Modified Strategic Plan
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UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT VILNIUS, LITKUAN1.A MODIFIED STRATEGIC PLAN MAY 1997 USAID / LITHUANIA MODIFIED STRATEGIC PLAN FY 1996 Table of Contents 1. Modified Strategy for USAID Assistance to Lithuania: 1997-2000 ............. 1 2. MacroEconomic Setting for Transition ..............................2 3. Democracy Trends ..........................................4 4. Key Transition Challenges .....................................4 5. Modified USAID Strategic Objective Activities ........................6 Strengthened Fiscal Management (SO 1.2) .........................7 A More Stable Financial Environment (SO 1.4) ...................... 7 Improved Energy Safety and Policy (SO 1.5) ........................ 7 Strengthened NGO Sector (2.1) ................................ 8 6. Role of Other Assistance Providers ................................8 7. Budget and Management Implications ..............................9 8. Main Rationale for Extending Graduation ........................... 10 9. Post Close-Out Foundation ....................................11 10. What Will Be Unfinished Without Additional Funding ................... 11 11. Probability of Success ...................................... 12 Tables 1. Summary of budget shifts 2. Macro economic trends 3. Propose modified budget by SOs. Annexes 1. Strategic Objective 1.2, Improved Financial Management, Modified Results Framework 2. Strategic Objective 1.5, Improved Energy Safety and Policy 3. Strategic Objective 2.1, Baltic Region: Sustainable Citizen Participation to Stabilize 4. Tabor, Steve, 1997a. "The Republic of Lithuania: the 1996 Economic Situation 5. Tabor, Steve, 1997b. "Emerging Opportunities for Supporting Economic Policy Reform: the New Governments Program" 6. Foundation for Participatory Democracy Concept Paper (not yet submitted) Modified Strategy for USAID Assistance to Lithuania: FY 1997-2000 The priority management challenge during the 1997 to 2000 period will be to achieve program results and successfully close-out the USAID program in Lithuania. USAID's unfinished business is to assist the Government of Lithuania (GOL) to complete economic policy reforms in three curical inter-related areas thereby ensuring that USAID meets its program objectives, and to establish a Baltic Regional foundation that will develop the capacity of the non-governmental sector to help sustain gains achieved in the democracy and economic sectors. We also envision the foundation to serve as a US legacy in the Baltic Republics. The number of activities will decline from the FY 95 level of 55 to 6 in FY 99. Specifically, the Mission will accord priority to: -- furthering the economic transformation: by putting public finances on a sound footing, assisting government to manage central bank monetary and exchange rate policy, and removing fuel subsidies and facilitating the privatization of the energy complex; and -- supporting development of civic society: by endowing a Baltic regional foundation that will: 1) strengthen the capacity of NGOs to expand and deepen the gains achieved in the economic and democracy sectors; and 2) serve as a US legacy in the Baltic Republics. The key issues of economic reform can be achieved within the next three years with a modest budget increase in FY 1998 and 1999. The proposed modification takes into account the priorities of a newly elected government and an analysis of the length of time needed to achieve key sustainable policy and institutional reforms, Lithuania's continued economic progress since 1996 (Section 2), the unique role that US technical assistance provides in Lithuania, the progress and high quality of results achieved by key implementors (R4), a strong commitment by the newly elected government to promote more economic reforms (Sections 3-4), the long time frame needed to develop an effective NGO sector, and to coordination with donors and the international financial institutions, as USAID phases out its Lithuania program. USAID Vilnius proposes to use an additional $5.3 million in FY 98 and FY 99 funds (Table 1) to: 1. continue and extend assistance in fiscal management (SO 1.2) by providing a senior policy team on fiscal policy (tax, budget, treasury) to the Ministry of Finance (FY 99); 2. continue and extend assistance for a more stable financial environment (SO 1.4) by maintaining the Treasury senior bank and monetary policy advisor (FY 99), provide training in collateral law (FY 97), and completing the work on capital markets (FY 98); 3. ex~andand consolidate improved energy safety and policy in a new limited focus strategic objective (SO 1.5) to improve nuclear safety (FY 99) and build the capacity of the new Energy Price Commission to set energy tariffs and establish the regulatory framework for energy investments (FY 99). This new strategic objective merges the energy activities from Strategic Objective 1.3 "Improve the policy environment for enterprise Table 1 Summary of Proposed Increased Budget Compared to Approved Levels strategif Objeftive Current, Proposed Increaselshif Budget FY 97-99 t FY 97-98 1.2 Strengthened Fiscal Management $1,550,000 $4,715,000 $3,165,000 Improved .Policy Environment for Enterprise Development -- - -- - 1 1.4 ( More Stable Financial ~nvironmenr1 $3,450,= $3,710,0070 $260,000 1 1.5 Improved Energy Safety and Policy (from 1.3 and Spec Initiatives) $300,000 $2,575,000 $2,275,000 2.1 citizen-Participation $1,500,000 $1,800,000 $300,000 4.1 Special initiatives-Regional $100,000 $100,000 $0 Environment Cross cutting training $700,000 $875,000 $175,000 staff; evaluation $90Oj000 $1,575,000 $675,000 TOTAL $10,000,000 $15,300,000 $5,300,000 Table 2: Selected Economic Indicators, 1991-1996 Indicator , 1991 1992 1993 1994 1995 1996 GDPINMP (percent change) Consumer Prices (% change) Real Wages (96 change) Broad Money (76 change) Credit to the economy (96 change) Unemployment rate (76) Trade Balance ($ mill) Wages (USDjmo) Current Account (4% GDP) ~ov'tRevenue (96 GDP) Gov't Expenditure (96 GDP) Fiscal Balance (96 GDP) note: 1995 figures are preliminary and 1996 figures. afe estimates. Source: IMF (1995 and 1996), Ministry of Finance, Bank of Lithuania, and Starkeviciute (1996). development" and the special initiative to reduce dependency on the Ignalina Nuclear Power Plant; and 4. establish a reeibnal foundation which will strengthen the capacity of NGOs to effectively contribute and participate in the socioeconomic transition process through the establishment of the Baltic-American Foundation for Democracy. The FY 96 Strategic Plan included a Strategic Objective to improve the policy environment for enterprise development (SO 1.3). This objective will be deleted because the majority of activities under this strategic objective will be achieved by the GOL, significant results were achieved in commercial law, environmental pricing' reforms have been achieved and significant structural reform is unlikely over the next few years, and the high degree of institutional uncertainty in the GOL will reduce success in trade policy reform. The activities under energy price reform have been expanded in the new Strategic Objective (1.5) noted above. Section 2: The Macroeconomic Setting 'for Transition Since Independence, Lithuania has registered impressive progress towards building a democratic, market-oriented economy. Prices and most markets have been liberalized and now respond largely to the forces of supply and demand. Voucher privatization has put residences, agricultural land and small-businesses into the hands of the private sector. Inflation has been tamed, largely by reducing public spending and by diligent adherence to a fixed exchange rate and a currency 'board monetary arrangement. Investment regulations have been crafted to promote both domestic and foreign direct investment. Trade flows have shifted from eastern to western markets, facilitated by bilateral and multilateral trading agreements. From 1990 to 1996, Lithuania struggled to restore macroeconomic stability. Inflationary pressures were severe, public revenues collapsed, and government had to borrow large amounts from concessionary lenders and compress public expenditures to meet import demands. The output collapse was particularly severe with GDP in 1993, which was just over one-third of that reported in 1989 (Table 2). Unemployment remained low, but reflected mainly a fall in female labor participation, scant unemployment benefits and little progress in reducing over-employment in Government and the large public enterprises. With falling output and high inflation, living standards deteriorated, with pensioners and female-headed households bearing the brunt' of the economic downturn. By 1996, more than half of average household expenditures were used to buy basic foodstuffs. Close to a third of the population reported. incomes below the poverty line. Lithuania's economy began to show some first tentative signs of recovery in 1994. From 1994 to 1996, GDP grew by an average of 2 percent per annum. Export growth and services sector activity led the recovery, with transport and entrepot services (through the Klaipeda port) experiencing the most rapid growth. In agriculture and industry, performance has been more mixed. One third of the manufacturing firms have restructured output to meet western demands. In agriculture, restructuring has yet to begin in earnest and only a handful of ago-enterprises are financially viable. Cash-based privatization of the larger enterprises was started in 1995, but no meaningful progress has