Economy depends on political will

VILNIUS (BNS) - The European rating agency Fitch IBCA will watch carefully the future economic situation of Lithuania, but the outlook for changes in Fitch IBCA's long-term credit rating remains unclear. According to the agency, recent crises have showed the importance of swift and effective reaction, but the Lithuanian response in dealing with the Russian crisis hasn't, so far, risen to acceptable standards. This was written in a Fitch press release describing the state of the Lithuanian economy.

Fitch says Lithuania felt a tremendous impact from the Russian crisis and because of that the long-term credit rating BB+, which Fitch gave Lithuania, changed from positive in early 1998 to negative by the end of the year.

Lithuania's ability to withstand the shock from the Russian crisis depends on the flexibility of the real economy, financial stability and the effectiveness of the policy response, Fitch says.

In dealing with the Russian crisis, Lithuania has succeeded fairly well in reducing the foreign trade and currency account deficits and the country's key financial indicators remain stable.

Despite that, Lithuania's slow political reaction has fostered apprehensions, the report states.

The official Lithuanian GDP forecasts were extremely optimistic and that encouraged unrealistic financial prognoses. So far no actions have been taken to stabilize the deteriorating economic situation and only a few concrete measures have been adopted to reduce the currency account deficit.

The Lithuanian govern-ment's decision to use two-thirds of funds from privatization for compensating savings lost to inflation in 1992 when Lithuania was in the ruble zone remains an area of concern for Fitch.

The first two such distributions in 1998 and 1999 expanded domestic and import demand, putting further pressure on the currency account deficit, and reduced foreign currency reserves.

Suspending this program would help demonstrate the new government's determination to reduce the currency account deficit and acknowledgment of the seriousness of the situation, Fitch believes.

The agency also reports danger arising from the impression the Bank of Lithuania and the Finance Ministry disagree on the future of the national currency, the litas, which so far has managed to withstand speculative attacks and talk of its devaluation.

Against the background of the Russian crisis and the ever-strengthening U.S. dollar, upon which the litas is pegged, poor coordination among policy making bodies is not helpful, the press release states.