The litas is currently pegged to the dollar at the rate of four to one. This arrangement has a twofold impact on Lithuania: While the litas has been able to piggyback on the strength of the dollar in recent years, its strength has actually hurt exporters who are in dire need of finding new markets where the weak euro prevails.
This decision marks a departure from the central bank's goal of pegging the litas to the euro/ dollar basket in 2000. Sarkinas explained that the basket was a transitional measure and was no longer needed because the euro has been stabilizing lately. "We believed that the instructional basket was [a good idea] at the start of the year, at least the second quarter of this year, when our exporters suffered certain losses," Sarkinas said.
When asked what if the euro should bomb, Sarkinas quipped, "What if it rises abruptly? I wouldn't like to go into forecasting exchange rates. Of ourse, it wouldn't be very good if the exchange rate fell."
Sarkinas' defense of the action also rested on the early notification to the country's business community. "What is important for the economy is that it was informed of this in advance and will have time to change its orientations, change contracts, the sale and purchase of goods - that is the most important, to give it time to adapt," he said.
The central bank statement said that "a clear signal is given now to Lithuanian companies to increase the use of the euro in their international settlements in trade with the European Union."
The move has won praise from Ruta Vainiene, a financial expert with the Free Market Institute, an organization that supports Lithuania's currency board regime. "I'm quite satisfied because there is no more uncertainty in the market, at least for the time being," said Vainiene. "I think that delaying repegging is good also because it is important to see what will happen with the euro because the euro is still an experiment."
While some exporters cringe at the thought of maintaining the litas-dollar peg for almost another two years, Vainiene maintains that a currency should not be used to achieve mercenary economic goals. "The one thing a currency has to do is be a good currency - stable and predictable," she said.
The exporters' community has expressed cautious optimism over the decision. Sigitas Brazinskas, director of the Lithuanian Development Agency's export department, thinks the repeg to the euro will ultimately make business with euroland smoother. "The main market for Lithuania will be European countries around Lithuania. This makes it much easier to deal with other countries," he said.
Sarkinas assures that exporters could stand to thrive in the new conditions. "I think the fact that the euro stopped weakening against the litas is good by itself and will help exporters, but what is most important is that we have clearly stated in advance what we are going to do and they will have time to prepare for these actions," he said.
While some exporters generally support the idea of devaluing the litas, a central bank statement said that devaluation "would throw Lithuania back for several years in terms of reforms" and would eliminate low inflation. Also, a devaluation would not improve the competitiveness of exports, "owing to the relative lack of price elasticity of imported energy sources and other raw materials" as well as low labor costs, said the central bank's statement.
Some are questioning the timing of the announcement, coming on the heels of Sarkinas' meetings with International Monetary Fund officials in the United States. "I think it's more political pressure, not economical, to make such a move," said Dr. Eugenija Martinaityte, director of the Lithuanian Banking, Finance and Insurance Institute. "The monetary policy of the country is in an uncertain situation and is still partially dependent on the IMF and the World Bank, which impose rather strict requirements."
Sarkinas denied there were outside pressures, but admitted that the decision received internal political support. "The decision was taken in light of the current situation in the economy and the financial markets, and the decision was supported by the president and the prime minister," Sarkinas said.
In general, Martinaityte questions the wisdom of what she calls a money-saving move by the central bank. "The cheapest way was to change [the currency peg] once instead of in two stages," she said. "But in my opinion it's not safer because the euro is not stable in the market. So in an economic sense it will still be safer to change to the basket."
Sarkinas maintains that the plan is the safest route possible for the repeg of the litas. "I don't see any specific indications of risk increase. Everything that we're doing is specifically to avoid risks. I believe that these actions will help to do that," he said.
But there is an element of once-bitten, twice shy in a country that has seen the central bank change its mind more than once. However, Sarkinas insists that on this matter the central bank will not waver. "Our decision should not change and once we have adopted it it's a matter of honor to keep our word," he said.
He added that the litas in circulation is already backed at present by 140 percent in gold and silver - the highest percentage in Central and Eastern Europe.