations in foreign exchange.

93. Although the number of credit unions has more than doubled from 12 in early 1997 to 29 at present, they still account for less than 0.1 percent of the assets of commercial banks. Credit unions submit financial reports to the BOL and are subject to on-site inspections, but less frequently than banks. The financial officer of a credit union must pass an exam. Depositors are not covered by the deposit insurance fund.

F. The Insurance Sector

94. The insurance sector has grown rapidly in recent years, but its size remains modest. Total investments of insurance companies increased by 23 percent during 1998, but still accounted for less than 1 percent of GDP at the end of 1998. Approximately 64 percent of insurance companies’ investments are in government securities. As of May 1999, there were four insurance companies providing life insurance and 27 companies providing non- life insurance. In addition, four life insurance companies are still liable for contracts concluded before July 31, 1997 under the former regulation, and three non-life insurance companies and two life insurance companies were under liquidation. Four insurance companies were licensed in 1998 and one in April 1999.66 Several banks have established or are in the process of establishing insurance subsidiaries, and many nonresidents have invested in insurance companies. The largest insurance company, Lietuvos Draudimas, which accounted for more than half of the premiums written in 1998, was privatized in May 1999, when 70 percent of the shares were sold to a foreign insurance company.

95. The Law on Insurance of 1996 delegates the authority to supervise insurance companies to the State Insurance Supervisory Authority. The law is currently under review with a view to facilitate compliance with international standards. The Supervisory Authority has about 30 staff members, who analyze the quarterly reports submitted by insurance companies and conduct regular on-site inspection every 1½-2 years, along with ad hoc inspections.

G. Capital Markets

96. The capital market in Lithuania consists of the stock market, which is divided into quoted and unquoted stocks, and the market for government securities.67

The stock market

97. The National Stock Exchange of Lithuania (NSEL) was created by government resolution in 1992 and started operating in September 1993. Both equities, which accounted for about 60 percent of the turnover in 1998, and treasury bills are traded at the Stock Exchange. In 1998, several legislative changes affected the Stock Exchange. The Law on Companies was amended, which made dematerialization of public limited companies compulsory. The Law on Public Trading of Securities was also amended with a view to clarifying disclosure requirements and reorganizing the Stock Exchange and the Central Securities Depository from nonprofit companies to profit-seeking public limited companies. In April 1998, continuous trading was introduced and since June 1998, equities have been divided into an Official list, a Current list, and unlisted securities. The Official list includes the most liquid securities and companies that report according to IAS (six securities were listed, in early 1999, including two banks).

98. During 1998, the capitalization of the quoted stocks fell from almost 18 percent of GDP to 10 percent of GDP. This to a large extent reflected the fact that the index of quoted stocks plunged about 41 percent during 1998 and since has remained subdued.68

Government securities

99. Government securities mainly consist of treasury bills, but special nontradable restructuring securities and newly introduced savings bonds also exist. Treasury bills are issued with 1-, 3-, 6-, and 12-month maturities and notes with a 2-year maturity.69 They are auctioned at multiple-price auctions. The secondary market for treasury bills is rather thin, with the result that the authorities are considering introducing a primary dealer system. The yield on treasury bills was relatively stable during the first half of 1998, but immediately after the Russian crisis, banks wanted to remain liquid, and the bids fell short of the offers, resulting in higher interest rates (Figure 8).70 In April 1999, the government issued its first savings bonds.

Figure 8.
Figure 8.

Three Month Treasury Bill Interest Rate

Citation: IMF Staff Country Reports 1999, 096; 10.5089/9781451823998.002.A006

Source: Ministry of Finance.

The Securities Commission

100. The Securities Commission is charged with regulating and supervising capital markets. With the adoption of the Law on Public Trading in Securities of 1996, it became an autonomous institution directly accountable to Seimas and funded by the government. The Law on Securities, the Company Law, the Law on Investment Companies, and the Code of Ethics of Intermediaries of Public Trading of Securities establish the framework for participants in the capital market. The Commission oversees the Lithuanian Stock Exchange, the Central Securities Depository, brokerage firms, investment companies, and it will also supervise the new private pension funds, according to the law on private pension funds adopted in June 1999 (which will become effective January 1, 2000). Several regulatory changes were adopted during 1998 with a view to complying with the relevant EU directives. For instance, new capital requirements for brokerage firms became effective, and the legal status of the Stock Exchange and the Central Securities Depository were changed. Furthermore, rules on notification of acquisition or sale of a substantial bloc of shares and disclosure of issuer’s material events have been strengthened. Before the end of 2000, the Commission intends to prepare amendments to the Securities Law with a view to fully comply with relevant EU directives. The three Baltic securities commissions have agreed to unify their coordination efforts.71

101. The Securities Commission licenses brokers trading at the Stock Exchange.72 At the end of 1998, 50 broker companies were licensed, of which 39 were brokerage firms and 11 were brokerage divisions of banks, compared to 102 licensed broker intermediaries in 1994. Several of the brokerage firms are owned by foreign investors. New capital requirements became effective January 1, 1998, with the result that two brokerage firms had their license revoked and four firms had their license temporarily limited until they complied with the new capital requirements. The brokerage firms thus increased their own capital by 25 percent during 1998 to LTL 44.5 million. These firms, however, experienced an operating loss of LTL 3.6 million during 1998. The largest broker accounted for almost 15 percent of the turnover at the Stock Exchange, and the five largest broker intermediaries account for about 55 percent of the turnover.

H. Conclusions

102. Important strides have been made since the 1995-96 banking crisis to rationalize the banking sector and strengthen prudential oversight. However, the monetization of Lithuania’s economy has remained relatively modest. Mobilization of savings is also limited, and there continues to be a strong reliance on cash, in spite of a relatively generous deposit insurance scheme. Against this background, the authorities are committed to improving the soundness of the financial system further and developing it with a view to facilitate sustainable economic growth. The authorities intend to implement a number of measures toward this end, including the privatization of the two state-owned banks, continued enhancement of banking supervision, and further development of capital market infrastructure.

103. The two remaining state-owned banks continue to dominate the banking sector and the government generally keeps its deposits with these banks, which also provide a range of banking services to the government, all of which may affect competitiveness. These two state-owned banks are expected to be privatized in 1999/2000, with a view to ensuring a level playing field. To this end, the Agricultural Bank has already transferred bad loans of a net value of LTL 28 million (gross value LTL 288 million) to the workout unit (Turto Bank) to improve its balance sheet. However, an attempt to privatize it failed. As part of the preparations of privatization, the possible transfer of further bad loans to the workout unit and the clarification of the role of these banks as service providers for the government are currently being discussed.73

104. The authorities are also determined to further enhancing banking supervision. The BOL has adopted a three-year strategic plan and a more detailed annual action plan. The Law on Commercial Banks and bank regulations will be amended as necessary, after discussions with the banking industry, with a view to comply with EU directives and the Basle Core Principles for Effective Banking Supervision. The authorities also plan to continue the enhancement of the supervision of capital markets in line with EU-directives, and to develop the legal framework for institutional investors, like the recently adopted law on private pension funds.

APPENDIX I

Table 1.

Lithuania: Summary of the Tax System, July 1999

article image
article image
article image
article image

APPENDIX II Status of EU Accession

105. This appendix summarizes the status of Lithuania’s application for EU membership and reviews progress towards fulfilling economic membership criteria.

Accession milestones

  • Since regaining independence in 1991, Lithuania has progressively strengthened its relations with the EU, including through a Trade and Cooperation Agreement (1993), a Free Trade Agreement (1995), and the membership application (1995).

  • In March 1998, the EU approved Lithuania’s Accession Partnership (AP). Lithuania is one of 10 “accession candidates” from Central and Eastern Europe (CEE), but is not included in the first group of CEE candidates with which membership discussions have already started.74 The AP aims at guiding an applicant towards EU membership, setting out the priority areas for further work identified in the Commission’s Opinions, and financial assistance that could be provided by the EU. The objectives are to enable an applicant to meet the Copenhagen criteria (see below) and accept the Acquis Communautaire.

  • Also in March 1998, Lithuania presented its first National Programme for the Adoption of the Acquis (NPAA) to the European Commission (EC). (A modified version was prepared in June last year, and an update was presented to the EC on July 2 this year). The NPAA describes in greater detail the actions needed to reach the objectives set out in the AP.

  • In May 1998, the Lithuanian government established the European Committee responsible for coordinating pre-accession work and liaising with the EU. Since early 1999, the Lithuanian government through this office has started to release quarterly progress reports (see http://www.euro.lt).

  • During 1998, the EC initiated the bilateral screening process of progress made by Lithuania in the 29 chapters of the Acquis. By end-April 1999, the screening had been finalized for 18 chapters.

Progress in meeting the Copenhagen Economic Criteria75

106. EU membership requires the existence of a functioning market economy and the capacity to cope with competitive pressure and market forces within the Union (the so- called Copenhagen economic criteria).76 Lithuania has been undertaking great efforts in meeting these criteria, and this has been acknowledged by the EC. In its 1997 Opinion, the EC found that Lithuania had made “considerable progress in the creation of a market economy.” However, it also found that Lithuania would face “serious difficulties in coping with competitive pressure and market forces within the Union in the medium term,” and that progress in fulfilling the requirements of the acquis had been “uneven.”

107. In a report on economic developments in Lithuania published in the fall of 1998,77 the EC noted that Lithuania, on the one hand, had made progress in macroeconomic stabilization and structural reforms in various areas, including large scale privatization, banking supervision and prudential requirements, bankruptcy legislation, reforms in tax policy and administration, and public expenditure management. On the other hand, the report noted that the widening of the current account deficit in 1997 and 1998 posed the biggest macroeconomic risk for Lithuania. It emphasized that Lithuania would benefit from formulating a coherent macroeconomic framework for the implementation of reforms in preparation for accession. The report also highlighted the need to deepen structural reforms by accelerating large-scale privatization (with the focus on improving efficiency rather than maximizing revenues), enforcing financial discipline for enterprises, restructuring agriculture, and following through with reforms in the energy sector on the basis of a comprehensive sector strategy. Such a strategy should include setting energy prices at cost- recovery levels, strengthening the independence of energy parastatals, restructuring and privatizing faster certain enterprises (e.g., Lithuanian Power Company), establishing a “proper regulatory and financing framework,” and devising a strategy to cope with the costs of the decommissioning of the Ignalina nuclear power plant.78 In addition, the report noted that Lithuania will need to improve its administrative capacity to be in a position to fully meet the requirements of the Acquis Communautaire.

Financial support from the EU

108. The 1998 EU Phare program for Lithuania consists of a “national allocation” of euro 32 million for institution building (about 30 percent) and infrastructure projects (approximately 70 percent), especially in the environment, transport, and energy sectors. Alongside the Phare program, from the year 2000 onwards the EU will provide substantial support to CEE accession candidates in agriculture and under the Instrument of Structural Policies for Pre-Accession (ISPA) in an amount of euro 1 billion per year during the period 2000-06 (for all accession candidates).79

109. Large additional investments will be required especially in the environment and energy sectors to comply with EU requirements. Although the EU and others can be expected to provide much of the necessary financing through ISP A and other funds, Lithuania will be faced with a considerable additional budgetary burden over the medium term. For example, to access ISP A Lithuania will have to meet additionality requirements, which calls for co-financing and real increases in domestic spending on proposed projects or programs.

STATISTICAL APPENDIX

Table 11.

Lithuania: GDP by Expenditure, 1994-98

(In percent of GDP)

article image
Sources: Data provided by the Lithuanian authorities; and Fund staff estimates.
Table 12.

Lithuania: Gross Domestic Product by Sector at Current Prices, 1993-98

(In percent of total)

article image
Source: Data provided by the Lithuanian authorities

Preliminary data.

Financial intermediation services indirectly measured.

Table 13.

Lithuania: Industrial Production Sold by Sectors, 1993-98

(At current prices; in percent of total)

article image
Source: Data provided by the Lithuanian authorities.

Preliminary data.

In 1997 and 1998, including tobacco.

Table 14.

Lithuania: Supply and Use of Energy, 1993-98

(In millions of tons of oil equivalent)

article image
Source: Data provided by the Lithuanian authorities.
Table 15.

Lithuania: Electricity Production and Consumption, 1993-98

(In millions of KwH)

article image
Source: Data provided by the Lithuanian authorities.

Preliminary data.

Including hydro pump storage.

Table 16.

Lithuania: Domestic Energy Arrears, 1998-99

(In millions of litai)

article image
Sources: Data provided by Lithuanian Power Company and Lithuanian Gas Company
Table 17.

Lithuania: Prices and Wages, 1996-99

article image
Sources: Data provided by the Lithuanian authorities; and Fund staff estimates.
Table 18.

Lithuania: Average Monthly Wages, 1993-98

(In litai)

article image
Sources: Data provided by the Lithuanian authorities; and Fund staff estimates.

Preliminary data.

Table 19.

Lithuania: Labor Force and Employment, 1993-98

article image
Source: Data provided by the Lithuanian authorities.

Ages 16-55 for women and 16-60 for men.

Preliminary data for 1998.

Derived as the difference between labor force and employment.

Labor force in percent of working age population.

Table 20.

Lithuania: Employment Distribution, 1993-98

article image
Source: Data provided by the Lithuanian authorities.

Preliminary data.

Table 21.

Lithuania: Registered Unemployment at Labor Exchanges, 1995-99 1/

(In thousands)

article image
Source: Data provided by the Lithuanian authorities.

Nonunemployed seeking work are referred to as unemployed as of January 1995.

Table 22.

Lithuania: Balance of Payments, 1996-98

(US$ millions)

article image
Source: Data provided by the Lithuanian authorities; and staff estimates and projections.

Preliminary actual data.

Debt service falling due, including public and private debt, regardless of original maturity.

Table 23.

Lithuania: Merchandise Trade by Country and Country Group, 1994-98

article image
Source: Lithuanian Department of Statistics.