Foreign Economic Relations
Because of its small domestic market, Lithuania is dependent on trade to ensure its prosperity. It has made impressive progress since the late 1980s. Imports declined from 61 percent of GDP in 1980 to 23 percent in 1991. Most significant, trade was shifted to Western Europe from the former Soviet Union. In 1993 three-quarters of Lithuanian exports went to the other Baltic states and the other former Soviet republics. But this percentage is projected to drop dramatically so that most exports will be to the rest of the world by 1996. In the first half of 1994, the countries of the former Soviet Union accounted for about 53 percent of Lithuania's trade, and West European markets made up about 47 percent of Lithuania's trade (see table 28, Appendix). In previous years, trade with Western markets had made up only about 10 percent of trade.
According to 1994 estimates, exports totaled approximately US$1 billion, up from US$805,014 in 1992, and imports amounted to nearly US$1.3 billion, up from US$805,776 (see table 29; table 30, Appendix). Lithuania had an overall negative trade balance of US$267 million in 1994, according to IMF estimates. An estimated surplus of US$63 million in the services account and a deficit of US$192 million in the current account resulted in a negative balance of payments overall.
When the Soviet Union imposed an economic blockade on Lithuania in April 1990, many enterprises nimbly shifted production away from goods required under central planning (for example, computers for the defense industry) to consumer goods. These transformations demonstrated the flexibility of many enterprises under difficult circumstances and set the stage for economic growth and prosperity.
Tariffs are imposed on a wide range of imported goods, but they are scheduled to be reduced gradually until 2001, when Lithuania's free-trade regime will be fully implemented. The lowest tariff schedule applies to countries with which Lithuania has most-favored-nation status. These countries, about twenty in number, include the United States, Canada, Russia, Belarus, Ukraine, and Australia. A slightly higher tariff schedule applies to goods imported from about twenty countries with which Lithuania has a free-trade agreement, such as Estonia, Latvia and the members of the EU. These tariffs are scheduled to be reduced during the six years following 1995 and will be abolished for industrial products at the end of that time. The tariffs on food products imported from the EU are scheduled to be substantially reduced except for sugar, butter, and oil and for a limited number of other items.
Imports consist primarily of natural gas, oil, coal, machinery, chemicals, and light industrial products. Oil and natural gas are imported from Russia, natural gas is imported from Ukraine, and cotton and wool are imported from the Central Asian republics of the former Soviet Union. Lithuania exports primarily machinery, light industrial products, electronics, food products, and textiles.
On July 18, 1994, Lithuania signed a free-trade agreement with the EU that went into effect at the beginning of 1995. It calls for a six-year transition period during which trade barriers will be dismantled. The agreement grants Lithuania tariff exemptions on industrial goods, textiles, and agricultural products. Full membership in the EU is a primary goal of Lithuanian economic policy.
Lithuania did not acknowledge responsibility for any debts of the Soviet Union. The international community supported its contention that it should not be responsible for debts incurred while it was "occupied." International financial institutions, especially the IMF and the World Bank (see Glossary), issued credits to Lithuania after independence. Lithuania's total debt, which was about US$38 million at the beginning of 1993, mushroomed to US$500 million by the end of 1994. Increases in the debt to US$918 million by the end of 1996 are projected. As a percentage of GDP, the debt will rise from 3.6 percent to 10.6 percent by 1997. However, repayment terms are manageable, and the proceeds of these credits fund needed and productive investments. The large inflow of foreign credits and investments is responsible for maintaining living standards at an acceptable level in the wake of a steep decline in production in 1992 and 1993 and negative trade balances.
The largest foreign investor is the United States tobacco and food services company Philip Morris, which purchased the state tobacco company in Klaipeda for US$25 million in 1993. Foreign investment was critical in maintaining public support for economic reform during the first years after independence and resulted in an influx of hard currency (from foreign assistance, loans, and investment) and increased activity by the private sector. Most foreign investment came from Britain, Germany, the United States, Russia, Poland, and Austria (see table 31, Appendix). Total foreign capital invested in the country was estimated to be 551 million litai in November 1994. About three-quarters of the foreign investors were involved in joint ventures.
Lithuania's Law on Foreign Investments, introduced in 1990 and amended in 1992, guarantees the unrestricted repatriation of all after-tax profits and reinvested capital. A new draft of this law places restrictions only on foreign investment in sensitive industries, such as defense and energy. Foreign investors receive generous profit tax rebates of up to 70 percent. A draft amendment to the constitution would lift the prohibition on landownership by foreigners. Nevertheless, in part because of the growth of organized crime, Lithuania's ability to attract more foreign investment has been impaired. Neste, the Finnish oil company that operates twelve gas stations in Lithuania, halted future investment after an attack, presumably carried out by organized crime, on a company representative in Klaipeda in October 1994.
Lithuania in 1994 received a number of foreign loans, including ECU10 million (for value of the European currency unit--see Glossary) over fifteen years from the European Investment Bank (EIB) for reconstruction of the airport in Vilnius and an ECU14 million loan from the EIB for reconstruction of the port of Klaipeda. Other foreign loans included a US$25 million agricultural sector loan from the World Bank, and loans of ECU22 million and ECU9 million from the European Bank for Reconstruction and Development (EBRD) and Japan's Export-Import Bank, respectively, for the modernization of the country's telecommunications system. The EBRD also disbursed US$6 million in 1993 as part of an ECU36 million energy infrastructure loan. By February 1994, the World Bank had disbursed US$45 million of a US$60 million import rehabilitation loan approved in 1992. Lithuania obtained an ECU33 million loan in 1994 from the EBRD to improve safety at the Ignalina nuclear power plant and a seventeen-year US$26.4 million loan to refurbish its coal- and oil-fired power plant.
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