As early as in 1994, the Lithuanian Government had adopted a decision on Anchor Currency and the Litas Official Exchange Rate, setting the US dollar as the anchor currency and the official exchange rate at 4 litas for 1 US dollar. The main goal of having an anchor currency was to ensure the exchange rate stability of the national currency litas and to attract foreign investments in Lithuania.
In 1999, the litas exchange rate reorientation policy was initiated when the EU adopted the single currency euro. Switching to an anchor currency basket consisting of the US dollar and the euro was planned. The weight of the currencies in the basket would be set based on the balance of payments and the public debt structure at the time of making the decision. The litas was planned to be pegged to the basket in the same way as it was pegged to the US dollar, by setting a fixed rate.
In 1999, the euro was adopted by eleven European countries, but it did not have a physical form yet, and was only used for interbank settlements.
On 1 July 1999, the Guidelines for the Application of the Bank of Lithuania Monetary Policy Instruments were adopted. They set the objective of the Bank of Lithuania - to seek stability of Lithuania’s national currency. Amendments to the Law on the Bank of Lithuania were later proposed to implement the requirements set for the central banks of the EU Member States and to change its main objective so that is the same as that of the European System of Central Banks - price stability. When specifying the monetary policy objectives, it was established that the Bank of Lithuania pursues its main objective by choosing the anchor currency (currencies) and maintaining the fixed exchange rate of the litas.
When considering Lithuania’s negotiating position on the EU accession, it was agreed that the fixed exchange rate system is acceptable for Lithuania’s integration into the EU. It was stated that the fixed currency exchange rate will continue to be maintained and that Lithuania plans to replace the US dollar with another anchor currency, the euro, in the second half of 2001. Pegging the litas to the euro at the fixed exchange rate allowed to fulfil contractual requirements and enabled Lithuania to participate in the second Exchange Rate Mechanism (ERM II), the intermediate stage of assessment of the country’s preparation to join the euro area, after joining the EU.
The Bank of Lithuania emphasized that the reorientation of the litas exchange rate by pegging it to the euro will be done without changing the rate, i.e. without applying devaluation or revaluation, because the depreciation of the litas exchange rate would be harmful to Lithuania’s economy. The EU institutions officially announced in 2000 that countries which employ currency board arrangements can join the ERM II and start preparing for joining the euro area, even though the currency board arrangement is a unilateral commitment of a country that employs it to follow a stricter regime than the ERM II provides for.
On 28 June 2001, the Board of the Bank of Lithuania, in coordination with the Government, decided to set the euro as the anchor currency from 2 February 2002, whereas the official exchange rate was set according to the rate of the euro to the US dollar on the exchange market on 1 February 2001. On that day, the official litas exchange rate stood at 3.4528 litas for 1 euro and was maintained like that. The euro banknotes and coins had already entered into circulation in Europe on 1 January 2002.
When the EU Accession Treaty entered into force, Lithuania joined the ERM II on 27 June 2004, retaining the same fixed litas to euro exchange rate - 3.4528 litas for 1 euro. The currencies of the EU Member States participating in the ERM II were allowed to fluctuate against the euro within the standard limits of ±15%, however Lithuania unilaterally committed to maintain the fixed exchange rate regime and ensure that the exchange rate of the litas to the euro does not fluctuates. Such a commitment was made considering the fact that since 1994 this regime was one of the most important factors in ensuring non-inflationary and stable macroeconomic growth in the country, thus, it had to be maintained when adopting the euro.
In Lithuania, the euro entered into circulation on 1 January 2015. The exchange rate remained the same.
