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Lithuania: IMF Praises Economic Reforms And Performance

  • Robert Lyle

Washington, 23 July 1998 (RFE/RL) -- Lithuania has received strong praise from the Executive Directors of the International Monetary Fund (IMF) for its implementation of economic reforms and the robust growth of its economy with declining inflation and interest rates.

In the board's annual review of Lithuania's economy, called an article four consultation, the directors said the "key challenge" facing Lithuania is to sustain the favorable economic performance.

The 24 directors, representing the larger nations individually and the others in groups or constituencies, make the daily decisions of the 183 nation fund. With the consent of the country involved, the IMF releases a report on the consultation.

In a background prepared by fund staff, the IMF noted Lithuania's economy grew by nearly six percent in 1997 and was doing even better -- growing close to seven percent -- in the first quarter of 1998. Industrial production rose by 10 percent in the first five months of this year while inflation fell to six percent for the 12 month period ending June 30th.

Lithuania's budget deficit was reduced to 1.8 percent of the economy (GDP or gross domestic product) in 1997. The IMF's Executive Directors acknowledged the government's progress so far in consolidating its budget, but several of them recommended that the target date for balancing the budget be advanced from 1999 to this year. They said that strengthening the fiscal position would send a "clear signal" of commitment to prudent policies and would further reduce Lithuania's vulnerability to disruption in financing.

Lithuania has remained "relatively unaffected" by the financial turbulence in the region -- from Asia to Russia -- but the Executive Directors cautioned that there is a risk in the current account deficit and the low rate of savings. "There is no scope for complacency," said the directors, who called for "determined action" to reduce the country's vulnerability to external shocks.

One problem the IMF staff and the Executive Directors pointed out is the need to reform Lithuania's Social Security Agency (SoDra). The staff background report said SoDra had shown signs of "financial fragility" in the past year and the Executive Directors called for speedy implementation of measures to deal with its cash flow problems. The reforms needed, said the directors, are improvements in tax administration to collect pension revenues, and an acceleration of the schedule for raising the retirement age in Lithuania.

Raising the retirement age, said the directors, would strengthen the SoDra's medium-term financial sustainability.

The directors also suggested that the SoDra be shifted into the government's budgetary process, continuing to make the budget process more transparent and to put greater reliance on domestic financing.

The Executive Directors recommended that in its budget process, the Lithuanian government focus more on the expenditure side by limiting the growth of current outlays, "especially the wage bill."

The IMF's directors noted that the currency board arrangement had served Lithuania well and some suggested that Vilnius slow down its plan for shifting back to a regular central bank. All of the directors agreed that implementation of the planned exit from the currency board had been handled "with pragmatism and without undue reliance on rigid deadlines."

In the banking sector generally, the Executive Directors recommended speedy privatization with an emphasis on ensuring that banks remain vigilant against excessive reliance on short-term borrowed money from abroad.