ANALYSIS - Lithuanian PM Banking on Economic Revival

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By Jonathan Leff

Dateline: VILNIUS, Feb 17 (Reuters)

Lithuanian Prime Minister Andrius Kubilius has played all the right cards in his first 100 days in office, but must now stand fast and hope the economy improves in the next six months before general elections. In just over three months, Kubilius has restored calm to local financial markets and brought down soaring domestic debt rates, sealed a much-needed International Monetary Fund (IMF) agreement and set several key utility sell offs on their way. But with such feats behind, there is little more he can do before general elections this autumn.

"Taking into consideration the short time span, he took a very pragmatic approach and in fact has done what the previous two Conservative governments should have done," said local TV commentator Audrius Sarasiauvicius.

To keep markets happy, Kubilius must stand firm on his tough austerity measures despite the lowest popularity ratings for his right-wing Homeland Union since it took office in 1996. To improve his party's chances in this autumn's general election, he must materially improve the lives of the 3.7 million people living in the Baltic state.

The only solution likely to please both sides is largely out of his hands: the resumption of economic grwoth after a year-long recession brought on by the 1998 Russian crisis.


"We would like of course to see results sooner...Our time to do and to show, to gain the understanding of the people, is very short," Parliamentary Chairman and party leader Vytautas Landsbergis told Reuters.

Kubilius took office in early November during one of the country's darkest periods. Treasury reserves were depleted by an expensive - and, unpopular oil sector privatization, high borrowing rates were stifling economic recovery and the political scene was in turmoil with the third cabinet of the year taking control.

The 42-year-old politician promised unpopular decisions -- and delivered them. He yanked away a state-backed savings compensation scheme, froze public sector hiring and raised utility tariffs for the first time in years.

Although he may have drawn the wrath of the electorate, markets have been thankful. In February, Lithuania got away a 250 million euro bond issue at a spread of 281 basis points, much narrower than a September issue's spread of 395 points.

The new government might not have made many overt concessions to the nation's nascent capital markets, but the overall mood has turned more optimistic, says Aidas Galubickas, head of local investment house Suprema.

"I think the main headache is still the budget... Budget problems should be solved in an efficient way and I think everything else will take care of itself," he said.

The 2000 budget, with a fiscal deficit planned at 2.8 percent of GDP versus 7.1 percent in 1999, is based on an assumed growth of two percent this year. But January revenues came in well below the plan, causing some consternation.

Preliminary statistics department data showed fourth quarter growth of 1.2 percent, an unexpected surprise, which should give the government some reason for hope.

Without more signs of expansion, however, Kubilius and his party could face a dim future.


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