LITHUANIA FACES FISCAL CRISIS…

The Lithuanian government played Scroogein the last week of December by asking all state employees to work without pay between Christmas and New Year’s, a request apparently made on the basis of Lithuania’s rapidly deteriorating fiscal position (Financial Times, December 22, 1999)–the 1999 consolidated government deficit being estimated at over 9 percent of GDP. If not reduced, this deficit could pose a major threat to Lithuania’s prospects for economic recovery.

Fiscal policy was at the center of economic policy controversy in Lithuania during the second half of 1999, much of which controversy stemmed from the privatization of the Mazeikiai oil refinery (as well as an oil terminal and pipeline) to the U.S.-based Williams International company. This sale, which precipitated the resignation of Lithuania’s economic, finance and prime ministers in October (see the Monitor, November 2) and led to a sharp drop in the approval ratings of the government and president, was accompanied by a US$350 million state loan to the refinery. Critics, including the International Monetary Fund (IMF), argued that Lithuania’s budget could not accommodate this loan, a charge which may now be borne out. But while the particular privatization method selected may be debatable–the government granted Williams exclusive negotiating rights, rather than pursuing a competitive tender–the sell-off itself should help Lithuania’s fiscal balance. Had Mazeikiai remained under state ownership, the loss-making refinery would have continued to drain public coffers.

Lithuania’s fiscal problems run well beyond the Mazeikiai privatization, however. They include the balance on the SODRA social insurance fund, which recorded an estimated year-end 1999 deficit of some US$75 million and necessitated borrowing from commercial banks to pay out current pensions. Although the social insurance tax rate was increased by 3 percentage points starting in 2000, this hike may not be sufficient to repair SODRA’s finances. If the government remains unwilling to bring pension spending under control, SODRA could be a major threat to Lithuania’s fiscal balance in 2000. Lithuania’s increasing debt burden is another important concern. While state employees were understandably upset about not being paid during the last week of 1999, foreign claimants on Lithuania’s budget could be even more troubled by the growth and structure of Lithuania’s debt. Foreign debt, which accounted for 76 percent of Lithuania’s overall debt at the end of 1999, rose from 14.7 percent of GDP at the end of 1998 to 21.7 percent last year. Lithuania’s public debt rose to 28.3 percent of projected GDP in 1999, and while this may not yet be problematic, it did exceed the government’s target of 24.0 percent of GDP.

…CONTINUING RECESSION…