Front Matter

Front Matter Page

© 2001 International Monetary Fund

April 2001

IMF Country Report No. 01/63

Republic of Lithuania: Second Review Under the Stand-By Arrangement-Staff Report; Staff Supplement; and News Brief on the Executive Board’s Decision

In the context of the second review under the Stand-By Arrangement, the following documents have been released and are included in this package:

  • the staff report for the Second Review Under the Stand-By Arrangement, prepared by a staff team of the IMF, following discussions that ended on March 1,2001, with the officials of the Republic of Lithuania on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on April 4,2001. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • a staff supplement updating information available as of April 12, 2001.

  • a News Brief of April 16,2001, on the IMF Executive Board’s decision completing the second review.

The document listed below has been separately released.

Letter of Intent by the authorities of the member country*

*May also be included in Staff Report.

The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to Publicationpolicy@imf.org.

Copies of this report are available to the public from

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Price: $15.00 a copy

International Monetary Fund

Washington, D.C.

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INTERNATIONAL MONETARY FUND

REPUBLIC OF LITHUANIA

Second Review Under the Stand-By Arrangement

Prepared by European II and Policy Development and Review Department

Approved by Mohammad Shadman-Valavi and Liam P. Ebrill

April 4, 2001

  • Discussions were held in Vilnius during February 21- March 1,2001. The Fund staff team comprised P. Alonso-Gamo (head), S. Fabrizio, S. George, V. Kramarenko (all EU2), and Q. Wang (PDR), and was assisted by M. Horton, the Fund’s resident representative. Mr. A. Tornqvist, alternate Executive Director, attended some policy meetings.

  • The mission met with President Adamkus, Prime Minister Paksas, Bank of Lithuania (BoL) Governor Sarkinas, Minister of Finance Lionginas, Minister of Labor and Social Protection Blinkeviciute, Seimas Budget and Finance Chairman Glaveckas, as well as other senior government officials, members of Parliament, and representatives of the banking and business communities.

  • On March 8, 2000, the Executive Board approved a 15-month Stand-By Arrangement in an amount of SDR 61.8 million (equivalent to 42.6 percent of quota), and the first review was completed on January 10,2001. The authorities confirmed their intention to make no purchases under the arrangement.

  • In the attached letter dated April 2,2001 (Attachment), the authorities request the completion of the second review and a waiver of applicability for end-March performance criteria.

  • Lithuania has accepted the obligations of Article VIII of the Funds Articles of Agreement and maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions.

Contents

  • Executive Summary

  • I. Introduction

  • II. Recent Developments and Performance Under the Program

  • A. Macroeconomic Developments

  • B. Structural Reforms

  • III. Policy Discussions

    • A. Outlook for 2001

    • B. Medium-Term Fiscal Strategy

  • IV. Staff Appraisal

  • Text Boxes

  • 1. Pension System and Prospective Reform

  • 2. Foreign Direct Investment in Lithuania

  • Figures

  • 1. Selected Economic Indicators,1996-2001

  • 2. Indicators of External Competitiveness,1996-2000

  • 3. Financial indicators 1997-2001

  • Tables

  • 1. Selected Macroeconomic Indicators,1996-2001

  • 2. Summary of Consolidated General Government Operations,1998-2001

  • 3. Balance of Payments,1997-2001

  • 4. Summary Monetary Accounts,1998-2001

  • 5. Schedule of Available Purchases Under the Stand-By Arrangement,2000-2001

  • 6. Indicators of Financial Obligations to the Fund,2001-2008

  • 7. Performance Criteria, Benchmarks and Indicative Targets Under Stand-By Arrangement, January 2000-March 2001

  • 8. Structural Benchmarks Under Stand-By Arrangement

  • 9. Indicators of External and Financial Vulnerability,1998-2001

  • 10. Indicators of Financial Sector Vulnerability,1997-2000

  • 11. Macroeconomic Framework,1998-2005

  • 12. Summary of Consolidated General Government Operations,1998-2005

  • 13. Medium-Term Balance of Payments,1998-2005

  • Appendixes

  • I. Fund Relations

  • II. Technical Assistance from the Fund,1997-2001

  • III. World Bank Relations

  • IV. Survey of Reporting of Main Statistical Indicators

  • V. Illustrative Medium-Term Fiscal Scenario

  • Attachment

  • Letter of Intent

Executive Summary

The program remains broadly on track. The macroeconomic situation in 2000 was better than expected and growth prospects for 2001 appear somewhat stronger than envisaged under the program, although the unemployment rate has continued to rise. All performance criteria for end-December 2000 were met, except for the elimination of expenditure arrears of the central government. The authorities committed to eliminate central government expenditure arrears by end-March 2001. Significant progress has been made in negotiations for EU accession. Finally, structural reforms advanced in the areas of banking privatization, labor, bankruptcy, and land legislation, while progress was mixed in the fiscal structural and energy sector areas.

Discussions focused on policies for 2001 and medium-term fiscal issues. The macroeconomic outlook for 2001 was updated. Real GDP is now expected to grow by at least 3.6 percent against the program target of 3.2 percent, and the current account deficit is projected to reach 6.5 percent of GDP, slightly less than initially projected.

The fiscal deficit target of 1.4 percent of GDP for 2001 remains appropriate. End-March targets under the program appear to be achievable and any revision of the budget in May would aim mainly at reallocating expenditures. In the staff’s view, modest upward revisions of revenue and expenditure should only be considered at a later stage, once it becomes clear that the revenue performance during the first half of the year exceeds expectations.

The authorities intend to maintain the currency board arrangement in the runup to EU and EMU accession. In this regard, the preparations to a repegging of the litas from the dollar to the euro are under way. The monetary program has been revised to reflect a higher level of monetization of the economy.

The authorities indicated that they would move to regain momentum in the implementation of structural reforms in view of some delays experienced in late 2000-early 2001, in particular in the area of the energy sector and fiscal structural reforms.

Regarding medium-term policies, the government presented in February 2001 a tax reform program aiming at simplifying the tax system and reducing the tax burden, in order to stimulate investment, growth, and employment. The staff prepared with the authorities’ assistance an illustrative medium-term fiscal scenario to highlight policy tradeoffs and their macroeconomic implications. The projected deficit of 1.4 percent of GDP for 2001 is close to a balanced position if cyclically adjusted. Therefore, the required reduction in the structural fiscal deficit, excluding the cost of the pension reform, to achieve a balanced position by the time of EU accession would be marginal. Consistent with this objective, the major tax and expenditure measures should be phased in gradually. Following the discussions, the authorities concurred that tax reforms should be more gradual than initially envisaged.

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INTERNATIONAL MONETARY FUND

REPUBLIC OF LITHUANIA

Second Review Under the Stand-By Arrangement—Staff Supplement

Prepared by Legal, European II, and Policy Development and Review Departments

Approved by Francois Gianviti, Mohammad Shadman-Valavi, and Liam P. Ebrill

April 12, 2001

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News Brief No. 01/37

International Monetary Fund

FOR IMMEDIATE RELEASE

700 19th Street, NW

April 16, 2001

Washington, D. C. 20431 USA

IMF Completes the Second Review Under the Stand-by Arrangement for Lithuania

EXTERNAL RELATIONS DEPARTMENT

Washington, D.C. 20431 • Telephone 202-623-7100 • Fax 202-623-6772• www.imf.org