OVERVIEW OF LITHUANIAN ECONOMY
The ideas, economic growth, reforms and business achievements fostered in
Lithuania have made our country a successful rival on European and world
markets. The first decade of political and economic independence has created a
stable basis for a market economy, showing that liberalisation is the right
path to growth and prosperity for both newcomers and old players on the global
President, Lithuanian Free Market Institute
Gross Domestic Product
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
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.
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
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
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.
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
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
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
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
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
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.
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
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'
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
Debates on the privatisation and globalisation of the National Stock Exchange of
Lithuania are underway.
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
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
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
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
Source: Lithuanian Department of Statistics, Lithuanian Labour Exchange and
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
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
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
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