PUBLIC AUDIT REPORT

PUBLIC DEBT MANAGEMENTJuly 30, 2007 Vilnius

Annual meeting of INTOSAI PDWG Nadi, Republic of Fiji Island, July 24-25, 2008

Erika Latyšovič, Chief Public AuditorNational Audit Office of Lithuania

erika.latysovic@vkontrole.lt

Auditee – Ministry of Finance of the Republic of Lithuania

Audit objectives – To assess:

Public debt management on behalf of Government

Design and objectives implementation of the programme “Debt Management on Behalf of Government” implemented by the Ministry of Finance

Assessment Criteria:

• Following the legal acts regulating government‘s debt management

• Following the Guidelines for Public Debt Management developed by the International Monetary Fund and World Bank

• Efficiency of planned government‘s debt management measures: comparison of measures applied in Lithuania with good foreign practice

Public debt - the consolidated amount of assumed but still outstanding liabilities of entities attributable to the general government sector, that have the borrowing right, to creditors to repay funds borrowed by issuing Government securities, signing loan, leasing agreements and other binding debt documents

When borrowing and managing public debt the Government shall be represented by the Ministry of Finance

By the end of 2006 the public debt equalled LTL 14 938,7 million (1 Euro – 3,4528 LTL fixed rate)

Borrowing objectives in Lithuania

• To finance the State Budget deficit and to balance the State Treasury cash flows

• To finance State investments and to increase current assets of enterprises

• To cover the expenses related to the national debt and to repay the national debt

• For other purposes if there is a separate law of the Republic of Lithuania

Lithuanian public debt, deficit and debt management costs trends, 2004-2007

Year Budget deficit

(LTL mln)

Public debt / GDP

(per cent)

Public debt (LTL mln)

Public debt trend

(LTL mln)

Debt management

costs

(LTL mln)

2004 858,5 19,4 12 162,2 + 116,4 641,9

2005 668,4 18,6 13 276,1 +1 113,9 566,2

2006 1 193,2 18,2 14 938,7 + 1 662,5 569,3

2007 337,1 17,3 16 698,0 +1 759,3 710,8

Government Sector Debt (per cent of GDP) 2005–2009 forecast (The 2006 Lithuanian Convengerce Programme)

Year 2005 2006 2007 2008 2009

Indicator 18.7 18,4 19,2 19,0 17,7

Public Finance Sustainability Risk (European Commission)Risk level Country

Low Lithuania, Denmark, Estonia, Latvia, Netherlands, Finland, Sweden, Poland

Medium Belgium, Germany, Spain, France, Ireland, Italy. Luxembourg, Malta, Slovakia. United Kingdom

High Greece, Cyprus, Hungary, Slovenia, Portugal

Trends of government sector debt to GDP ratio in Baltic's and EU member

states in 2003-2007, per cent

Country 2003 2004 2005 2006 2007

Estonia 5,3 4,9 4,8 4,1 3,4

Latvia 14,4 14,3 11,9 10,0 9,7

Lithuania 21,2 19,4 18,6 18,2 17,3

ES member states (average)

63,3 63,8 63,4 61,7 58,7

Structure of public debt

By the end of 2006 (per cent):

• Domestic debt – 31,6 foreign – 68,4

• Long–term liabilities – 97,7 short–term – 2,3

• Loans – 9,1 securities – 90,9

• Debt in Euro – 81 in Litas – 17,8 other – 1,2

Liabilities of the central government

sector LTL million in 2007–2023 17

03.2

1637

.8

3610

.7

3928

.1

3866

.7

691.5661.7

569.7558.4

539.5

538.4

326.6 438.0

368.

7

287.

4

24.0

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

2007 m. 2008 m. 2009 m. 2010 m. 2011 m. 2012 m. 2013 m. 2014-2023

m.

Debt (GS issue) Interests

AUDIT FINDINGS AND CONCLUTIONS

Public debt strategy (1)

1. The objectives and indicators of the Government Medium Term Borrowing Policy Guidelines are not concrete and specific

2. Do not determined the use of public funds in case of non-deficit or surplus budget

Public debt strategy (2)

3. Do not assess optimal level of debt, which would not influence the sustainability of government sector finance

Examples:

Finland – by 2010 the debt shall be reduced by 35 per cent of GDP

Canada – by 2012–2013 the debt shall be reduced by 25 per cent of GDP

Ukraine – in 2006 the Government set forth a limit that public debt shall not exceed 20 per cent of GDP

Recommendations to the Government

• To review periodically the Medium-Term Public Debt Management Strategy by revising debt management

objectives and indicators

• To consider possibility to make a legal provision of using surplus revenues received after the government sector will

be reached a zero balance for reducing of public debt

Public debt risk management (1)

The Ministry of Finance in general ensures the debt risk management and when borrowing follows priorities and

limits set forth by the Government

Public debt risk management (2)

Borrowing limits set forth by the Government ,

(2005-2008, per cent)

Limits Actual2005 2006

The dynamics of the ratio of short-term liabilities and all debt liabilities on behalf oh government

30 18,7 6,36

The dynamics of interest expenditure for debt liabilities on behalf of government and annual amount of tax revenue planned to be collected to the State Budget ratio

25 4,9 2,39

Trends of ratio of debt liabilities on behalf of government under floating interest rate to all debt liabilities on behalf of government

10 6,1 1,88

Public debt risk management (3)

Has to be improved:

• The process of identifying of public debt risks tolerable level and sufficient periodic disclosure

• Market risk management

• Assessment and disclosure of the potential influence of contingent liabilities and fiscal threats on the public debt

Recommendations to the Ministry of Finance

• To urge the application of the debt stochastic simulation model based on cost at risk method

• To set a procedure of stress tests and to apply them on a regular basis

• To assess contingent state debt liabilities and fiscal threats and properly disclose information on them

Borrowing need

Borrowing need 2006 - 5,4 LTL bln:

The biggest part (98,5%) – budget deficit (32,3 %) and debt repayments (66,2%)

For investments only 80,9 LTL mln. or 1,5 %

Should be improved:

Rules of Assessing the Government Borrowing Need Disclosure of information in the annual Government

Borrowing Programme

Management of state monetary resources

There is no approved procedure regulating forecasting, management, and accountability of state monetary resources

Public debt and monetary resources management integrated TT system does not created

The Ministry of Finance insufficient use the right given by the Government to use (refundable) temporarily free funds from state monetary funds

Temporarily free state monetary resources are not invested for a relatively long time

Recommendations to the Ministry of Finance

To set forth a procedure regulating state monetary funds management, forecasting, and accountability

When forecasting need of borrowed funds to assess all possibilities provided by the Government for use of temporarily free money of state monetary funds

To speed the investment of temporarily free state monetary resources

Further improve the Public Debt and Monetary Resources Management IT System

The implementation of audit recommendations

Until July 2008 the Ministry of Finance:

1. Prepared the draft of new Public debt Medium Term Strategy

2. Started to use Public Debt and monetary resources Management IT system

3. Improved management of borrowed funds

4. Specified Rules of Assessing the Government Borrowing Need and indorsed Procedures regulating state monetary resources management