Enough room for Williams and IMF?

  • 1999-11-04
  • By Paul Beckman
VILNIUS - Lithuania and the U.S. energy company Williams
International signed a deal Oct. 29 after 18 months of torturous
negotiations. The pact will give Williams a significant chunk in the
country's oil complex.

But the controversial deal, which requires cash-strapped Lithuania to
lend millions of litas to the ailing oil company, builds roadblocks
to getting an essential agreement with the International Monetary
Fund. Lithuania has not chosen between Williams and the IMF but made
necessary other painful choices.

Complex sale - complex situation

A mission from the IMF will come to Vilnius during Nov. 2 -5. Led by
Baltic division's Odd Per Brekk, IMF Baltic division deputy chief,
the group plans to review recent economic and financial developments.

The deal with Williams, however, tends to complicate the financial picture.

The American company agreed to purchase a 33 percent stake in the
Mazeikiu Nafta oil complex, which includes a refinery, pipeline and
an offshore terminal.

The complex is sinking in its own financial problems. Although
Williams agreed to pay $150 million for the 33 percent, the state
will also be expected to kick in a total of $344 million to Mazeikiu

According to ELTA news agency, a little more than half of the $344
million will be used to cover previous government loans while the
remaining amount will be lent this year and next year to help solve
the Mazeikiu's working capital shortfall. The oil complex plans to
pay back the loans with a 10 percent interest within seven years.

"In order to close the transaction, all Williams has requested is that

Lithuania pay Mazeikiu Nafta's unpaid bills and make it a solvent
company. The same as it was when Williams turned in its bid proposal
18 months ago," Williams President John Bumgarner said a week before
the deal was signed.

Although the conditions are somewhat better for Lithuania than they
were in mid-October, the Williams deal may nevertheless put a strain
on the state's already serious financial problems. Former Finance
Minister Jonas Lionginas, who quit when the majority of the Cabinet
of Ministers decided to go ahead with Williams, predicted at that
time a 9 percent of GDP fiscal deficit for 1999.

Some analysts predict even uglier figures, like 12 percent or 13
percent, for 2000 if the state coughs up the money required by the
original Williams deal. Such figures, even if they are slightly
reduced, do not bode well for dealing with the IMF. Lithuania is
trying to nail down a precautionary stand-by agreement with the IMF.

The prospective agreement would work somewhat like an emergency
option should Lithuania really require funding. But as a
"precautionary" agreement, Lithuania would at least appear a shade
better than it would with a typical stand-by agreement.

"It's a precautionary stand-by agreement expected to be 15 months in
duration. Lithuania would only draw on it if the need really arose,"
Mark Horton, IMF's resident representative, said.

In order to draw on it, Lithuania would still need to meet fiscal and
monetary benchmarks. Instead of a 9 percent or 12 percent deficit,
the IMF wants closer to 2 percent. Horton expressed concerned about
Lithuania's need to inject funding to cover Mazeikiu Nafta's working
capital shortfall but added that the Williams deal will not
necessarily mean that an agreement with the IMF is impossible.

"Fiscal adjustment is needed," said Horton. "We are not [oil sector]
analysts. If they think [the deal with Williams] is of sufficient
importance and go ahead with it, adjustments of a similar magnitude
would need to be made someplace else."

Other places could mean postponing the savings restoration program.
When some Lithuanian citizens lost their entire ruble savings as the
Soviet system collapsed and inflation sky-rocketed, the Lithuanian
government at the time promised to compensate the population down the

True to its word, the government began compensating the older part of
the population last year. According to the weekly magazine Veidas,
865 million litas ($216.25 million) have been used from the state's
privatization fund in the first nine months of this year to
compensate evaporated ruble savings. The government is also trying to
pay people for losses suffered when the Joint Stock Innovation Bank
collapsed during the 1995 banking crisis.

To continue savings compensation and keep Williams on at the same
time may prove to be too unrealistic. But postponing the compensation
program would also be wildly unpopular. Any official who gears up
for the postponement may be flirting with political suicide. Many
Lithuanian financial analysts tend to suggest postponement only
under their breaths.

But with the Williams deal nailed down, there may be no other choice.
Andrius Kubilius, who is well on his way to filling the prime
minister's chair, said "unpopular decisions" would have t o be made
in connection to Lithuania's financial situation. But Kubilius did
not specifically mention postponement of compensation.

The sooner the better

A precautionary stand-by agreement between Lithuania and the IMF
would certainly help the country out. Horton said there is hope for
signing an agreement by the end of the year. "The sooner the better,"
said Horton. "It's somewhat conditional upon the political situation
clarifying itself."

Should Lithuania try to keep too much on its plate and fall victim to
a 12 percent fiscal deficit, not only would agreements with the IMF
be in jeopardy, but getting help from other sources would be more

"The markets themselves would like to see the same kind of fiscal
adjustment," said Horton.

According to Ardo Hansson, senior economist with the World Bank,
should Lithuania fail to reach an agreement with the IMF, some of the
bank's activities in the country would be affected.

Some standard projects which are not directly related to the
macro-economic environment would continue. But Hansson said
something like a possible structural adjustment loan, which puts
money into the general budget to support reforms in several sectors
of the economy, would be extremely unlikely without the IMF agreement.

"The working hypothesis [of the loan] is about $100 million," said
Hansson. "In 1996 the World Bank gave one of $80 million."

As Kubilius prepares to take the reigns as prime minister, his job
will be far from easy. It is safe to say that few would volunteer to
be in his shoes when it comes time to face the daunting choices and
challenges of Lithuania's financial situation.