Republic of Lithuania: Third Review Under the Stand-by Arrangement
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar Close
Publication Date:
05 Mar 2003
eISBN:
9781451823981
Language:
English
Keywords:
ISCR; CR; government; EU membership referendum; Lithuania to SDR; SDR; objective; private sector; debt service; labor market; budget deficit; foreign direct investment
Download PDF (3.1 MB)

This paper focuses on the Republic of Lithuania’s Third Review Under the Stand-By Arrangement. Program implementation has been good and all end-December 2002 quantitative performance criteria were met. Macroeconomic performance in 2002 was better than expected: real GDP grew by 5.9 percent, led by domestic demand. Further progress was made in structural reforms during 2002, including tax reform, municipal finances, health care expenditure, banking privatization, financial sector reforms, and energy sector privatization. Some measures, however, were implemented with some delays, including privatization in the energy sector.

Abstract

This paper focuses on the Republic of Lithuania’s Third Review Under the Stand-By Arrangement. Program implementation has been good and all end-December 2002 quantitative performance criteria were met. Macroeconomic performance in 2002 was better than expected: real GDP grew by 5.9 percent, led by domestic demand. Further progress was made in structural reforms during 2002, including tax reform, municipal finances, health care expenditure, banking privatization, financial sector reforms, and energy sector privatization. Some measures, however, were implemented with some delays, including privatization in the energy sector.

I. Introduction

1. In the ten years since independence, Lithuania has become a functioning market economy invited to join the EU. Initially, the pace of structural reforms was relatively slow. By 1999, in the aftermath of the 1998 Russia crisis, expansionary domestic policies could not avert a deep recession and led to increased instability, threatening the future of the currency board arrangement (CBA). The strong fiscal adjustment implemented since 2000, coupled with ambitious and wide-ranging structural reforms, helped to regain credibility and transform the business environment, leading to a rebound in growth, very low inflation, new employment opportunities and restored external viability.

Selected Macroeconomic Indicators, 1998-2002

article image
Sources: Lithuanian authorities; and Fund staff estimates.

2. Such ambitious reforms could be implemented owing to widespread support across the political spectrum for the goals of EU and NATO accession. The surprise second-round electoral victory on January 5, 2003 of former Prime Minister Paksas against the incumbent President Adamkus introduces some uncertainty but is not expected to alter significantly the direction of economic policies. Prime Minister Brazauskas, backed by a solid parliamentary majority, should be reconfirmed comfortably, ensuring continuity.

II. Recent Developments and Performance Under the Program

3. Program implementation has been good and all performance criteria for end-September and for end-December 2002 were met (Tables 1 -3). Some benchmarks were not met, however. The end-September quantitative benchmark for zero central government arrears was missed mainly due to arrears accumulated by the Health Insurance Fund. The submission to Seimas of the real estate tax law (an end-September structural benchmark) and of the unemployment insurance law (an end-December structural benchmark) was delayed to 2003.

Table 1.

Lithuania: Performance Criteria far Stand-By Arrangement, 2001-02 1/

article image
Source: Lithuanian authorities; and Fund staff estimates.

Definitions and exclusions are presented in the Technical Memorandum of Understanding.

Based on latest available data. The figures for the cumulative fiscal deficit outcome have been revised from the previous staff report (EBS/02/105) but remain below the program targets.

This performance criterion was modified on February 2, 2002 consistent with TMU paragraph 2.

This is consistent with the statutorily imposed required reserve ratio of 6 percent, because, pursuant to paragraph 5 of the TMU, the required reserve ratio envisaged under the program allows for a 2 percentage point variation from the statutorily imposed required reserve ratio.

Table 2

Lithuania: Quantitative Benchmarks for Stand-By Arrangement, 2001-02

article image
Source: Ministry of Finance; and Fund staff estimates.

A government decision to clear pharmaceutical arrears was considered as clearance of arrears under the program.

Table 3.

Lithuania: Structural Benchmarks for Stand-By Arrangement, 2001-02

article image
Source: Lithuanian authorities.

Not discussed by Seimas.

The current timing is as agreed in SMEP from EBS/02/105

A. Macroeconomic Developments in 2002

4. Growth in 2002 was stronger than expected (Table 4, Figure 1). Real GDP grew by 6.1 percent over the first three quarters of 2002 and reached 5.9 percent for the year as a whole. Domestic demand increasingly replaced exports as the main source of growth. Investment continued to recover, supported by a surge in construction activity. Private consumption growth also accelerated owing to lower unemployment and higher real wages. The registered unemployment rate fell from 13.1 percent in January 2002, to 10.9 percent in December 2002, while real wages increased by 4.5 percent in 2002, after a decline of 0.5 percent in 2001. The consumer price index (CPI) increased by only 0.3 percent in 2002, reflecting the appreciation of the litas against the US dollar and a sharp drop in food prices (see text figure below).1

Table 4.

Lithuania: Selected Macroeconomic Indicators, 1999-2003

article image
Sources: Lithuanian authorities; and Fund staff estimates and projections.

Registered unemployment, end-of-period.

The program target for 2002 assumes 50 percent implementation of outlays for capital expenditure and net lending, as explained in the Technical Memorandum of Understanding. The projection for 2003 assumes 100 percent implementation, and an implementation rate of 50 percent would reduce the projected deficit to 1.3 percent of GDP. The figures for 2003 do not include the early repurchase of Lithuania’s EFF by the BoL in net lending.

Gross official reserves reported here differ from the monetary table due to valuation differences.

External liabilities minus foreign equity investment in Lithuania.

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

December 2000 is adjusted for reclassification, of LTL 270 million of DMB’s claims on private sector, which were removed from balance sheets in July 2000. Also, July 2001 numbers have been adjusted by LTL 785 million of reclassified assets.

Figure 1.
Figure 1.

Lithuania: Selected Economic Indicators, 1996-2002

Citation: IMF Staff Country Reports 2003, 055; 10.5089/9781451823981.002.A001

Sources: Lithuanian Department of Statistics; Bank of Lithuania; and Fund staff estimates.
uA01fig01

Inflation Developments

Citation: IMF Staff Country Reports 2003, 055; 10.5089/9781451823981.002.A001

Source: Country authorities and Fund staff estimates.1/ World oil prices (average of UK Brent, Dubai, and West Texas Intermediate).

5. The weakening in export markets and the relatively strong growth of domestic demand contributed to a modest widening of the current account deficit, which is estimated to have reached 5.4 percent of GDP in 2002 (from 4.8 percent in 2001) (Table 5). Strong productivity increases and moderate wage growth continued to provide a strong basis for exports, which increased by 16.5 percent over the first 10 months of 2002 compared to the same period in 2001, despite the real appreciation of the litas and the slowdown in the euro area (Figure 2).2 Imports increased by 19.9 percent over the same period, largely driven by imports of capital goods. Non-energy exports and imports increased by 24 and 26 percent in the first 10 months of 2002 compared with 2001.3

Table 5(a).

Lithuania: Balance of Payments, 1998-2003

article image
Source: Data Provided by the Lithuanian authorities, and Fund staff estimates and projections.

“-” indicates repurchase “+” indicates purchase.

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

External liabilities minus foreign aquiry investment.

Total external liabilities minus total external assets, excluding foreign direct investment, equity investment and reserve assets.

Debt services comprises interest and repayment of external loans, and interest and repayment on debt securities.

Total short-term liabilities minus total short-term assets, on an original maturity basis.

Table 5(b).

Lithuania: Balance of Payments, 2001-2008 (continued)

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

“-” indicates repurchases, “+” indicates purchase.

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

External liabilities minus foreign equity investment.

Total external liabilities minus total external assets, excluding foreign direct investment, equity investment and reserve assets.

Debt service comprise interest and repayment on external loans, and interest and repayment on debt securities.

Oil prices for 2002-8 are based on WEO baseline projection.

Figure 2.
Figure 2.

Lithuania: Indicators of External Competitiveness, 1996-2002

Citation: IMF Staff Country Reports 2003, 055; 10.5089/9781451823981.002.A001

Sources: Lithuanian authorities; and Fund staff estimates.
uA01fig02

Foreign Direct Investment in Lithuania and Privatization Proceeds

(In millions of LTL)

Citation: IMF Staff Country Reports 2003, 055; 10.5089/9781451823981.002.A001

1/ First 9 monthsSource: Country authorities.

6. Foreign direct investment (FDI) continued to be high, despite the decline in privatization activity. Currently, FDI is mostly linked to the expansion of existing operations in Lithuania, based on the positive experiences of foreign investors and the anticipation of EU membership. In the first nine months of 2002, FDI in Lithuania amounted to US$577 million, more than 150 percent of the current account deficit for the period. The government successfully issued a €400 million 10-year Eurobond in May at a spread of only 94 basis points over comparable German bonds.4 External liquidity indicators improved substantially (Table 6), as gross reserves reached US$2,419 million by year-end, and the reserve coverage of short-term debt reached 86 percent at end-September 2002.

Table 6.

Lithuania: Indicators of External and Financial Vulnerability, 1999-2002

article image
Sources: Bank, of Lithuania, Ministry of Finance, Department of Statistics, National Stock Exchange of Lithuania, Bloomberg, Baltic News Service, and Information Notice By

Public and publicly guaranteed debt, excluding short-term debt of SoDra and nonguaranteed debt of municipalities.

December 2000 is adjusted for LTL 270 million of DMB’s claims on private sector, which were removed from balance sheets in July, 2000. numbers have been adjusted by LTL 785 million of reclassified assets.

Gross official reserves reported here differ from the monetary table due to valuation differences.

On a remaining maturity basis.

Deposit money banks.

External liabilities minus equity investment in Lithuania.

Total external liabilities minus total external assets, excluding foreign direct investment, equity investment and reserve assets.

Total short-term liabilities minus total short-term assets, on an original maturity basis.

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

CPI-based REER against the 21 major trading partners in 1999.

LITIN-G price index, calculated for all issues that have been quoted in the current trading list in the past three months, excluding treasury bills and shares of investment eorr.

S&P investment grade rating.