Honourable Chairman of the Seimas of the Republic of Lithuania,

In order to include at least the most essential facts and trends into the Annual Report that describe the development of the state of Lithuania in 1995, there is a comprehensive version prepared in writing. However, so many important things happen in our country during a year, that it is impossible to put them all into one report.

The full text of the Annual Report is issued as a separate publication and distributed to all the members of the Seimas and the Government. I hope that it will be useful to those who wish to study in-depth my opinion about last year's developments in Lithuania. Today I present to your attention a much shorter version which is devoted only to the most important matters, including those that acquired new features after the written version of the Annual Report was set for printing. For lack of time I shall not dwell on culture, science, education, health care and many other very important spheres of our life; these will be dealt with in the written version.

Economy is the foundation for the existence and welfare of a nation and a state, therefore, first of all I should like to speak about economy and later about politics.

In 1994, Gross Domestic Product, which shrank dramatically in 1990-1992, slightly increased for the first time during the times of radical economic restructuring. According to the analysis of the economic development in 1995 based on incomplete data, it increased by about 3-4 per cent. The structure of GDP is undergoing considerable changes as well: production in all sectors decreased from 75 per cent in 1991 to approximately 33 per cent in 1995, and during the same period the volume of services increased from 25 to 67 per cent.

Last year we could observe the first signs of intensification of industry. The extraction and processing industries offered more products to consumers. There was an increase in the sales of productin of chemical, clothing, fur dressing and dying, and paper industries. However, the industries of machines and machinery, electric equipment and appliances, medical, high precision and optical equipment are still trying to recover albeit with little success. The activities of all these enterprises is impeded by the shortage of circulating capital and the crisis in the banking payment system; the tax system which does not encourage at all the introduction of new technologies or vitalise investment processes.

The negative foreign trade balance remains under the influence of unfavourable structure of imported goods that has developed historically. Since we do not have our own primary energy resources we are forced to import them. This results in the overall foreign trade deficit that exceeds on billion Litas and comprises 5-6 per cent of the overall turnover. The export of some goods is much higher than import, and their trade balance is positive.

The geographical structure of foreign trade also changes. In 1993, the commodity turnover with the countries of the Commonwealth of Independent States comprised 63 per cent of the overall foreign trade volume, and with the Western states it comprises 37 per cent. According to incomplete data, in 1995, the trade volume with the East was almost 40 per cent, and with the West - 60 per cent.

These figures show that the industry is undergoing positive processes, that the quality of production is improving and new roads are paved into the Western markets. An annual increase can be observed in the output of textile and chemical industries, and in the export of timber and wood products.

When restructuring our economy, we should give more attention to the development of small- and medium-scale businesses. The world experience shows that this type of enterprises can react faster to the changes on the market and produce high quality goods.

The construction sector was largely affected by the continuous increase of prises for construction, insolvency of clients and consequent indebtedness of contractors, as well as a drop in the number of orders.

In general, the Lithuanian transport sector was able to meet consumer demand. The activities of various branches of transportation is intensifying, excluding the railway transport. The readjustment of the latter from East to West is too slow. Because of lack of resources, the key projects of modernisation of transport infrastructure are implemented with the help of foreign credits and through direct investments.

Nearly thirty Central and Eastern European states are going through the transitional period which exposed common macroeconomic problems. I believe I will not be wrong in saying that among these problems inflation or price rise is the most acute one. This depends on the rise of production costs and the growth of demand. At present, the inflation we are currently experiencing is caused by production costs when prices are determined by input. In Lithuania, in 1995, inflation reached almost 36 per cent, and although it exceeded the anticipated level by ten points, we are not much behind Latvia and Estonia (note: in Latvia - 23 per cent, in Estonia - 29 per cent).

The higher than expected level of inflation of last year can be explained by two inevitable decisions that were taken on the increase of support of agricultural producers and the rise of electricity tariffs.

We had to adopt these decisions in order to strike a balance between the interests of producers and consumers. For Lithuania, agriculture has been a traditionally important sector. This is predetermined by our history and nature. Last year, there were many measures implemented to regulate prices of agricultural products and farmers' income. This brought about tangible positive results: as compared with 1994, the overall agricultural output increased by nearly 2 per cent, the payouts for sold products increased by more that 60 per cent. This basis is still too inadequate for large investments, nevertheless, through sensible management and search for new markets, input costs can be covered at least.

Last year the agricultural reform went at a usual speed and additional 35 thousand people recovered their lands. So far farming land has been returned to 165 thousand former owners. Their land constitutes 45 per cent of the total land used for agricultural production. About 100 thousand people of the abovementioned number have already been issued with ownership documents. I am aware that not everyone is satisfied with such pace of the agricultural reform. However, we should bear in mind that this is a very complex process. For example, the 1922 land reform was not finished even by 1939. Today we have to encourage sensibly the establishment of new promising farms and their co-operation.

The current situation in the energy system is rather complicated. Such a situation occurred not in a day - problems accumulated throughout the years. In my last year's Report I proposed to revitalise the energy sector, make a forecast of energy prices for at least two or three years. Unfortunately, my suggestions were not heard by those who were supposed to, that is the Government who has to deal with strategic economic issues, and, of course, the Ministry of Energy itself. It is especially difficult to justify inactivity in combating theft of electricity. For this reason alone, each year the revenue losses amount to 100 million Litas. Last year heat losses increased by approximately 900 thousand GCal (giga-calories). Such losses are compensated by burning more than 100 thousand tonnes of mazut which costs about 40 mln. Litas. As much as 30 per cent of hot water heated in boiler rooms of housing blocks is lost on the way to people's flats because of leaking pipelines and inappropriate account. Even the wealthiest countries cannot afford such waste. We, too, have to take urgent measures to stop this from happening, otherwise the losses will continue to increase and, among the international community, we shall earn a poor reputation of squanderers.

Everyone has his own opinion about what happened in the Lithuanian banking system. I believe that it is yet impossible to define accurately and confidently the processes taking place in the banks: whether this is a general banking crises connected with the economic decline of our country, or is simply a problem of solvency and liquidity of particular banks. Whatever it may be, the trust of economic subjects and natural persons in banks has suffered considerably. This can be seen from the amount of letters flooding the President's Office and from the number of people coming to the Reception Office to air their complaints. Budget revenues have declined, and people's living standards have been badly affected. The assets of economic subjects frozen in the suspended banks has a negative effect on the economic situation throughout the country. Production is impeded by complicated payment system for material products, accomplished work and services in all economic sectors. I understand very well the dissatisfaction of the Lithuanian producers about the situation, especially since the economic development is retarded by the lack of circulating capital, imperfect tax and finance system, and a limited market.

Bank depositors, first of all elderly people and those receiving social allowances, found themselves in a very tricky situation, because they cannot use their savings even for basic necessities. Under the current economic circumstances, it is not possible to compensate immediately all the losses incurred to the people. However, this is already being done and will be continued, and I want to reassure that the state will do all within its powers to help the people recover their money.

It would be naive to expect that foreign businessmen will ignore the crisis in a few banks while studying possibilities for their investments in Lithuania. No propaganda clishes can hide such a failing. If we manage to overcome the difficulties, we shall emerge from this crisis stronger than we were before, and our international prestige will rise.

Nearly two months have passed since the end of December events, however there is yet no in-depth analysis of the developments. The Bank of Lithuania, law enforcement institutions and the Government whose activities directly and indirectly influence the state of affairs in the banking system, tend to defend their departmental interests rather than devote all their efforts towards the rectification of the situation. The worst thing of all is that we wait for foreign experts' conclusions as if they were a panacea, and as though our own specialists are totally incapable. In my opinion, the specialist of the Bank of Lithuania should come forward with their recommendations in defining the level of solvency and liquidity of commercial banks. We should seek advise from foreign experts only when final conclusions are drawn and when looking for the support of foreign financial organisations. These issues need to be solved immediately and effective supervison must be ensured of the implementation of the adopted decisions.

Last year's budget performance can be evaluated as satisfactory. In 1995, we did not receive nearly 120 million Litas of the planned revenues, which comprises 3 pr cent. This, of course, affected the assignations to the institutions and organisations financed from the budget. The state is indebted to hospitals, schools of higher education and other institutions which, in their turn, could not pay for heating, electricity and other services.

I should like to remind you that according to the functioning laws, these debts cannot be returned at the expense of the subsequent year's budget resources.

The effects of the suspension of banking activities can be felt sharply especially now, when collection of budget revenues is increasingly lagging behind the schedule. In January, the state budget received 20 per cent of revenues less than in December. In February the situation shows no signs of improving. This year, the plan of budget revenues is especially tight and it will require much effort to carry out the plan.

More than half of state budget revenues consist of VAT and excise duties. Last year, very strict measures were applied to collect these taxes and the results were good. There were more taxes collected than planned.

At present, a suggestion to reduce tax burden is very popular. In Lithuania, taxes are not too high as compared with other countries, although they could certainly be lower if the state were able to compel all the tax payers, and I stress 'all', to pay taxes. In other words, the more taxpayers, the lower taxes.

Recently the head of the Government was replaced. Certainly, this is an important event, however, we should not blow it out of proportions. State politics does not depend on a single person, whatever his position. We shall continue to implement the measures aimed at reviving banking activities, returning peoples' deposits, preserving the stability of financial system and meeting social obligations. All this will have to be very clearly outlined in the new Government's programme which will have to approved by the Seimas.

I am forced to admit frankly that in our country conscientious work has been severely depreciated. Very often salaries that are paid to persons with equal qualifications for exactly the same work differ 10-15 times. The public sector is no exception. The draft law on work payments to the employees of budget organisations should be adopted immediately and salaries of the persons with equal qualifications levelled irrespective of their place of work; additional work payments disguised as allowances, regular bonuses, and particularly high interests rates paid to the bank's personnel should be eliminated.

Certain commercial banks have become especially bold in abusing the freedom given to them by law to dispose of administration funds. It is not acceptable when a monthly salary of a head of a commercial bank is as high as a five year salary of a university rector. The results of the banks' activities speak for themselves. Therefore, it is necessary to return to state control: to determine the level of salaries or regulate the administrative and management expenses of commercial banks.

In the life of each state the middle stratum of the society plays a significant role. These are economically active, qualified and well-off people, true specialists in their fields, small- and medium-scale proprietors. This stratum helps maintain stability in the country's economy and politics, and create conditions for the development of democracy. In Lithuania, we also have to try and create favourable conditions for the growth and expansion of the middle stratum. With its assistance we shall be able to get out of the economic depression, help the people in need of social support. I should like to stress that preconditions for this are already there. Last year more interest was shown in higher education - entry competition at schools of higher education increased. Education has been and will be the foundation of our country's development.

The year 1995 was full of events in the life of self-governments. I shall remind you only of the main events: on March 25 elections to self-government councils were held according to a new - proportional - election system. A new Law on Local Self-governments came into effect. It was prepared on the basis of the provisions of the Constitution of the Republic of Lithuania. Last year was the formative period of the economic basis of self-governments. The first stage of the administrative territorial reform was completed. The number of categories of administrative units and of units themselves was reduced. The Lithuanian Association of Self-Governments was founded to protect the interests of self-governments and represent them at state authority institutions.

I cannot but mention that in 1995, on the basis of the provisions of the Lithuanian Constitution, higher administrative units - counties - were formed which, according to law, are governed by the Government. The first stage of the formation of county governor's institutions was far from easy. There were disagreements with self-governments over the transfer of functions that had previously belonged to self-governments, to the counties. The second stage of county formation will not be easy either.

During the first stage of the administrative territorial reform, those 56 towns and regions were granted the right of self-government which had appropriate conditions for carrying out independent functions and those delegated by the state as has been established by law. The law allows self-governments to divide their own territory into smaller administrative subunits - neighbourhoods, and entrust an official of the self-government administration - the elder - to deal with social issues..

In my opinion, the main criteria in appointing elders should have been competence, work experience and personal prestige. Unfortunately, many mayors, who represent political parties that won elections to self-governments, appointed elders disregarding the residents' opinion. Former chief rural executives who seemed to be the most suitable candidates, were not offered these positions. In addition, former chief rural executives and quite a large number of other self-government employees were dismissed in violation of law. According to the State Control Department, in the cases of unlawful dismissal of employees, courts ruled that self-governments pay over 216 thousand Litas of compensations.

In 1996, it is important to strengthen economic and financial independence of self-governments. Within a set time limit, it is necessary to implement the law on the transfer of a part of the state's property to the ownership of self-governments, and pass legal acts that would regulate the procedure of management, utilisation and disposal of the property of the state and self-government. The procedure of self-government budget formation should also be readjusted.

It is also necessary to develop co-operation between the powers that belong to different levels of administration, to harmonise the laws functioning in Lithuania with the legal basis of the European Union. In 1996, we should work out the concept of state administration reform. It would become a basis for the restructuring of the system of state administration, development of local self-governance and establishment of new self-governments in future.

Last year important steps were made in creating a national legal system. Many new laws were adopted the purpose of which is to regulate economic, financial, social and other issues that are very important to the state and the people. However, too little attention was given to the systematising and codification of the adopted laws, their adjustment to the European Union's requirements. Last year we failed to adopt any new codes. Meanwhile, the efforts are confined to amending the codes that were adopted before the restoration of independence of the Republic of Lithuania (March 11, 1990). Last year's activities of the Seimas show that the regular criticism - the too frequent alterations in laws - is correct. The endless 'patching' of laws encourage legal nihilism or simply circumvention of laws. The national legal system should be built quickly, but giving it enough thought.

The year 1995 will be recorded in the history of Lithuania as the year when the court system started functioning according to the provisions of the Constitution of the Republic of Lithuania. The General Prosecutor's Office, as well as regional and town prosecutors' office were reorganised, district prosecutors' offices were established.

Last year a four tier court system was introduced and time limits for court trials became longer. This induces dissatisfaction in the people. In my opinion, appropriate amendments of procedural laws should be drafted and adopted to simplify court procedure for obvious and simple cases.

There is an increasing number of complaints from the public about judges. Independence of the people who have chosen this profession should not take precedence over their professional and civil responsibility. The behaviour of the judges who abuse their official position should be evaluated accordingly by the Ministry of Justice, the Judges' Council and the Judges' Court of Honour. It is necessary to speed up the preparation of the judges' Code of Ethics.

Unfortunately, in my Annual Reform I cannot speak of improvement in the crime situation, because there is none. On the contrary, last year the number of registered crimes exceeded that of the previous year by 3.7 per cent. The number of heavy crimes is growing. Certainly, this can be partly explained by objective factors: the overall economic situation in the country, inadequate material and technical basis of the law enforcement institutions, shortage of qualified staff. On the other hand, though, we cannot fail to observe that when dealing with the main issues of crime control and prevention, there is practically no co-ordination among the law enforcement institutions, their co-operation with the other state power and administrative institutions is insufficient. This became only too obvious during the critical period in the banking system at the end of 1995.

Heads of law enforcement institutions, first of all of the Ministry of Internal Affairs and the General Prosecutor's Office, should understand that crime prevention and control are a problem of the whole country and that it should be solved through the concerted effort of all these institutions. State matters should come before departmental interests. Combat against crime should be conducted according to a special programme of crime control and prevention which would correspond our everyday realities. More attention should be given to the importance of the forecast of negative social phenomena and prevent them from the very start.

It is also very important to implement the principle of unavoidability of punishment. There is only one way to achieve this by disclosing as many crimes as possible and punishing those who committed them.

It is difficult to combat organised crime by traditional means alone. Special anti-mafia laws are required, although at the moment the law enforcement institutions could use to their advantage the possibilities provided by the Law on the Operative Activities.

There is yet another reserve for combating crime which has not been utilised so far. It is the willingness of citizens to participate in crime prevention. Why not support this initiative! Certainly, the principle of voluntarism should be strictly observed here, and legal and social aspects should be settled.

The year 1995 witnessed successful development of international relations of the national defence system: establishment of the infrastructure and the armed forces interoperable with NATO, as well as integration into Western security and defence systems. The achievements in this sector are obvious and need no wider comments.

We are more greatly concerned with the day-to-day issues of the army life, which saw rather few positive changes. The problems of creation of the legal standard basis and financing of the army still remain to be tackled; extra-statutory relations among the officers continue to be a problem; the administration of conscription is poorly organised, the machinery of the army is too large, there are no concrete programmes on the training of staff, procurement of armament and technical equipment. I would like to voice my criticism in the address of the Government as well as the Ministry of National Defence and the leadership of the Armed Forces which failed to submit for the debate in the Seimas the programme on the development of national defence system for the nearest future.

I would like to comment on the implementation of the decisions adopted by the National Defence Council. Article 8 of the Provisional Law on the National Defence Council envisages that (I quote) "the decisions of the National Defence Council shall be binding upon all the institutions of the state". Unfortunately, I have to state that some decisions are being ignored and there are even attempts to revise them. This is not understandable. Therefore, I ask the Prime Minister to give a concrete explanation why the implementation of certain decisions of the National Defence Council is delayed and to request the state officials to take very responsible and timely action in respect with the recommendations provided by the National Defence Council.

The foreign policy of Lithuania, as well as its internal policy is aimed at securing prosperity of the country and welfare of its citizens.

Now, when we are only a few years away from the third millennium, the standards of the approaching age should be applied in foreign policy. That is why we hear often that the 21st century shall be the century of humanism, democracy and co-operation among nations, if it comes at all.

Last year the efforts of the international community helped to bring to an end the war in Bosnia. Just recently such wars in Europe seemed impossible. Whereas in recent years the possibilities for the international community to interfere with that conflict and to bring it to an end was viewed sceptically. Today we see Germans and Poles, Americans and Russians, as well as Lithuanians and Danes in military uniforms on the Bosnian ground. Only now did the peacekeeping attempts made it possible to re-establish peace in the region, however, this has also given us the hope that in the 21st century there shall be no place for bloodshedding conflicts among the nations in Europe, and that the peacemaking shall be replaced by partnership, co-operation and integration.

I see Lithuania's place in a united Europe implementing co-ordinated economic, foreign and security policies. Such Europe would be impossible without Lithuania and other states of Central and Eastern Europe. It is also impossible to envision a single and undivided Europe which would be integrating only politically and economically ignoring the security aspect. Therefore, NATO enlargement must not create new dividing lines between those countries which of their own free will have determined to create the space of the uniting Europe. At the same time, the European Union and NATO enlargement should secure the relationship of partnership, trust and overall co-operation with other European states which are not currently seeking for membership in the European Union. In my opinion, in future separate regions of Europe shall be different only in terms of the level of their integration in the union and the nature of co-operation.

I hope it will not be too strong to say that the entire life of Lithuania until the year 2 000 and after that should be based on the integration into European Union. I have always given special attention to the integration into Europe. I understand that a lot remains to be done yet, therefore, in the future I shall devote particular attention to this very important area of our activity. The society as well as all the state agencies should consider all the important decisions in the light of the integration. Lithuania should search very intensively for its place in a united Europe. We should direct our relations with the European Union more decisively towards the solution of specific issues. The pragmatic part of the policy of foreign affairs should become more specified and a greater number of state institutions should be involved in the process of integration.

It is impossible to wake up being a citizen of Europe one day. It is possible to become one. However, there should be no threats with tasks which are insoluble, with insurmountable problems of the agricultural sector, and loss of sovereignty. I am deeply convinced that integration into Europe is the most effective method of dealing with our problems. It will give us the possibility to remain secure, reduce the inflation to the annual rate of 3%, make our production competitive, guarantee democracy and ensure the standards of human rights and freedoms.

This is not just an abstract and groundless vision. This is simply an everyday life in the European Union. The burden of responsibility shall be accepted not only by me and the Government, but also the political parties, mass media and non-governmental organisations. All of us should change and make changes, teach and learn.

We hear a lot of good ideas in Lithuania about the striving of the European Union for implementation of the four major freedoms: free movement of capital, services, labour and people. I should like to stress that little has been done to enable our state to compete in all four areas of freedoms.

European Union countries are entering the Economic and Customs Union, the standards of which constitute the guidelines for economic reforms in Lithuania. Lithuania was able to meet certain standards of this Union in the areas of the state budget deficit, national indebtedness and stability of the Litas already in 1995.

The European Union is already contributing to the progress in Lithuania. The major political forces in the Seimas were able to reach an agreement on the Article 47 of the Constitution. I am convinced that this amendment which should be introduced in the shortest possible period will play a very positive role in attracting foreign investments and shaping a positive image of Lithuania in the world.

I think that the year 1997 or 1998 should be the start of negotiations for membership between Lithuania and the European Union and they should be concluded in about one year. Ratification of an agreement on our membership in European Union should also start this century. I shall make every effort to ensure that our citizens, just like the citizens of the other European countries, became aware of the importance of Lithuania's integration into Europe and supported it. It would help us to implement these tasks which I see as very real.

One of the main goals of our foreign policy is free border crossing by Lithuanian citizens. So far the negotiations over this issue are hardly going on. To my mind, now, as it became technically possible, it is time to consider the unilateral revokation of visa regime to all citizens of the European Union member states . It would be of practical benefit to Lithuania, and demonstrate to Europe our good will and resolution.

In addition to that I would like to note, that effective border control is only possible when taking special engineering-technical measures. It has been discussed many times during the meetings at different levels, however, so far there are no changes to the better. Organisation of competitions got prolonged. Up to now we still do not have the results of the international competition "The Information System Of the Border Control", which was announced on 1 September 1995. The new Government has to take as speedy as possible the engineering-technical measures for the State border control.

It is important that in the processes of reforms and integration, we increasingly realise that apart from well-disposed Nordic countries and some of the Western European countries we have a reliable partner and good neighbour Poland. One more way to Brussels is revealing in front of us - together with Poland and other Vyshegrad countries. Good co-operation between Vilnius and Warsaw is

an indubitable prop also to the other Baltic states.

I have always considered the legal strengthening of the State borders of Lithuania a priority of my realistic foreign policy. I follow the spirit and instruments of the Helsinki process, which accentuate inviolability of borders and their establishment by mutual agreement only. In spite of some unsettled problems after the summit contacts we, in fact, settled the border issues with Latvia, Belarus, and Poland. The negotiations with Latvia over the borders the of sea economic zone will be started anew. It is important that the Latvian side also agrees with it. Very soon we will conclude an agreement concerning the State borders with Russia. I think it is proper time for both parties to strengthen political will on this issue.

Lithuania's achievements in foreign policy significantly contribute to the security and stability of the Baltic Sea Region and the whole continent. It has been recognised and highly estimated in all European capitals.

Lithuania is undoubtedly successful in implementation of human rights and democracy. Lithuania does not have any territorial problems with neighbours, good relations with which are established by international agreements. Relations with national minorities in Lithuania are based on European standards.

All that speaks about political maturity of the State and forms a firm basis for Lithuania to seek for the status of non-permanent member of the United Nations Security Council in 2001.

Dear Members of the Seimas of the Republic of Lithuania,

Today, on the eve of the day of the Restoration of the State of Lithuania, it is deeply symbolic to recall the most important stages in our history. The Grand Duchy of Lithuania, the inter-war Lithuania, and the present Republic of Lithuania, - the Lithuanian people were carefully and patiently lying and strengthen the foundations of Lithuanian self dependence.

Last year, which was the sixth one after the restoration of independence, we added one more brick to the centuries old construction, - we took one more step by signing the European Union Association Agreement and submitting application for its membership.

I have faith in that Lithuania will soon become full member state of the European Union. We will achieve it by joint efforts. Thus, in conclusion I would like to recall the words of a herald of revival Vincas Kudirka: "The cause of homeland is a single one to everybody,...it is above egoism of different parties,... in front of this cause the opposite parties have to stand with olive branch and forget personal disagreements". It was important idea a hundred years ago. It is urgent today and will remain such in the future.

Thank you for attention.