As a result of Soviet legacies, Lithuania suffered rather severe price and monetary instabilities following independence in 1990. By 1995, inflation had reached 35.6 percent. In response, the Lithuanian government undertook a series of reforms that were assisted by the International Monetary Fund (IMF), an organization that lends money to governments to help them protect their national currency. By 1999, inflation had been reduced to 3 percent.
As part of the post-Soviet macroeconomic transformation, the Bank of Lithuania (B of L) was established as the main financial institution with both the currency exchange rate management and bank supervision functions. In 1994, Lithuania adopted a currency board
|Exchange rates: Lithuania|
|litai per US$1|
|Note: Currency has been at a fixed rate since May 1, 1994; litai is the pluralof litas.|
|SOURCE: CIA World Factbook 2001 [ONLINE].|
which means the value of the Lithuanian litas is fixed at the level of US$0.25 or 4 litai per U.S. dollar and guarantied by Lithuania's foreign exchange reserves . So the value of litas travels with the value of the U.S. dollar and no exchange rate policy is currently being conducted.
The Bank of Lithuania's main function is to protect the nation's currency. However, it also regulates the private commercial banks in Lithuania and sets interest rates. It also sells government bonds and treasury bills which help finance the debt. Interest rates vary between 6 to 10 percent per year. High interest rate levels largely reflect higher risk and volatility in the domestic capital markets. Foreign banks must receive approval before they are allowed to purchase more than 10 percent of the shares of a local bank.
Overall, the Lithuanian banking sector is rather small but operating smoothly as of 2000. It consists of 10 commercial banks, 1 special purpose bank, and 3 foreign bank branches. The share of the public sector in the capital of commercial banks continues to decline, to some one-third by 2000. At the same time, the share of domestic privately owned assets rose; the role of foreign private owners increased only slightly. The stability of the nation's banking sector was such that in 1996, Lithuania became the first country of the former Soviet Union to be granted a credit rating by such international firms as Standard & Poor's and Moody's. Because the government's bonds are rated as trustworthy by these firms, these bonds are more attractive to foreign investors.
The role of non-bank financial markets is still rather weak. While a relatively large number of firms are listed on the well-organized National Stock Exchange of Lithuania (NSEL) modelled after the Paris Bourse, trading is rather low and suffers from the shortages of liquidity , a condition affecting most stock exchanges in the post-communist economies.