News Brief No. 01/4

News Brief: IMF Completes First Lithuania Review

January 10, 2001

IMF Completes First Lithuania Review

The Executive Board of the International Monetary Fund (IMF) today completed the first review of Lithuania's performance under a 15-month, SDR 61.8 million (about US$81 million) stand-by arrangement. This opens the way for release of SDR 41.2 million (about US$54 million) from the arrangement, which the authorities, however, are not expected to request as they have treated the stand-by as precautionary.

In commenting on the discussion of the Executive Board's decision today to complete the review of Lithuania's economic program, Shigemitsu Sugisaki, Deputy Managing Director, stated:

"The Lithuanian authorities' strategy of achieving an orderly current account adjustment through fiscal tightening and structural reforms in the context of the currency board arrangement brought significant positive results in 2000—economic growth resumed while inflation remained low, the current account deficit declined faster than expected, confidence in the currency board was maintained, and financial markets stabilized. Growth was export-led, as competitiveness was sustained through productivity growth and terms-of-trade gains, despite a further real appreciation of the litas. Structural reforms advanced significantly, including in the areas of energy sector restructuring, privatization, trade policy, and budget and treasury management. However, domestic demand remained weak and unemployment continued to rise.

"Fiscal policy will continue to be the main instrument of economic policy under the currency board arrangement. Following the major consolidation in 2000, the program fiscal deficit target of 1.4 percent of GDP for 2001 is consistent with the authorities' macroeconomic objectives. The authorities plan to clear municipal arrears by mid-2001. They also plan to complete the treasury modernization project by early 2001, and to set up a reserve stabilization fund to manage privatization receipts in a transparent manner by end-March 2001.

"The authorities' goal of a cyclically balanced budget by 2003 will be instrumental in achieving a sustainable external position and bolstering confidence in economic policies. The achievement of this objective will require a significant restructuring of expenditure to accommodate increases related to possible EU and NATO accession, and pension reform.

"The currency board arrangement has served Lithuania well and will continue to anchor macroeconomic policies. The financial system remains stable and banking supervision is functioning well. The privatization of the remaining two state-owned banks will foster competition in the banking sector and should help promote sustainable credit growth to the private sector," Mr. Sugisaki said.