Bringing savings back to Lithuania

The main economic issues exercising the minds of the Lithuanian government these days have a strangely circular feel to them. The current account and fiscal deficit, the compensation of deposits eroded by hyper-inflation in the early 1990s and the willingness and ability of the government to continue supporting the litas exchange rate are all right at the top of the agenda. All are intimately linked to each other.

This column has argued that the current account deficit of Lithuania is easily the most important economic issue facing the economy in 1999, and I have so far seen no evidence that leads me to think otherwise

Analysts continue to warn that the country's current account deficit - among the highest in Europe - may put pressure on the litas sometime this year.

Internally, there is considerable political pressure for a currency devaluation, but so far, the government is determined to stick to a policy that has served the economy well since its introduction almost five years ago. The government has received support in its endeavors from the International Monetary Fund, which has urged Lithuania to stick to the currency board arrangement until the current account gap (running at 13 percent of GDP from January to September 1998) shows signs of improvement.

All the Baltic countries, with their relatively open markets and their tight exchange rate policies, have been facing the deficit issue for some time now. Usually, the analysts fears are rebuffed by Baltic politicians thus: "Our deficit may be high, but it is funded by direct foreign investment and is distorted by the fact that many foreign investors bring foreign plant and machinery with them."

There is much truth in this argument, but in Lithuania, the government is no longer relying just on this reasoning. It is starting to take action as well. In announcing plans to offer a new type of savings bond to the public in late March or early April, Lithuanian Finance Minister Algirdas Semeta made a very telling observation. He noted that according to the most reliable estimates, total savings held by Lithuanian residents amounts to between 8 billion and 12 billion litas. At least half of the sum is probably kept abroad.

Even assuming the lower figure, some 2 billion litas would be raised if half of those savings held abroad were repatriated. This would be enough to cover the whole of the current account deficit. The issue of the savings bonds will also be timed to coincide with the start of the second round of compensation for devalued ruble deposits and the end of a six month savings program offered to the people eligible for the first round.

Compensation of savings in this manner has long seemed to me to be an extraordinary policy, and one that deserves closer analysis. It is being carried out as a populist measure, the result of a political pledge made by the government, but it is one that would in essence make many an extreme free market pressure group blush.

Instead of choosing to invest this money in, for example, nationally-owned infrastructure such as schools or hospitals, the government has chosen to give it back to the people for them to decide how to spend it.

The danger inherent in this policy is intimately connected with the current account deficit and resultant pressure on the currency. The government is well aware of this. It is likely that, if no additional measures are taken, a large proportion of the restored funds would be spent on imported goods, thereby increasing still further the deficit and the pressure on the litas.

The government clearly hopes that by introducing the new savings bonds, not only will money currently held abroad be brought back, but also that the lion's share of the compensated deposits will be invested and not spent on more foreign consumer goods. The financial community hopes so too.