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Economy of Lithuania

Economy - overview: Lithuania, the Baltic state that has conducted the most trade with Russia, faced its own economic and financial crisis in 1999 as a result of the government's wrongfooted economic policies and its inadequate response to the August 1998 Russian financial crisis. Preliminary figures indicate 3% negative GDP growth, 10% unemployment - the highest level since independence in 1991 - and a budget deficit estimated at between 8 and 9% of GDP. The policies that Prime Minister Kubilius implemented upon taking the helm in November 1999 underscore a commitment to fiscal restraint, economic stabilization, and accelerated reforms. The austere 2000 budget in based on a 2% GDP growth forecast, 3% inflation, and a 2.8% budget deficit. Lithuania was invited at the Helsinki EU summit in December 1999 to begin EU accession talks in early 2000. Privatization of the large state-owned utilities, particularly in the energy sector, and reducing the high current account deficit remain challenges for the coming year.

Economy - in greater depth:
The Soviet era brought Lithuania intensive industrialization and economic integration into the U.S.S.R, although the level of technology and state concern for environmental, health, and labor issues lagged far behind Western standards. Urbanization increased from 39% in 1959 to 68% in 1989. From 1949-52 the Soviets abolished private ownership in agriculture, establishing collective and state farms. Production declined and did not reach pre-war levels until the early 1960s. The intensification of agricultural production through intense chemical use and mechanization eventually doubled production but created additional ecological problems. This changed after independence, when farm production dropped due to difficulties in restructuring the agricultural sector.

The transportation infrastructure inherited from the Soviet period is adequate and has been generally well maintained since independence. Lithuania has one ice-free seaport with ferry services to German, Swedish, and Danish ports. There are operating commercial airports with scheduled international services at Vilnius, Kaunas, and Klaipeda. The road system is good. Border facilities at checkpoints with Poland were significantly improved by using EU funds, but long waits are still a frequent phenomenon. Telecommunications have improved greatly since independence as a result of heavy investment. The Telecom company will operate as a monopoly until the end of 2002, but there are a number of cell phone companies to provide competition.

The economy of independent Lithuania had a slow start, as the process of privatization and the development of new companies slowly moved the country from a command economy toward the free market. By 1998, the economy had survived the early years of uncertainty and several setbacks, including a banking crisis, and seemed poised for solid growth. However, the collapse of the Russian ruble in August 1998 shocked the economy into negative growth and forced the reorientation of trade from Russia toward the West. Since the Russia crisis, the focus of Lithuania's export markets has shifted from East to West. In 1997, exports to former Soviet states were 45% of total Lithuanian exports. Today, exports to the East are only 19% of the total, while exports to EU members and candidates are 71%. The government of 1999, which was led by Prime Minister Kubilius, managed to control raging budget deficits in the midst of the crisis, and all successor governments have maintained that fiscal discipline. Privatization is now largely complete, with 75% of the economy now in private hands. The one exception is the energy sector, with gas company privatization behind schedule and energy company privatization stalled altogether.

The year 2001 was a good one for the Lithuanian economy. The 5.9% growth in gross domestic product}GDP went beyond even the most optimistic expectations, despite the slower developments in the neighboring markets after the September 11th terrorist attacks in New York and Washington, D.C. The growth in Lithuania was mainly driven by private consumption and exports. Growth was strongest in construction, financial intermediation, and processing and light industries. Inflation was low, the growth of the external account deficit stabilized, and the state finances improved noticeably with a fiscal deficit of 1.5% of GDP. Exports continued to be the driving force of Lithuania's economic growth. Recently, they surpassed the pre-crisis levels ($3.7 billion in 1998 versus $4.6 billion in 2001). The contribution of domestic market oriented sectors, especially construction, also was increasing.

Lithuania's economic situation has continued to improve during the first two quarters of 2002. During the first and second quarters of 2002, GDP grew at 4.4% and 6.9%, respectively. Economic growth continued, and inflation was low. Progress also was achieved in the areas of privatization and deregulation. Weaknesses remain in public policy development and structural and agricultural reforms.

Manufacturing is Lithuania's largest economic sector, making up 23% of the GDP. It is followed by wholesale and retail sales, which comprise 15 and 8.4%, respectively. The privatization of major state enterprises is expected to be completed in the next couple of years. In 2001, the private sector contribution to GDP increased from about 72% to about 75%. The share of employees in the private sector rose to about 70%. Recently, the Government of Lithuania completed banking sector privatization. 89% of this sector is now controlled by foreign capital. The privatization of the national gas and power companies "Lietuvos Dujos" (Lithuanian Gas) and "Lietuvos Energija" (Lithuanian Energy) also is underway. The privatization of the national airline is temporarily on hold, while the privatization of "Lithuanian Railways" is postponed until about 2003.

Inflation continues to be low. Annual inflation in 2001 stood at 2.0%, however, at the end of the second quarter of 2002, 0.5% annual deflation was recorded. The deflation has been the result of sharp competition among retail trade chains and appreciation of the local currency against the U.S. dollar.

The minimum wage has not changed since June 1998 and stands at $107.50 per month, well below the poverty threshold. The average wage has hardly changed since the economic recession in 1999 and stands at $241 per month.

Exports to the United States make up 3.1% of all Lithuania's exports, and imports from the United States comprise 3.4% of total imports to Lithuania. Foreign direct investment (FDI) in Lithuania reached 1.3 billion Litas at the end of June 2002, which represented an increase of 17% compared to the same period in the previous year. As of September 30, 2002, the United States was the third- largest investor (10.2%) in Lithuania, behind Denmark and Sweden. In the second quarter of 2002, the current account deficit stood at 8.5% of GDP; 87% of it was financed by foreign direct investment.

On February 2, 2002, the government re-pegged the Litas from the U.S. dollar to the Euro at the rate of 3.4528 Litas for 1 Euro. The re-peg, which went on smoothly, reflects a change in trade orientation and is to help Lithuania prepare for the European Monetary Union. However, with the appreciation of local currency against the U.S. dollar, production costs of our enterprises have been decreasing, and competitiveness increasing.

GDP: purchasing power parity - $17.3 billion (1999 est.)

GDP - real growth rate: -3% (1999 est.)

GDP - per capita: purchasing power parity - $4,800 (1999 est.)

GDP - composition by sector:
agriculture: 10%
industry: 32%
services: 58% (1998 est.)

Population below poverty line: NA%

Household income or consumption by percentage share:
lowest 10%: 3.4%
highest 10%: 28% (1993)

Inflation rate (consumer prices): 0.3% (1999 est.)

Labor force: 1.8 million

Labor force - by occupation: industry 30%, agriculture 20%, services 50% (1997 est.)

Unemployment rate: 10% (1999)

revenues: $1.5 billion
expenditures: $1.7 billion, including capital expenditures of $NA (1997 est.)

Industries: metal-cutting machine tools, electric motors, television sets, refrigerators and freezers, petroleum refining, shipbuilding (small ships), furniture making, textiles, food processing, fertilizers, agricultural machinery, optical equipment, electronic components, computers, amber

Industrial production growth rate: -14% (1999 est.)

Electricity - production: 15.58 billion kWh (1998)

Electricity - production by source:
fossil fuel: 13.09%
hydro: 4.3%
nuclear: 82.61%
other: 0% (1998)

Electricity - consumption: 7.829 billion kWh (1998)

Electricity - exports: 7 billion kWh (1998)

Electricity - imports: 340 million kWh (1998)

Agriculture - products: grain, potatoes, sugar beets, flax, vegetables; beef, milk, eggs; fish

Exports: $3.3 billion (f.o.b., 1999)

Exports - commodities: machinery and equipment 19%, mineral products 19%, textiles and clothing 19%, chemicals 10%, foodstuffs (1998)

Exports - partners: Russia 17.4%, Germany 15.8%, Latvia 12.7%, Denmark 5.9%, Belarus 5.2% (1999)

Imports: $4.5 billion (f.o.b., 1999)

Imports - commodities: machinery and equipment 30%, mineral products 16%, chemicals 9%, textiles and clothing 9%, foodstuffs (1998)

Imports - partners: Russia 20.4%, Germany 16.5%, Denmark 3.8%, Belarus 2.2%, Latvia 2% (1999)

Debt - external: $NA

Economic aid - recipient: $228.5 million (1995)

Currency: 1 Lithuanian litas (LTL) = 100 centas

Exchange rates:1 EUR = 3.4528 litas since 2002-02-02, before it was litai per US$1 - 4.000 (fixed rate since 1 May 1994)

Fiscal year: calendar year

See also : Lithuania