Lithuania's Economy: Focus 1997

Dalia Grybauskaite, Ph.D is a Minister, Economic Relations, at the Lithuanian Embassy in Washington, D.C.

Focused economic reforms,
attractive foreign trade
policies, and investment
opportunities lead Lithuania
into the world's economic sphere.

In Lithuania, the last decade of the century is marked by fundamental market oriented economic reforms. Since the end of 1996, after a new, stable, right-centered government came into power, the course of re-integration into the world's economy, based on market principles, accelerated cash privatization, structural and legislative reforms.

Lithuania's Gross Domestic Product (GDP) growth began recovering in 1994, increasing to 4.2% in 1996. From January to September 1997, the GDP rose to 6.4%. The GDP per capita at nominal value in 1996 amounted to $2,120 US. Taking into account the Purchasing Power Parity (PPP), this amount doubles.

Nearly 70% of the local GDP originate in the private sector. Increased output in nearly all sectors of the economy has contributed significantly to the sustainable growth of the national economy during the last four years. Textiles, leather, chemical, and wood processing industries were the first industrial sectors to recover after the decline. Currently, recovery is evident in other traditionally important economic sectors, such as machinery, electronics, and agriculture.

Significant GDP growth in 1997 was accompanied by approximately 13% increase in real income -- +6% in 1996. Together with export growth of 15% (+24% in 1996), these were major factors of Lithuania's surging economy.

The official unemployment rate in 1997 was estimated at 5.8%; down compared to 7.1% in 1996. The average wage in Lithuania reached $220.00 US per month in 1997. As evidence of a growing economy and firm monetary policy, the rate of inflation in Lithuania, decreased from 410% in 1993 to 13.1% in 1996, and continued to decline to 8.4% in 1997. This was one of the lowest in Central and Eastern Europe. The average annual inflation rate is expected to be under 7% by 1999.

Despite the difficulties related to revenue generation, the general government deficit was gradually reduced from 5.5% of the GDP in 1994 to an estimated 1.3% in 1997. The 1998 budget foresees a deficit of under 2% of the GDP.

The current account deficit has been increasing as a result of fast growth of import and internal demand. It reached 12% of the GDP in 1997 compared to 9.2% in 1996. The foreign trade deficit also grew from 11.4% of the GDP in 1996, to 14.7% in 1997. This is mainly due to imports relating to investments; technology, machinery, and equipment.

The level of Lithuania's developmental results and financial creditability was evaluated by international rating institutions. In June 1997, Standard & Poors, for the first time accommodated Lithuania with a BBB+ investment rating.

In 1991, Lithuania's trade with the countries of the European Union (EU) amounted to 2% of the total foreign trade. Currently its share is 38.6% and is expected to grow in the future. Lithuania's export growth rate is among the highest in Central and Eastern Europe. In 1996, it was 24% -- while, the standard imports growth rate is 25%. Germany and the United Kingdom (UK), followed by Italy and Denmark are the most important trade partners in the EU.

Lithuania's trade with the US is growing very quickly. The US Commerce Department reported that during ten months of 1997, the trade balance between the US and Lithuania was positive for Lithuania.

The United States was importing from Lithuania $71 million US and exporting to Lithuania $69 million US. The increase in trade between the two countries in 1996 was about 125%. The same tendency was maintained in 1997. Dominant Lithuanian export products included woven apparel, dairy products, fertilizers, base metals, wood, albumin and glue, glass, and toys.

Lithuania asserts a rather liberal foreign trade policy. There are no quantitative restrictions on imports. Import duties are among the lowest in Central and Eastern Europe. Free trade agreements (FTAs) with 26 countries (EU, the European Free Trade Association (EFTA), Latvia, Estonia, Poland, Czech Republic, Slovakia, Slovenia, and the Ukraine) are in force. An FTA with Turkey is expected to be in effect soon. (See TABLE 1 below for an economic overview)

Bilateral agreements providing for mutual most favored nation (MFN) treatment in trade are enforced with 17 countries: Australia, Belorussia, Bulgaria, Georgia, India, Canada, China, Cyprus, Republic of Korea, Cuba, Moldavia, Romania. Russian Federation, Turkey, Uzbekistan, Hungary, and Vietnam. Lithuania expects to become a member of the World Trade Organization (WTO) in 1998.

For more than a year the new government has done much to improve the country's attractiveness for foreign investors. Foreign dollar investments (FDIs) have doubled since 1996 and amounted over $1 billion US at the end of 1997. This was the first FDI billion in the Baltics. The biggest share of this amount has come from the EU. The United States led with a 27% share of total FDI stock. Several American companies who invested in Lithuania include: Motorola, Philip Morris, Lancaster Steel Co. Inc., Kraft Foods International, Coca-Cola, Masterfoods, and Ochoco Lumber. Other countries investing in Lithuania are Sweden, Germany, and the UK.

By the beginning of 1999, the total FDI stock in Lithuania is expected to rise to a level of $2 billion US. Cash privatization of large strategic state enterprises, such as "Lithuanian Telecom", "Lithuanian Airlines", "Air Lithuania", "Mazeikiu Nafta", state banks, etc., will play a significant role in the stock increase. Confidence in this growth has already been shown with the Standard & Poors investment grade.

The Lithuanian National Stock Exchange could also serve as a good example of fast and steady improvement of the national economy. There are over 520 companies listed on the trading list with market capitalization rates at 20% of the GDP ($1.8 billion US at the end of 1997).

Among the main advantages for foreign investment is Lithuania's gateway position to the largest markets of the region. Klaipeda is the largest all year, ice-free port in the Baltics. Lithuania has also one of the best road infrastructures in the region, and a highly-skilled and inexpensive labor force.

Currently the private sector creates nearly 70% of the GDP in Lithuania. In 1997 state incomes from privatization amounted to $20.5 million US, compared to $0.8 million US in 1996. 1998 is expected to become a "year of great privatization".

Lithuania first focused on small and medium-sized enterprises (SMEs) for privatization. In the middle of 1997, 5,872 of SMEs were privatized. Their capital accounted for approximately one quarter of the total capital of the 8,065 enterprises that the State owned before privatization. The privatization of SMEs was implemented through vouchers to the employees and managers of the enterprises, and citizens of Lithuania (Stage I). However, in 1995, other methods; cash-based privatization allowing participation of foreign investors (Stage II), were introduced. In some cases, the Government retained some shares in private enterprises as a transitional measure. (See Table 2 on the previous page for an overview)

In 1996, the Government drew up plans to privatize 13 (presently, this list contains 14 enterprises) of the largest and strategic enterprises in key industries and services on a cash basis to foreign and domestic investors. In most cases, the State still has 80 to 100% of the shares in these enterprises.

In addition, the Government also launched the privatization of the three largest state banks. After the privatization of 14 state enterprises and three state banks, the main part of state-owned capital will be transferred to the private sector. Currently, there are 157 enterprises not included in the privatization program; for example, the State Nuclear Power Plant, Lithuanian Post, airports, railways and related infrastructures, pipelines, electricity transmission lines, sea ports, etc. (See Table 3 for an overview)

The year of 1997 was also memorable for U.S.  Lithuania's bilateral relations. Two important economic treaties were initialed, and later signed during President Algirdas Brazauskas's last visit in January of 1998.

These treaties are The Treaty for the Encouragement and Reciprocal Protection of Investment, and The Treaty for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income.

Presently, Lithuania is a signatory to all the basic economic treaties with the United States. Both treaties are expected to be ratified by the Lithuanian Parliament and the United States Congress, and be effective by 1999.

Economic reforms and a stable government ensure financial opportunities for foreign investors, entrepreneurs, and the Lithuanian people. All of these dramatic, positive changes establish Lithuania's position as a viable partner in the world financial community.