Lithuania strategy overview

Full strategy  (0.5Mb) Approved 23  Mar 2006

Strategija Lietuvai  (0.9Mb)

Summary of public comments  (0.1Mb)

Lithuania continues to meet the conditions specified in Article 1 of the Agreement Establishing the Bank. In recent years the country has made substantial progress in transition and this Strategy document recognises the laudable success of Lithuania and its economy. Some 75 per cent of economic activity is in the private sector and price and trade liberalisation, enterprise privatisation and effective financial sector reforms have taken place. There is an open foreign trade regime and no major constraints to foreign investment.

The macroeconomic environment remains generally favourable. The impact of EU accession has been positive in terms of trade and enterprise investment. The economy grew by 7.5 per cent in 2005 and has averaged annual growth in excess of 7 per cent since 2000. Strong domestic consumption and investment demand were major contributors to growth. However, raising expenditures contributed to a loosening of the fiscal stance in 2004 when the general government deficit widened to 1.4 per cent of GDP. The economic stimulus continued in 2005. Following an increase in 2004, the current account deficit stabilised at just over 7 per cent of GDP in 2005 as a result of an improved trade account performance. Unemployment is declining rapidly while the labour force is shrinking due to emigration. The currency board continues to enjoy broad support and Lithuania was admitted to the European Exchange Rate Mechanism (ERM II) in 2004. However, annual average inflation accelerated in the course of 2005. The authorities are aware of the risk to EU convergence that this poses but remain convinced that inflation can be contained within the Maastricht limit.

Since the last strategy, progress has continued on the reform front, and a number of high-profile companies have been privatised, including the national carrier Lithuanian Airlines, power line construction company Elektros Tinklu Statyba, gas utility Lietuvos Dujos and the National Stock Exchange of Lithuania. The business environment is becoming more dynamic and local banks and leasing companies have started to extend loans and leases to smaller companies, often supported through credit lines from international financial institutions. Foreign ownership of the banking sector has led to the restructuring and recapitalization of the system, the introduction of a wider array of products and services and improved corporate governance and transparency.

However, with respect to the Bank’s mandate, a number of remaining transition challenges in Lithuania have been identified and this strategy aims to address those challenges in order to further increase the competitiveness of the Lithuanian economy. The priority transition challenges for Lithuania are as follows:

Infrastructure, environment and energy

With extensive investment and operational needs, there is limited private sector participation in municipal sectors including water and sewage, urban transport and in the development of state transport infrastructure. Energy efficiency is a concern. There are significant costs related to heat losses from municipal-owned heating networks and buildings and privatised industrial enterprises. The closure of Ignalina Nuclear Power Plant is a key challenge. After the closure Lithuania will be reliant on natural resources imported mainly from Russia for most of its energy generation needs.

Enterprise sector

Further improvements in the business environment are needed, including more extensive and consistent enforcement of laws, reduction in corruption and improved transparency in public procurement. Expansion of private enterprises and completion of restructuring of former state owned companies, particularly in less developed regions, are important.

Financial sector

Financial intermediation remains low, particularly to the SME sector and there is a lack of equity and mezzanine capital to support economic growth.

As of 30 November 2005 the Bank had signed a cumulative total of 31 projects for Lithuania with a total project cost of €1.1 billion, including Bank financing of €475 million, or 43 per cent. The private/state sector portfolio ratio stood at 61/39.

While new business in 2005 is modest, the Bank can continue to play a role over the strategy period by focusing selectively on areas where it is additional and where it can address the remaining transition challenges, particularly in providing equity and cross-border financing, promote public private partnerships and strengthen corporate governance and good business practice. 

In addressing the transition challenges, the Bank’s activities in Lithuania will be based on the following operational objectives:

• Support large, complex or sensitive transactions that would benefit from the Bank’s expertise in project structuring, corporate governance and mobilising co-financing;
• Support the expansion of local companies, particularly in cross-border projects, for example into or from Russia or other CIS countries;
• Promote SME and municipal financing and energy efficiency through financial intermediaries, enhanced where appropriate with EU or other donor support;
• Encourage the development of local capital markets, for example in investing in the local securitisation of mortgage loans.

The Bank will continue to ensure that all EBRD operations in Lithuania meet sound banking principles, have transition impact, are additional and are subject to the Bank’s Environmental Procedures and incorporate, where appropriate, Environmental Action Plans.