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Lithuania - Economy

Lithuania became the 19th European Union (EU) member to adopt the euro on January 1, 2015. The European Commission announced Lithuania's accession to the euro zone in June 2014, after rendering a positive evaluation of the member state's compliance with the criteria to switch to the euro.

Lithuania, a former Soviet republic, is one of the poorest countries in the European Union. Lithuania escaped Soviet-imposed industrialization, sparing itself the large influx of Russian workers that occurred in Estonia and Latvia. One of the countries hardest hit by the global economic crisis after several years of post-independence economic boom, Lithuania is suffering a crisis of confidence, with some questioning Lithuania's western and free market orientation.

In the second half of the 20th century, the Lithuanian economy underwent fundamental transformations. The Soviet occupation of 1940 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 to 1952 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.

The disadvantages of a centrally planned economy became evident after the collapse of the U.S.S.R. in 1991, when Lithuania began its transition to a market economy. Owing to the availability of inexpensive natural resources, the industrial sector had become excessively energy intensive, inefficient in its utilization of resources, and incapable of manufacturing internationally competitive products. More than 90% of Lithuania's trade was with the rest of the U.S.S.R., which supplied Lithuanian industry with raw materials for production and a market for its outputs. The need to sever these trading links and to reduce the inefficient industrial sector led to serious economic difficulties.

The process of privatization and the development of new companies slowly moved Lithuania from a command economy toward a 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. In 1997, exports to former Soviet states were 45% of total Lithuanian exports. In 2006, exports to the East (the Commonwealth of Independent States--CIS) were only 21% of the total, while exports to the EU-25 were 63%, and to the United States, 4.3%.

By mid-2010, Lithuania had accumulated foreign direct investments (FDI) of $13.7 billion, with U.S. investments amounting to $356 million, or 2.7% of FDI. The current account deficit in the second quarter of 2010 was 3.6% of GDP. Lithuania has privatized nearly all formerly state-owned enterprises. More than 79% of the economy's output is generated by the private sector. The share of employees in the private sector exceeds 65%. The Government of Lithuania completed banking sector privatization in 2001, with 89% of this sector controlled by foreign--mainly Scandinavian--capital. Lithuanian Railways and Lithuanian Post are the only remaining state-owned companies that may be offered for privatization in the near future.

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, though air connections contracted in 2009 with the bankruptcy of national carrier FlyLAL. The road system is good. Telecommunications have improved greatly since independence as a result of heavy investment.

After joining the EU in 2004, Lithuania saw its economy boom, reaching a record 8.9% GDP growth in 2007. Strong growth continued through much of 2008, but a weak fourth quarter, as financial stress spread through Europe, slowed growth to 3.0% for the year. In 2009, the global financial crisis hit the Lithuanian economy hard: the economy shrank by 15%, unemployment climbed to 13.7%, and salaries fell by 12.3%, the worst performance since comparable records began in 1995. Growing unemployment and lower income contributed to some limited social unrest in early 2009. That same year the government approved heavy budget cuts and passed a $2.3 billion stimulus plan. In 2010 Lithuanias GDP grew slightly by 1.3%. Eurostat has forecast GDP growth of 5% and 4.7% in 2011 and 2012, respectively.

Lithuania pegged its national currency -- the litas -- to the euro on February 2, 2002 at the rate of LTL 3.4528 to EUR 1. The initial target date for Lithuania to adopt the euro, January 1, 2007, was postponed due to the high inflation rate of 2006. The government and most private analysts predict that euro adoption is unlikely until 2014 at the earliest. The government has been able to finance its budget deficit through private sector credit, thus avoiding the need to adopt an International Monetary Fund (IMF) program.

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Page last modified: 02-01-2015 20:04:27 ZULU