Nordea says litas could be pegged to euro at 3.88 rate

VILNIUS - The Nordic financial group Nordea predicted in a recent research report that the Lithuanian national currency could be pegged to the euro at the rate of around 3.88 to one during the planned shift of the litasÕ peg from the U.S. dollar to the single European currency in early 2002.

LithuaniaÕs tight fiscal policy and the relatively low current account deficit, at about 5 percent, increased confidence in the litas last year, according to the report. Reinoldijus Sarkinas, the Lithuanian Central Bank's Governor, announced earlier this year that the litas would be repegged to the euro at the start of 2002 at the prevailing market exchange rate. The litas will stay pegged to the dollar at a four-to-one rate until the shift takes place.

Nordea analysts do not believe that the litas will be devalued and predict that the litas/euro rate will depend on movements in the dollar/euro rate.

ÒIn our view the euro will rise against the dollar in the first half of this year and then turn down toward a euro/dollar rate of 0.97 at the end of the year, so the litas would then be pegged to the euro at the rate of 3.88,Ó according to the report.

Nordea analysts said that the weakening of the dollar against the euro in the first half of this year will continue to support Lithuanian exports, the main driving force of the economy in 2000.

ÒThe depreciation of the dollar this year will therefore support exports and, if the litas subsequently weakens against the dollar as expected, there are good prospects for continued export-led growth next year,Ó Nordea said.

The groupÕs analysts predict that LithuaniaÕs GDP growth was only 2.4 percent last year because of weak domestic demand and tighter fiscal policy. They forecast 3.1 percent growth for this year.

ÒEconomic growth last year was founded mainly on export demand and we expect the trend to continue largely unchanged this year,Ó the analysts said.

Domestic demand and imports are likely to remain relatively weak this year, so the current account deficit is expected to stay roughly at the same level as last year Ð about 5 percent. Inflation is projected to rise to nearly 2 percent this year from last yearÕs 1 percent.

Nordea is comprised of FinlandÕs Merita Bank, SwedenÕs Nordbanken, DenmarkÕs Unibank, NorwayÕs Christiania Bank and other financial institutions. In Lithuania, the group is represented by Merita BankÕs Vilnius branch.