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Country Commercial Guides FY 2000: Lithuania Report prepared by U.S. Embassy Vilnius, released July 1999 Note*

CHAPTER II. Economic Trends and Outlook

Since restoring its independence in 1990, Lithuania has implemented reforms aimed at abolishing the remains of the former socialist system. In 1992, aided by IMF and other international institutions, Lithuania adopted a program to restrain inflation, reduce price controls, lower the budget deficit and privatize the economy. Inflation has since dropped dramatically. For the first quarter of 1999, the inflation rate was 2.4%, down from 35.6% in 1995. GDP has improved noticeably since 1994, from 1% in 1994 to 3% in 1995. The forecast for GDP growth in 1998 was 5%, but due to the recent Russian economic crisis the GDP grew only by 3.5%. In 1999 the GDP decreased by 4% during the second quarter. Lithuania has a freely convertible national currency, Litas, which has appreciated against world currencies. For stability purposes it is tied to the U.S. dollar at the rate $1: 4 Litas.

Due to the restructuring of the financial sector, together with improved banking supervision and enforcement, the macro-economic impact of the banking crisis had eased by 1999. The 1998 Russian crisis did not have a significant impact on the Lithuanian banking system.

According to the Lithuanian Department of Statistics the main exports in 1998 were mineral products (19%), mechanical goods and electrical equipment (12%) and products of chemical industries (9%). Lithuania's main imports in 1998 were: machinery, electrical and associated equipment (19%), mineral products, including oil and gas (15%) and transport means and equipment (12%).

Structural reform has proceeded rapidly in the privatization of small enterprises and in agriculture. Over 70,000 private farms have been established. However, due to the lack of financial resources and an inefficient crediting system, many of the new farmers are operating only at subsistence levels. Urban and rural property is being returned to its original owners, but legal mechanisms for title registration, sale and mortgaging of real property are not yet fully developed. About 86% of all enterprises and about 83% of state property included in the initial privatization program have been privatized. Some 5,714 (86%) out of 6,644 eligible companies were privatized during the first stage. Privatized state-owned capital equaled 3.4 billion Litas (current value $850 million) -- or approximately 30% of all state-owned property. The remaining state-owned property is valued at almost 9.9 billion Litas, or nearly $2.5 billion. In March 1998, the Lithuanian government established the State Property Fund to manage and privatize the remaining state assets. The remaining assets to be privatized include the energy sector and more of the telecom and transportation sectors. Currently, privatization of the State property is carried out by the following methods:

1. Public share subscription (large and medium scale enterprises);
2. Auctions (small enterprises or divisions thereof);
3. Tenders or auctions for convertible currency;
4. Direct negotiations;
5. Lease with the option to purchase; and
6. A combination of different methods.

Privatization also includes tenders evaluated for the best business plan, i.e. tenders, which take into account both the financial offer and an overall plan for the development of a company. Open tenders were generally used to privatize large industrial enterprises for hard currency.

According to the Department of Statistics the amount of foreign investment in 1998 was $1.3 billion. Most of it originated from the EU, the U.S. and C.I.S. Motorola and Williams Inc. are two of the largest U.S. investors.

Lithuania has historically been an exporter of agricultural products, primarily processed meat, dairy products and fish. As part of the Soviet Union, Lithuania exported about 80% of its agricultural production to the other Soviet Republics. Today owing to the diminished purchase power of the eastern markets and the inadequate restructuring of the agricultural sector, the trade balance to the east is negative.

Major infrastructure projects that are currently being implemented (or are still pending) include: the privatization and upgrading of the Mazeikiai oil refinery; safety upgrades of the Ignalina nuclear power plant; construction of the Via Baltica highway connecting the Baltic countries to the rest of Europe; expansion and modernization of Klaipeda sea-port facilities, and construction of the electric power transmission line to the West.

Lithuania's current road network is good especially along the few main routes. Likewise, the rail links to Russia are strong, though train tracks and grade crossings need upgrading in order to handle higher speeds and heavier loads. The port of Klaipeda is well equipped but in need of modern management techniques. Vilnius International Airport has been brought up to Western standards and is preparing to offer expanded services. Lithuania has two additional international airports -- Kaunas and Palanga -- and one commercial airport in Siauliai.