Lithuania is an upper middle income country with Gross National Income (GNI) per capita of US$ 3,660. Some 30 percent of the country is covered with forests. Lithuania's major exports are textiles (15% of total exports), wood and furniture (5%), food products (11%) and refined oil products (19%).

Agriculture remains an important sector in the country's economy, employing 17.7 percent of the population. However, the sector is still mostly characterized by small-scale, semi-subsistence farms with a low level of productivity. As the country's economic structure gradually shifts towards that of a developed market economy, the share of the agricultural sector has declined from 12 percent of GDP in 1995 to 7 percent in 2002, while the share of services has increased from 54 percent to 62 percent in the same period.

The country’s transformation agenda is almost complete. GDP growth in recent years has been remarkable, increasing by an average of 6.6 percent in 2001-2002. In the first half of 2003, the economy grew by an impressive 7.7 percent, despite the global economic slowdown.Negotiations to join the European Union (EU) have been concluded, and more than 93 percent of the population voted in favor of EU Accession in a referendum held in May, 2003. Lithuania expects to accede to the EU in May 2004. However, it remains the poorest among the EU accession countries.

Events since independence

The economy has passed through several stages in the period after independence in 1991. The initial transformation from plan to the market took place between 1990-1994. Between 1995 and 1997, the country's market infrastructure was strengthened and the economy restructured. This was followed by an external shock-led recession in 1998-1999, in the aftermath of Russian crisis. From 2000 onward the economy has recovered and growth accelerated, and the trend is expected to continue for some years to come.

Recent economic performance

Lithuania’s macroeconomic performance started to improve in 2000, when the government embarked on the policy of fiscal consolidation and acceleration of structural reforms. As a result, macro-financial stability was achieved and the economy returned to a sustainable growth path. Fiscal deficits were reduced from 8.5 percent in 1999 to 1.9 percent in 2001, and 1.2 percent in 2002. Inflation declined from an annual average of 1 percent to 0.3 percent in 2002, mainly due to the appreciation of the Lithuanian Litas against the US Dollar, and a sharp drop in food prices.

While the initial economic recovery after the recession was supported by strong export performance, the latest economic growth has been led by recovery of domestic demand, especially in the service sectors. Nonetheless, exports have been growing substantively. The current account deficit was, on average, 5 percent of GDP in 2001 and 2002, and was financed comfortably by foreign direct investment.

The EU accession process has been instrumental in advancing regulatory reforms, including in the restructuring of the important energy and banking sectors. In the aftermath of the Russian crisis, Lithuanian enterprises have been successfully reorienting their exports from the traditional markets to the east, towards the more competitive EU markets. This has been a critical factor in the country's export-led economic recovery. On the other hand, social sectors which are outside the competence of the EU such as health, education, pensions and social support, still require concerted efforts on the part of the government to increase their efficiency, quality and access.

Focus Of World Bank Assistance

Lithuania joined the World Bank in 1992. Since then, the Bank has played an important role in the country’s transition from a planned to a market economy through adjustment and investment lending, policy dialogue, and analytical and advisory assistance. Bank support has helped the Government implement structural reforms and build capacity at the sector and local levels, improve the access of small and medium enterprise to finance through commercial banks, and tackle the cleaning up of the Baltic Sea as part of an international effort.

The Bank’s current program is focused on:

ž Building public sector capacity, including the reform of public sector management, and regulatory reform.

ž Sustaining growth by improving the business environment, promoing the knowledge economy, and encouraging rural development.

ž Reducing social vulnerabilities through reform of the pension system, the social assistance program, and the health sector.

Lithuania’s per capita income is below the graduation threshold at which discussions to initiate formal graduation would normally commence. Bank assistance to Lithuania will be demand-driven and based on the Bank’s framework for support to EU accession countries. A move to a non-lending relationship is envisaged in the new Country Assistance Strategy, whereby the Bank will maintain its presence in Lithuania as a key development partner for policy advice, knowledge transfer, capacity building, implementation support and technical assistance, and promote capacity building for effective use of EU structural funds.

Impact on the Ground

Alternative community social services for vulnerable groups established. Some 14 new social service centers for battered women, disabled children, the elderly, alcoholics, drug abusers and other vulnerable groups have been established as replicable models with Bank assistance. Utilization has increased rapidly. Based on the early success of these centers, the Government is replicating these services in other parts of the country.

Primary health care services improved. With Bank assistance, 179 General Practitioner's offices have been set up and equipped, each servicing about 2500 people, and 51 more are to follow. Day surgery centers are being established in Kaunas and Alytus, each with capacity to perform over 4000 surgeries annually. Eleven mental health centers have been renovated and eleven health promotion offices established in Kaunas County.

Energy efficiency in apartment buildings promoted. The creation of private homeowners associations is improving the stock of apartment buildings and promoting energy efficiency. Residents have started organizing themselves into homeowners' associations more actively and are renovating private apartment buildings. Bank loans and revolving funds have so far financed some 465 projects managed by 423 such associations.

Local services improved. With Bank assistance, some 121 schools have been renovated across the country by replacing windows, roofs and heating equipment, leading to improved conditions for students and considerable savings in heating costs. In addition, some 16,000 street lamps have been replaced in the city of Kaunas, reducing lighting costs by half. Better local services at lower costs are now available due to the increased capacity of municipalities to develop investment projects and manage their finances.

Water quality in Klaipëda, the third largest Lithuanian city, raised. The Klaipëda Water Company, which delivers water to over 90 per cent of Klaipëda's 205,000 inhabitants, has raised water quality standards to meet EU hygiene requirements with assistance from the Bank. It has also cut water losses by half by installing new pumping stations. In addition, the construction of a wastewater treatment plant has allowed the city to reduce wastewater emissions to meet EU emissions norms.


Competitiveness of Klaipëda Port increased. Under the Klaipëda Port Project, the competitiveness of Klaipëda port on the Baltic Sea has increased. Longer breakwaters, as well as a dredged and widened entrance channel and port waters, have allowed the port to accept larger vessels. This will lead to increased turnover of cargo and create new jobs in the port.

Better agricultural statistics to facilitate decision making. Agriculture is one of the most important sectors in Lithuania and the Bank’s IDF grants have helped to prepare for the first agricultural census in the post-independence period. The census will provide the statistical underpinnings for decisions to be taken on agricultural policies.

Challenges Ahead

ž Reducing unemployment and poverty. Despite the country's positive economic performance, unemployment and poverty remain high with the highest incidence occuring among people with low education. Moreover, regional differences in income levels have been increasing as economic activities are concentrated in the municipalities of Vilnius and Klaipëda.

ž Improving health, education and public services in rural areas. Large urban-rural differences also exist in health, education, and public services as spending on these sectors is much lower in the rural areas. As a result, rural areas have worse health indicators, lower levels of educational attainment, and less access to public services such as transport than the urban areas.

ž Establishing clear priorities to absorb EU structural funds. While the Government has significantly strengthened its administrative structures, the major challenge remains to ensure the most effective use of EU money, by establishing clear priorities. In this, it is important to balance national priorities with regional development issues, especially labor market, housing and education reforms. Successful regional development would include strengthening municipal governance capacity.

ž Diversifing economic activities and developing new engines of growth. Key to improving competitiveness is the systematic generation, use, and communication of knowledge throughout the economy and society, not just in the high-tech sectors but also in areas such as textiles, wood processing, and agribusiness, and not just among the educated elite, but also among the general population. The ability to network within and outside Lithuania, supported by internet access, will become increasingly important to the country's development.

World Bank Partners in Lithuania

SECTOR	LEAD NATIONAL AGENCY	PARTNERS
Agriculture	Ministry of Agriculture	EU
Economic Policy	Ministry of Finance Ministry of Economy	IMF, EU
Education	Ministry of Education and Science	Government of Finland
Electric Power and Energy	Ministry of Economy	EU, EBRD, EIB
Environment	Ministry of Environment	EU, GEF, NIB, NEFCO
Finance	Central Bank Ministry of Finance	IMF, OECD
Health	Ministry of Health	SIDA, UNDP
Social Protection	Ministry of Social Protection and Labor	SIDA, UNDP
Transportation	Ministry of Transport	EU, EBRD, EIB
Urban Development	Ministry of Environment Municipalities	GEF, SIDA

World Bank Lending

Total IBRD Commitments from FY93 to FY03: US$ 474 million

(by fiscal year *, in nearest US$ millions)

	upto 1996	1997	1998	1999	2000	2001	2002	2003	Total
Commitments	160	113	-	20	57	99	25	-	474
Disbursements	61	52	19	61	31	68	35	15	342

Total Commitments by Sector since 1993

(in nearest US$ millions)

Fiscal year from July 1-June 30