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                           Ir:~~m2.tior::11      Fi.rnn-:e Corporation
                     iv1ultilat~ral         Investment Guarant~c Agency
                                    FOR OFFICIAL LSE O'LY

                                 CON F ll)EJ\i·r (_1-\ [,

                                                                                           EDS99-I30
                                                                                          May 10. 1999

Statement by Andrei Bugrov
Date of Meeting: May 11, 1999


                                                  Lithuania CAS

Lithuania has made great progress in its transition, and these achievements are clearly presented
in the CAS document. While initially somewhat lagging behind the two other Baltic countries,
Lithuania is now firmly on track of sustained growth and EU accession. Fiscal consolidation and
monetary stability underpinned by the stringiest framework of currency board is undeniably the
major factor of this welcome development.

Lithuania now faces, as it were, the second tier of transition challenges, which are to be
addressed by an appropriate set of instruments. Therefore it is understandable that our strategy is
expected to be highly selective, with very limited reliance on lending instruments. Health reform 7
district heating reform, urban transport reforms - all these areas of the base-case scenario lending
are appropriate for our involvement due to the seriousness of underlying problems on the part of
the client and to the availability of expertise on our part.

On the macroeconomic front, some fiscal adjustment seems to be in order. Lithuania's current
fiscal accounts are positive but public sector capital expenditures are financed primarily from
nonrecurring sources, and while there obviously are a great number of justifiable needs which
warrant these investment, their impact on future fiscal developments should not be neglected.
The very fact that it is necessary to have a special external shock case lending program which
includes quite large SAL attests to the seriousness of fiscal challenges over the next few years.

Lithuania's impressive growth over the last few years is clearly associated with the currency
board system, and public foreign debt might be viewed as an additional claim on its reserves. In
view of the still limited monetization of the economy, the authorities would be well advised that
integrity of the currency board be assigned the utmost priority. While it is appropriate to
postpone shifting from the currency board, it is not clear whether it should be phased out at all.
As far as I know all currency board countries are now markedly safer than many of their
neighbors, and none of them is planning to give up this mechanism.
One may recall in this respect that in 1993 the Bank organized an important conference on
currency substitution and currency boards, proceedings of which are perhaps still the most
interesting publication about this important issue. Very much has changed since then, but
currency boards countries are demonstrating their ability to survive very serious challenges. It
seems that we owe the global community a great deal of analytical work about this phenomenon.

There is also significant room for further improvement in the areas like dismantling the
protectionist regime, phasing out some hidden subsidies, streamlining energy payments, etc.

At the same time I do not fully share some concerns expressed by the Staff. For instance, a low
!eYe! of stock market liquidity (para 14) does not seem to be a serious issue- it just indicates that
stock market participants correctly acknov,;ledge the small size and inadequate transparency of
listed firms.

The Savings Restitution Plan (box 3) is also, in my opinion. quite a legitimate undertaking. as
long as its financing is provided from non-inflationary, non-debt, and off-budget sources,
primarily out of privatization proceeds. The Staffs reasoning does not seem convincing to me: it
emphasizes the lowering of interest rates, lower capital inflows, and increased consumption of
those benefiting from the Plan as its drawbacks. However, it is exactly the short-term capital
inflows (which are particularly sensitive to the interest rate differential) which are labeled as a
matter of concern by the Staff in some other paragraphs of the CAS. I see the Plan in its current
design as an important element of targeted off-budget poverty reduction policy - an aspect one
cannot neglect.

It was interesting to learn that Lithuania is now planning to undertake some administrative
decentralization. As far as I know, neighboring Latvia went quite far down this path, and it is a
sort of re-consolidation of local and municipal units that is now underway there. It is possible
that some analytical work in this area, based on the accumulated experience of transition
economies which attempted to change their framework of subnational and local administration,
might be very useful. Such analysis may identify some factors which are common for transition
economies and which are important for designing this administrative framework.

I noticed that the document contains a number of important observations. related to the client
perception of our activities in the country. I welcome this much needed clarity and expect that
the necessary lessons - valid not only in Lithuania but elsewhere as well - are seriously learned.

For example, there is an instructive case of our structural reform program being overly ambitious
and therefore perceived as not being fully compatible with general economic and political goals
of the Government (para 33). Repeated complaints about rigid and extremely cumbersome
procurement rules are also not at all surprising to anyone familiar with Bank's activities in
transition countries. Our goals are not always well explained to t:l1e client and civil soc;.ety., and
there are cases when the Bank with all its resources and power can impose these goals over those
emphasized by the country itself (boxes 4 and 5).
Thus, it is understandable that the Government is somewhat skeptical about further Bank lending
and prefers to rely more upon our high-quality technical assistance and IFC investment. In view
of the current stage of reforms in Lithuania, and pending EU accession, this approach seems
appropriate, and we fully approve the proposed strategy of limited and highly targeted lending
program. However, it is necessary that our practices in other countries be adjusted according to
the legitimate concerns expressed in Lithuania's CAS.