• Gross Domestic Product
• Foreign Trade
• Privatisation
• The Monetary System
• State Finance and State Debt
• Capital Market
• Banking
• Labout Market and Personal Income

In 2000 the Lithuanian economy recovered from a recession caused by the Russian crisis and put on growth. The rate of GDP growth rose from minus 4.2% in 1999 to 5.9% in 2001, the Lithuanian Department of Statistics (LDS) reported. GDP amounted to LTL 47,968,000,000, or LTL 13,752 per capita, in 2001. The private sector, which employs 70% of the working population, accounts for about 75% of Lithuania's GDP.

The growth of export and commerce were the main factors of Lithuania's economic development. In 2001 the industrial sector showed the best results since 1996. Industrial sales edged up by 17 percent. The oil industry grew by 47 percent. The timber industry rose by 29 percent. Fishery and agriculture declined the most, by 10.3% and 6.9% respectively. 2001 saw a 28% upturn in the volume of investments, caused largely by the upcoming imposition of the corporate income tax on reinvested profits starting from 2002.

Source: Lithuanian Department of Statistics, Ministry of Finance

In 2001 foreign direct investments rose by 14.2% and totalled LTL 10,662,000,000, or 3,062 Litas per capita on 1 January 2002. Most of FDI came from Denmark, Sweden, Estonia, Germany and the United States. Financial intermediation absorbed the bulk of FDI in 2001.

The Lithuanian Ministry of Finance predicts that the country's GDP will grow by 4.7% in 2002. The International Monetary Fund and the European Commission forecast a 4.0% growth rate. The forecasts of Lithuania's economic growth are related mostly to the anticipated recovery of foreign markets after last year's economic decline and rising domestic consumption. It is also expected that Lithuania's improving economic situation, the financial sector's stability and successful EU membership negotiations will boost foreign investors' confidence and injections in the Lithuanian economy.


Foreign Trade

The volume of foreign trade has steadily increased over the past years, reaching the highest level in 2001. According to the Lithuanian Department of Statistics, Lithuanian export rose by 20.3% and import went up by 16.4% in 2001.

Significant changes took place in the composition of Lithuania's foreign trade. Exports to the EU rose from 33% of total exports in 1997 to 47.8% in 2001. Exports to the CIS fell from 46% in 1997 to 19.7% in 2001. Lithuanian exports consist mostly of mineral products, textile and textile articles, machinery and electrical equipment. The economic decline in the EU impeded export growth and caused a sharp expansion of Lithuania's trading links with rapidly developing CIS countries, especially Russia. In 2001 Lithuania's exports to the CIS rose by 45.9%, while exports to Russia soared by a striking 86.4%. The volume of trade with the EU grew mainly because of a sharp increase in the export of oil products to the United Kingdom. 2001 saw an upsurge of re-exports, especially vehicles and foodstuffs.

Unlike exports, the level of imports from the EU varied from 40% in 1996 to 47% in 1999 and down to 44% in 2001. The share of imports from the CIS remained almost the same, 30.7% in 1997 and 29.4% in 2001. Lithuanian imports comprise mainly mineral products, machinery, mechanical appliances, electrical equipment, vehicles and chemical products. Rising investments were a key factor of import growth in 2001. This shows that Lithuanian companies are upgrading their technologies and expanding operation, thus enhancing efficiency and competitiveness.

Despite a higher growth of exports, the volume of imports exceeded that of exports. In 2001 the foreign trade deficit remained almost the same, LTL 6,792,000,000, or 14.2% of GDP, as a year before.

Source: Lithuanian Department of Statistics

In 2001 the United Kingdom was in the top position among Lithuania's export partners, followed by Latvia, Germany and Russia. The main importers were Russia, the biggest supplier of energy resources to Lithuania, followed Germany, Poland and Italy. More than 80% of Lithuania's export and about 60% of import are conducted on the basis of free trade agreements.

The first months of 2002 showed that the economic decline of Western economies continued to impede the growth of Lithuania's foreign trade. Rising exports to Eastern markets are likely to make up for export losses in other regions. On the other hand, Lithuanian exporters continue to strengthen links with the EU. The re-peg of the Litas to the euro reduced currency risk created a more stable trading environment for Lithuanian exporters to the euro zone.

In 2001 Lithuania's tariffs averaged 5.4%, with 15.2% for agricultural products and 2.5% for industrial goods. The highest import duty is charged on sugar. In May 2001 Lithuania became a member of the World Trade Organisation. In accordance with WTO membership obligations, Lithuania reduced import duties on sugar, spirits, agricultural products, textile, household articles and construction goods. Tariff cuts will have a profound impact on Lithuania's trade with CIS and WTO member states. Lithuania is obligated to lower import tariffs every year in equal increments until they reach the level negotiated with WTO. At the beginning of 2002 Lithuania lowered import duties on agricultural products from the EU.


Privatisation

Lithuania is proceeding with privatisation of state property, including large infrastructure items. A total of 3,128 items have been sold for LTL 4,245,000,000 during the second round of privatisation, launched in August 1996. Another 3,000 entities are slated for sale. The biggest transactions included Lietuvos Telekomas, Mažeikių Nafta, KLASCO, Lietuvos Draudimas, LISCO and the last state-owned commercial banks. In April 2001 the Lithuanian Savings Banks, the second-largest commercial bank and the biggest retail bank, was merged with Hansabankas. In March 2002 the German Norddeutsche Landesbank Girozentrale acquired a 76% stake in the last state-owned bank, Lietuvos Žemės Ūkio Bankas.

The largest entities now scheduled for privatisation are the power utility Lithuanian Energy, the Lithuanian Gas, the Lithuanian Airlines and the Lithuanian Railway. Four companies separated from the Lithuanian Energy in late 2001 - the Eastern and Western Distribution Networks and Mažeikiai and Elektrėnai electrical power plants - supplemented the privatisation list. In May 2002 a 34%-stake in the Lithuanian Gas was sold to a strategic Western investor, the German Ruhrgas and E.ON Energie.

The 1997 Law on Privatisation defines several methods of privatisation, including public auction, public tender, direct negotiations, public sale of shares, rent-to-own and transfer of state control. Foreign and local investors have equal rights. A method of privatisation is selected depending on the size and branch of an enterprise, the portion of stock slated for sale and other criteria. Strategic items, e.g. Mažeikių Nafta and state-owned commercial banks, were privatised according to special laws. The state has a right to retain a "golden" share granting extra non-property rights if more than half of public stock in transportation, energy, oil, communications and public utility enterprises is sold. Privatisation on the stock exchange has been rather scant.

Special requirements pertaining to buyers' qualifications, future investments and job preservation are applied when large state enterprises are privatised. Discretionary powers of privatisation authorities in selecting privatisation methods and setting privatisation requirements have reduced the transparency and efficiency of privatisation. Sales through direct negotiations have led the Lithuanian government to assume significant obligations. For example, the buyer of the Lithuanian Telecom pledged to preserve about 10,000 jobs and to invest USD 225,000,000 in return for monopoly rights in terrestrial communications. Lithuanian authorities pledged to extend to the buyer of Mažeikių Nafta a loan worth USD 300,000,000 and loan guarantees worth USD 71,000,000, in addition to concessions for the use of infrastructure.

The privatisation fund is separated from the state budget. By law no less than two thirds of revenues from privatisation must be used to compensate savings lost to rouble depreciation before 1992. The remaining proceeds go towards financing privatisation outlays, business aid programmes and other government expenditures.


Monetary System

On 2 February 2002 the euro replaced the U.S. dollar as the anchor currency of the Lithuanian Litas. The Litas was pegged to the euro at a fixed exchange rate of LTL 3.4528 to EUR 1. The Bank of Lithuania established this rate according to the EUR/USD exchange rate announced by the European Central Bank on 1 February 2002. After the re-peg the Litas floats in relation to the U.S. dollar in accordance with the EUR/USD exchange rate on international markets.

All Litas in circulation are backed 100% by foreign currency and gold reserves under a currency board system. At the end of 2001 official foreign reserves of the Bank of Lithuania reached the highest level, USD 1,700,000,000. After the re-peg euros accounts for 70% of Lithuania's official foreign reserves, while U.S. dollars comprise about 25%. The currency board, established by the 1994 Law on Litas Credibility, brought transparency and stability into the Lithuanian monetary system. It put inflation under control and caused a sizeable fall in interest rates. Lithuania is intent upon preserving a currency board regime until accession to the European Monetary Union.

After the Litas re-peg changes in the LTL/USD exchange rate will affect companies depending on the composition of their income and expenses. Equally important will be what influence these changes will have on their competitors. The re-peg of the Litas to the euro can benefit companies that operate in the euro zone by providing a more stable trading environment in terms of currency risk.

The national currency, the Litas, is the sole legal tender in Lithuania. Commercial banks accept deposits and extend loans in Litas and foreign currencies. Loans in foreign currencies were legitimised in late 1997. In the spring of 2002 the Bank of Lithuania proposed liberalising settlements and allowing legal entities to use any currency in local non-cash transactions. The adoption of this proposal would reduce currency risk and the costs of currency exchange for companies operating on international markets.

A strict monetary policy has brought about a sizeable decrease in the rate of inflation. Inflation fell from 45% in 1994 to 0.3% in 1999. In 2001 consumer prices went up by 2%. Private consumption grew rather negligibly and had a minimal effect on the general level of prices. Changes in monopolistic and government regulated prices as well as sharp leaps in fuel prices were the main causes of inflation in 2001. Consumer prices were pushed up by a rise in water supply and telecommunication prices. Sugar price regulations, introduced in September 2001, drove up the prices of other food products. The biggest decrease was recorded in transportation prices.

Source: Lithuanian Department of Statistics, Ministry of Finance

The Lithuanian Ministry of Finance predicts that inflation will fall in 2002. Other institutions forecast a higher rate of inflation. The International Monetary Fund and Vilnius Bank predict 2.8%, while the European Commission put it at 2.7%.

Growing domestic consumption and changes in regulated prices and taxes will be the main factors of inflation in 2002. Most prices edged up after excise duties on fuel and electricity prices were raised at the beginning of 2002. The general level of prices may go down after excise duties on food products, jewellery and electrical energy are abolished in July 2002. Prices will also be affected by changes in the LTL/USD exchange rate, as Lithuanian companies buy most raw materials, including energy resources, for U.S. dollars.


State Finances and State Debt

In 2001 state budget revenues rose by 9.7% and totalled LTL 6,344,789,000. The budget deficit stood at LTL 734,900,000. Municipal budgets received LTL 2,867,1000,000. Over 90% of budget proceeds are received from value added tax, excise and customs duties and personal income tax, with VAT accounting for almost a half of budget revenues. A significant portion of government revenues is administered through non-budgetary funds, e.g. the State Social Insurance Fund, the Privatisation Fund and the Health Insurance Fund. In 2000 other non-budgetary funds were consolidated with the state budget, helping to enhance the management and transparency of state finances.

In 2001 state debt rose by 1.4% and accounted for 27% of GDP. At the end of March 2002, total state debt was LTL 12,903,000,000, or 25.2% of projected GDP. Direct state debt accounted for 84.2% of total state debt (direct foreign debt was 60.3% of total state debt, while direct domestic debt stood at 24%). Indirect foreign debt comprised 14.9% of total state debt, whereas indirect domestic debt was 0.8%. Total foreign debt was 75.2% of total state debt.

Source: Ministry of Finance

Changes in the maturity of government securities caused a reduction in the amount of government borrowing. The share of treasury bills (short-term government securities) fell from 80% of all government securities in 2000 to 53% in 2001. One- and three-month treasury bills were repealed, and five- and seven-year treasury bills were first issued at an interest rate of 7.04% and 7.52% respectively. The average maturity of government securities rose from 369 days in 2000 to 807 days in 2001. In the middle of 2001 the issue of two-year government bonds was terminated. Ten-year government securities appeared in March 2002.

A decrease in government borrowing, Lithuania's stable political and financial situation and falling interest rates on international markets drove down the yield on government securities. In 2001 the average interest rates slumped from 9.29% to 6.41% (they stood at 20.38% in 1994). The average annual interest rates on six-month T-bills fell from 27.22% in 1995 to 5.67% in 2001; those on one-year government securities slumped from 20.15% in 1995 to 5.67% in 2001.

In 2000 interest rates on government securities became lower than those on loans. In 2001 the average interest rate on one-year government securities was 5%, as compared to almost 9% on loans. Despite that, banks' investments in government securities rose much more (33%) than their loan portfolio (14%). The yield on government savings bonds is still higher than the average interest rate on time deposits. Despite that, the demand for savings bonds remains rather low.

In April 2002 Standard&Poor's raised Lithuania's rating of long-term loans in foreign currency to BBB. Lithuania's rating from Moody's is Ba1, while that from Fitch IBCA is BBB-.

At the beginning of 2002 the ceiling on government borrowing was raised to 30% of GDP. The ceiling on foreign debt was set at 25% of GDP, or 70% of total state debt. If the economy grows at the rate forecast by the Ministry of Finance, government debt will have grown by LTL 5.5 billion, or 43%, by 2004. A rapid growth of government borrowing may have a negative effect on the current account deficit and Lithuania's international credit ratings. This may ultimately drive up the costs of borrowing.


Capital Market

The National Stock Exchange of Lithuania was established on the French model in 1993. Since 1998 it has operated under a system of continuous trading at variable prices. All public issues of securities must be registered with the Securities Commission.

In the first quarter of 2002 share demand and share prices grew, increasing the securities market turnover. The total turnover of the Stock Exchange amounted to LTL 393,000,000. Central market turnover showed a growth of 80% and totalled LTL 70,000,000. Trading in securities by block transactions came to LTL 324,000,000, with tender offers and privatisation of state-owned property accounting for 30%. In the first quarter share demand increased considerably, exceeding share supply twice in February. This brought about a rise of all NSEL indices. The Official List's LITIN index went up by 15%. The general LITIN G index rose by 16%. The LITIN-10 index grew by 2.75%. Trading volumes on the central market accounted for 42.5% of the total share turnover, up from 13% in 2001. The total share turnover amounted to LTL 117 million and was larger than the first quarter trading volumes of the previous two years. The stock exchange capitalisation grew by 4.97% to LTL 13,095 million, while that of listed securities went up by 8.85% to LTL 7,360 million.

The growth of the securities market is related to several factors. One of them is the introduction of mandatory third-party liability vehicle insurance, which has augmented insurance companies' investments. In addition to that, trade in securities boosted as several large companies announced plans to buy in up to 10% of the companies' shares. The supply-demand trends have changed. While previously the supply continuously exceeded the demand, at present both supply and demand are varying. This shows that trade on the stock exchange is being increasingly dominated by permanent investors rather than one-time buyers.

In the past two years certain measures were taken to boost the securities market. Restrictions on the number of buyers and shares were eliminated. A capital gains tax was abolished in 2001. Procedures for pledging securities were simplified. Restrictions on share prices acquired in direct transactions were revoked. A new set of laws, including the Civil Code, the Law on Companies, the Law on the Securities Market and the Law on Insurance of Investor Liabilities of Commercial Banks and Financial Intermediaries to Investors, came into effect in 2001 through 2002.

The main impediments to the development of the securities market pertain to a lack of investment and pension funds, scant foreign investments and intensifying capital concentration trends. Over-restrictive capital and investment requirements impede the operation of insurance companies and prevent the establishment of open-end investment funds. Pension funds are non-existent. The legal basis for pension funds is in place, but the current predicament of the social security system and delayed pension reform have so far precluded the establishment thereof. In April 2002 the government of Lithuania proposed lifting restrictions on the types and amounts of insurance companies' investments.

Government borrowing policy is another drag on the growth of the securities market. A relatively large volume of government borrowing plus regulations stimulating investment in government securities have absorbed the bulk of resources. Another obstacle is extensive privatisation of state-owned companies via direct transactions rather than on the stock exchange. The abundance and complexity of legal acts plus excessive regulations are another cause of concern.

Debates on the privatisation and globalisation of the National Stock Exchange of Lithuania are underway.


Banking

In 2001 the banking sector in Lithuania continued to expand. The deposit and loan markets grew, as did retail banking stimulated by increased competition. The International Monetary Fund has judged the Lithuanian banking sector to be credible and secure.

2001 and 2002 marked the end of privatisation of state-owned banks. In April 2001 the state-owned Lithuanian Savings Bank was merged with Lithuania's Hansabankas, owned by the largest commercial bank in the Baltic States Estonia's Hansapank. In March 2002 the German Norddeutsche Landesbank Girozentrale acquired a 76% stake in the last state-owned bank, Lietuvos Žemės Ūkio Bankas. The share of foreign equity in Lithuanian banks rose from 16% in 1996 to 89% in 2002. At present there are nine commercial banks and branches of four foreign banks - the Polish Kredyt Bank SA, Merita Bank Plc, the German Nord LB and Vereins- und Westbank. The banking sector remains highly concentrated. The three largest banks - Vilniaus Bankas, Hansa-LTB and Lietuvos Žemės Ūkio Bankas - hold 78% of all banks' assets.

In 2001 total assets of Lithuanian commercial banks rose by 15.3% and amounted to LTL 15,500,000,000. The loan portfolio grew by 24% and totalled LTL 7,300,000,000, or 15% of GDP, at the end of 2001. As the re-peg of the Litas approached, more loans were taken in Litas and euros. In 2001 the volume of new loans in Litas and euros rose by 54%. An increase in loans in euros may also be related to changes in Lithuania's foreign trade. At present Lithuania's trade with the EU and acceding countries accounts for a half of Lithuania's foreign trade.

Source: Bank of Lithuania

The loan portfolio grew due to the country's stable economic situation and improved terms of crediting. Falling interest rates on international markets, a diminishing yield on government securities and increased competition have brought about interest rate cuts. In 2001 the average interest rate on loans in Litas fell from 8.1% to 11.2%. Interest rates on loans in U.S. dollars slumped from 10.7% to 5.9%, while those in euros, from 8% to 5.5%. Interest rates can be affected by a cut of mandatory reserve requirements from 8% to 6%, scheduled for 24 May 2002 and expected to release some LTL 220,000,000. The Bank of Lithuania plans to achieve the EMU level of 2% in two or three years.

A total of 42.8% of banks' income was generated from loans. Income from services rose from 19% to 22%, showing that banks were expanding other operations and services. In 2001 commercial banks sustained an aggregate audited loss of LTL 22,500,000, mainly due to falling interest rates on loans and large technical provisions made by Hansa-LTB after the bank's privatisation.

Despite falling interest rates, the deposit portfolio of Lithuanian commercial banks grew the most since 1994. It rose by 27% and totalled LTL 11,700,000,000, or 24.4% of GDP. This may be related to a high rate of economic growth, rising corporate sales and slowly growing consumption. Time deposits grew by 33%, while current accounts and demand deposits rose 21%. In 2001 most deposit contracts were concluded for time deposits of up to one month. The upcoming replacement of the anchor currency had a minor effect on the currency composition of deposits. Only 8% of new time deposit contracts were in euros.

In 2001 the average interest rates on time deposits in Litas fell from 4.3% to 2.8%. Interest rates on deposits in U.S. dollars went down from 4.49% to 1.95%; those for euros, from 3.73% to 2.75%. Falling interest rates on inter-bank loans plus growing bank credit resources and liquidity were the main factors that brought down interest rates on deposits. However, increasing competition and a growing demand for long-term credit resources are likely to drive up the yield on deposits.

Source: Bank of Lithuania

In March 2001 a new law on the Bank of Lithuania was passed, replacing the stability of national currency with price stability as the main goal of the central bank. The new law conferred more independence on the central bank.


Labour Market and Personal Income

In 2001 there were 1,522,000 employed individuals in Lithuania, a decrease of 64,200 since 2000. The private sector employs 70% of the working population. Most employees were in industry (18%), agriculture (17.3%), wholesale and retail trade (15.4%) and education (10.7%). In 2001 major changes occurred in employment by sectors of the economy. Employment contracted the most in agriculture and forestry (18%), transportation and warehousing (11%), education, health care and social service (4%). Given that agriculture employs almost a fifth of all working individuals but contributes a mere 6.3 percent of GDP, falling agricultural employment is a positive structural change of the labour market.

According to the Labour Exchange, unemployment rose from 12.6% in 2000 to 12.9% at the end of 2001. The rate of unemployment ranged between 7% and 27% across the country. According to a survey of market participants conducted by LFMI in early 2002, unemployment stood at 14% at the end of 2001. A labour force survey conducted by the Lithuanian Department of Statistics showed that unemployment hit a record high, 17%. The difference between the data of the Labour Exchange and the results of the labour force survey is indicative of a high level of hidden unemployment.

Source: Lithuanian Department of Statistics, Lithuanian Labour Exchange and LFMI survey

A total of 223,500 jobless individuals registered with the Labour Exchange in 2001. Although the official rate of unemployment went up, the number of jobless individuals registered with the Labour Exchange fell for the first time during the past five years (by 8,300 persons or 3.2% as compared with 2000). Given that the labour force contracted, growing unemployment can be explained by the fact that the number of the unemployed fell less than the labour force. The labour force shrank due to a decrease in the population and a growing number of Lithuania citizens working abroad. As opinion polls show, about 200,000 Lithuanian citizens are currently working in other countries.

Unemployment is mainly attributed to a heavy tax burden, restrictions on individual business activity, strict employment regulations and a falling demand for unqualified labour impeded. Structural reforms may cause a temporary rise in unemployment but they will create conditions for job creation in the long term. In July 2001 a new bankruptcy legislation came into force, setting out faster and simpler bankruptcy procedures. The number of enterprise bankruptcies increased, disclosing the real scope of hidden unemployment. Yet, the country's stable economic growth, rising investments and growing company sales and profits are expected to reduce the rate of unemployment in 2002.

In March 2001 amendments were adopted to labour legislation, aimed at liberalising employment regulations. A mandatory form of labour contracts was abolished, layoff benefits were reduced and wage regulations were simplified. A new Labour Code is to be passed shortly. It will abolish a number of outmoded regulations, such as listing legitimate causes of terminating a labour contract, and legitimise new types of labour contracts (temporary, supplemental, household and commission contracts in addition to the existing fixed-term, permanent and seasonal contracts). However, freedom of labour contracts is not recognised and labour relationships are regulated in an excessively detailed and imperative manner. The new code preserves many obsolete regulations, e.g. mandatory reporting to the labour exchange, and expands the role of collective agreements.

According to a household budget survey conducted by the Lithuanian Department of Statistics, disposable monthly income per household member fell by 1.4% and totalled LTL 410 in 2001. A cut in pensions for working pensioners caused a reduction in old-age pensions. Income from business activity contracted due to excessive administrative restrictions on small family business. A sizeable gap exists in the levels of urban and rural income. Disposable rural income is estimated to comprise 68% of urban income. Rural inhabitants are largely dependent on pensions and social benefits, which constitute the same portion of income, about 32%, as earnings. Market participants think that monetary household income is almost twice as big as the official statistics report. As the LFMI survey shows, average monthly monetary income per household member rose by 0.6% and amounted to LTL 650 in 2001.

*per household member

Source: LFMI survey, Lithuanian Department of Statistics and Ministry of Finance

According to official statistics, average monthly net earnings edged up by 1.9% and totalled LTL 705 in 2001. The LFMI survey of market participants shows that average earnings (reported and unreported) rose by 7% and reached the highest level, LTL 1,035, since 1997. This difference indicates that a sizeable share of wages goes unreported. In April 2002 a tax-exempt minimum income was raised from LTL 214 to LTL 250. The basic pension increased to LTL 142. This is likely to improve the situation of low-income individuals and to augment official household income. It is expected that the country's stable economic growth, rising profits and falling unemployment will bring about an increase in personal earnings.

LITHUANIAN FREE MARKET INSTITUTE

The Lithuanian Free Market Institute is an independent non-profit organisation founded in 1990 to promote the ideas of economic liberalism, based on the principles of individual freedom and responsibility, free market and limited government.

For further information please contact:
Ms Aneta Piasecka
Lithuanian Free Market Institute
Birutės g. 56, LT-2004 Vilnius, Lithuania
Tel.: +370 5 272 25 84, fax: +370 5 272 12 79
E-mail: lfmi@lrinka.lt
www.lrinka.lt or www.freema.org