Litauen-Nytt Extra sept 98
Litauens ekonomi mot bakgrund av den ryska krisen

LITHUANIA FINDS MAINTAINING FIXED EXCHANGE RATE INCREASINGLY DIFFICULT

Michael Wyzan

Lithuania's economy generally receives less attention from foreign observers than its two Baltic neighbors. It is often seen as less reformed than Estonia and Latvia, although since last year its macroeconomic performance has been at least as strong as theirs.

A continuing distinction between Lithuania and the other two Baltic States is that it remains more dependent on trade with Russia: 22 percent of its exports went to that country during January-April, while the corresponding figure for imports was 24.4 percent. The corresponding figures for Latvian trade with Russia during the same period were 17.4 percent for exports and 13.6 percent for imports. Some 8.3 percent of Estonia's exports went to Russia, while 8.5 percent of its imports came from there.

Most Lithuanian macroeconomic indicators are highly favorable. GDP in the first quarter of 1998 was 6.9 percent higher than in the same period last year, reflecting an acceleration of economic growth from 1997's figure of 5.7 percent. Sales of industrial production were up by 9.4 percent during the first six months, almost double last year's 5.0 percent.

While production has boomed, consumer price inflation has subsided, reaching 6.1 percent in the 12 months to June, compared with 8.4 percent in the year to December 1997. Another favorable macroeconomic indicator is the budget deficit, which as of May was on target to meet the goal of 1 percent of GDP, which was agreed to with the IMF. That deficit fell from 4.5 percent in 1996 to 1.8 percent last year.

Wages have been booming, along with the economy: the average gross monthly wage reached $249 in May, compared with $199 a year earlier. This may explain why the unemployment rate has been higher during every month this year than in the corresponding month in 1997. However, by June the difference was negligible, with the rate that month of 5.5 percent only slightly above June 1997's 5.3 percent.

Large current account deficits have been a hallmark of the Lithuanian economy. As economic growth turned positive in 1995, the current account imbalance rose from $94 million (2.2 percent of GDP) in 1994 to $981 million in 1997 (a high 10.3 percent). This trend continued into the first quarter of 1998, when the deficit was $514 million, up $118 million on the same period last year.

Such deficits have been commonplace in rapidly growing transition economies, especially ones with fixed exchange rates; the litas has been pegged at four to the dollar under the currency board introduced in April 1994.

The Bank of Lithuania is currently undergoing a transition to a normal central bank, a three-stage process scheduled to be completed next year. For example, under the currency board, the bank is not allowed to provide overnight loans to commercial banks. In April, as part of the transition to central banking, it set the interest rate it will charge on such loans.

To retain confidence in monetary policy, the fixed rate for the litas against the dollar is to remain valid at least until 1999, when the currency will be tied partly to EU currencies; by the end of 2000, the litas will be pegged to the Euro.

Although the current account deficit is high, the Bank of Lithuania's foreign reserves have risen steadily, reaching $1.2 billion in June (further augmented by privatization proceeds in July), compared with $939.6 million in June 1997. Another encouraging sign is the rapid rise in foreign direct investment, which was a cumulative $1.1 billion at the end of June, compared with. $727.6 million in June 1997.

The IMF's Executive Board in July praised the government for increasing excise taxes, improving tax collection and the budget process, privatization successes in banking and telecommunications; and creating an Energy Pricing Commission. The board called for further fiscal tightening to limit the growth of expenditures and to put the Social Security Agency on a firmer footing, especially by raising the retirement age.

These are the standard recommendations that the fund would make to any successful economy in transition. A more interesting question is how vulnerable Lithuania will prove to contagion from the financial turbulence in East Asia and especially Russia. Large current account deficits under fixed exchange regimes are often an indication of such vulnerability.

The key issue is whether Lithuania will be able to manage the transition to central banking under a fixed exchange rate or whether it will be forced to allow its currency to weaken, as the Czech Republic did in spring 1997 and Russia on 17 August 1998. In this context, Lithuania's high trade dependence on Russia is worrisome, since the weaker ruble will probably further increase the Baltic State's already large trade deficit with that country. The author is a research scholar at the International Institute for Applied Systems Analysis in Laxenburg, Austria.

02-09-98

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Reprint with permission from RFE/RL.