On April 1, 2009 the currency board system in Lithuania marked its 15-year anniversary. It was launched in 1994 by adopting the Law on Litas Credibility which tied the national currency, litas, to a strong foreign currency at a fixed exchange rate, with a 100 percent reserve backing. The Law on Litas Credibility helped stabilising the Lithuanian economy and curbing hyperinflation, while Lithuania’s national currency became liberated from government interference and manipulations.
The underpinning of the currency board, a monetary arrangement which has a 15-year record of an impeccable performance in Lithuania, is a 100-percent reserve backing which ensures that every litas in circulation is freely convertible into foreign currency. At the start the anchor currency was the U.S. dollar, and on February 2, 2002 the litas was re-pegged to the euro.
“The Law on Litas Credibility ensures that the Lithuanian government cannot resort to unrestricted issuing of money, which provokes price growth, impoverishes holders of money, plus sparks off business cycles and world-wide crises. Neither the Bank of Lithuania nor the Government or Parliament cannot print litas uncovered by euros. Therefore, the Law on Litas Credibility serves as a safeguard against manipulations in money supply,” says LFMI’s President Rūta Vainienė.
Ms. Vainienė contends that a stable litas has been the greatest virtue of the Lithuanian economy. It helped the economy to pick up and grow. During the current economic hardship, the tied litas serves as a strong anchor, preventing the country’s economy from falling into a bottomless financial abyss which would be opened up, if authorities were free to act with the national currency at their own discretion.
The importance of the currency board system in Lithuania has been highlighted by one of this model’s architects – Prof. Steve H. Hanke who served as a Senior Economist on President Reagan’s Council of Economic Advisers and as an advisor to many countries. In 1994 Mr. Hanke was Adviser to Lithuania’s former Prime Minister Adolfas Šleževičius and State Counsellor responsible for designing a currency board system in Lithuania.
“No monetary system can insulate an economy from all problems that may arise. The world economy is shrinking, and few countries will grow this year. It is noteworthy, however, that the first wave of countries to experience severe currency problems have been those with central banks — within Europe, Iceland, Ukraine, Latvia, Hungary, and Belarus,” says Prof. Hanke.
According to him, all countries are now experiencing the pain of a world economic crisis. In Lithuania, the pain is mitigated by the currency board system. “In short, things would even be worse if Lithuania had any other type of exchange-rate regime—short of being a member of the European Monetary Union,” believes Prof. Hanke.
