Reform Was Hard To Accomplish But I Would Do It Again

Adolfas Slezevicius led the sixth government from 1993 until 1996. His cabinet proposed and implemented the adoption of a currency board system, by far the most successful economic reform in Lithuania. Mr. Slezevicius agreed to share his memories of the turbulent history of adopting a currency board in Lithuania, a history we can celebrate today thanks to the titanic efforts of the sixth administration and its supporters.

Only a few countries in the world have a currency board arrangement. How did you discover it and how did you come to learn more about it?

Indeed, very few countries in the world opt for a currency board model, but that does mean it is ineffective. Currency board arrangements, with certain specific nuances, have existed in more than 70 countries during different periods. Virtually all of these countries have gained very positive outcomes from such a rigid monetary policy such as stabilizing the exchange rate, curbing inflation and stimulating economic growth.

I first learned about the currency board regime when it was being implemented in Estonia. At that time Estonia had achieved the highest rate of economic growth and stability as compared with other former Soviet nations. Equally attractive was the history of adopting a currency board in Argentina. In this country a currency board system was implemented after a severe bout of hyperinflation and as a result it helped to bring down inflation and achieve positive economic growth in a very short time.

These successful examples from Estonia and Argentina led us, in the light of the instability of the national currency, to learn more about the specifics of applying and operating this peculiar monetary policy arrangement. The interest in the currency board increased when the policy pursued by the Bank of Lithuania began to drive into despair not only the government but also business entities.

When talks about the possibilities of introducing a currency board in Lithuania began, Professor S. Hanke from the United States visited Lithuania several times to provide advice to the government of Lithuania. It was him who gave us an abundance of information about the advantages of the currency board and about other countries’ experience in implementing it. We also obtained much information from representatives of the International Monetary Fund, first of all Mr. Knobl and Mr. P. Cornelius. IMF strongly supported the government’s position in all stages of implementing the currency board.

I would like to particularly emphasise LFMI president Elena Leontjeva’s role in advocating the currency board in our country. She personally and the Lithuanian Free Market Institute were very important aids of the government in promoting the idea of a currency board in Lithuania.

When and in what circumstances did you comprehend that a currency board system would be suitable for Lithuania? What led you to take a strong decision in favour of this model?

There were several factors that favoured the final decision of the government. First of all let me note that the currency board arrangement was implemented in Lithuania in very complicated economic and political conditions. The sixth administration, which took office at the beginning of 1993, inherited a particularly deplorable economic legacy. At that time the average wage in national currency was 27 U.S. dollars, while the average pension was 9 U.S. dollars. And this negligible income lost much of its value every day in the conditions of hyperinflation which stood at 1,263 percent in 1992! According to the World Bank, only Armenia and Georgia out of 26 post-communist states suffered from higher inflation that year. But apart from the economic turmoil, these countries were also being shattered by civic war.

Our country’s indebtedness to Russian companies for gas and nuclear fuel amounted to almost 100 million U.S. dollars. Apartments were faintly heated and had no hot water; petrol stations had no fuel; stores had no foodstuffs. The society was plunged in enormous social tension and hostility. Pickets and other disobedience actions were held in front of the government building almost every day. Political opponents sought to impede at every cost the economic reforms we pursued. So the ground for all types of economic speculations and public intimidation was particularly fertile. But the history of adopting the currency board had not even started then.

At that time the introduction of the national currency was the first priority. Thanks to the efforts of the Bank of Lithuania, this was accomplished during a very short period of time, during three months after the new administration and the new leadership of the Bank of Lithuania took office. We were the last of the Baltic States to introduce national currency, just like many other important economic reforms by the way. For this reason almost all micro- and macroeconomic indicators in our country were the worst of all Baltic States. It took us two or three years to catch up. Today Lithuania is more and more often labelled as “the Baltic tiger” and the leader of economic development in the region. There is no doubt that the currency board has played no small part in this success story.

Let me mention that hyperinflation was overcome with the introduction of the national currency. When the national currency was adopted in July 1993, the monthly inflation was a mere 0.7 percent, down from over 25 percent in April. Fragile foundations for economic growth were laid down. However, numerous monetary policy restrictions for business and individuals remained. Companies had much difficulty in buying and selling foreign currency. The exchange rate of foreign currencies against the litas swung heavily. The Lithuanian Industrialists Confederation and other business associations kept blaming the government for ruining companies and businesses. As you may know, the government had no powers or instruments to conduct monetary policy. By the estimates of the Lithuanian Industrialists Confederation, swings in the exchange rates of the litas and foreign currencies cost industrial companies a loss of 350 to 400 million litas of profits only in 1993. In the economic conditions of those days such losses were particularly painful. Naturally, this money did not just disappear. First of all it went to commercial banks.

It was obvious that the Bank of Lithuania and commercial banks were not satisfied with the situation. Calls from the government to bring order in this area were ignored. At that time the governor of the Bank of Lithuania increasingly demonstrated his wish to engage more in politics and commerce than in monetary policy. The notorious credit of 20 million litas extended by the Bank of Lithuania to “theirs” Litimpex Bank and political activities Mr. Visokavicius later embarked on only confirmed our suspicions.

These considerations led the government and first of all me personally as its leader and chair of the ruling party to initiate the removal of the governor of the Bank of Lithuania, Mr. Visokavicius, from office. My suspicions regarding his politicking proved correct very quickly. Shortly after his removal from the position of the governor of the Bank of Lithuania Mr. Visokavicius was at the forefront of the Conservative party’s congress. His banking and politicking career cost the Lithuanian economy dearly at that time. Of course, his removal was seen as political dealing with a decent banker who modestly called himself no less than “Litas’ father.” A question that kept bothering me and others at that time was how much inexperience and how much conscious harm-doing with regard to the-then government there was in the Bank of Lithuania’s actions. Maybe historians will answer this question some day…

The persisting instability of the national currency only reinforced the government’s position on the need to adopt a currency board in our country. It became absolutely clear that only a monetary policy independent of biased leaders of the Bank of Lithuania and immune to political pressure could secure the stability of the national currency that was much needed by the Lithuanian economy and the people. The government had simply neither possibilities nor time to wait until, hopefully, the newly formed board of the Bank of Lithuania, led by newly appointed chair Mr. Ratkevicius, achieved the stability of the national currency.

My meeting with Argentina’s economic minister D. Covallo during the 1994 World Economic Forum in Davos played an important role in the story of implementing a currency board in Lithuania. It was Mr. Covallo who was the main architect of very successful economic reforms, including the introduction of a currency board, in Argentina. Our long discussion revealed a host of aspects and benefits of having a currency board regime. This meeting dispelled any doubts regarding the need to adopt a currency board arrangement in Lithuania once and for all.

True, the possibilities of applying a currency board model in our country were briefly discussed at the sitting of the Litas committee when the preparations for introducing the national currency took place. The-then governor of the Bank of Lithuania, Mr. Visokavicius, strongly opposed the application of this monetary policy model in Lithuania. He assured that the Bank of Lithuania would secure the stability of the national currency. At that time I lacked experience and information, so naturally I was not able to assume an adequate position concerning the implementation of a currency board Lithuania. But there was no need to adopt a currency board at that time either. After all, central banks successfully applied classical monetary policy around the world. Unfortunately, this policy failed to justify itself in Lithuania through the fault of the-then governor of the Bank of Lithuania. It took almost one year after the litas had been introduced to implement the Law on Litas Credibility, a law which served to stabilize the country’s economy and stimulate growth.

It is natural that introducing novelties always raises various discussions and emotions. Who supported you and who opposed you the most when the currency board system was being introduced? Can you tell us a little bit more about how responsible institutions and persons changed their attitudes in supporting or opposing this idea?

The introduction of a currency board in Lithuania required tremendous efforts from the government and, first of all, from me personally as its leader. During three years of heading the government I could not recall a single law that faced such a large resistance.

Commercial banks were the biggest opponents of this law. And this resistance was easy to explain. There is no easier way for commercial banks to earn money than in the conditions of unstable currency and inflation. Commercial banks used every possible means to influence the government’s views on the adoption of a currency board in Lithuania. There were collective statements from commercial banks. Help was solicited from individual politicians and economists. In the last phase of adopting the law efforts were made, quite fruitfully, to influence even President of the Republic of Lithuania A. Brazauskas.

The press and other media teemed with various articles and opinions about the likely disastrous consequences of the currency board not only for Lithuania but for its statehood. The circle of the opponents was not narrow. It comprised such economists as Mr. Uosis, Mr. Terleckas, Ms. Visokaviciene and others plus politicians with various views and outlooks. Famous energetic dissident Mr. Terleckas was also at the forefront of the opposition.

There were even a few cabinet ministers who doubted the necessity to submit the Law on Litas Credibility to the parliament. These were economic minister Mr. Veselka and foreign affairs minister Mr. Gilys. Mr. Veselka’s position was more understandable: he was always an oppositionist, sometimes even against himself. It was always interesting to listen to the proposals he presented to the government. Sometimes he managed to oppose even his own proposals, motivating that he had changed his opinion. But I could not understand economic professor foreign affairs minister Mr. Gilys. It seemed to me that a minister with good economic knowledge had to be the first to comprehend how inevitable and necessary this decision was in implementing the government’s agenda. Obviously, commercial banks did not miss the opportunity to take advantage of the aforesaid ministers’ position in order to exert pressure on other members of the cabinet. I am glad that these ministers remained a minority on this issue.

President Brazauskas’ position was also very important in gaining passage for the Law on Litas Credibility. Let me note that President Brazauskas upheld the government almost until the adoption of the law. However, on the eve of the adoption commercial banks tried for the last time to change the government’s position. At the initiative of president’s advisor academician Mr. Rajeckas a large council was called. The participants included for the most part heads of commercial banks as well as governor of the Bank of Lithuania Mr. Ratkevicius, finance minister Mr. Vilkelis, leaders of the parliamentary faction of the Lithuanian Labour Democratic Party (LLDP) Mr. Karosas and Mr. Kirkilas, chairman of the parliamentary budge and finance committee Mr. Kolosauskas, chairman of the Economic Crime Investigation Commission Mr. Juskus, LFMI’s president Ms. Leontjeva and others.

At the very beginning of the council I realized that the president had, to put it mildly, changed his opinion on the Law on Litas Credibility (many years of affiliation with the president made it easy for me to notice the change). I realized that heads of commercial banks had done their best. A hard conversation was in store.

And then the principle of the last source of information worked. The president was easily persuaded and could easily change his opinion, even on fundamental issues, drawing on the information he obtained last. I witnessed this yet another time at the end of my political career when the president changed radically his position concerning my removal from the position of the prime minister during one hour only. But this is another story….

So the president offered me to start. I said that it would be better if all members of the council spoke first. The composition of the audience determined the contents of the speeches. Most of the participants strongly opposed the adoption of a currency board arrangement in Lithuania. They repeated all of the traditional intimidations about the inevitable disasters that the currency board would bring if the law were adopted. Only LFMI’s president Ms. Leontjeva and Mr. Kolosauskas and Mr. Juskus upheld the idea. The latter MPs had visited Estonia to familiarise themselves with the functioning of the currency board and thus became keen advocates of this model.

In the light of this absolute criticism of the Law on Litas Credibility even finance minister Vilkelis, who felt in which direction the president was steering the council, expressed some doubts. By the way, he was the last to speak so he could take a position that would suit any outcome. Mr. Vilkelis upheld the president’s idea that the adoption of the law had better be postponed for some time until there was more information on hand. I knew quite well that temporarily meant never. This would have meant abandoning the idea altogether.

When the president realized that the outcome of the council was clear, he cheerfully gave me the floor saying: “You see, Adolfas, the majority arguments are very convincing and we’d better refrain from adopting the law in parliament. Maybe we could come back to this question some day.”

It was obvious that the government’s position had to be presented very clearly and categorically. I spoke very briefly: “Your Excellency. The government cannot secure economic stability in the conditions of such unpredictable swings in the exchange rate. Exchange rate fluctuations are only pumping money from the economy to commercial banks. By not being able to influence these processes, we are becoming their hostages. Therefore, the government cannot and will not change its decision to submit the Law on Litas Credibility for the third reading in parliament. If the parliament approves it [I already had the approval of the LLDP faction], you may refuse to sign it. If you do so, the government will resign. This will be a simple and civilized way out of this situation.”

Obviously, the president and the majority in the audience did not expect a speech like this at all. The president did not anticipate such a turn and was evidently discontented. I could easily feel the president’s dissatisfaction. In such cases his blood pressure rose, his face flushing red. I felt that the president made a great effort not to criticize my position. But no more discussions followed. Although I used to stay on after any conversation to discuss with the president one issue or another, this time we all departed without further ado.

The next day the parliament passed the Law on Litas Credibility. The president signed it and we never returned to this question again. But since then I have always wanted to ask the president who and in what circumstances had influenced him so that he was ready to decline the law.

So this is the story how the Law on Litas Credibility came into being despite intense debates behind the scenes and open discussions, lobbying and vehement opposition. Apart from other economic reform components, this law laid the foundations for the country’s economic stabilization (meriting the label of “the long stabilizer” among the reporters), economic growth and a rise in people’s real income.

What in your opinion were the main motives of the opponents: interests or simply fear and a lack of determination?


I am confident that interests were the main motive that determined the opponents’ fierce resistance to the Law on Litas Credibility. And these interests were very big. These were both economic and political interests and both powerful and concrete enough.

Economic interests determined first of all the opposition on the part of the central bank and commercial banks. After all, a fixed exchange rate eliminated any possibilities to profit from swings in the exchange rate. I already mentioned the losses that economic entities incurred. These amounts did not disappear anywhere. They were redistributed from industry and other sectors for the benefit of commercial banks. This was the golden age of commercial banks. Hyperinflation, exchange rate fluctuations… How many famous “bankers” this period raised… Of course, these forces could not just take a neutral position and watch how the preparations for the introduction of the currency board proceeded. It was an out-and-out opposition. There were statements from bankers and commissioned articles with prophecies virtually about the end of the world if such a monetary policy model were adopted in Lithuania. Pressure was also exerted through individual members of the cabinet.

Political interests could not remain unexpressed either. After all, political opponents in most cases do not care about general interests of the state. The principle “the worse for the government, the better” is, unfortunately, the main motto for many politicians. I think that it was this principle that caused this fierce opposition to the adoption of the currency board. Many of them understood already then that this monetary policy would guarantee the growth of the economy and people’s real income. Naturally, that was not in line with the interests and plans of the-then opposition, whose major goal was to instil in people the idea that the parliamentary majority and its composed government were not capable of governing the state. But the thought of waiting until the next legislative elections was disconcerting for them.

There were plenty of “troubadours” on the political barricades trumpeting about the collapse of the economy and even the state that the adoption of the Law on Litas Credibility would inevitably bring.

Naturally, you were confronted with difficult tasks and puzzling questions. What was the most difficult: choosing the anchor currency, securing sufficient reserves, persuading opponents or anything else?

Frankly speaking the most difficult job was to convince members of the LLDP faction in parliament that it was crucial to adopt the Law on Litas Credibility. It took hours and hours and hours. I solicited help from IMF representatives Mr. Knobl and Mr. Cornelius, LFMI’s president Ms. Leontjeva and other specialists. We took advice from currency board specialist S. Hanke. We organized various publications and presentation of the currency board in the media. MPs Kolosauskas and Juskus visited Estonia and familiarized themselves with the functioning of the currency board system. This facilitated dialogue with members of parliament.

Of course, I am not talking now about political opponents and their committed economists. No arguments could suffice or convince them. They simply did not want the-then ruling majority, its government and the president to achieve positive changes in various areas of life, including the economy. The opposition followed faithfully the principle “the worse, the better.”

In forming the Litas stabilization fund, we received tremendous help from IMF. Also, the repayment of Lithuania’s pre-war gold reserves by foreign countries, first of all France and England, did not come amiss.

Why was the U.S. dollar chosen as the anchor currency? After all, integration into the European Union was already being projected then.

The choice was not difficult to make. Almost all hard currency reserves in the Bank of Lithuania were in US dollars. Almost all trade transactions of Lithuanian economic entities with foreign partners were in US dollars too. At that time the prospects of Lithuania’s full membership of the European Union in 2004 were very dim indeed. By the way, the introduction of the European currency, the euro, was only a plan then. As we all know, the euro as the common means of settlement in European countries was introduced only from the beginning of 2002.

How was the exchange rate set? Did anyone profit (in the bad sense of the word) from fixing of the exchange rate?

Fixing the exchange rate was not easy either. We held long and difficult negotiations with IMF, the Lithuanian Industrialists Confederation, commercial banks and other business associations. Industrialists wanted the litas-U.S. dollar exchange rate to be fixed at no less than 4.5 to 1 or 5 to 1. IMF credibly insisted that the exchange rate should be not higher than 3.2-3.5 to 1. After intense negotiations we reached not a bad compromise at all, to my mind. The litas-U.S. dollar exchange rate had remained 4 to 1 for almost six years until the litas was pegged to the euro. True, shortly afterwards the U.S. dollar depreciated markedly against the litas. Just for fun, remembering the saying of one Lithuanian political classicist, “who can deny” that the earlier strength of the dollar was not based on the strength of the litas…

I don’t think that anyone profited from the fixing of the litas to the U.S. dollar. It was before the Law on Litas Credibility came into effect that profiting, large-scale profiting indeed, had taken place.

The currency board system did not appear in Lithuania overnight. How long did it take to implement the system?

Naturally an important decision like this could not have been adopted very quickly. Nevertheless, it took much longer than expected. It took no less than eight months from the promotion of the idea until the adoption of the Law on Litas Credibility in the parliament.

Can you count how many times attempts were made to abandon the system? Would you count them with your one hand?

There were many calls and intimidations to scrap the currency board model, but not a single political party in power dared to even start such a debate in the parliament. Argumentation on the part of individual politicians or industrialists could not be viewed as attempts to dismantle the system.

Ten years have passed since the currency board arrangement was installed in Lithuania. Do you think the system has justified itself? Would you make the same decision once again, and in general is it hard to implement such sweeping reforms?

It is my strong conviction that the very fact of celebrating the tenth anniversary of the currency board in Lithuania answers this question. This system has survived all parties which have been in power. I have already mentioned how strong the opposition was. It was claimed that this ostensibly disastrous monetary policy would end with the end of the LLDP tenure. During those ten years the opposition and other political parties had many occasions to abandon the currency board. However, no politician dared to even start debating this question, although there was constant pressure, especially from industrialists, to change the exchange rate of the national currency and the anchor currency. This confirms once again that the currency board arrangement, which has been applied for ten years now, has fully justified itself.

Reforms like this are indeed very difficult to implement. The government offered this decision although it was disadvantageous for the government itself. The government forewent the right to draw loans from the central bank, which lost the function of a lender of last resort. So this move required a great deal of political will on our part.

However, if I had to take this decision once again, it would be the same because it was exceptionally important and necessary. And it has excellently served the common good.

And what benefits has this system brought for people?

I can see several gains. Apart from other elements of the economic reform, a strict monetary policy first of all helped to curb inflation, or price rises. To quote one classical economist, it is inflation that robs and impoverishes unnoticed the whole society. Curbing inflation laid the foundations for the rise of the economy and people’s real income. Higher pensions and wages and stable or slowly rising prices are the goals which all governments pursue, and societies count on their governments to achieve these goals.

A strict monetary policy pursued in Lithuania since April 1, 1994 has secured a rapid increase of gold and hard currency reserves. They grew almost 30 times only during the incomplete three-year tenure of the sixth administration! This laid the foundations for the long-term stability of the litas. And the winners of a stable national currency are first of all the people!

Thank you very much