IMF representative suggests not to review investment deals

  • 2000-10-26
  • Geoffrey Vasiliauskas
Mark Horton, the resident representative of the International Monetary Fund, has been in Lithuania for over one year. In his interview with The Baltic Times correspondent Geoffrey Vasiliauskas, he praised Lithuania's progress in putting forth a strategy toward European accession.

The Lithuanian government after the first quarter results predicted fantastic growth in GDP, 3.5 percent to 5 percent, but had to revise the figure to zero growth in the second half. What are the IMF's figures?

The Fund had expected that growth would be 4 percent next year, and now we're back closer to 3 percent or 3.3 percent for 2001. I think this really reflects the expectation the euro will probably stay more or less in the range of $0.85 to $0.90. That will make it difficult for Lithuanian exporters to grow strongly [the litas is pegged to the U.S. dollar 4:1].

Exports did well in the first quarter of 2000. In the second quarter the euro's fall made revenues for Lithuanian exporters smaller, and so that's the major change from some optimism after one quarter.

The first quarter showed some recovery of the Mazeikiai oil company, which still forms a big part of Lithuania's GDP. Mazeikiai did very well in the first quarter of 2000 compared to the first quarter of 1999, so that probably influenced the GDP numbers a bit more. I think overall there's maybe some resignation that the recovery won't be all that strong this year, and that feeds into some cautiousness for next year.

What can you say about the fiscal deficit?

Looking at the big picture the improvement of the overall fiscal balance from somewhere around 9 percent of GDP in 1999 to more like 3 percent or 3.3 percent this year is quite a significant achievement, one that's recognized externally much more than internally. The pain of that adjustment is felt much more internally, but externally this has been critical to Lithuania reestablishing its credibility.

Lithuania has privatized two major former state enterprises, the telecom Lietuvos Telekomas and oil concern Mazeikiu Nafta. Both privatizers enjoy legal monopolies for a set span of time. Consumers have seen little or no benefit from these sales, only higher phone bills and constant news of supply interruptions at Mazeikiai. What can you or the IMF suggest as a viable foreign investment policy to the new government and what does the IMF advise on the privatization of the gas company Lietuvos Dujos?

Unfortunately this is the standard privatization model for public utilities, to have a monopoly for a certain fixed period of time. Generally speaking the rate increases are meant to stabilize the finances of the company while investment is underway during the short- to middle-term period. Unfortunately that sort of model is a hard one to avoid. If you don't grant a monopoly of some sort, and tariffs that are sufficient to cover costs and give a sort of positive financial framework to raise money for investment, then you basically don't get the kind of price that Lithuania received, at least for Telekomas. So it's a bit of a trade-off, otherwise it would be quite difficult to sell some of these companies.

Again, one shouldn't necessarily judge privatization after just two years. For something like Telekomas, for Mazeikiai as well, if there's a sound investment program, then you wouldn't necessarily feel the benefits after just two years. Mazeikiai was politicized when the transaction was concluded, and it continues to be, I think, highly politicized, including over supply discussions. It's better to take a longer-term perspective.

In reference to the Lithuanian gas company, the IMF doesn't actually have that strong of a position. Generally, we support privatization in cases where there are clear, on-going government subsidies to companies, either guarantees for borrowing or cross subsidies built into their tariff structures, or if the privatization would help these companies improve their management, or attract more investment. I think in the case of Lithuanian gas, it's not a company that's losing money right now, it is a company that generally still requires a government guarantee for borrowing. The risk of that then does go on to the state and on to taxpayers. The company might benefit from stronger management, and probably would benefit from a partnership or ownership that led to more investment.

How can the new government enhance foreign investment?

Probably the best way is moving ahead on deregulation. The outgoing government [Andrius Kubilius'] has tried to initiate this process through the sunrise and sunset commissions. I think Lithuania still has, even after the last 10 months of efforts in deregulation and macroeconomic stabilization, some reputation as something of a laggard, some countries not moving as fast as some of the other EU accession candidates.

The next government should be quite sensitive to that and see that Lithuania has a currency that's pegged to the dollar, so it is a strong currency, and the way it can support investment in general, and not simply foreign investment, is to work on deregulation and structural reforms, make it easy for companies to do business here, give some certainty.

Again, I don't want to suggest that there's not some elements of the transactions with Telekomas and Mazeikiai that some might find objectionable, but to start to open those transactions back up and review them is probably not a good signal and doesn't suggest a stable environment. Certainly if there's some contractual obligations under those two agreements that aren't being met by the investors, if certain things were supposed to have been done by a certain date and they're not, that's a different matter. That's clear and those things should be highlighted and taken to arbitration or however to solve them. To generally create an impression that every couple of years big transactions might come under review is not very positive.

About the Memorandum of Economic Policies with Lithuania: how is that being carried out?

I think the Fund is quite pleased with the implementation of the memorandum. We just had a mission here who completed their work two weeks ago. The structural reforms components have virtually all been implemented, including fiscal structural reforms, which allow further work on the treasury, on the organic budget law to consolidate the number of extra-budgetary funds and improve the budget process. Most of the financial targets under this memorandum have been met, some fiscal targets have not been met, but they were missed by a rather small amount.

Does that mean Lithuania has access to an IMF credit line?

What it would do is make them eligible to receive financing under this stand-by arrangement, if the Bank of Lithuania elected to receive it. They have plenty of foreign exchange reserves, so they're not drawing money off from this credit line they have with the IMF under this memorandum.

How much is the credit line for?

About 80 million dollars. In fact the purpose of this memorandum was more to demonstrate openness to receiving external economic policy advice, together with the 100 million dollar loan from the World Bank. These were developed jointly. It was more to show to the international financial markets, to the EU and the World Bank that the Lithuanian government was ready to take the advice of the IMF. One would certainly like to see that success in implementing this program was coincident with a strong economic recovery, but I think for exogenous reasons, reasons outside the control of Lithuania, the recovery hasn't been as strong as it could be, but it's not because of poor implementation of this program.

What about Lithuania's prospects for joining the WTO in October?

I think it's a positive step. It shows a longer-term commitment to a certain economic policy strategy, and that's quite beneficial to Lithuania. Lithuania is a small, open economy with a currency board arrangement and not many capital controls. For several years now, it's already adopted the major strategy of WTO membership.

There are certain elements of WTO membership, for instance on agricultural policy, that are simply difficult for Lithuania, but I think the commitments now under the WTO will help Lithuania show a consistent policy from here on out. In areas like agriculture policy, there will be less risk of dramatic changes from year to year, from government to government, and that sort of stability will be ultimately helpful for Lithuania.

In the past year-and-a-half the country has officially become one of the EU applicant countries. It's very close to WTO membership, it looks like its progress toward NATO accession is rather good, it's improved its macroeconomic policies quite dramatically in the past year.

If Lithuania could somehow manage to package its quirkiness - a small, naturally beautiful country with a great past - it couldn't help but succeed.