Report No. 13111 -LT Lithuania Agriculture and Food Sector...

Report No. 13111 -LT

LithuaniaAgriculture and Food Sector Review(In Two Volumes) Volume l: Main Report

April 14, 1995

Natural Resources Management DivisionCountry Department IVEurope and Central Asia Region

Document of the WoVkd Bank

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

Currency unit = Litas (LT) (earlier talonas @ 100 TL per LT)

Currency Unit = Lithuanian Litas (LT)US$ 1 = 4 Litas (as of March 1995)LT 1 = US $0.25

WEIGHTS AND MEASURES

ha HectareKg KilogramKwh Kilowatt hour

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS

AB Agricultural BankAC Agricultural CompanyBOL Bank of LithuaniaCEE Central and Eastern EuropeCEM Country Economic MemorandumEBRD European Bank for Reconstruction and DevelopmentECU European Currency UnitEU European UnionEU PHARE European Union Assistance ProgramFAO Food and Agriculture Organization of the United NationsFIFO First in, First outFOB Free on BoardFSU Former Soviet UnionGATT General Agreement on Tariffs and TradeGOL Government of LithuaniaIFC International Finance CompanyIMF International Monetary FundMIGA Multilateral Investment Guarantee AgencyMOA Ministry of AgricultureMOF Ministry of FinanceSOE State Owned EnterpriseSB State Savings BankTA Technical AssistanceWTO World Trade Organization

CONTENTS

Volume I - Main Report

EXECUTIVE SUMMARY .................. ..................... i

1. BACKGROUND AND RECENT DEVELOPMENTS ............ 1............... A. Introduction ............. ........................... IB. Agricultural Resource Base and Structure .......... ................... IC. Agricultural Production Perfornance ............. ................... 2D. The Decline in Per Capita Food Consumption ......... .................. 6

II. OVERALL FRAMEWORK FOR REFORM .................. 9A. Macroeconomic Framework . ............................... 9B. Context for Agricultural Policy Reforms ............................. 9C. Pricing Policies and Subsidies ................................ 10D. Land Reform and Privatization ................................ 13E. Agricultural Credit ............................... 16F. Agricultural Trade ............................... 18

III. SECTOR DEVELOPMENT STATEGIES .............................. 21A. Overall Strategy for Sectoral Development .......... .................. 21B. New Role for Agriculture ....................................... 22C. New Role for the Govemment ..................................... 22D. Challenges During Transition ..................... a . . .23E. Subsectoral Strategies .................... 24F. Policy Action Plan .................... 26

IV. ROLES OF THE BANK AND THE EXTERNAL COMMUNITY ....... ......... 29A. World Bank Group Activities To Date ............. .................. 29B. The Role of the World Bank ...................................... 29C. Technical and Financial Assistance and Coordination ...... ............... 30

Boxes: E.l Policy Action Plan Summary ..................................... vii2.1 Delayed Payments to Farmers ..................................... 20

Figures: 1.1 Structure of Agricultural Production . .................................. 32.1 Principal Farm Prices ....................................... 112.2 Average Price of Main Foodstuffs . ................................. 11

Tables: 1.1 Production Declines ........................................ 21.2 Dairy Production . ....................................... 41.3 Meat Production . ....................................... 51.4 Per Capita Food Consumption ...................................... 71.5 Comparative Purchasing Power in Lithuania ......... .................. 72.1 Maximum Mark-up for Selected Goods ............ .................. 122.2 Status of Land Privatization ....................................... 14

Map: IBRD # 26282

Volume 11 - Subsector Analyses

A. PRIVATIZATION IN AGRICULTURE .......... .......................... I

B. PUBLIC EXPENDITURES IN AGRICULTURE .............................. 9

C. AGRICULTURAL FINANCING AND BANKING ............................ 13

D. REFORM OF MARKETING AND AGRICULTURAL TRADE ................... 21

E. CROP AND LIVESTOCK PRODUCTION ........ ......................... 33A. Agriculture in the Economy . ............................... 33B. The Legacy of Previous Systems ............................. .. 33C. Present Situation in Arable Agriculture ............................... 35D. Present Situation in Animal Production .............................. 46E. Agricultural Research and Education ............................... 66

F. FOREST AND FOREST INDUSTRIES ................ ................... 71A. The Forest Resource Base . ....................................... 71B. Forest-Based Industries . .......................................... 74C. Future of Forestry and Forest-based Industries in Lithuania ................. 79

G. THE FOOD AND AGRO-PROCESSING INDUSTRIES ........................ 81

H. ENVIRONMENTAL ASPECTS OF AGRICULTURE .......................... 95

I. STATISTICAL ANNEX . ............................................. 99

Boxes: E. 1: Payment Delays in Grain-Bread Marketing ............................ 40E.2: Structure of Fisheries Management ............................. . 65

Figures: E.l: Changes in Number of Farms . .............................. 34E.2: Land Development .............................. 36E.3: Grain Production Mix ........................................... 40H.l: Relation between Nitrogen Fertilizer and Crop Yield .96

Tables: A. 1: Current Status of Land Privatization ......................... 1B.l: Functional and Structural Composition of Budgetary Expenditures in Agriculture . 12D. l: Changes in Agricultural Prices.............. ....... 22D.2: State and Private Marketing of Agricultural Produce, 1983-1993 .26D.3: Agricultural and Food Trade. ............................. 30D.4: Main Agricultural Imports & Exports, 1000 tons ............. 1.......... 3 1E. 1: Lithuanian Chambers of Agriculture .34E.2: Change in Fertilizer Use .37E.3: Fertilizer Price Change .37E.4: Per Capita Consumption of Vegetables .41E.5: New Farm Equipment Acquired in 1992-1993 .44E.6: Main Owners of Agricultural Equipment .44E.7: Milk Yield Changes by Farm Type .47E.8: Milk Prices .49E.9: Cost of Milk Pasteurization .49E.10: Major Dairy Products .......................................... 50E. I 1: Ratio of Cows to Cattle .54E.12: Energy Costs in Poultry Production .59E.13: Number of Students in Agricultural Schools .69F.1: Annual Allowable Cut ... ................................ 72F.2: US $ per Ton of Paper, 1992 .78G.1: Exports of Agricultural Products .81G.2: Food Processing Enterprises .82G.3: Exports of the Food Industry .............................. . 82G.4: Development of Energy Prices .84G.5: Importance of Energy in Production Costs .84G.6: Capacity Utilization and Main Issues in Industry Branches ................. 86H. 1: Nitrate Concentration in Agricultural Products .96H.2: Percentage Samples with Pesticide Residue ............................ 97

This report is based on the findings of a Sector Review mission in November 1993. Data wereupdated during a follow-up mission in May 1994. Members of the mission team included: H. Kim(mission leader), T. Schillhorn (livestock), R. Chalk (forest industry), M. Lundell (policies), andconsultants: J. Intrator (rural finance), and C. Cronberg (agro-industry). Editorial support wasprovided by C. Hughes and A. Zuschlag. An agriculture sector review supported by EU-PHAREprovided valuable background information.

EXECUTIVE SUMMARY

I. This sector review provides a status report on the agriculture sector in Lithuania andassesses the progress and challenges of ongoing sectoral reforms. In the main report (Volume I) Chapter1 focuses on the background and recent developments and provides an overview of the resource base andstructure of the agricultural sector. Chapter 2 examines the reforms that have already taken place andtheir effect on sectoral development. Future strategies for completing the transition to a market-basedagricultural sector are discussed in Chapter 3, and the possible future roles of the World Bank and otherorganizations in the international donor community in Lithuanian agricultural development are discussedin Chapter 4. Volume II of the report provides additional detailed information in the forn of annexesregarding privatization, financing, marketing and trade reforms, forestry, crop and livestock production,and the environmental aspects of agriculture.

Agricultural Performance and Structure

II. Historically, agriculture has played an important economic and social role in Lithuania.As the second largest sector in the Lithuanian economy, it has been one of the country's main sourcesof income, employment, and foreign exchange earnings. Since independence, the agricultural sector hascontracted along with the decline of the general economy. However, as other sectors also declined, theagricultural sector was able to maintain its relative share in GDP. In 1993 agriculture accounted for morethan 20% of the GDP, employed about 22% of the labor force, and produced 20% of all exports.Traditionally Lithuanian agriculture enjoyed a trade surplus, mostly in livestock products, that was soldto other republics in the former Soviet Union (FSU). While diminished in scope and absolute size,livestock production still accounts for 67% of total agricultural output. Crop production, the bulk ofwhich has been feed grain, has averaged 30% of total agricultural output for most of the past decade.

III. Since the dissolution of the Soviet Union, Lithuania has undergone a difficult adjustmentprocess, responding to internal shocks from the cessation of unsustainable past policies, and externalshocks resulting from the ruptured trade relations with other FSU republics. Because agricultural policiesin Lithuania were both highly distorted and very dependent on trade with other FSU republics,adjustments to these policies and disruption of trade has caused substantial output declines. By 1993,agricultural production had declined by more than 35% compared with 1987-89 average levels, whileexports declined even more, by roughly 50%. The livestock industry has suffered from both reducedexport demand and higher production costs with rising input costs. Crop production has declinedlikewise.

IV. Future of Agriculture. At present, it appears that the sharp decline in agriculturalproduction has been halted. Nevertheless, long-term reduction of the sector's share in GDP seemsinevitable. As Lithuania shifts more economic resources towards industrial production, the anticipatedgrowth of the industry and service sectors would be able to absorb the redundant agricultural labor.Meanwhile, Lithuania has been quite successful in redirecting a portion of its exports to non-FSU marketsand there are signs of long-term investments being made in the sector as farmers, with improving farm-gate prices, start to regain confidence. It is evident that the sector's full potential can only be realizedif the ongoing major structural and policy reforms are fully implemented.

V. The agricultural sector has good economic potential in Lithuania due primarily to itsrelatively favorable agro-climatic conditions, well established agricultural traditions, and a trained poolof farmers and technicians. The conditions are particularly well suited for production of grains, rootcrops, and livestock, and production of some fruits and vegetables. While the country traditionally has

ii Executive

been a net exporter of livestock commodities, crop and livestock yield potentials have not been realized.Crop yields are less than half of those in Western Europe, as are feed conversion efficiencies for all typesof livestock. The food processing industry, with its outdated technology and excess capacity, requiresmajor restructuring and upgrading. Losses are high throughout the food production system due to limitedstorage, handling, and transportation facilities. There is substantial potential to increase raw productyields, as well as processing and distribution efficiency, thus increasing the competitiveness of Lithuanianagriculture.

Policy Environments and Past Reforms

VI. Macro Stabilization. The Government of Lithuania has made substantial progress ineconomic stabilization and structural reforms. Inflation declined from over 1,000% per annum in 1992,to 410% in 1993, and fell again, to 69% in 1994. Since 1993 the country has had a fully convertible andstable currency, the Litas (LT), which is pegged to the US dollar. Prices have been mostly liberalized,a new trade regime has been developed, and the country has made progress in re-orienting its trade. Theshare of exports directed outside the FSU increased from 3% in 1990 to around 20% in 1994. Moreover,there has been rapid progress in the privatization of small businesses and agricultural land.

VII. Agricultural Reforms and Legacy of Past Problems. The Govermnent of Lithuania hasbeen equally committed to transforming agriculture into an efficient and dynamic sector by encouragingthe development of a market-based, predominantly privately owned production system, but the progressto date has been mixed. The adjustment needed is still considerable due to the long legacy of distorted"soviet type agriculture" which has produced severe structural problems. Centrally directed, collectivizedagriculture, together with the routine covering of enterprises losses, and the cumbersome mechanisms ofcentral planning and control, resulted in inefficient production and distribution systems and distortedproducer, as well as, consumer prices. High investment levels in the Soviet era did not lead tocommensurate gains in production efficiency. Instead growth was achieved by increasing the level ofcostly agricultural inputs. With rising costs, agriculture became a financial burden to the economy, andthe subsidization of both consumers and producers became a significant cause of macro-economicdestabilization.

VIII. Reform Progress to Date. Lithuania has made considerable progress in agricultural policyreform to date; the Government no longer sets procurement quotas, producer or consumer prices, andthe last remaining food subsidy (on bread prices) has recently been lifted. However the Governmentcontinues to exert pressure on pricing structures by setting maximum wholesale and retail trade marginson domestically produced foods, limiting profit margins for agro-processing, and perpetuating cost-pluspricing in agroprocessing. Bankruptcy laws have been enacted and the special treatment clause whichcontinued to protect agro-processing industries was phased out in July 1994. Competition laws and fairpractice supervisory roles have been strengthened. A hot line for consumer complaints and unfairpractices has been established, with penalties in place for violations. In 1994 Lithuania enacted lawswhich require agro-processing enterprises to pay farmers within 15-30 days. Yet supervision andmonitoring of payments to farmers should be strengthened even further as delays in payments are stillpervasive.

IX. On the trade front, in early 1993, the Government announced liberalization of trade andadopted a more uniform tariff structure that featured lower average import tariffs and eliminated licensingprocedures for exports. This liberalization has been partially reversed however, by later decisions to levyrelatively high import tariffs on many agricultural imports, and introduce export taxes for selected raw

Summary iii

materials for agroprocessing. Nonetheless, the trend of evolving reforms has been to move the countryaway from administrative management of production and the licensing of trade, towards a moretransparent market system.

Overall Strategy for Continuing Reforms

X. Challenges during Transition. The major short term challenge for policy makers is toprovide basic subsistence support for the population without jeopardizing the long-term goals ofrestructuring and revitalizing the agricultural sector. This will not only require an awareness of marketconsiderations, but also a sensitivity to the social considerations of those employed in the sector. It isunderstandable that the Government wishes to support the agricultural sector at present. In December1994 the Government passed new laws on agriculture which call for the re-introduction of price controls,quotas, and various subsidies for agriculture. The Government should recognize, however, that theimposition of food pricing restrictions is not an efficient method of providing food security. Marketprices should be charged for food, and needy segments of the population should be targeted to receiveincome supplements through social programs. Subsidies and any other Government supports must betransparent and clear, with objectives and targeted beneficiaries, and clearly delineated phase-out plans.

Xi. Delays in agricultural reform will not cushion the impact of sectoral adjustment nor makeit more tolerable. In contrast, such delays will make it more difficult for agriculture to harness its truepotential and to counteract the reductions in domestic and export demand. Furthermore, such delayswould be costly to the Government and to the economy as a whole, because delays in reforms also createa need for continuous government interventions. In order to avoid unnecessary delays and potentiallydamaging after-effects, prioritization and sequencing of reform is critical. The ultimate objective shouldbe the integration of Lithuanian agricultural production and agroprocessing into international foodmarkets.

Priorities

XII. Continuation of Price Liberalization and Subsidy Reduction. Despite price and tradeliberalization, distortions resulting from collusive price setting practices of large agro-processingenterprises continue to exist, and these are not properly monitored or policed. The Government still setsexplicit profit margin limits on agroprocessing, and wholesale and retail maximum mark-up margins ondomestically produced goods, to hold down consumer prices. The Government should implement fullliberalization of price which would allow agricultural enterprises respond to changed price signals. Priceliberalization can only be achieved by a serious commitment to remove restrictions on trade, eliminateany remaining cost-based pricing mechanisms, and by creating a competitive environment for input supplyand output marketing.

XIII. Restoring International Trade. Exports of agricultural products are vital to sustainedsectoral growth. In the past, over 95 % of agricultural and food exports were directed towards the FSU.These exports have fallen by over 50% due to general disruption of trade links with the FSU. Presently,however, roughly 20% of total agricultural exports are to the West, while only 9.2% of overall exportsare shipped to Western countries. However, these new exports to the West are not sufficient to offsettrade losses with the FSU. Further growth in exports depends on improving sanitation and qualitystandards, trade contacts, and overcoming various trade barriers both in the EU and in other FSUcountries.

iv Executive

XIV. There are some marked differences in the potentials for exports to FSU and non-FSUcountries. Every effort should be made to expand exports to convertible currency areas. This includesdeveloping "niche" or specialty markets as opportunities arise. However, the FSU countries will continueto be the natural market for Lithuanian agricultural exports. The Government should try to resolveexisting difficulties (e.g., payment problems, etc.) hampering trade with the FSU countries, and increaseaccess to markets in these countries in the near future by restoring business relations with them. Torealize this goal it is important to allow the development of commercial and private sector tradinginstitutions and agencies, financial and payments arrangements, and trade and exchange control policiesand systems that facilitate the economy's integration into international networks. This would also entailadopting low and uniform import tariff rates consistent with GATT requirements.

XV. Lithuania has signed trade agreements with other Baltic countries, Sweden, Norway,Finland, Kazahkstan, Belarus, and Ukraine. Since 1992, Lithuania has had observer status in GATT andis expected to achieve full membership in the World Trade Organization (WTO) in late 1995, providedthat Lithuania can successfully eliminate non-tariff barriers and phase out excessively high tariffprotection. To date, however, the real impact from these trade associations has been limited. Most ofthese trade agreements carry separate agricultural protocols and exceptions for agricultural commodities,hence impeding free trade. Moving to more open import and export agricultural trade policies willincrease Lithuania's competitiveness. To avoid magnifying the price fluctuations transmitted fromabroad, the Government should focus on developing functioning spot markets, efficient customsoperations, an effective means for resolving trade disputes, and eventually a commodities futures market.

XVI. Expediting Land Reform. Privatization in the agricultural sector started briskly, butprocessing of land titling has slowed down. The main reasons for the slow processing have been the lackof local capacity for proper cadastre and surveying, cumbersome application and processing procedures,the weak legal basis for ownership, and the lack of a registration and titling system. By the end of 1994,about 115,000 private farms (most holding small plots) had been established, accounting for about 30%of the total cultivated area. Nevertheless, there are more than 330,000 outstanding restitution claims tobe processed. In addition, about 3,000 "Agricultural Companies" (ACs) have been spun off fromprevious state/collective farms, with the workers holding shares. However, about 25 % of the land underAC control does not belong to these ACs, and is in fact subject to restitution to original land owners.The Government's extension of AC control of this land, by an additional five years, would substantiallydelay restitution. Many of these ACs are in weak financial positions and are likely to go bankrupt. Itis unclear how the restitution would proceed when the lease-holding ACs are liquidated. The expectedenactment of the revised land laws, would in part, address these issues.

XVII. Additional constraints are the lack of an effective land law and other related lawsconcerning property rights, leases, and mortgages, and a lack of functioning land markets, cadastresystems, and registries. A functioning land market is critical to ensure market-based consolidation ofsmall plots. At present, the sale of land is legal, but there is substantial confusion as to whether or notsuch transactions are subject to prior Government approval. Ending the present confusion over land salesand creating a fully functioning land market requires that a modern property registration system beinstituted to record, display, and protect rights to private property. Such sales are also excessivelybureaucratic and burdensome in the processing requirements for land titling and registration. Programsmust be initiated to establish public and private institutions which: (a) accurately value real property topromote its use as collateral and establish a property tax base; (b) develop land use zoning to guide urbanand rural development; (c) ensure widespread dissemination of land price information; and (d) ensure thecomplete liberalization of the land market.

Summary v

XVIII. Restructuring and Privatization of Agro-Industries. Privatization of agro-industries hasbegun, but it is moving slowly. Only about 15% of the total asset value of Lithuania's agro-processingenterprises have been privatized, and most major processing enterprises are still majority owned by theState. Processing industries often have little incentive to reduce costs, as many work within a cost-pluspricing regime, have few competitors, and have been able to effectively lobby Government for importprotection when foreign suppliers exert pressure on their profits. Furthermore, the majority of the agro-processing enterprises are in weak financial positions. Use of a "First In First Out" (FIFO) accountingof input costs has left enterprises in desperate financial straits: under high inflation, evaluating the costof inputs purchased months earlier understates their actual cost at the time of sale of the final good. Onthe other hand, their nominal profits appear high and their profit taxes are overstated, so that their netearnings are reduced in real terms. Consequently, self-financing of stable levels of production is notpossible. Uncertainty of ownership also leads to delays in decisions and investments which could improveefficiency.

XIX. The overall pace of privatization needs to be accelerated before agro-industry can beimproved. The practice of selling shares to workers and farmers at reduced prices has been heavily reliedon without much success. Methods which permit sale by auction to the highest bidder, including foreignbuyers, will establish market values for these enterprises and attract sorely needed foreign investment.Without outside share participation by the general public, there is a danger that the privatization processwill transform food processing enterprises into worker-owned firms, which have often demonstrated lowlevels of efficiency and the inability to promote investment and enterprise growth.

XX. Restructuring and Privatizing the Distribution and Marketing System. Lithuania inheriteda marketing system based on an administratively determined central plan; little attention was given toconsumer preferences and few alternatives or choices of food products existed. While at the retail level,about 60% of urban shops have been privatized and producer-owned retail shops are growing, the maindomestic distributors still remain state-owned. These parastatal companies, due to their size andGovernment sanctioned role as intermediaries, effectively control the input market.

XXI. State-owned distributorships need to be privatized as rapidly as possible, and new entryinto the areas of marketing, transport, and distribution should be encouraged. The efficient marketingof both inputs and outputs will require that enterprises: (a) construct a network of easily accessible pointsof delivery; (b) improve access to international market information (long-term agreements withinternational companies to provide access to international market information and to electronic tradingof agricultural commodities); and (c) train staff in agricultural and food marketing. Governrment shouldremove all controls on packaging and marketing of products, save those which focus on consumer healthand safety, and environmental concerns. The Government's focus should be to: (a) improve the gradingof agricultural products; (b) define efficient standard marketing rules (e.g., settlement procedures,agreement of inspections, etc.) between traders, cooperatives, and processing industries; and (c) establishregulations for forward and future trading.

XXII. Reform of the Agricultural Credit System. Presently there is a near absence of long-termcredit for agriculture, and except for some subsidized credit, short-term credit is only available at interestrates of 50% or higher. Subsidized credit should be discontinued and replaced with more transparent anddirect supports targeted at vulnerable groups. Subsidized credit support greatly interferes with thecreation and development of a sound financial system to serve financially viable agricultural production.Under present conditions, farmers and agroprocessing enterprises are unable to use the banking systemto finance their working capital and long-term investment needs. This can be attributed to several factors,including the lack of a mechanism for establishing a reliable collateral, weakness in the legal framework

vi Executive

for bankruptcy and property rights, and the extremely high demand for short-term credit for trading.Along with enterprise restructuring and privatization, the finance and banking sector also needs reform.This should include restructuring, privatization, recapitalization, and resolution of bad debts. Thedevelopment of skills for assessing long-term investment in the agricultural sector is crucial for anyagricultural lending in Lithuania. Additionally, regulation and supervision of banks needs to bestrengthened, while simultaneously ensuring the independence of banks from political interference'.

XXIII. Strengthening Education. Research, and Extension Services. Support services arecurrently insufficient to meet the needs of developing market agriculture. The linkages between research,teaching, and extension need to be strengthened to increase effectiveness and efficiency and to re-focusefforts to deal with small-scale private farmers, as opposed to the former large-scale state operations.Similarly, agricultural research should reflect Lithuania's small-scale agriculture, and concentrate on thetransfer of existing technology, applied research, and field trials. Training in business management,financing, and risk management is also essential.

XXIV. Targeting Critical Support to Needed Groups. Consumption has been declining steadily,but shows signs of bottoming out. Although average calorie and protein intake levels are belowtraditional Lithuanian levels, they are nutritionally sustainable. Notwithstanding, a substantial portionof the population is living at inadequate nutritional levels. With falling demand and output, theunemployment rate has been rising. While the "official" rate of unemployment was 1.6% as of March1994, "open unemployment" may be as high as 6%. Furthermore, about 100,000 workers are on unpaidleave or on short working hours. These groups would benefit from targeted programs that should be thecore of the social safety net. Food subsidies should be structured in a way that they target low incomeand other vulnerable groups. This could involve direct cash transfers to those at highest risk, orincreasing purchasing power through food stamp programs.

New Roles and Structures of Government

XXV. The main development challenges facing the Government are to maintain the structuralreform process and to elicit a strong supply response through higher levels of private activities, as wellas through rationalized and carefully selected public investment in infrastructure and support services.Accordingly, the Government's role during the transition will also change. The Government shouldfacilitate the transition rather than dictate its course. Changes should include moving away from thedirect government provision of goods and services towards indirect government guidance of the economythrough legal, regulatory, and policy measures. Such changes would allow greater incentives and theopportunity to take advantage of the efficiency of the private sector, while reducing total governmentexpenditure, and easing overall fiscal pressures. Consistent with the general trend, the governmentexpenditures on agriculture fell from more than 6% of GDP in 1991 to 2% in 1993, and are budgetedto be 1.7% in 1994. These reductions have been achieved largely through a reduction in subsidies. TheGovernment should continue to provide basic infrastructure and public goods such as roads, waterdistribution systems, education, or social insurance, although even in these areas, a greater participationby private sector should be encouraged.

I The World Bank has developed a project to restructure the enterprise and banking sector in Lithuania, whichembodies a set of major institutional development programs.

Summary vii

Investment Priorities for Sector Efficiency

XXVI. Investment and development strategies for the sector should focus on increasingproductivity and efficiency through development of efficient marketing structures, creation of a responsivefinancial sector, a structure of laws and regulations compatible with a market economy, andfarmer/processor market information systems. Additionally, transport, storage, and communicationsfacilities need to be modernized to service a sector consisting of a large number of smaller farms andenterprises, rather than, as in the past, a few very large farms. While public investment needs to bedirected toward improving human capital and physical infrastructure, it also needs to be linked to theimplementation of a program of further reforms which set clear priorities. Private investment shouldfocus on reconstruction and major modernization of support services along decentralized private and/orcooperative lines. Substantial technical assistance is needed to develop institutional and human capacityto support emerging private activities.

Summary of Policy Action Plan

XXVII. This review recommends certain Government policy measures to ensure the stability ofthe Lithuanian agriculture sector. These include short-term measures designed to trigger an immediatesupply response, and medium to long-term measures designed to promote a sustainable market basedsector. An outline of some of these measures, together with the ultimate goals of these policy reforms,is included at the end of Chapter 3.

immediate Steps Second Steps Third Steps

Price: Remove remaining price Eliminate cost-plus pricing practices Improve price reporting andcontrols such as fixed mark-up and in processing enterprises dissemination of market informationprofit margins

Market,in and Distribution: Phase Improve infrastructure in support of Encourage farners' narkets andout state trading, eliminate trade, especially the domestic and private & cooperative agriculturaladministrative restrictions on exports international payrment system wholesaling organizations& imports, and allow new entry orexit of enterprises

Land Reform: Accelerate land Simplify the land survey, titling, Develop land market and allowreform by clearly defining property and registration process, and create leasing and land mortgagingrights and ownership functioning land mnarkets

y,gjtiti: Break up monopoly Restructure and privatize input Refine legislation and regulationstructures, and accelerate supply organizations dealing with (including anti-trustprivatization of large-scale regulation) private ownershipprocessing industries

Credit: Phase out subsidized credit Remove remaining credit subsidies Strengthen prudent bankingwhile strengthening financial and encourage banks to maintain regulation and supervision, and helpintermediaries positive real interest rates create viable financial institutions

Box E.1

viii Executive

CHAPTER 1

BACKGROUND AND RECENT DEVELOPMENTS

A. INTRODUCTION

1.1 The food and agricultural sector is the second largest sector of the Lithuanian economy.In 1993, the sector accounted for 20% of GDP, 22% of employment, and 20% of all exports. However,compared to 1987-89 average levels, production in 1993 declined by more than 35%, while exportsdeclined even more, by over 50%. The importance of agriculture to export earnings has been decliningas well, as trade relationships (both domestic and international) are undergoing major compositionalchanges. The sector has been focussed largely on livestock production, its main strength, and thisconcentration was reinforced by the centrally planned economy under Soviet planning when Lithuania hadample access to subsidized feed grains and inputs while having a guaranteed export market in the FSU.

1.2 As with the economy as a whole, Lithuania's food and agriculture sector is facingdifficult adjustment challenges to the new, market-oriented system. This is due to rapid inflation,distortions in production and prices, and a disruption in relations, and resulting competition, with its maintrading partners in the former Soviet Union (FSU). Growth and development within the sector isrestrained by the uncertainty of farm and land ownership, poor infrastructure, and lack of proper marketsfor inputs and outputs. In addition to falling output, farmers' incomes have been squeezed by sharplydeclined terms of trade. Land reform, in particular the processes of restitution, privatization, and thedevelopment of well-defined ownership rights, has not proceeded as quickly as was hoped.

1.3 Despite the slow pace of adjustment, there are some signs of recovery in the food andagricultural sector. The relative share of agricultural exports to non-FSU markets is increasing from 3 %in 1990 to over 48% of all agricultural exports in 1993. Progress is being made on the implementationof basic policy changes regarding price reform, consumer and producer subsidy reduction, foreign tradeliberalization, allocation of land ownership rights, and the development of a land market. There are alsosigns of farmers making long-term imvestments as their confidence rises with the increase in farm-gateprices.

B. AGRICULTURAL RESOURCE BASE AND STRUCTURE

1.4 Natural Resources. Lithuania covers 6.5 million ha, of which agriculture land accountsfor 4.07 million ha (63%) (Table 1, Annex I). Most agricultural land is located on sandy loam and clayloam soils, although there are widespread regional differences in soil quality. Acidity also affects soilquality in much of Lithuania (45% of the soils have pH values of less than 5.5). Lithuania has moderatesummers and cool to cold winters. The length of the growing season varies from 165 days in the easternpart to 200 days in the coastal areas. These climatic conditions limit the mix of farm crops to cool seasoncrops and fruits.

Rural Infrastructure

1.5 Farms. Most of the mid-century farmsteads still remain and are dispersed throughout thecountryside. While most farms, including the smallest, are connected to the national power system, few

2 Chapter I

are connected to water or telephone systems. The national road system is excellent, but most rural roadsare gravel or sand, making transportation difficult in bad weather. Inherited private farm buildings andstorage facilities are often inadequate and urgently need renovation and modernization. These facilitiesare often too large, too energy inefficient, and too far from farm land to be useful.

1.6 Drainage. Most farmland in Lithuania requires extensive drainage (Table 22, Annex I).A massive effort in land reclamation organized by the central government is now coming to an end dueto a lack of public funds. Nearly 80% of all agricultural land is drained, mainly by the use of tiles. Poordrainage is limiting the cultivation of potentially valuable crops. It is estimated that the annual cost ofreconstruction of the drainage system (including adaptation to the new privatized farm system) would beapproximately US $50 million.

1.7 Farm Mechanization. A major drive for farm mechanization in the 1970s resulted infarms being over-equipped with heavy machinery (Table 21, Annex I). The ongoing privatization efforthas caused a rapid deterioration of the quality and distribution of the existing stock of farm equipment.Equipment was distributed to leaving collective members, either in existing condition, or in parts andpieces. The supply of equipment has also decreased due to the increasing cost of foreign madeequipment, and a decline in the availability of spare parts. The government is concerned about thisdeterioration, and has drafted a plan to improve equipment availability, emphasizing the localmanufacturing of farm equipment. Most of the new equipment acquired recently in Lithuania has beenacquired by larger private farms.

C. AGRICULTURAL PRODUCTION PERFORMANCE

1.8 Dairy, meat, and grain, the threemain categories of agricultural production, have Table 1.1: Production Declines (000 tons)

declined substantially since the 1989 peak levels(Table 1.1), but the decline now appears to have 89 93 % change

halted. Despite these general declines, the Grain Production 3,272 2,708 -30%

production structures have remained relativelyunchanged. Livestock continues to dominate the Dairy 3,235 2,067 -38%

sector, by contributing 67% of all production Meat 530 290 -45%(Figure 1.1). In the short-term furtherdownsizing is unlikely to occur very rapidly asthe industry and service sectors have notprogressed enough to absorb the surplus rural labor. Another reason for short-term stability in the sectorhas been the relative success of diverting Lithuania's agricultural exports to non-FSU countries. For amore complete discussion please refer to Annex E on crop and livestock production; Annex F on forestryproduction, and Annex G on food and agricultural processing in Volume II of this report.

Crops & Forestry

1.9 Grain. Prior to 1989 at least 50% of arable land was used for grain production as wasmandated by the Soviet system, even on soils not suitable for this purpose. However, present productiontechnologies are inefficient, and production costs are rising with increasing costs of inputs. While grain

Background and Recent Developments 3

yields are generally low (less than 2 ton/ha),good farmers are able to obtain over 5 ton/ha.Most grain is used for animal feed. Grain Structure of Agricultural Production -1993 (%)production in the last two years has beenaffected by the extreme weather conditions. Croo. &op

The drought of 1992 led to low yields of Malt PMS 10%

spring wheat and barley, while the wet fall ofF..d C,ops

1993 reduced opportunities to plant. 10%

1.10 Animal Feed. The lack ofanimal feed is considered a major constraint in T.h-ICloph C Lthe short-term to recovery in the agriculture 2% Milk Grain 33%

sector. Output of grain in 1994 was 2.1 31t6

million tons, of which 1.1 million tons was I _ _ _ __ _ _ __ _ _

used for the production of animal feed (Table Figure 1.1: (Source: MOA)

5, Annex I). Still, Lithuania has to importgrain to make up for the shortage. In addition to the grain, Lithuania currently needs to import proteinmeal and premixes for feed additives. The area planted for animal feed production has been stable, butin recent years the cultivation of oats has increased while the cultivation of silage crops has dropped.The total hay crop has increased however, which has partially offset the decline in feed grains.

1.11 Potatoes and Vegetables. The local soils are well suited for vegetable and potatocultivation. Nevertheless, yields are below what is possible in similar climates. The types of vegetablesgrown are limited, mainly to red beets, carrots and cabbage. Limited amounts (about 100,000 tons),of vegetables (especially red beets and winter carrots) are exported, mainly to Poland and Russia. Theother export product is canned vegetables, 60% of which is exported to the traditional market of the FSU.

1.12 Fruits and Berries. Most fruit and berry production has been in private hands, as it ismainly geared toward home consumption (Table 19 in Annex I). Prior to 1989, only 20% of fruit andberry production was in the public sector, and many of these farms have been restructured. Totalproduction of apples is about 200,000 tons per year. The majority of apples are used for the productionof apple juice and cider.

1.13 Sugar beets. This crop is grown primarily on the larger (communal) farms which stillpossess the large scale equipment necessary for planting, harvesting, and transportation. Although subjectto a 5% export tax and Lithuania's status as a net importer of sugar, the sugar processing plants haveexported some of the sugar beet crop.

1.14 Rapesed. The production of rapeseed in Lithuania is relatively low, even though thecrop is considered suitable for the area. However, the possibility of growing the low toxin QOO" varietyof rapeseed is still being tested. These tests are being followed with considerable interest by producersas well as potential investors in the processing industry.

1.15 Forestry. Forest lands cover about 1.8 million ha, or 28% of the land mass, and areLithuania's most valuable natural resource. Most of the forest consists of important commercial species.Currently, the forest is overstocked and would benefit, under proper supervision, from heavier thinning.The present log harvest is considerably less than the potential, and is restricted primarily because of the

4 Chapter I

lack of demand from domestic consumers and limited export activity. All forest lands were transferredto the Ministry of Forestry pending the resolution of claims of private owners under the program of landrestitution. Progress on the restitution of forest land is slow, but it is estimated that when restitution iscomplete, about 20% of forest land will be in private hands.

Livestock & Fisheries

1.16 Since peak production in 1987-89, the production level of livestock has declined by morethan 40% by the end of 1993. The general decline in the livestock subsector is a consequence inshrinking domestic demand and export markets, mainly to the FSU. This general decline was accentuatedby the dissolution of the agricultural cooperatives, reduced investments, deteriorating terms of trade anduncertainties surrounding land redistribution. Total cattle numbers declined from almost 2.5 million in1989 to 1.7 million in 1993, then down again in 1994 to 1.5 million. This decline is mainly seen in thepublic sector.

1.17 Dairy. The dairy productionsystem, traditionally the mainstay of agricultural Table 1.2: Dairy Production (000 tons)production and exports, is undergoing a major 1989 1993 % Change

change. This change concerns the shift in milkproduction to small holders and private farmers. Total Production 3,235 2067 -38%

The decline in scale of production leads to several Domestic 1,639 1,180 -28%

inefficiencies, including an increase in costs of Consumption

milk collection and storage, as well a higher riskof lower quality. Nevertheless, privatization is Export 1,114 700 -37%

most rapid in dairy processing industries, thusproviding a potential recovery of the subsectoralperformance.

1.18 Beef. Beef is considered a by-product of the dairy production system. Beef productionis now limited to small scale raising of male calves and steer by private farmers. Marketing of beef andlive animals has been somewhat confused, with excess slaughter associated with the contraction of thenational herd and with unrecorded exports. Total export of meat and meat products declined from180,400 tons in 1988 to below 70,000 tons 1992. According to veterinary records, 116,173 cattle wereexported in the first ten months of 1993, mostly to Turkey and Poland.

1.19 Pork. Pig production has shifted from the large pig production complexes to smaller scaleprivate farms. Production declined from almost 250,000 tons in 1988 to 90,000 tons in 1993 due toshortages of quality feed. Average daily weight gain has been declining from a relatively low 300 gramsto 250 grams.

1.20 Poultry. The poultry industry is concentrated in 33 poultry companies, of which twosmaller producers grow geese. Most of these have been privatized into joint stock companies. Poultryinventory declined until 1993 but now appears stabilized. The traditional markets for Lithuanian poultrymeat and eggs in Russia have contracted, leaving a significant overcapacity. Whether these markets canbe regained is questionable and will depend on their increased purchasing power and productionefficiency. Although the industry will continue to require imported soybean meal, the possibility ofreplacing part of the protein requirement with local sources (canola, bean, fish and rendering meals) may


make production sufficiently economic to be able to compete on the Russian market.

1.21 Fisheries. Fish has been a major component of the diet of the people in the Baltic states.Fish exports have declined from 105,000 tons in 1989 to almost nothing in 1994, while the number ofcanned fished dropped from 45 to 10 million cans over the same period. Lithuania is trying to adapt itsfisheries sub-sector to a lesser emphasis on long distance fishing, and greater use of coastal and inlandfish. Ocean fishing is complicated by the fact that Russia has kept all former Soviet international fishingrights, which means that Lithuania has to develop contact with individual countries to buy or leaseinternational fishing rights. These difficulties are compounded by a lack of funds for acquiring fishingrights and experience in this market. On the other hand, nearly all of the 22 inland fish farms have beenproceeding with the privatization, and more than 50% of their capital is in private hands. The mainproduct has been carp, which is consumed mainly by the local market.

Agro-processing Industries

1.22 Meat Processing. Although meatproduction played a lesser role than dairy Table 1.3: Meat Production (000 tons)

production in the national economy, itsimportance gradually increased, especially during 1989 1993 % Change

the mid-1970s and 1980s with the creation of the Total 530 290 -45%

large inter-firm meat producing complexes. Production

Since the 1989 peak level, meat production, Domestic 306 210 -31%

domestic consumption, and exports contracted Consumptionsharply. Yet, in 1993 the meat sector contributed Cost1o7

34% to overall agricultural output (Table 1.3). Expor 192 48 -75%Source: MOA

1.23 Currently, the processing industryis working at less than 60% capacity, and undergoing a transformation. More than 200 smaller privateslaughterhouses have emerged and have fostered increased competition in the subsector. Meat processingis concentrated in nine large processing plants, with a total labor force of 12,440 workers. Thecompanies are all in the process of restructuring.

1.24 Dairy Processing. Total output of the dairy processing industry declined by nearly halfbetween 1989 and 1993. Major declines were seen in the production of tinned milk and ice-cream. Totalexport of milk and dairy products, which until 1991 accounted for 45% of production, declined by nearly70% between 1988 and 1994. There are 43 large processing plants with outdated equipment andmanagement and operating at less than 50% of designed capacity. Energy consumption for pasteurizationof milk, for example, is 3.5 times that of western Europe. Although some plants are more efficient thanothers, the majority may have to be closed. Overcapacity is especially high in butter manufacturing.

1.25 Grain Processing. Lithuania has 20 grain processing enterprises, and compound feed isprocessed in 15 large feed mills. Feed mills still sell in bulk, as few have the capability of bagging feed,a prerequisite for servicing small farmers. It is unclear whether the large feed-mills can rapidly adaptto the new conditions, and compete with the emerging smaller private feed mills. Storage facilities arealso in the process of being privatized. About 50 different bakeries (large and medium sized plants) arein operation and considered to be efficient.

6 Chapter 1

1.26 Sugar Refining. Lithuania has four sugar beet processing plants which also processimported raw sugar into refined sugar for the domestic market and re-export. The extraction rate ofsugar from the beets is low, and energy costs of the refining equipment is high due to old equipment.Total sugar production has continued to decline from 1989 peak levels and was only about 30% of the1990 level in 1994.

1.27 Fruit and Vegetable Processing. Lithuania has 13 processing plants for fruit andvegetables. The plants process 90,000 tons of apples to produce 8,000 tons of concentrate, of which 85%is exported. In addition, there are four smaller plants organized under the Lithuanian ConsumersCooperative Association that process vegetables and fruits grown mainly in small plots and gardenconditions. Only 25 % -30 % of processing capacity was used last year due to market contractions and highenergy costs associated with the poorly designed plants.

1.28 Fish Processing. Processing facilities exist in major towns, including Klaipeda andPanevezys, and are also in the process of privatization. The exploitation of fisheries resource isdominated by the Joint stock company "Baltijia" and the State farms Neringa and Pajuris. Baltijia isvertically integrated with processing plants, shipyards, sales outlets, etc., and it owns 40 trawlers andapproximately 80% of the Lithuanian fishing quota in the Baltic Sea. Neringa and Pajuris own 11trawlers and specialize in non-sterilized canning of fish, and the production of frozen and smoked fish.The fish processors work at approximately 15% of capacity, as the production of canned fish has beenhalted due to the lack of packaging material. Only some offal is manufactured into fish oil and meal.

1.29 Forestry Industry. The forest industries branch in Lithuania employs some 40,000 peopleand makes up about 6% of total production. The mechanical wood processing industry consists of 25major factories (and more than 1,000 very small sawmills) producing a wide variety of output includingsawnwood, plywood, veneer, particleboard, hard and soft fiberboard, joinery, and furniture. Many ofthe furniture factories have integrated sawmills or panel production facilities. The pulp and paperindustry includes five mills producing paper and/or paperboard. Total pulp production capacity is270,000 tons of pulp per year. Virtually all parts of the forest-based industry are running at well belowcapacity, and production has been declining since independence.

1.30 The age and quality of equipment and the level of technology varies widely throughoutthe branch. In general, however, all of the pulp and paper mills are very old, as are most of thesawmills, but that some of the panelboard and furniture making capacity is in relatively modern andefficient machinery. Privatization in the forest industries branch is well advanced. Out of 36 large wood-based enterprises formerly under the control of the Ministry of Industry and Trade, 30 have already beenprivatized with majority ownership in the hands of employees, private citizens, and local investmentcompanies. The government retains a small share in some of these enterprises and still has majority orfull ownership in six plants, including the large pulp and paper mill at Klaipeda.

D. THE DECLINE IN PER CAPITA FOOD CONSUMPTION

1.31 Consumption of food products has been declining steadily, but shows signs of bottomingout (Table 36, Annex I). Although average calorie and protein intake levels are below traditionalLithuanian levels, they are nutritionally sustainable at the present level of approximately 2,000 calories.The timing and pace of a potential recovery of consumption levels is uncertain. However, the fact that


they are currently substantially below the levels twoyears earlier, suggests that with higher income and Table 1.4: Per Capita Food Consumptionstabilized prices, per capita food consumption formany items would be expected to increase again 1989 1993 % Change(Table 1.4). Meat 78 kg 55 kg -29%

1.32 Changes in per capita incomes, and Milk 440 kg 268 kg -39%in the relative cost of different products, has Grain 100 kg 151 kg +51%produced a shift in consumption levels and Source: MOApatterns. Consumption of meat and dairy productshas decreased, while consumption of bread,potatoes, and edible oils has increased. However, a large portion of the population -- pensioners and theunemployed -- are subsisting at nutritional levels that are inadequate. At present, social safety netprograms to support minimum food consumption levels for these at-risk groups are minimal. Thesegroups would benefit from targeted programs that should be the core of the safety net. This couldinvolve subsidizing the prices of products that tend to be consumed by the poor, such as coarser breads,or increasing purchasing power through food stamp programs. Re-instating price controls on basiccommodities should be resisted as the social safety net should not be financed by taxing the farm sectorwith repressed agricultural producer prices. This would threaten the continuation of agricultural sectorreforms.

1.33 Present levels of purchasing power, while substantially lower than in earlier years, arestill in line with other countries in eastern Europe and much higher than those of Russia and Ukraine(Table 1.5). Consumer purchasing power has fallen steadily since 1990s, as nominal incomes laggedbehind inflation. Unemployment has continued to increase, further eroding consumer confidence andpurchasing power.

Table 1.5: Comparative Purchasing Power in Lithuania and Other CEE Countries (March 194)Hours of work needed to buy the same staple goods in each country

ITEM in Lithuania in Russia in Ukraine in Poland in Slovakia

Milk (1 liter) 0:46 1:03 0:17 0:17 0:27

Bread (I kilogram) 0:42 0:24 0:31 0:17 0:36

Butter (1 kilogram) 1:18 2:03 2:59 0:22 1:19

Beef (1 kilogram) 4:03 28:20 24:01 2:17 3:13

Pork (1 kilogram) 6:46 29:21 30:02 2:29 3:07Source: World Economy Weekly (HVG) and Lithuanian State Committee of Statistics.

1.34 It is estimated that about a quarter of Lithuanian households had incomes below minimumwage levels of LT 50/month in early 1994. Increases in food and paid services (rent, heat, utilities, andbasic services), have been the primary sources of consumer price increases. As a result, the share ofdisposable income spent on food increased to over 70% of average income for Lithuanians in 1992, upfrom 35% in 1990 (Table 35, Annex I). Since then, the share has dropped to below 53% for urban

8 Chapter I

households and 44% for rural households in 1994, as a result of moderated price increases and areduction in consumed quantities.

CHAPTER 2

OVERALL FRAMEWORK FOR REFORM

A. MACROECONOMIC FRAMEWORK

2.1 Since independence in 1990, Lithuania has embarked on an economic reform programaimed at re-orienting its economy from a centrally planned to a market system. This goal has nowlargely been accomplished -- even if the process has not always been smooth'. The transition period hasbeen marked by the dramatic output decline and deteriorating terms of trade, due to the disintegration ofthe former Soviet Union and rising energy prices. This has imposed substantial hardships on Lithuania'spopulation. The unfavorable economic environment - with real GDP plummeting by some 37% in 1992,and 16-17% in 1993 - made the transformation difficult.

2.2 There have been many notable achievements during this period. Substantial progress hasbeen made in the areas of fiscal policy, currency reform, price reform, trade reform, privatization, andthe development of the social safety net. Inflation is subsiding and real GDP could stabilize and evengrow slightly in 1994. Private sector activity is becoming quite prevalent, possibly accounting for morethan 20% of GDP, and is absorbing a considerable amount of the redundant workforce. Since theintroduction of the national currency (Litas) in June 1993, the exchange rate for the Litas (LT) has leveledto around 3.9-4.0 LT/US$, and remained stable.

B. CONTEXT FOR AGRICULTURAL POLICY REFORMS

2.3 Following independence, and the dramatic shift in Lithuania's political and economicoutlook, Lithuania's broad agricultural strategy has had to change as well. In the agriculture sector,redirection of production facilities towards private ownership and market-based decision making hascommenced. However, future adjustment needs are still considerable, due to the long legacy of distortedprices, government intervention in the production system, oligopolistic input and output marketing, andthe built-in inefficiencies of the previous farm system.

2.4 Considerable progress has been made in removing Government control over agriculturalproduction and pricing. The last remaining controlled price, that of bread, has finally been lifted. Thusthe Government no longer sets farm-gate or consumer prices. There are however, a number of areas inwhich the Government still sets controls on market activity through: (a) maximum wholesale and retailprofit margins; (b) non-competing agroprocessing still based on cost-plus pricing and profit control; (c)import tariffs on many goods, with particularly high tariffs for agricultural goods; and (d) the"temporary" introduction of export taxes for selected agroprocessing products.

I The political climate since independence has been volatile: there have been six administrations in three years andnumerous cabinet changes. As a result, the political forces have shifted messages from ones of strong market reform tothose with greater populist appeal. Special interest groups' demands have led to some backsliding of reforms. Despite thesedifficulties, the Government remains committed to move to a full market economy, but aims to soften the impact ofadjustment during the process.

10 Chapter 2

2.5 Agricultural Reforms. Lithuania has a long history of agricultural policies that haveproduced severe structural problems; centrally directed, collectivized agriculture, together with the routinecovering of enterprises losses, and the cumbersome mechanisms of central planning and control, resultedin inefficient production and distribution systems and distorted consumer prices. High investment levelsin the Soviet era did not lead to commensurate gains in production efficiency. Instead growth relied onincreasing the levels of agricultural inputs. Agriculture became an increasing financial burden to theeconomy, with subsidization of both consumers and producers becoming an important factor inmacroeconomic destabilization.

2.6 Recognizing the unsustainability of previous policies, the Government of Lithuania hasbegun transforming agriculture into an efficient and dynamic sector by encouraging the development ofa market-based, predominantly privately owned, production system, but the progress to date has beenmixed. Bankruptcy laws have been enacted and the special treatment clause which continues to protectagro-processing industries was phased out in July 1994. Competition laws and fair practice supervisoryroles have been strengthened. A hot line for consumer complaints and unfair practices has beenestablished, with penalties in place for violations. Payment delays to farmers are declining due to newlyenacted laws which require agro-processing enterprises to pay farmers within 15-30 days.

2.7 During this transition period, restructuring and revitalizing the agricultural sector is ofcritical importance. However, implementing such tasks poses a number of challenges: the almostcomplete absence of rural credit (particularly long-term development credit); emergence of large numbersof newly created private farmers with limited productive assets, inputs, or farming skills; over-capacityof production facilities in the livestock sector; oversized agro-industries with antiquated technology andequipment; and insufficient support services, including extension, research, marketing, and distribution.To overcome these problems, the process of reform must continue before much needed investment canbe made in the sector. Furthermore, the reform program in agriculture will have to be consistent withoverall reform, and accomplished with appropriate speed of implementation and sequencing of allelements of reform.

C. PRICING POLICIES AND SUBSIDIES

Pricing Policies

2.8 Contirnuation of Price Liberalization and Subsidy Reduction. Despite price and tradeliberalization, distortions resulting from collusive price setting practices of large agro-processingenterprises continue to exist, and these are not properly monitored or policed. The Government still setsexplicit profit margin limits on agroprocessing, and wholesale and retail maximum mark-up margins ondomestically produced goods, to hold down consumer prices. The Government should implement fullliberalization of price which would allow agricultural enterprises respond to changed price signals. Priceliberalization can only be achieved by a serious commitment to remove excessive restrictions on exporttrade, eliminate any remaining cost-based pricing mechanisms, and by creating a competitive environmentfor input supply and output marketing.

Overall Framework for Reform 11

2.9 Massive currencydevaluation and high inflation inLithuania, coupled with sparseknowledge on the price of inputs, Constant rincipleFamF oire(LTp,oKgorLku)

makes it difficult to estimate the exact 6

decline of the agricultural terms of strade. However, it is clear thatagricultural prices have fallen sharply 4.

in real terms (despite increasing 3 Mike/

nominally) since 1991 and in particular 2 , - -M

have fallen during the period May to 2 - ' -

September 1993 (Figure 2.1). Over 1this period the price of live cattle in o

Dec Dm Dec Merdh Ma Jay SePt. Oct.real terms has fallen by 50%, that of 199 De 1992 1M 1g93 ism 19M 9ss 3

pork by 16%, milk by 40% and grainprices by 50%.

Figure 2.1 (Source: MOA, Lithuanian State Committee of Statistics)2.10 Average prices of mainfoodstuffs in Lithuania are generallylower than those in Latvia and Estonia,but the Baltic prices in general, aresubstantially higher than forneighboring Belarus. The main reason Aae .. 1Ma Foll*lt il ttMa wfor these relatively low prices inLithuania is that the present situation isnot in equilibrium. Under the oldsystem, there was no incentive to 0 |develop export marketing contacts or 0.4

facilities. Consequently with the 0withdrawal of the FSU market, LO v M

Lithuania has been left with asubstantial surplus of grain andlivestock products which its institutionsare not in a position to market. Whencompared to Latvia and Estonia, Figure 2.2 (Source: MOA)agricultural prices in Lithuania arelower, but still higher than those inBelarus (Figure 2.2).

2.11 In the longer run, as markets develop, and if the country follows a "neutral" taxationpolicy towards agriculture, then domestic prices will be linked to border prices, resulting in farmgateprices of milk, beef, and grain increasing in real terms. While Lithuania is not a spectacularly low costproducer of grains and meat, production of these items is likely to be economically viable at borderprices.

2.12 Fixed Mark-up Margins. While the state no longer determines price levels, it continuesto set maximum retail mark-up margins, thus in effect still maintaining a strong influence on pricing

12 Chapter 2

(Table 2.1). In addition, the low level ofcompetition in these food industries (especially Table 2.1: Maximum Mark-up Rates for Selectedthe sugar and meat processing sectors) means that Goods (May 1994)

a "cost-plus" pricing formula is just as widely city co-op rural

employed as in the past. Bread 20% 25% 25%

2.13 The most detrimental effect Milk 10% 13% 16%

caused by the imposition of maximum mark-up Ice Cream 20% 20% 20%

margins for wholesaling and retailing is thedisplacement of domestic goods by foreign Fruits and 20% 20% 20%

products, since the latter are not subject to the Veg.

maximum margins as are domestic goods. Retail Flour 20% 25% 25%

shops would rather sell more expensive imported Source: Ministry of Industry and Trade

goods than sell cheaper domestic goods. This practice is attested to by the widespread presence ofimported foods and beverages in many stores where domestically produced goods are hard to find. Sinceimports have demonstrated their ability to compete with domestic goods, mark-up regulations onwholesaling and retailing should be removed.

2.14 Taxation. Different taxes are applied in agriculture. Individual farmers pay only landtax (1.5% of value) or land lease (3% of value). Newly established farmers are initially exempt.Agricultural companies pay, in addition to land taxes, a profit tax (10%), but were exempt during 1992-1994. For enterprises with less than 60% of their income from primary agriculture, the profits tax rateis 29%, which is what the agricultural and food processing industries have paid since 1991. Thus, theagricultural sector's main tax advantage is the reduced profits tax, which is not a large amount offoregone revenue in times of reduced profitability for agriculture. However the implicit tax placed onagriculture by processors' delays in settlement of debts for delivered output more than negates anybenefits of the preferential tax treatment.

2 xs In 1993, the general excise tax was not applied to agricultural and food products.Agricultural enterprises get refunds for the tax paid on their inputs and machinery investments. In May1994, a value added tax (VAT) was introduced at 18%, but higher rates apply to tobacco and alcoholicbeverages, while lower rates (9%) apply to farmgate agricultural products. As the incidence of the VATfalls on consumers, the past exemption and current preferential rates for agricultural products act tostimulate food consumption at the expense of other sectors. As a tool to enhance food security, this non-targeted instrument has many preferable alternatives, such as food stamp or direct income supportprograms for the poor.

Subsidies

2.16 In the Soviet period, subsidies were provided to both producers and consumers ofagricultural products with a resulting distortion of output and factor prices. Consumption and productionof meat and milk was heavily favored.

2.17 Consumer Subsidies. Consumer subsidies of milk, meat, and grain products have beenremoved. Still, prices to the consumer remain artificially below border price levels due to a combinationof profit controls on processors, wholesalers, and retailers, and barriers to export. In order to shore up


declining consumer purchasing power, the Government has placed profit margin limits on milk, meat,and grain processing enterprises (enterprises are subject to 15% gross margin limits)2.

2.18 Although food prices to the consumer have risen much faster than wages, decontrol ofprices would have severe welfare implications. Nevertheless, continued implicit and explicit controls onagricultural prices will result in low output and sub-optimal investment in the sector. It is clear thatpresent prices of both livestock and crop products do not cover the full cost of production. Withoutfurther adjustment toward border price levels, production could drop further, and this would haveimportant implications for macroeconomic stability and food security. Keeping output prices at levelswhich do not adequately remunerate farmers is not an acceptable option for any length of time.Subsidization of credit for agricultural inputs is not a very cost effective way to compensate farmers forrepressed agricultural prices either. The legitimate concern over high food prices should not be resolvedat the expense of a viable agricultural sector.

2.19 Producer Subsidies. Though farms receive subsidized credit provided by the Governmentto purchase key inputs, collusive pricing by the highly concentrated agro-processing industries is noteffectively policed. Arrears to farmers are a significant problem and reduce liquidity and profitabilityeven more. However, the Government made a total of LT 240 million available in 1993 on concessionalterms. In 1994, a special Support Fund for Agriculture, channeled credit through the Agricultural Bankat 5 % annual interest rate, a significantly negative rate. These funds are originating from the Budget asa part of the National Agricultural Program. Regional committees decide on allocating the farm credit.

2.20 While protection and subsidies can be helpful to some producers and consumers in theshort run and to some extent counteracts against dumping, Lithuania's agricultural sector and consumersare likely to be better served by a policy of open borders. Lithuania does not have the budgetaryresources to secure stable incomes for producers in the face of unstable market conditions. In any case,world prices are much more stable than prices which would prevail if demand had to be met throughdomestic supply. For the near future, the highest priority is to explore export possibilities in livestockand crop production through improving product quality, processing efficiency, and marketing contacts.Any intervention aimed at holding down prices to domestic consumers should be aimed at increasingefficiencies in processing and marketing. To the extent that the instability in external prices is excessive,it could be compensated by targeting income support rather than through price stabilization. In the longerrun, the only way by which agricultural production in Lithuania can regain its historical high levels fromits current depressed levels is through export expansion.

D. LAND REFORM AND PRIVATIZATION

Privatization in Agriculture

2.21 Land Reform. Land reform is essential to the transformation of the agricultural sector inLithuania. Since the restitution began in 1991, steady progress has been made. As of January 1, 1994,more than 115,000 private farms had been established, and these accounted for about 30% of the total

2 Given rapid inflation and the failure to adjust the book value of the assets, margins are on the order of 1 %.

14 Chapter 2

cultivated areas. Recentlegislation mandates that Table 2.2: Status of Land Privatization (Jan. 1994)

restitution and privatization Type of Land Users Number Area ha Area as %

be completed before 1997 ('000) of total

(Table 2.2). Until theprocess of privatization is 1. State Farrs 200 49 1.4%

completed non-privatized 2. Agricultural Companies 1/ 3,000 1,551 42.7%

land will be farmed by 3. Private farms 2/ 115,000 1,040 28.6%large AgriculturalCompanies (ACs). About 4. Personal Plots (2-3 ha) 3/ 430,000 890 24.5%

3,000 ACs have been spun 5. Dwelling properties 400,000 80 2.2%

off from state/collectivefarms, with farmers 6. Garden (in rural areas) 4/ 215,000 22 0.6%holding shares according to Total 1,135,773 3,632 100.0%

seniority. The largest 1/ Privatized state/collective farms with share-holders.share of agricultural 2/ Privately owned individual fanns.privatization is from the 3/ Personal plots of 2-3 ha.

4/ Small plots held by urban dwellers for own vegetable growing.dissolution of collective and state farms. Virtually all of collective and state farms' non-land assets havebeen transformed into shares of new ACs, or sold to former workers for a combination of cash andspecial "green" vouchers.

2.22 Expediting Land Reform. Despite the brisk start, processing of land titling had sloweddown. The main reasons for the slow processing have been the lack of local capacity for proper cadastreand surveying, cumbersome application and processing procedures, the weak legal basis for ownership,and the lack of a registration and titling system. By the end of 1994, about 115,000 private farms (mostholding small plots) had been established, accounting for about 30% of the total cultivated area.Nevertheless, there are more than 330,000 outstanding restitution claims to be processed. Moreover,about 25% of the land under AC control does not belong to them, and is in fact subject to restitution tooriginal land owners. The Government's extension of AC control (by five additional years), of landclaimed for restitution by former owners would substantially delay restitution. Many of these ACs arein weak financial positions and are likely to go bankrupt. It is unclear how the restitution would proceedwhen the lease-holding ACs are liquidated.

2.23 Additional constraints for rapid land reform are the lack of an effective land law andrelated laws concerning property rights, leases, and mortgages, and the lack of a cadastre system,functioning land markets, and land registries. A functioning land market is critical to ensure market-based consolidation of small plots. At present, the sale of land is legal, but there is substantial confusionas to whether or not such transactions are subject to prior Government approval. Ending the presentconfusion over land sales and creating a fully functioning land market requires that a modern propertyregistration system to record, display, and protect rights to real property be instituted immediately. Suchsales are also excessively bureaucratic and burdensome in the processing requirements for land titling andregistration. Programs must be initiated to establish public and private institutions which: (a) accuratelyvalue real property to promote its use as collateral and establish a property tax base; (b) develop land usezoning to guide urban and rural development; (c) ensure widespread dissemination of land priceinformation; and (d) ensure the complete liberalization of the land market.


2.24 To date, total agricultural land area restituted to private farmers, including small personalplot farms, dwelling plots, and garden plots, constitute over 55 % of total agricultural land now ownedby the private sector. State farms only own 1.4% of agricultural land.

2.25 There are a number of other opportunities to streamline the processing of claims andreduce the length of the overall process. Surveying and registration of urban and garden plots could beseparated from that of agricultural land and given a lower priority. Documentation requirements couldbe reduced and the multiple approvals required reduced and eliminated. Better coordination and cleardelineation of responsibilities between land offices, the Land Use Institute, and the Ministry ofAgriculture is needed at the local level. Given the complexity of the task and the sheer volume of claims,the Ministry of Agriculture should engage a consultant to improve process management, identifybottlenecks and redesign the existing operation system and procedures.

2.26 Another issue that remains to be resolved during the restitution process is the excess ofclaims over available lands. Total outstanding claims include those for restitution of 3.16 million hectaresand for another 500,000 hectares for which compensation is being sought (monetary or otherwise). Thisresults in a land deficit of 400,000 ha. Clearly, more claimants will have to be persuaded to accept non-land compensation.

2.27 As many former collective and state farm workers have no claim to agricultural land,there is pressure from this group to slow down land reform. In addition, there is some legitimate concernthat many new private farmers lack the equipment and expertise to farm successfully on an individualbasis, hence the desire to maintain large-scale farming. To further privatization of agriculture whileexpediting land reforms, it is also critical to train farmers in new farming techniques, businessmanagement, and marketing.

2.28 Need for Government Commitment. Even if the processing of claims could besignificantly compressed and the entire restitution completed in a year or two, the Governmentconmmitment to restoring ownership to private farmers in the short term seems to be decreasing. A recentamendment to the various laws on land restitution and privatization was passed by the Seimas, postponingprocessing of certain restitution claims until 1997. This prolongs uncertainty in the sector, postponesrestructuring and reform of the sector, and delays investment. Since the bulk of AC land is stilltechnically state property, the state should provide prompt compensation of restitution claims and allocatethe rest of the land to the farming population. Presently there are requirements that new owners makearrangements to farm the land or lease it out. These could be strengthened by imposition of a land taxto raise the opportunity cost of holding property and to encourage its use.

2.29 Privatization of Agro-processing Industries. The program for privatization of enterprises,which was initiated soon after independence, has been quite successful in transferring assets out of thepublic sector into private hands. Nearly all small businesses and some 60% of industrial enterprises havebeen privatized through the voucher program. Privatization has proceeded with particular speed amongsmaller enterprises, but it has not been particularly fast among the larger state enterprises which have thegreatest influence on the domestic market. About 50% of the total assets of state agro-processingenterprises have been sold.

2.30 By subsector, privatization of the poultry and dairy have been most successful. All butone of seven major poultry operations has majority ownership in private hands. In dairy, 33% of dairyassets have been transferred to private ownership, and 17 of 44 major dairy processing enterprises have

16 Chapter 2

private ownership in excess of 51 %. In contrast, the meat and grain processing enterprises have faredmost poorly. Only about 9 % of state meat-packing enterprise assets have been sold to private individuals,and 7 of the 10 plants are still majority owned by the state. Of the 20 major grain mills in the country,all but one is still majority state-owned. The 11 major state bakeries have converted approximately 70 %of their assets. On the other hand, operations handling products such as sugar, alcohol, edible oil,vegetable and fruit processing and canning, and confectioneries are still majority state-owned with littleprospects of progress.

2.31 Slow privatization of the agroprocessing enterprises can largely be attributed to theirperceived poor financial state and meager private savings. Reduced export demand and capacityutilization coupled with the corrosive effects of inflation under prevailing FIFO-oriented costing/pricingpractices have stripped most of these enterprises of reserves and left them financially weak. Thegovernment recently passed legislation requiring processing enterprises to pay farmers within 15-30 daysor incur financial penalties. Under these circumstances, the lack of interest among suppliers (or any otherviable investors) to invest in these enterprises is understandable. Furthermore, allocating special sharesto suppliers and increasing farmers' share ownership to 50% seriously undermines incentives for foreigninvestors and prospective joint venture partners to get involved in an enterprise. This serves to perpetuateexisting management at a time when change is required. Therefore offering preferential allocation ofagroprocessing stocks to suppliers should be discouraged.

2.32 The overall pace of enterprise privatization needs to be accelerated. The privatizationmethod of selling shares to workers and farmers at reduced prices has been relied on too exclusively.Methods which permit sale by auction to the highest bidder, including foreign buyers, will establishmarket values for these enterprises and attract sorely-needed foreign investment. Despite the impressivenumber of joint ventures, the actual capital inflow from abroad is quite limited relative to some ofLithuania's neighbors. To date, levels of competition and efficiency are kept low throughout the entirechain of agricultural production, processing, marketing, and distribution by less than fully workingmarket mechanisms, unclear ownership, and lack of a well defined legal system.

2.33 Shares must be made tradeable and convertible into cash if shareholders are to be ableto impose financial discipline on enterprise managers. Without outside share participation by the generalpublic, there is a danger that the privatization process will transform food processing enterprises intoworker-owned firms, which have often demonstrated (in Poland, the former Yugoslavia, and othercountries) low levels of efficiency and inability to promote investment and enterprise growth.

E. AGRICULTURAL CREDIT

2.34 The Present Banking System. The Lithuanian financial system comprised the CentralBank (created in September 1992), three specialized state-owned banks (The Agriculture (AB), Savings(SB), and the Commercial (CB)), and 25 commercial banks. Privatization of the Agriculture and Savingsbanks started in mid-1993 through the sale of shares to the public. State enterprises were the foundersand principal shareholders of many of the commercial banks created after 1990. However, by September1993, the private sector's average share in the ownership of the commercial banks exceeded 75%.

2.35 Credit to the Agricultural Sector. By the end of 1993, total institutional credit to thesector amounted to about LT 500 million, consisting almost entirely of short-term credits for primary


production, agro-processing, crop purchase and trading, to both public and privately owned enterprises.A large portion of the credit, channelled from Government sources through AB, was distributed athighly concessionary terms (at an annual interest rate of 8%). AB is practically the sole source or channelfor financing of the sector. Involvement of other state owned or commercial banks is insignificant.

2.36 Limited Credit for Private Farmers. Although detailed information is not available, thenumber of private farmers benefitting from the special credits provided by Government through AB hasbeen very small and there is near absence of long-term credit for agriculture. Official statistics show thatthe number of individual farmholdings exceeded 110,000 by the end of 1993. No information is availableon the number of operating private farms and the best estimate is about 30,000, suggesting that theremaining farmns are either not in operation or have leased out their landholding to other farmers orcommunity farms/agricultural companies. Whatever the exact number is, it is evident that the largemajority of emerging private farmers have no access to credit from the banking system, depriving themnot only of institutional credit to finance start-up and development of their farming enterprise but alsoof the concessional terms at which funds are made available.

2.37 Government Support and Subsidized Credit. A wide range of interest subsidies exist.Access to credit is uneven or arbitrarily determined by various governmental agencies and most of it isdirected to the successor organizations of the former collective farms, and to agro-processing andmarketing enterprises. The largest budgetary allocation provided by Government in 1993 were the specialfunds of LT 50 million and LT 80 million respectively, for spring planting and purchase of diesel fuel.Investments financed from budgetary resources in 1993 included rural infrastructure - roads,electrification etc. - and capital grants of 30% of the price of tractors purchased by enterprises providingmachinery services. In addition, about LT 2 million was provided to cover 65 % of the interest paid onloans to farmers and farmers associations, made by AB at regular bank interest rates (which averaged58% in that year).

2.38 Agriculture Support Fund. In February 1994, Government issued a resolution creatingthe Agriculture Support Fund under the National Agriculture Program. The budget for 1994 includedan allocation of LT 212 million for the Program, which included LT 120 million for "soft" credits (atconcessionary terms and interest rates ranging between 5 and 21 %, to finance seasonal credit for inputs,crop procurement, agri-service enterprises, and the balance was allocated to various subsidy programsfor producers and processors, including subsidies of LT 28 million for bread bakeries.

2.39 Uneven Access to Credit. The above information may create the impression that anabundance of resources, mostly at very preferential terms, has been made available by the Government,with the assistance of foreign donors, to finance the agricultural sector. However, that this is not the caseand the funds currently channelled to agriculture, particularly the large amounts for spring planting andpurchase of diesel fuel, agricultural inputs, etc. provide, at best, temporary financial benefits to a smallsegment of agricultural producers which is not necessarily the most deserving.

2.40 Prerequisite for Bank Involvement. A pre-condition for any future Bank involvement inthe financial sector serving agriculture would be an agreement with the Government on a time-boundprogram for the phasing out of all interest subsidy schemes. The grant financing described above shouldbe discontinued forthwith. Provided an agreement is reached with the Government on these issues, anagricultural sector support project, financed by the Bank and closely coordinated with all donor agencies(in order to take into account all ongoing or planned donor activities) would be useful in the area ofagricultural finance and financial management.

18 Chapter 2

F. AGRICULTURAL TRADE

International Trade

2.41 Overview. In the past, over 95 % of agricultural and food exports were directed towardsthe FSU. These exports have fallen by over 80% due to decreased demand from the FSU and generaldisruption of trade links. Exports of some agricultural products to the West, such as skim milk powderand live animals have increased (and accounted for roughly 20% of the 1993 total), but not sufficientlyto offset trade losses with the FSU. Further exports are hampered by poor sanitary and quality standards,lack of trade contacts, and various trade barriers in the EU and other countries.

2.42 Though the bans previously imposed on some agricultural exports were lifted as ofOctober 1, 1993, agricultural import and export tariffs are continually adjusted in response to pressure,largely from domestic agricultural processing industries. Export taxes on raw products and import tariffson processed agricultural and food products combine to yield high effective rates of protection for anumber of Lithuanian processing industries (most notably sugar, leather working, and furniture).Processing industries often have little incentive to reduce costs, as they work on a cost-plus pricingregime, have few competitors, and can effectively lobby Government for import protection when foreignsuppliers exert pressure on their profits. These frequent tariff changes create an unusually high risk fortraders.

2.43 To the degree that raw agricultural products face export tariffs, primary agriculturalprocessing is being taxed in order to subsidize the large inefficient processing industries. Given thepreference shown workers in the privatization of state owned agricultural processing enterprises andtransformation into joint-stock companies, high import protection of agricultural processing enterprisesruns the risk of becoming a long-term practice vocally demanded by workers and managers alike.

2.44 While protection and subsidies can be helpful to some processors and consumers in theshort run, Lithuania's agricultural sector and consumers will be better served by a policy of open borders.To the extent that the deterioration of Lithuanian agricultural processor's competitiveness has been severe,it could be compensated for by targeting income support to affected labor groups rather than throughexcessive protection.

2.45 In comparison to many other FSU republics, foreign trade operations in Lithuania are lesscomplicated and involve lower transactions costs. There is no forced surrender of foreign exchange fromexports as firms may deposit hard currency in separate accounts. The population is also allowed to freelyhold foreign currency, but may not settle domestic debts in currency other than the Litas.

2.46 Import operations are quite profitable, with food products coming in from Poland andother West and Central European countries, in addition to higher value consumer goods being flown infrom Asia (Tables 29 and 30, Annex I). This prevalence of imported goods in private stores is also duein part to the wholesale and retail price margin limits on domestically produced goods. As these limitsdo not pertain to imported goods, private retailers can make greater profits selling imported goods. (SeeAnnex D on marketing and trade).


2.47 With the recent establishment of its own currency, Lithuania must pursue an independenttariff policy. Given the limited size of the domestic economy, the extensive reliance on FSU trade, andthe already evident collapse of former trade levels, the Government has little ability to buffer enterprisesfrom external trade shocks with a discretionary trade policy. Rather it needs to adopt a low uniformimport tariff rate (10-15%) to accelerate the economy's integration into international markets. Theadvantage of committing to a uniform tariff is that the propensity for generating rent-seeking by individualsectors is reduced, since they are aware of the non-discretionary nature of tariff policy.

2.48 Bilateral Trade Negotiations. Lithuania has signed the trade agreements with Sweden,Norway, and Switzerland, with accompanying protocols for agriculture that were very limited. Tradeagreements have also been signed with Kazahkstan, Belarus, Ukraine, and Finland. These are generaltrade agreements which are then supplemented by individual sector protocols. While the general intentshave been agreed upon, these agreements are not effective as yet. Moreover, the process of finalizationwas expected to be piecemeal: one sectoral protocol at a time. It is expected that due to sensitive natureof agriculture, it may well be left to be resolved at the end of the line. Since there was no overalldeadline for all the protocols to be finalized, realization of any meaningful "free-trade" arrangement maybe still premature. Among the Baltic countries, a Baltic free-trade zone agreement has been signed butthe agreement excludes the agricultural trade. Each country has a list of exceptions, mostly ofagricultural commodities which remain protected under tariff and non-tariff barriers.

2.49 WTO and EU Association. Since September 1992, Lithuania has had observer status inthe GATT and is expected to ascend to full membership of the World Trade Organization (WTO) in early1995. The outstanding obstacles to becoming a full member in the WTO are the use of non-tariff barriersto trade as well as high tariffs and a lack of a scheduled phasing-down plan. Lithuania currently levieshigh agricultural import tariffs on sugar and meat products (50-70%, with even higher effective rates ofprotection due to export tariffs on sugarbeets and live animals). The WTO will likely push for significantreductions of the overall average tariff level in the agricultural sector. Lastly, WTO will require thatLithuania bind its tariff levels at the maximums reached at the end of a phasing-out period. Raising themabove these levels after that in the future would usually bring on WTO sanctions.

2.50 Following Romania and Bulgaria's experience, Lithuania is in the process of negotiatingEU trade concessions in the form of an association agreement. These concessions will likely be rathersmall for agriculture. The main beneficiary from joining the EU will be the non-agriculturalmanufacturing sector. An EU association will probably take until 1996-97 to come into effect withLithuania's broader membership coming as late as the year 2005 as many other countries are waitingahead of Lithuania.

2.51 The main implication of full EU membership for Lithuanian agriculture would be higherfarm-gate prices, above world market rates. EU support price levels would stimulate Lithuanianagricultural production but increase consumer prices just as much. A rough estimate indicates that thefood costs to consumers would increase by about 40-50% and by more for meat and dairy products.Given already high proportion of disposable income spent on food (more than 70%), whether suchincrease is politically sustainable is uncertain. As a counter-measure, the downsizing of agriculture couldbe better managed by limiting the adoption of higher EU support prices and promoting programs forretraining of farmers, rural workers, diversifying rural activities, decentralizing social welfare servicesaway from processing enterprises and ACs, and increasing absorption capacity of industrial and servicesectors.

20 Chapter 2

Domestic Trade and Marketing

2.52 The high inflation which has occurred over the past three years3 , coupled with an historiccost-plus based pricing system, generally geared to First In First Out (FIFO) accounting has resulted ina severe shortage of working capital among agricultural storage/processing companies. Because of thetraditional FSU system of having producers deliver agricultural produce shortly after harvest time tomajor central storage units, there has been no significant development of grain storage on the farms. Thismeans that even though farmers were concerned that they may not be paid for their deliveries, substantialdeliveries of grain were made anyway.

2.53 Delayed payments to farmers arecomnmon. A typical delay can be two to three An Illustration of Delayed Payments to Farmersmonths (Box 2.1). Visits to individual farming For example, one large farm in Marijampole which wasand processing businesses confirmed this providing milk to two different processors found that

payment for supplies to one of its dairies was up to dateproblem of a severe shortage of working capital while the other was more than two months in arrears.

and delayed payments. Delayed payments to Because inflation rates in Lithuania are very high (6% orfarmers are, in effect, a form of taxation on 7% per month), delays in payment such as these have atheir output, while being implicit subsidies to substantially negatively effect producers - a two month delay

processing enterprises and state procurement is equivalent to a 12-15% price discount.

agencies. Box 2.1 (Source: Field Visit)

2.54 Recapitalizing agricultural processing firms so that they have adequate working capitalto finance their operations and to pay farmers promptly will be a vital part of re-injecting confidence intothe agricultural sector. Agro-processing firms will be able to survive only in an inflationary climate ifthey change their pricing policy to reflect the cost of inputs at the time of sale of final products. If thereis continued inflation in food prices, the resultant gains need to accrue to the processing/storage sectorif that sector is to be able to maintain sufficient working capital. Should prices continue to be set on acost plus basis (FIFO), the real value of working capital within the sector would become further eroded,and firms would be even less able to pay farms than at present.

2.55 In order to reduce its interference in marketing and trade, the Government needs to takeseveral significant steps: (a) abolish the setting of indicative prices, as inflation is being reduced, thereis no longer any rationale for the Government to set indicative prices to guide pricing; (b) allowenterprises to account for costs in a way that reflects the input's value at the time of output sale: this willreduce the working capital shortfalls of processors and wholesalers, and reduce their reliance on statecredits; (c) promote the privatization of state processing, procurement, and storage enterprises byemphasizing their sale to emerging private enterprises: this entails breaking up national monopolies intoregional, or local, enterprises, which then are privatized or liquidated; and (d) reduce the propensityof both state and private enterprises to effectively lobby for import protection by adopting a bound tariffschedule under WTO. This will promote competition as enterprises learn to rely on their managementskills more than protectionist policies.

3 Prices increased by a factor of 5 in 1991, a factor of 13 in 1992, and a factor of just under 3 in 1993.

CHAPTER 3

SECTOR DEVELOPMENT STRATEGIES

A. OVERALL STRATEGY FOR SECTORAL DEVELOPMENT

3.1 Following independence and the dramatic shift in Lithuania's political and economicoutlook, Lithuania's agricultural strategy has been forced to change as well. Lithuanian agriculture canonce again become a reliable source of income for the rural population and provide needed foreignexchange earnings, although at reduced levels when compared to the past. This would require furtherstructural adjustments in the sector induced by policy reforms and market forces. Expected changes instrategy would involve: (a) closures of certain antiquated factories; (b) continued privatization ofprocessing enterprises and distribution and trading companies; (c) accelerated land reforms resulting intradeable property rights and functioning land markets; (d) the development of a well-functioningstructure of institutional and legal support systems; and (e) creation of employment in rural areas. Thesepolicy changes would promote the continued downsizing of livestock production and most agro-processingindustries from Soviet era peak levels and a reduction in the size of the agricultural labor force. Aconcerted effort at reform by the Government would be required to achieve an efficient and viable privatesector that is competitive in international agricultural trade. The sooner the market can orient agricultureto its comparative advantage, the sooner agriculture can begin to recover.

3.2 With the macroeconomic environment now under reasonable control, long-terminvestment in the sector should focus on increasing productivity and efficiency through the building ofsupporting economic institutions, physical infrastructure, and a structure of laws and regulationscompatible with market agriculture. This includes investment in developing efficient marketingstructures, a responsive financial sector, and market information systems. Additionally, transport,storage, and communications facilities need to be improved to service a sector consisting of a largenumber of smaller farms and enterprises rather than a few very large farms as in the past. In additionto investment, substantial technical assistance is needed to develop institutional and human capacity tosupport emerging private entrepreneurs and to restructure and privatize state-owned enterprises and ACsso that new entrepreneurs and farmers are able to adapt and operate in a market-based economy.

3.3 Comparative Advantages of the Agricultural Sector. The agricultural sector has goodeconomic potential in Lithuania primarily due to its relatively favorable agro-climatic conditions, wellestablished agricultural traditions, and a trained pool of farmers and technicians. The conditions areparticularly well suited for production of grains, root crops, and livestock, and they are also suitable forthe production of some fruits and vegetables. While the country traditionally has been a net exporter oflivestock commodities to the rest of the FSU, crop and livestock yield potentials have not been realized.Crop yields are less than half of those in Western Europe, as are feed conversion efficiency for all typesof livestock. The food processing industry, with its outdated technology and under-utilized capacity,requires major restructuring and modernization. Losses are high throughout the food production systemdue to limited storage, handling, and transportation facilities. There is substantial potential to increaseyields and processing and distribution efficiency, thus increasing the competitiveness of Lithuanianagriculture.

22 Chapter 3

B. NEW ROLE FOR AGRICULTURE

General Strategies

3.4 Lithuania can develop competitive agriculture due to its relatively good overall agro-ecological conditions, and due to its low land, labor, and machinery/equipment costs relative to Westernpractices. Once land becomes tradeable, land prices are expected to become comparatively cheap, currentland rental fees are only fractions of those charged in Western Europe, and agricultural labor andtechnology (mainly Russian designs) are presently up to 50 and 10 times cheaper respectively than inWestern countries. Even by discounting this cost advantage due to lower productivity, and machineryand equipment quality, respective savings in production costs are still substantial, and can be expectedto enhance Lithuania's international competitiveness in the future.

3.5 Structural changes are likely include a change in land use, especially in the eastern andwestern parts of the country, away from intensive crop farming, and toward extensive livestock, forestry,and niche product production. Animal production may shift from the intensive grain based productionof pork and beef, to a more extensive production system. Production in the more fertile central part ofthe country also depends on the ability of the new farmers to maintain soil fertility and the drainagesystems.

3.6 In order to shift its production into those crops and products for which it has reasonablecomparative advantage, Lithuania needs to allow markets to operate freely. Opportunities for efficientsmaller sized farms exist in areas of intensive production - vegetables, fruits, pigs, poultry. Furthermore,in certain areas of the country, linking of agriculture with tourism, forestry, or other jobs, may also bepracticable. The proposed restructuring of the district level government provides an opportunity toredistribute the responsibility for financing and management of rural infrastructure, especially drainage.Among the systems to be considered are management through cooperation between district levelgovernment and private landowners, and a cost-sharing scheme between them.

C. NEW ROLE FOR THE GOVERNMENT

3.7 As Lithuania progresses in its transition to a market economy, the role of the Governmentshould be to facilitate the transition rather than dictate the course. Changes would include moving awayfrom the direct government provision of goods and services towards indirect government guidance of theeconomy through legal, regulatory, and policy measures. A clear and pronounced shift in this directionwould allow greater incentives and the opportunity to take advantage of the efficiency of the privatesector, while easing overall fiscal pressures on the Government. Consistent with the general trend, thegovernment expenditures on agriculture fell from more than 6% of GDP in 1991 to 2% in 1993, and arebudgeted at 1.7% in 1994. These reductions have been achieved largely through a reduction in subsidies.

3.8 The Government can continue to provide basic infrastructure and public goods such asroads, water distribution systems, education, or social insurance, although even in these areas, a greaterparticipation by private sector should be encouraged. Government activity should complement rather thansupplant the private sector by actively encouraging private sector entry and participation whereverpossible. In addition, the Government should focus on building the supporting legal, economic, and

Sector Development Strategies 23

physical institutions and infrastructure aimed at developing a market system for agriculture, and raisingproductivity and efficiency. Investments in productive sectors, e.g. agriculture, industry and to somedegree, housing and energy, should as a general rule, be funded by the banking system on the basis ofcommercial viability. If public investments are required in these sectors, it should be as low as possiblewith a built-in cost recovery system and a phasing-out plan over time.

3.9 The current trend, which shows agriculture providing a smaller contribution to GDP andreceiving a smaller part of total government expenditures, is in line with Lithuania's transition to anindustrialized market economy. Privatization and commercialization in the sector are proceeding,although at a moderate and uneven pace. In particular, there is scope for an accelerated privatization ofland and farms. Taking into account the danger of excessive fragmentation of arable land, thegovernment is rightly, and understandably, not inclined to break up all of them. Nevertheless, there isa need to allow the bankruptcy of a substantial number of the ACs, while the remaining viable ones arefully corporatized and commercialized. This would facilitate their turn-around and enhance their long-term viability with the provision of good management, adequate technical assistance, and the creation ofan appropriate market framework.

3.10 Some of the key policy actions requiring the attention of the Lithuanian Governmentinclude: (a) phasing out subsidized credit while strengthening financial intermediaries; (b) acceleratingland reform by simplifying the land survey, titling, and registration process and clarifying the legalfoundation for land markets; (c) rehabilitating and modernizing key rural infrastructure, including accessroads, electricity, and water to new private farms, through carefully selected criteria based on soundpublic investment policies; (d) enforcing hard budget constraints and bankruptcy laws on state enterprises;(e) privatizing downstream services -- transportation, marketing, and distribution of food (activeconsideration should be given to establishing a centralized wholesale market); (f) supporting anddeveloping the rural human capital by modernizing and modifying the education and training system tomeet the needs of a market economy, especially in basic principles concerning pricing and investmentanalysis, business planning and management, marketing, and information management; (g) facilitatingthe flow of market information by improving price reporting and dissemination of market informationto producers and consumers. Support research and technical advisory services to keep farmers abreastof new technological developments and new information; and (h) coordinating and prioritizing technicalassistance programs to maximize benefits to the country.

D. CHALLENGES DURING TRANSITION

3.11 The present Government was elected in late 1992 in response to the visible hardshipsassociated with the transition, such as drastic decline in real wages, lack of heat and hot water in wintermonths, and large cuts in public services. There are considerable demands on the government to cushionthe impact of restructuring related hardships incurred thus far, and to prevent further degradation of theLithuanian standard of living. This would result in pressures on the budget to finance social assistanceprograms (which are likely to grow due to over-employment in the agricultural and industrial sectors) andpublic investments to stimulate growth.

3.12 These demands and pressures pose serious challenges to a government which thus farhas demonstrated a tendency toward fragmentation, displayed a limited strategic vision for thedevelopment of the economy, and handicapped itself by failing to appreciate fully the inefficiency of

24 Chapter 3

micro-management and intervention. The Government suffers from a shortage of specific skills in keyareas, and has relied to some degree on external pressure to carry out reforms. In other areas, whereprogress has been made, the Government is beginning to vacillate, creating uncertainty among thedomestic population and the international community. All of this suggests that there is some evidencethat the commitment by the government to tackle some basic areas of reform is faltering.

3.13 The ability of the economy to cope with border prices is greatly hampered by the slowpace of market reforms in primary agricultural production and food processing. The Government mustimpose hard budget constraints on enterprises, remove price controls which are not justified by thepresence of monopolies, and discard excessive import protection where no believable infant industryargument can be made for the development of a particular product. The key development areas needingsustained or increased policy action, and in many cases concomitant investment, include: (a) continuedfocus on stabilization, in particular through fiscal and monetary policies; (b) reform of the financialsector; (c) incentives for private sector development; (d) reorientation of the energy sector; (e) provisionof basic social protection; and (f) maintenance and development of physical infrastructure.

E. SUBSECTORAL STRATEGIES

New Roles for ACs

3.14 While the majority of ACs are likely to disappear due to their inability to compete, thereare about 400 to 500 ACs which have potential to become viable. These surviving ACs would be ofimportance to the stabilization and development of primary agricultural production. Measures proposedto improve the performance of the ACs and state owned enterprises (SOEs) include: (a) a program toassess the viability of the ACs and SOEs; (b) technical assistance to help the ACs adjust and restructurein order to recover input sources and output markets; (c) financing for viable enterprises; (d) and thedevelopment of schemes to deal with non-viable ACs. In developing such measures, it is important toactively involve those players who possess knowledge of individual enterprises, including enterprisemanagers, Ministry officials, private entrepreneurs, and bankers. The continued restructuring should bemonitored, in order to assure transparency and prevent exploitation of workers. The latter should beallowed to leave the AC or SOE and settle on their own private land, without losing their right to farmassets. The bulk of land under AC control is no longer subject to restitution. However, in order toexpedite the land privatization and creation of land markets, all required compensation for land restitutionwithin the ACs should be settled and the remaining state-owned land within ACs should be auctioned off.These measures would reduce uncertainty over ownership and encourage potentially viable ACs to makeinvestments to improve productivity and profitability.

Measures to Improve Performance in Primary Agricultural Production

3.15 Mechanization. A large part of present farm equipment is oversized for present use, inpoor condition, and expensive to operate. This equipment will be phased out as farms become smallerand re-equip themselves with more efficient and appropriate technologies. Of importance would be theuse of intermediate mechanization technologies adapted to the smaller individual farms, especially forvegetables and potatoes. A major challenge for the Lithuanian machinery industry would be to develop


quality local equipment, and to find innovative ways of financing the purchase of such equipment byfarmers. A number of suppliers provide foreign made equipment, and are backed by financing throughtheir foreign headquarters. The possibility of machinery rings (the use of shared equipment among severalindividual farms), rental, or custom services should all be explored by interested farmers and farmgroups. It is the role of the government and extension system to alert farmers to the advantages anddisadvantages of these diverse options in use and purchase of equipment.

3.16 Adjustment in Farm Size. An analysis of economic cost of production shows thatLithuania can certainly produce grains (wheat, barley, rye) at below import parity price. Farm size is animportant factor in cost of production of cereals. With some of these items, this can be achieved bymatching farm size to the item, i.e. a 60 ha farm would more or less make efficient use of one tractor,or a 250 ha farm could use one combine harvester. When farm unit size is below the optimum level formachinery, then two major options exist for ensuring that economies of scale and mechanization areachieved. The first is for the operation of land to fall into larger units through land transfers, renting,etc. The second is the development of mechanization systems whereby appropriately sized machinerycan be used by smaller holdings on a rental contract farming or share-cropping basis. This latterapproach can be accomplished through: (a) formation of 'machinery rings'; (b) development of multi-purpose agricultural cooperatives which provide machinery services as one of their inputs; and (c)development of commercial contractors and contract farming.

3.17 Whatever systems are used, it would be important that the average farm size in Lithuaniaincrease substantially in those areas where extensive arable farming is carried out. Agricultural policiesshould reflect this and provide an enabling environment which allows renting of land, contract farming,share-cropping, hire of machinery, and various other arrangements to take place under market conditions,so that the most appropriate relationships are set up. It would be very important to avoid subsidizing theestablishment of certain farm mechanization centers based on the old collective farms, as this would stiflecompetition from, and the development of, unsubsidized operators which would normally be the mainsuppliers of these services.

3.18 Changes in Livestock Feeding. Lithuania's meat requirements are likely to be in the 200- 300 thousand tons/year range for the domestic market - or about half of the peak 1988 production of545 thousand tons of which 180 thousand tons was exported. At world prices, and taking account of thelow conversion efficiency of intensive livestock in Lithuania, the focus should be on producingsubstantially more from grass. This would require larger land holdings. With dairy cattle, this mightinitially involve herds of 40 milking cows for farms of minimum 25 ha size. With beef cattle and sheep,which require less intensive management, the size of farms would be larger.

3.19 A primary requirement for increased dairy production revolves around questions ofquality improvement. On the farm, quality can be improved by utilizing better milking machines, milkparlors, and milk coolers, and by improving the monitoring system to measure milk quality on the farmas well as in the factory and on the shelf. A market incentive to achieve this would be clear pricedifferentiation of milk based on quality. At the level of processing, quality can be improved by raisinghygiene during transportation and storage, and by improving better and more efficient processingequipment. Options include investment credit for small processors and technical assistance for trainingin better transport and processing.

3.20 A&propriate Technical Assistance. Technical assistance to advise on improving theproduct mix, and product quality, up to international standards should be provided. The technical

26 Chapter 3

assistance should aim at all the links in the production and processing chain. It should include farmers(through extension, breeding organizations, milk collection points and milk control organizations, andthrough the processing plants), transporters (through extension and processors), the processors (throughextension, through government agencies dealing with quality, and direct short term technical assistancefrom local or international specialists) and the dairy stores (through agencies dealing with food qualityadvice).

Measures to Improve Forestry and Forest Industry Production

3.21 As a short term goal, the volume of allowed harvesting should be increased up to thesustainable annual cut, and until the domestic processing industry is capable of absorbing such volumesof wood, the export of pulpwood and sawnlogs should be vigorously promoted through private operators.Export taxes on roundwood should be removed. The development of wood fuel as a substitute for fossilfuels merits careful consideration and is probably best examined by existing wood-based industries whichalready have excessive accumulations of wood waste. However, the present policy of returning all forestland back to the state should be reconsidered, as many woodlots are an integral part of the drainagesystem of farms and therefore should not be separated.

3.22 Other commercial activities in the forestry sector, such as sawmilling, should be separatedadministratively from the purely forestry activities. As there is a need and considerable scope forimprovement in farm buildings, demand for local wood will be high and private saw mills will emergeto meet this demand.

Measures to Improve Performance in Agro-processing

3.23 Processed agricultural products appear to be largely priced on a cost plus basis using aFIFO system of costing. For development of strong competitive businesses, it is important that suchprice controls be removed. It is important that management of these firms be profit driven, and theconcept of inter-regional competition developed. It would be important that the legislative and financialclimate is in place to encourage new entrants to the processing industries, and not restrict competition.The practices of selling shares to workers and farmers at reduced prices has been heavily relied uponwithout much success. Methods which permit sale by auction to the highest bidder, including foreignbuyers, will establish market values for these enterprises and attract sorely needed foreign investment.Competition would be enhanced by the development of further specialized businesses such as grainbrokerages and private traders who provide arbitrage services between producers and processors. It isequally important that an emergency program for aiding non-viable state-owned agro-processingenterprises be developed.

F. POLICY ACTION PLAN

3.24 Certain measures are needed to ensure the long term stability of the Lithuanian agriculturesector. These include short term measures designed to trigger an immediate supply response, andmedium term measures designed to promote a sustainable market based sector. An outline of some ofthese measures together with the ultimate goals of these policy reforms is included in the following ActionPlan.


AGRICULTURE SECTOR REVIEW: ACTION PLANISUES RECOMMENDED MEASURES ULTIMTE GOAL

SHORT-TERM MEDIUM-TERM

. POLICY REFORMSAgricultural prlcing and subsidles * Continue liberalization of all prices * Prepare a flexible subsidy phase-out plan * Distortion free, competitive agricultural

sector* Eliminate fixed profit margin of processing

industries * fair competition in local markets

* Dissuade processing enterprises from cost-plus pricing practices

* Eliminate fixed-margin for wholesale andretail marketing

11. TRADE, MARKETING AND * Rationalize tariffs and avoid frequent * Develop legal framework to improve binding * Free trade and efficient resource allocationDISTRIBUTION changes to reduce uncertainty and corruptioni of transactions and security against breach of

contract * Foreign market development* Allow new free entry or exit to the sector

expand and upgrade public facilities for * Market transparency* Phase-out state trading output marketing (farmer's markets, etc)

* Cost-effective export and import* Proceed with demonopolization, * Improve infrastructure in support of trade, transactions

corporatization. and phased privatization of especially the domestic and internationaltrading enterprises payment system

* Promote emergence of wholesale marketingby private traders by privatizing statefacilities

III. LAND REFORM * Start land survey registration and titling * Complete land survey and titling * A farming system based mainly on privateservice as top priority ownership of land

* Develop land cadastral system and complete* Establish a consistent land valuation system land registration. * A working land market for efficient and fair

and information flow asset transfer* Allow sales of land

* Make leasing rights freely tradeable* Develop land market by clarifying the legal

* Formalize clear rights to own and sell land foundations for land sale, lease, andmortgaging

* Eliminate administrative restrictions on sizeof individual landholdings * Analyze and promote new roles for

cooperatives in niarket economy* Establish instittiional support to restructure

Agricultural Companies (ACs)

[V. PRIVATIZATION AND * Promote management contracts * Transfer assets to private ownership * A market economy through new incentivesRESTRUCTURING according to the ovcrall privatization strategy

* Break up monopoly structures in industry * Efficient privately owned firms subject tomarket forces

* Accelerate privatization of large-scale * Tighten up legislation and regulation ofprocessing industries private ownership * Agro-industries with high quality products

which can compete in world markets* Carry out small-scale privatization, including * Disseminate market information

transport, e.g.. trucking* Set-up anti-trust regulation

* Restructure and privatize input supplyorganization

* Help organize local and regional farmerscooperatives

* Solicit TA for pre-and post- restructuring /investment for enterprises and ACs

28 Chapter 3

RSSUES RECOc bENDED MEA:SURES a ULTIMATE GOAL

V. RURAL CREDIT * Develop phasing-outplan for subsidized * Institutional support to create viablc financia * Viable financial institutions serving thecredit instituuions to serve the rural sector agricultural sector cfficiently

l Eliminate ad-hoc injection of credit from the * Strengthening prudent banking regulation * Efficient allocation of credit to profitableBudget and supervision activities undertaken by clients willing to

repay loans* Identify financial intermediaries that can

channel funds to farmers and develop * Well functioning banking system within ainstitutional strengthening program proper banking regulatory framework

* Solicit TA for loan risk assessment andponfolio management

* Maintain positive real interest rates

* Implement generally accepted accountingprinciples

* Implement external audits, publication ofrelevant information

Vl.AGRICULTURAL * Review and analyze agricultural research * Strengthen the reorganized research system * Improved technology, managerial practices,PRODUCTION TECHNOLOGY requirements vis-a-vis agriculture's current and efficiency in agricultureAND FARM MANAGEMENT problems and long term prospects * Redesign research priorities and thePRACTICES appropriate structure and organization of the * Improved product quality to meet the

* Strengthen agricultural training and research system demands of the domestic and foreigneducation for private market conditions markets

l Continue to emphasize ecologically sound* Strengthen farm management and production systems. * Commercial farm management

agricultural economic disciplinesSustainable production and preservation of

* Develop a private sector farm management soil and clean water.and technical advisory service

* Emergence of truly commercial private* Strengthen agricultural extension services farms

(LAAS)* Improved training and education for

competitive agriculture

Vll. PUBLIC AGRICULTURAL * Dc-link the Government from production * Adjust public agricultural administration to Efficient and effective public sectorADMINISTRATION planning and management the needs of a market economy administration and support for private

agriculture* Strengthen the capacity for market-oriented

policy analysis * Improvement in policy formulation andanalysis of emerging constraints

* Promote establishment of a system toprovide technical and financial assistance forenterprise and ACs restructuring

CHAPTER 4

ROLES OF THE BANK AND THE EXTERNAL COMMUNITY

A. WORLD BANK GROUP ACTIVITIES TO DATE

4.1 Lithuania became a member of the World Bank on July 6, 1992. The first CountryEconomic Memorandum was published in March 1993 and has served as a basic reference on theeconomy for a wide international audience and in Lithuania. Sector work has been completed in theenterprise/finance and energy sectors, and policy notes in five key areas of structural reform have servedas useful inputs to the Bank's policy dialogue with the Government. A Public Expenditure Review hasbeen completed, and will serve as the basis for a donors' meeting on public investment organized andhosted by the Bank. The first Bank loan to Lithuania was a Rehabilitation Loan for US $60 millionequivalent to facilitate importation of critical inputs and support the government's economic reformprogram. In addition, the Bank has approved the Power Rehabilitation Loan which aims to improveenergy efficiency, and the Klaipeda Environment Project, designed to help improve coastal environment.The Bank Group is also currently preparing an Enterprise and Financial Sector Assistance Project, as wellas Geothermal, Highway, Klaipeda Port, Social Safety Net, Housing Development, and MunicipalDevelopment Projects.

4.2 The IFC, which Lithuania joined in January 1993, has developed an investment strategyaimed at financing export oriented projects in sectors where Lithuania has a comparative advantage (lightindustries and agriculture), and particularly with strong foreign sponsors who can provide modemmanagement practices, technical know-how, and links to Western markets. To this end, the IFC hasprepared one investment project for its FY94-95 program, and has identified two additional projects forconsideration. The IFC has also made available trust funds for legal technical assistance from theSecurities Exchange Commission, as part of the overall involvement in the development of local capitalmarkets. At the request of the Government, the IFC undertook a diagnostic assessment of theenvironment for foreign investment and identified a number of specific areas for reform. Lithuania isalso a full member of MIGA.

4.3 Lithuania joined the IMF in April 1992. The first Stand-By Arrangement (SBA) for SDR56.9 million was approved in October of that year. Performance was satisfactory, and a second SBA forSDR 77.6 million was approved by the IMF Board in October 1993, and incorporated access to theSystemic Transformation Facility (STF) (SDR 51.7 million). The Government is considering channelingthe STF funds through commercial banks to provide funds for enterprise investment.

B. POTENTIAL FOR BANK SUPPORT

4.4 The main objective of the Bank's strategy for Lithuania is to support an acceleration ofthe economic transition to a market system and a recovery of output and export growth and livingstandards through reforms. The Bank's lending program is intended to provide a mixture of policyreform support, institution building, and investment finance. The proposed lending program includesseveral projects intended to bring about improvements in basic infrastructure.

30 Chapter 4

4.5 To assist the Government of Lithuania in developing a viable agricultural sector, a PrivateAgriculture Development Project was developed based on the priorities identified in this sector review.The project is currently under preparation. The main objectives of the proposed project are to supportGovernment reforms for the agriculture sector by supporting the development of private farmers andprivate entrepreneurs, training and re-orienting farmers and entrepreneurs to a market-driven system, andby improving local institutional capacity (both private and public) to provide necessary agriculturalsupport services. In addition to financial assistance, particular emphasis will be placed on technicalassistance to identify and address weaknesses in the institutional framework which are impeding theefficient restructuring of the sector. The proposed project would also support transformation to amarket-based agricultural economy by specific measures which include support for land reforms,acceleration of privatization of state processing and distribution enterprises, strengthening the ruralfinancial system, improving the extension service, and improvements in applied research.

Prerequisites for Future Involvement

4.6 Before any lending operation can commence in the sector, the Government's commitmentto continued reforms in the sector must be demonstrated in the following areas:

* subsidized credits to the sector would be phased out;

* fixed wholesale and retail margins would be phased out;

* agricultural terms of trade would have to be improved by removing all remaining subsidies;

* land reforms would be accelerated and be the priority areas for support;

* Government would be committed to restructure large ACs and any remaining restitution disputeswithin the ACs would be resolved through appropriate compensation and/or auctioning of state-owned land to private hands;

* import tariffs must be kept at uniform and low levels and comply with the IMF agreement; and

* Government would not revert back to price controls and procurement quotas to guaranteeminimum incomes to farmers.

C. TECHNICAL AND FINANCIAL ASSISTANCE AND COORDINATION

4.7 Lithuania has received considerable attention and support from the internationalcommunity. Despite its brief history as an independent republic, it has received generous balance ofpayments support from the EU/OECD, substantial grant financed technical assistance for overall structuralreform, sector reforms and institution building (primarily from EU-PHARE and selected bilateral suchSweden, Denmark, the US, and Germany), and the beginnings of investment financing (primarily fromthe EBRD in the energy and transport sectors, with EIB expecting to start its operations soon). For someof this assistance, both technical and financial, absorptive capacity has been, and continues to be, limited.

Roles of the Bank and the External Community 31

4.8 While it is expected that all the technical assistance will come from external sources, thefinancial assistance needs will be met largely through mobilization of domestic resources, enhanced insome instances by external funding for foreign exchange costs. TA should be designed to augmentinstitutional capacities and skills, initially with outside technical assistance to bridge the gap, until, withtraining and experience, the necessary domestic capability can be developed.

4.9 Continued substantial TA is planned by bilateral and multilateral sources for theagricultural sector, but most of the TA is ad-hoc and of limited scope and coverage to have major sector-wide impact. It is widely recognized that future TA efforts must be coordinated and integrated tominimize duplication and avoid waste. EU-PHARE has been coordinating TA in the agricultural sectorbut the focus, nature, and priority of the TA needs to be changed. Both donors and recipients share theview that TA efforts linked to specific investment programs are the most productive in terms ofpromoting the human and institutional growth which will contribute to gain in efficiency andcompetitiveness of the agricultural sector. The Bank Group can play a constructive role in coordinatingTA, and co-financing TA components that complement Bank projects. The proposed agricultural projectwill integrate many of the on-going efforts to minimize duplication.

4.10 TA Priorities. Some of the key priority areas of the technical assistance proposed to thesector over the next three to four years are:

* Comprehensive private farm Survey;

* Coordination of TA and foreign assistance;

* Development of local farm and enterprises restructuring expertise and consulting services;

* Expediting land reforms in legal, procedural and cadastre areas;

* Strengthening of the Agricultural Advisory Services (extension);

* Training of farmers and entrepreneurs in accounting, costing, better farming techniques and otherbusiness management;

* Improving the legal and regulatory capacity of government by training staff and setting upinstitutional capacity for contract enforcement and dispute resolution;

* Operational/financial audits of selected Agricultural Companies and processing enterprises;

* Privatization of processing and distribution companies;

* Dissemination and promotion of new technique and technology transfer;

* Marketing support through market studies and better market information dissemination; and

* Training in market identification, export promotion, and market research.

__________________________________________________ BED 24282~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~IBD 228

LITHUANIAFOOD AND AGRICULTURE L AT V I A

REVIEW

4i9 Nivbe ot pr,V:oe tars _ __ /*%_

Arr7i .mdu5p1 ri N - , u,I -n -DO--- t - _ -ZE.KIAi 3 -) '

343 PerneniaqecL;d ct ud mvcg,.iii.uol use /O- SSKnDUOO5s g _ OAMN MJNKS f S

Elvs_ a!z- A j-I , 3-ZEl- (_

r~~~~~~~~~~~~~~~~~~~~~~~~~ t D . . u ® Za515_

Iei,vr.iRle,s -~ . *\ e N r/ ''1/ _\ 'KUR,S

t3tRelo CoillsKtAPEA g j, -' . _., Y s - _,.. ?

ISO "ol:: LapLuol 2 3 r 3/ PNEE S J -, I1 ~ - - ~ Dlsir cI bound,,-, -d,~ g-0-1 A' At U U

tLPDr * (. r- r J rrii_ KDANA wAEiAS

50 n v IU3AG \ X \ t | D KMERG shE¢IOtH /e0

Region CapNTRY TOTALS .Pj . . uPANVEDY Et. .A_ _ IS_® Nai.derculevatioIC84vp400hacR U S S I A N ,j'"- f .r. ,I J B-'A/c KEVarS -:---'~~~~~~~~~~~~~~~~~P.~~~ UP~

ID- C.p.1.1L - - I -i*SILUTE - A' - . -.~~~~~~~~~~~~~EVU Y .

. .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~3 .4 ,! \ 330RUKINNA 3 jB AAAR

f L A T V A \ 0 87 ^0 60 SO I 1 O K lonsta . ._~~~~~~~~~~~~~~~~rCuI tA AE3ER

Nl . : ,, 'A- 1 7 ' iO 50 M le

_ s FED _I vilnib5fe i ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~KD-A. \~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~T

1s SIRVINTOS EvErPlOrtys 1 5.COUNTRY TOTALS .' ~@ SAKIWt (, ASADn

Prvt 1amr 111,352 B KAUNAS .

Area un-der cultivatio -841,400 ha R U S S I A NPecntg aftota land area un,der N VILNIUS

cutivatio,, -25 9%FE E R T O vv B Hp ruF E D E R A T I 0 N ~ ~ ~~~~~~~ VT-I AN/N

-, GE~~~~~OIRSTO)NAS -

SWEDEN F '

ESTONIuAOA D~ B RUFED UZI 3 -R-

( EATS~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

L:~~ ~ ~ ~ 10 I0 A u 3 Qvi,.,'

RUSSIA" So~~~~~~~~~~~~~~~2 D n 5 Wuai.,

tED J. Wiu®

RELAVUS

POLAND I A&.Ai,.

SEPTERR v

C

Srif

�¼. 1� rt, �g�44�4

�I �* -� �

� ��**4�*

� �.4 4.. 4

�

,�� < �

� -�<�

�

4-

4. 4

Date post:	19-Apr-2020
Category:	Documents
Upload:	others
View:	4 times
Download:	0 times

Report No. 13111 -LT Lithuania Agriculture and Food Sector...

Documents