Lithuania: Baltic tiger

Date: 19/07/03

Lithuania has the fastest-growing economy in Europe

NAME the country with the highest growth rate in Europe last year, booming exports, zero inflation, a rock-steady currency, shrinking unemployment and a budget surplus. Stumped by this happy conundrum? Then look to Lithuania, the southernmost of the three small Baltic states, and for most of the 1990s the quietest and sleepiest of them.

Sleepy no more, Lithuania romped home last year as Europe's top-performing economy with real growth of 6.7%. In the first quarter of this year it did even better, its economy swelling by 9.4%, year-on-year. The IMF thinks Lithuania will manage to grow this year by about 6% and the same again next year - a remarkable feat for a country that looked just four years ago as though it was veering towards tragedy rather than triumph in its transition away from communism.

The reforms paying off so handsomely now for Lithuania are the painful ones it took after its big neighbour, Russia, defaulted and devalued in 1998. The shockwaves from that crash hit all three Baltic countries, through their big Russia-related trade and finance activities. Lithuania, where reforms were slowest, was hit hardest. Its economy shrank by almost 4% in 1999 and local interest rates soared, as the government tried to finance a yawning budget deficit.

But Lithuania righted itself, with the IMF's help. It stepped up privatisations to raise quick cash, improved tax collection, and cut general government spending from 38% of GDP in 1999 to 32% in 2002. All this brought the budget deficit down from 8.5% of GDP in 1999 to just 1.2% last year - while this year's first quarter yielded a modest surplus.

Growth rebounded quickly. So did foreign investment, including a vital deal last year giving a Russian oil producer, Yukos, control of the Mazeikiu oil refinery, Lithuania's biggest export earner. The deal assures supplies of crude oil for Mazeikiu through the Soviet-era pipelines which tie it still to Russia.

Lithuania is being given a run for its money by its two Baltic neighbours. Latvia's economy grew by 6.1% last year; its rate in this year's first quarter rose to 8.8%. Estonia's grew by 5.8% last year; in this year's first quarter its rate was 5.2%.

But for all their dynamism, the Baltic trio still rank among the poorest of the ten countries due to join the European Union next year, with per capita incomes around one-fifth of the EU average. But with growth across the Union's current 15 countries averaging just 1% last year, the Baltic tigers are catching up.