Press Release No. 00/16

The International Monetary Fund (IMF) today approved a 15-month stand-by credit for Lithuania in an amount equivalent to SDR 61.8 million (about US$83 million) to support the government's economic program during January 1, 2000-March 31, 2001. Lithuania will treat the stand-by credit as precautionary and does not intend to draw on it.

After the IMF Executive Board's discussion on Lithuania, Shigemitsu Sugisaki, Deputy Managing Director, made the following statement:

"The Lithuanian authorities have embarked upon an ambitious economic adjustment program, which the Fund is supporting with a stand-by arrangement. The program seeks to underpin the economic recovery and to achieve sustainable economic growth with a viable current account deficit and external debt position. The authorities have announced their intention to treat this arrangement as precautionary.

"The program envisages continuity in exchange rate policies, as the present currency board arrangement will remain the nominal anchor for economic policies. Fiscal policy is the sole macroeconomic policy instrument to achieve the necessary external adjustment. Accordingly, the government aims at a major fiscal consolidation, with the general government deficit targeted to decline substantially in 2000. Recognizing the large increase in government spending in the last few years, the fiscal consolidation will be achieved primarily through expenditure restraint. The ambitious fiscal adjustment will be combined with a package of structural reforms aimed at improving productivity and external competitiveness. Structural reforms will in large part be guided by EU accession requirements.

"A key fiscal reform measure is the establishment of a Fiscal Reserve Fund to save large prospective privatization proceeds. In addition, the authorities intend to introduce a new Budget Law that will include extrabudgetary funds in the national budget, and improve budget preparation and monitoring. Further steps will be taken to make the Treasury system fully operational by end-2000.

"The authorities will implement other structural policies with a view to increasing efficiency in resource allocation, encouraging private saving, and improving corporate governance. The policy agenda encompasses sectoral reforms in energy and agriculture, privatization of additional large-scale enterprises and the two remaining state-owned banks, strengthened bankruptcy and competition policies, pension reform, and improved financial sector supervision. Temporary import protection and other anti-crisis measures, introduced following the Russian crisis, will be eliminated," Sugisaki said.

ANNEX

Program Summary

Following solid progress in macroeconomic stabilization and structural reform during the first several years of transition, the Lithuanian economy suffered setbacks owing to policy slippages and external shocks, including a sharp drop in exports to the CIS region in the wake of the Russian crisis. Fueled by fiscal expansion, the current account deficit swelled and external debt increased sharply, while the economy slipped into recession. The economic decline may now have bottomed out and the new government's economic program has taken the first steps toward correcting the fiscal imbalance.

Lithuania's economic program aims at an orderly reduction in the current account deficit and a sustainable external debt position, to be achieved through a major fiscal adjustment supported by a strong package of structural reforms. As GDP growth picks up to about 2% in 2000, from about -3½% in 1999, and inflation remains low at about 3% in 2000 (end-of-period), the current account deficit is expected to narrow to about 9% of GDP in 2000 from nearly 11% of GDP in 1999 and over 12% of GDP in 1998.

Fiscal policies emphasizing expenditure restraint are at the core of Lithuania's strategy. The authorities have prepared sound budgets for 2000 for the national government and SoDra, and they have taken steps to curtail off-budget spending of privatization proceeds, in particular by suspending the Savings Restitution Plan. As the key to the program's success is a prudent approach to budgetary financing, the government intends to set aside as a contingency reserve the proceeds from the euro bond issued in early 2000 and to invest receipts from privatization in the Fiscal Reserve Fund.

The currency board arrangement provides the nominal anchor for macroeconomic policies and will be kept in its present form until the second half of 2001, when it will switch to a euro peg. The program is designed to safeguard monetary restraint through performance criteria on the foreign exchange coverage under the currency board and on minimum required bank reserves.

Structural reforms will support government budget adjustment and promote economic restructuring. The government is committed to follow open and transparent procedures in the privatization of state-owned companies. In the energy sector, the program calls for energy tariff increases and restructuring. In agriculture, the government will reduce subsidies to the level that prevailed prior to the Russian crisis, while legal reforms will be initiated to allow ownership of agricultural land by domestic legal entities and facilitate access to financing.

Lithuania joined the IMF on April 29, 1992, and its quota¹ is SDR 144.2 million (about US$193 million). Its outstanding use of IMF financing currently totals SDR 165 million (about US$221 million).

Lithuania: Key Economic and Financial Indicators, 1995-2000   1995 1996 1997 1998 1999 2000           Est. Proj.                 (Percentage changes from previous period) Real GDP 3.3 4.7 7.3 5.1 -3.3 2.1               Consumer prices             Period average 39.5 24.7 8.8 5.1 0.8 2.2 End of period 35.5 13.1 8.4 2.4 0.3 3.1               Broad money 29.0 -3.5 34.1 14.5 7.7 7.2 Reserve money 35.0 2.2 32.4 28.8 -4.0 1.8 Credit to private sector 23.0 -4.4 18.9 16.9 13.8 12.7 Currency in circulation 42.9 -0.4 36.4 11.4 -2.1 5.1 Velocity of broad money (level) 4.8 6.5 6.1 5.5 5.1 4.9 Money multiplier (level) 2.3 2.2 2.2 2.0 2.2 2.3 Deposit interest rate 1/ 17.6 10.6 6.2 7.1 8.1 ... Lending interest rate 1/ 26.2 14.7 12.2 16.7 14.5 ... Treasury bill interest rate (3 months) 26.1 20.0 8.8 10.7 11.1 ...                 (Percent of GDP) Gross national saving 14.5 15.3 16.3 12.1 11.9 13.4 General government 2.4 0.2 1.9 -1.2 -3.8 -1.1 Nongovernment 12.1 15.2 14.4 13.3 15.6 14.5 Gross investment 24.7 24.5 26.5 24.2 22.8 22.6 General government 3.8 2.7 2.7 2.7 1.8 1.7 Nongovernment 20.9 21.8 23.9 21.5 21.0 20.9               General government financial balance 2/ -2.6 -2.5 -1.5 -4.3 -6.3 -2.8 General government net lending 1.9 2.0 0.3 1.5 2.3 0.1 Consolidated general government fiscal balance 2/ -4.5 -4.5 -1.8 -5.8 -8.6 -2.8               External current account (including transfers) -10.2 -9.1 -10.2 -12.1 -10.9 -9.1 External debt 3/ 13.7 21.3 29.6 31.1 36.8 40.7 External debt 4/ 23.7 30.2 34.0 34.8 40.5 44.3 Debt service (in percent of exports             of goods and services) 2.5 8.1 10.3 18.2 21.6 20.3                 (In millions of litai at current prices) Gross domestic product 24,103 31,569 38,340 42,944 42,649 43,664                 (In millions of U.S. dollars) Gross domestic product 6,026 7,892 9,585 10,736 10,662 10,916 Current account balance -614 -722 -981 -1,298 -1,165 -997 Sources: Department of Statistics, Bank of Lithuania's, and IMF staff estimates and projections. 1/ In percent; weighted average of rates at commercial banks; 1-3 months' maturity. 2/ Includes discrepancy between above and below the line estimates of the financial balance and balances of budgetary organizations not recorded above the line. Also includes savings restitution payments. 3/ Includes public and publicly guaranteed debt. External liabilities minus equity, IMF loans, and currency and deposits. 4/ External liabilities minus equity investment. 1A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.