Litas re-pegging nears point of no return

VILNIUS - Lithuanian authorities are finalizing technical details on the long-awaited re-peg of the litas to the euro. Plans to replace the current U.S. dollar peg in early 2002 seem to be on track, with analysts and officials predicting a smooth transition.

Central bank officials are expected to visit the European Central Bank in Brussels in mid May to discuss their currency policy plans as these relate to the European Union accession process.

According to Bank of Lithuania Governor Reinoldijus Sarkinas, work is proceeding with special care because once a firm date for the re-peg is announced in May or June it will not be changed no matter what happens. "When the date is set then it will certainly be done on that day, we are not going to jump around," Sarkinas told The Baltic Times.

Sarkinas said earlier this year that the start of 2002 seemed to be the best time for the change. However, at that time he said the re-peg would not go forward if the exchange rate of the euro and the dollar were not stable and at an acceptable level. By removing that condition, the central bank now seems intent to make the transition as predictable as possible, to minimize speculation about possible contingency plans.

The litas has been fixed at 4 to the U.S. dollar since 1994 under a modified currency board system. In the fall of 1999, Lithuanian authorities canceled plans to re-peg the litas to a basket of the dollar and the euro after a financial crisis in nearby Russia destabilized local and international markets. Sarkinas does not support calls by some top officials to re-peg the litas earlier than the start of 2002. In recent weeks Finance Minister Jonas Lionginas and the head of the Parliament's budget and finance committee, Kestutis Glaveckis, have said Lithuania's economy might benefit if the step is taken this summer or in the fall.

"It should not be done earlier," Sarkinas said. "There is no serious basis for doing everything at once."

He emphasized the need to prepare the re-peg well and make sure companies and the general public fully understand the details.

The International Monetary Fund is very supportive of the central bank as regards the re-peg plan. "There are several considerations that affect timing and we are convinced the Bank of Lithuania is going about this process in the right way," said Mark Horton, the IMF's resident representative for Lithuania.

Horton told The Baltic Times that the remarkable fiscal adjustment Lithuania has achieved over the past 18 months created the proper conditions for re-pegging the litas. Earlier concerns about pressures to devalue the litas and about the sustainability of macroeconomic policies have disappeared. He said those concerns underlay past IMF recommendations not to rush the exchange rate change.

Horton noted that the euro had been rather stable in recent months and was at a more attractive level than a year ago. Nonetheless, rushing to re-peg could undermine the credibility that the Bank of Lithuania has worked so hard to establish over the past decade, and it could leave some parts of the economy with unhedged exchange rate risk.

Horton praised the decision by Lithuanian authorities to re-peg directly to the euro, and to do so without devaluing the litas even though the unit has strongly appreciated together with the dollar in recent years.

"The time and attraction of pegging to a basket has passed," he noted. This is partly due to the accelerating pace of Lithuania's integration into the euro zone and its desire to join the European Monetary Union. It also makes sense for a small country to keep things clear and simple, Horton added. "Under a basket arrangement people would start to ask: Well, when's the next change going to come about?"

Meanwhile, he said the fact that the litas would not be devalued would help the economy to develop faster.

"Lithuania's medium- and long-term growth prospects clearly depend more on a completion of the structural reforms needed to enhance competitiveness than on some short-term gains which might come about from a weaker currency. These short-term gains would likely flow through to somewhat higher inflation rather quickly, easing pressures for structural reform at a decisive time. This is what we see now in Russia."

Asked about longer-term plans for the litas, Sarkinas said the fixed exchange rate regime would continue en route to the EMU. He noted that the European Central Bank had ruled that an exchange-rate peg to the euro was acceptable in the run up to EMU accession. "We will stick with such an arrangement. I do not see any need for us to change it," Sarkinas said.