Republic of Lithuania: Staff Report for the 2000 Article IV Consultation and First Review Under the Stand-By Arrangement

Lithuania showed good economic growth and low inflation, under the Stand-By Arrangement. Executive Directors commended the fiscal adjustment and structural reforms. However, domestic demand remained weak and unemployment continued to rise. Directors appreciated the sound financial system and the banking supervision. They emphasized the need to maintain fiscal and monetary policies. They agreed that the privatization of the state-owned banks will foster competition in the banking sector and promote sustainable credit growth to the private sector.

Abstract

Lithuania showed good economic growth and low inflation, under the Stand-By Arrangement. Executive Directors commended the fiscal adjustment and structural reforms. However, domestic demand remained weak and unemployment continued to rise. Directors appreciated the sound financial system and the banking supervision. They emphasized the need to maintain fiscal and monetary policies. They agreed that the privatization of the state-owned banks will foster competition in the banking sector and promote sustainable credit growth to the private sector.

I. Introduction

1. The 1999 Article IV Consultation was conducted by the Executive Board on July 27, 1999 (SM/99/170). In approving the present SBA (EBS/00/28) on March 8, 2000, Executive Directors commended the authorities’ policy strategy, which aimed at returning to sustained economic growth and achieving a viable external position. They noted the benefits of Lithuania’s currency board arrangement (CBA) and the authorities’ decision to maintain this arrangement, eventually switching to a euro peg. They stressed, however, that the viability of this strategy would hinge on sustained fiscal adjustment, wage moderation, and determined implementation of structural reforms.

2. Relations with the Fund and World Bank are summarized in Appendixes I and II, respectively. A US$100 million Structural Adjustment Loan was approved by the Executive Board of the World Bank in June 2000, with the first tranche of US$50 million disbursed in July. Extensive technical assistance provided by the Fund is presented in Appendix III. The periodicity and timeliness of the most important statistics are adequate and presented in Appendix IV.1 Appendix V describes the medium-term framework and alternative scenarios, and Appendix VI describes external and financial vulnerability.

3. Parliamentary elections were held on October 8. A center-liberal coalition government led by former Prime Minister Paksas was formed, relying on smaller parties for a majority in the 141-seat Seimas. The opposition includes a center-left group that was led in the elections by former President Brazauskas, which has more than one third of the seats, and the former ruling conservatives, who received just 9 seats, down from a majority in the previous Seimas.

II. Recent Economic Developments And Performance Under The Program

4. The macroeconomic objectives for 2000 under the program were largely attained. The external current account deficit declined sharply, reflecting fast export growth, while real GDP growth rebounded, after the recession experienced in 1999. Implementation of difficult adjustment measures stabilized the financial situation, and the government regained access to domestic and foreign capital markets on favorable terms. Structural reforms advanced significantly, including in energy sector restructuring, privatization, trade policy, and budget and treasury management. Domestic demand remained weak, however, and unemployment increased (Table 1-Table 9).

Table 1.

Lithuania: Selected Macroeconomio Indicators, 1996-2001

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Source: National authorities; and Fund staff estimate; and projections.

GDP for 1999 has been substantially revised by the Statistical Office since EBS/00/28 has bas been published.

Registered unemployment, end-of-period.

The program adjuster was 0.2 percent of GDP for Q 1 2000 and 0.3 percent of GDP for Q 2 2000.

Including valuation changes. Gross official reserves reported here differ from the monetary survey because here reverse repos involving major currencies in both legs are included.

External liabilities minus equity investment in Lithuania.

CPI-based, trade-weighted real exchange rate against 21 major trading partners in 1999.

Table 2.

Lithuania: Summary of Consolidated General Government Operations, 1998-2001

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Sources: Ministry of Finance, Ministry of Social, Security, and Fund staff estimates.

Program revenue and expenditure numbers reported in EBS/00/28 were adjusted to reflect the elimination of government employer contribution to SoDra from revenue and expenditure and the incorporation of the Road Fund and three other extra-budgetary fluids into the general government. General government revenue and expenditure under the program are different from the passed budgets of all levels of the general government by LTL 140 million.

For the program of 2000, the provisioning of defaults was reclassified from goods “and services” to “net lending”.

Interest payments do not include provisioning of defaults, which are reflected under “net lending”.

Program numbers and projections for 2000 are reported without the program adjustor to net lending and deficit for higher-than-expected project lending, The adjuster for nine months of 2000 is LTL 77 million. The budgeted amount of provisioning of defaults of 102 million is included for the program numbers and projections for 2000.

Table 3.

Lithuania: Balance of Payments, 1996-2005

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

The difference between the current projection of FDI for 2000 and the projection under the original program is primarily due to the lower-than-expected privatization-related FDI and reclassification of a portion of privatization-related inflow in the amount of USS150 million from FDI into equity portfolio inflow.

The forecast for 2000 reflects the assumption that banks will use the envisaged reduction in reserve requirements to increase their foreign assets.

Including valuation changes. Gross official reserves reported here differ from the monetary survey because reverse repos involving major currencies in both legs are included.

External liabilities minus equity investment.

Debt service comprises interest and gross repayment on external loans, and interest and net repayment on debt securities.

Table 4.

Lithuania: Summary Monetary Accounts, 1998-2001

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Source: Bank of Lithuania; and Fund staff estimates and projections.

Excludes local government deposits includes counterpart funds

DMBs’ net claims on government include government lending funds of LTL 270 million and corresponding claims on private sector that were removed from balance sheets in Jury, 2000. If excluded, private sector credit would only fall by 4 percent in September, 2000.

Only annual average velocity is reported at year-end.

Gross official reserves for historic data differ between Tables 1 and 3 because the exposure under reverse repos was not reflected either in foreign assets or liabilities at the time of the program design. For projections, it is assumed that all reverse repo transactions are unwound.

Table 5.

Lithuania: Macroeconomic Framework, 1996-2005

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Source: National authorities; and Fund staff calculations.

Negative current account balance.

Includes discrepancy between above and below the line estimates of the financial balance and balances of budgetary organizations not recorded in the above the line number. Also includes savings restitution payments.

External liabilities minus equity investment in Lithuania. Includes public, publicly guaranteed and private external debt.

Table 6.

Lithuania: Schedule of Available Purchases Under the Stand-By Arrangement, 2000-2001

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Source: Fund staff calculations.

In addition to other clauses in the arrangement.

Table 7.

Lithuania: Indicators of Financial Obligations to the Fund, 2000-2008

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Sources: Lithuanian authorities, and Fund staff estimates and projections

Assuming no drawings under the proposed stand-by arrangement.

Assuming all drawings are made under the proposed stand-by arrangement.