PUBLIC AUDIT REPORT PUBLIC DEBT MANAGEMENT July 30, 2007 Vilnius Annual meeting of INTOSAI PDWG

1. PUBLIC AUDIT REPORT PUBLIC DEBT MANAGEMENT July 30, 2007 Vilnius Annual meeting of INTOSAI PDWG Nadi, Republic of Fiji Island, July 24-25, 2008 Erika Latyšovič, Chief Public Auditor National Audit Office of Lithuania erika.latysovic@vkontrole.lt

2. 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

3. 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

4. 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 publicdebt the Government shall be represented by the Ministry of Finance • By the end of 2006 the public debt equalled LTL 14938,7 million (1 Euro – 3,4528 LTL fixed rate)

5. 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

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

8. Trends of government sector debt to GDP ratio in Baltic's and EU member states in 2003-2007, per cent

9. 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

10. 5000 4500 326.6 438.0 4000 538.4 3500 3000 2500 3928.1 3866.7 691.5 2000 661.7 3610.7 1500 1000 1703.2 1637.8 558.4 569.7 500 539.5 368.7 287.4 24.0 0 2007 m. 2008 m. 2009 m. 2010 m. 2011 m. 2012 m. 2013 m. 2014-2023 m. Debt (GS issue) Interests Liabilities of the central government sector LTL million in 2007–2023

11. AUDIT FINDINGS AND CONCLUTIONS

12. 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

13. 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

14. 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

15. 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

16. Public debt risk management (2)

17. 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

18. 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

19. 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

20. 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

21. 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

22. The implementation of audit recommendations Until July 2008the Ministry of Finance: • Prepared the draft of new Public debt Medium Term Strategy • Started to use Public Debt and monetary resources Management IT system • Improved management of borrowed funds 4. Specified Rules of Assessing theGovernment Borrowing Need and indorsedProcedures regulating state monetary resources management