Economy
GDP (2006): $32.8 billion.
Annual growth rate (2006): 7.5%.
Annual inflation rate (2006): 3.7%.
Unemployment rate (2006): 5.6%.
Per capita income (2006): $9.58.
Natural resources: Limestone, clay, sand, gravel, iron ore, and granite.
Major sectors of the economy (2006): wholesale and retail trade, transport 31%, manufacturing, mining 26%.
Trade: Exports--$15.55 billion (2006): mineral products 23.9%, machinery and mechanical appliances 12.4%, textiles and textile articles 9.2%, wood and paper products 4.6%. Major export partners--EU 63%, CIS 21%. Imports--$21.14 billion (2006): mineral products 23.4%, machinery and equipment 17.6%, transportation equipment 13.9%, chemicals 8.4%, base metals 7%, textiles and clothing 5.6%. Major import partners--EU 62%, CIS 28%.

GEOGRAPHY
The largest and most populous of the Baltic states, Lithuania is situated on the eastern shore of the Baltic Sea, in northeastern Europe. It is bordered by Latvia to the north, Belarus to the southeast, Poland to the southwest, and Kaliningrad, a territory of Russia, to the west. It has 60 miles of sandy coastline, of which only 24 miles face the open Baltic Sea. Lithuania's major warm-water port of Klaipeda lies at the narrow mouth of Kursiu Gulf, a shallow lagoon extending south to Kaliningrad. The Nemunas River and some of its tributaries are used for internal shipping. Situated between the 54th and 56th latitudes and the 20th and 27th longitudes, Lithuania is glacially flat, except for the hills (of no more than 300 meters) in the western and eastern highlands. The terrain is marked by numerous small lakes and swamps, and a mixed forest zone covers 30% of the country. According to some geographers, Lithuania's capital, Vilnius, lies at the geographical center of Europe.

LITHUANIA ECONOMY
In the second half of the 20th century, the Lithuanian economy underwent fundamental transformations. The Soviet occupation of 1940 brought Lithuania intensive industrialization and economic integration into the U.S.S.R., although the level of technology and state concern for environmental, health, and labor issues lagged far behind Western standards. Urbanization increased from 39% in 1959 to 68% in 1989. From 1949 to 1952 the Soviets abolished private ownership in agriculture, establishing collective and state farms. Production declined and did not reach pre-war levels until the early 1960s. The intensification of agricultural production through intense chemical use and mechanization eventually doubled production but created additional ecological problems.

The disadvantages of a centrally planned economy became evident after the collapse of the USSR in 1991, when Lithuania began its transition to a market economy. Owing to the availability of inexpensive natural resources, the industrial sector had become excessively energy intensive, inefficient in its utilization of resources, and incapable of manufacturing internationally competitive products. More than 90% of Lithuania's trade was with the rest of the USSR, which supplied Lithuanian industry with raw materials for production and a market for its outputs. The need to sever these trading links and to reduce the inefficient industrial sector led to serious economic difficulties.

The process of privatization and the development of new companies slowly moved Lithuania from a command economy toward a free market. By 1998, the economy had survived the early years of uncertainty and several setbacks, including a banking crisis, and seemed poised for solid growth. However, the collapse of the Russian ruble in August 1998 shocked the economy into negative growth and forced the reorientation of trade from Russia toward the West. In 1997, exports to former Soviet states were 45% of total Lithuanian exports. In 2006, exports to the East (the Commonwealth of Independent States--CIS) were only 21% of the total, while exports to the EU-25 were 63%, and to the United States, 4.3%. At the end of the first quarter of 2007, Lithuania accumulated foreign direct investments (FDI) of $12.7 billion, with U.S. investments amounting to $277 million, or 2.4% of FDI. The current account deficit in the first quarter of 2007 stood at 11.6% of the GDP.

Lithuania has privatized nearly all formerly state-owned enterprises. More than 79% of the economy's output is generated by the private sector. The share of employees in the private sector exceeds 72%. The Government of Lithuania completed banking sector privatization in 2001, with 89% of this sector controlled by foreign--mainly Scandinavian--capital. The government has also completed privatization of the national gas and power companies "Lietuvos Dujos" (Lithuanian Gas) and "Vakaru skirstomieji tinklai" (Western electricity distributor). The national telecommunications company had a monopoly on the market until the end of 2002, but now several cell phone companies provide competition. "Rytu skirtomieji tinklai" (Eastern electricity distributor), "Lietuvos Energija" (Lithuanian Energy), and "Lithuanian Railways" remain state-owned.

The transportation infrastructure inherited from the Soviet period is adequate and has been generally well maintained since independence. Lithuania has one ice-free seaport with ferry services to German, Swedish, and Danish ports. There are operating commercial airports with scheduled international services at Vilnius, Kaunas, and Klaipeda. The road system is good. Border facilities at checkpoints with Poland have been significantly improved, using EU funds. Telecommunications have improved greatly since independence as a result of heavy investment.

The last couple of years have been good for the Lithuanian economy. In 2006, Lithuania's GDP increased 7.5%, above expectations, and in the second quarter of 2007 Lithuania's GDP grew by 8%. This economic growth has been largely driven by private consumption. The contribution of domestic market-oriented sectors has also increased. Growth in 2006 was strongest in construction, retail and wholesale trade, and processing and light industries. In 2006, inflation reached 3.7%, and the government's budget deficit stood at approximately 0.3 % of GDP. Greater development is needed in public policy and further progress in structural and agricultural reforms. Lithuania pegged its national currency--the litas--to the euro on February 2, 2002 at the rate of LTL 3.4528 to EUR 1.

Lithuanian income levels lag behind those of older EU members. Lower wages and high income taxes may have been factors that contributed to the trend of emigration to the wealthiest EU countries after Lithuania joined the European Union in 2004. In 2006, the flat income tax rate was reduced to 27%, and a further reduction to 24% is expected in 2008. Moreover, in 2007, the minimum wage increased to $277 per month; the average wage now stands at $724 per month, a 20% increase from the previous year. Income tax reduction and wage growth are starting to result in the return of some emigrants; in early 2006 emigration was 30% lower than in 2005.

The initial euro adoption target date of January 1, 2007 was postponed due to the high inflation rate of 2006. Achieving the Maastricht inflation criterion necessary to adopt the euro in 2010 will require significant fiscal tightening in Lithuania. In the short-term, increasing energy prices are likely to raise the headline inflation rate above 4% in 2007. While this influence could moderate in 2008, temporary spikes from the necessary excise tax increases and longer-term convergence forces will probably keep inflation above the Maastricht reference value. Rapid credit growth will call for continued proactive supervision and implementation of prudential measures to ensure financial stability.

DEFENSE
Lithuania, a relatively new member of the North Atlantic Treaty Organization (NATO), fully endorses the concept of "collective defense." National policy recognizes the primacy of NATO as the guarantor of security in Europe. The goal of Lithuania's defense policy is to create a military that can contribute to international missions through the NATO alliance, the UN, and other groups, and to continue to integrate Lithuania into Western defense structures. The Defense Ministry is responsible for combat forces, search and rescue operations, and intelligence. The government has committed to but not yet reached the goal of dedicating 2% of GDP to defense spending.

Lithuania maintains approximately 10,000, active duty troops and 8,000 reserve troops. The core of the Lithuanian force structure is the Iron Wolf Motorized Infantry Brigade, which consists of five battalions and appropriate support elements. The Lithuanian Air Force operates 17 fixed wing aircraft and nine helicopters. The Home Guard is organized into five districts.

The Border Police, with 5,400 guards, fall under the jurisdiction of the Interior Ministry; they are responsible for border protection, passport and customs duties, and the interdiction of smuggling and trafficking activities.

Lithuania cooperates with Estonia and Latvia in the joint naval squadron BALTRON, and plans to contribute to a trilateral Baltic land forces element for future NATO Response Force rotations. Lithuania has deployed troops to Iraq since 2003 and has soldiers serving with Polish and Ukrainian counterparts in Kosovo. Since the summer of 2005, Lithuania has also been part of the NATO International Security Assistance Force (ISAF) in Afghanistan, leading a Provincial Reconstruction Team in Ghor province. A small special forces element also serves in Afghanistan under NATO command.