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The following item is a Letter of Intent of the government of Lithuania, which describes the policies that Lithuania intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Lithuania, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
 
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December 13, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street NW
Washington, D.C. 20431
U.S.A.

Dear Mr. Köhler:

1. The overarching objective of Lithuania's economic policies is to lay the basis for sustained economic growth through macroeconomic stabilization and a continuation of the transition to a fully functioning market economy. Membership in the European Union and NATO remains our central policy goal, while accession to the WTO is expected to be completed in the coming months.

2. The implementation of the economic program supported by the stand-by arrangement (SBA) that was approved by the Fund's Executive Board in March 2000 has brought significant positive results. However, despite our best effort, two end-September 2000 performance criteria were not observed. The performance criterion for the reduction of general government expenditure arrears was not met, due to delays in arrears clearance by municipalities, which are autonomous from the central government in implementing their budgets. To correct this problem, a number of legal steps are being taken to compel municipalities to clear expenditure arrears. Moreover, the ceiling on contracting and guaranteeing external debt with maturity in excess of one year up to and including 5 years for end-September was missed, due to the additional eurobond issue which was justified by the situation in domestic and international financial markets and was undertaken in consultation with the Fund staff. Therefore, we request waivers for the nonobservance of the two above-mentioned performance criteria for end-September 2000.

3. The attached Supplementary Memorandum of Economic Policies (SMEP) lays out the concrete policy measures planned for remainder of the term of the SBA. During this period and for 2001 as a whole, the key goal will be a continued strengthening of macroeconomic stability, notably through a further adjustment of the external current account deficit. The economic policy strategy will be based on continued fiscal consolidation, maintaining the currency board arrangement in its present form, and a furthering of the progress made already in 2000 in structural reforms, improving the business environment and on privatization.

4. In support of the policies detailed in the SMEP, we request completion of the first review under the stand-by arrangement along with the waivers requested for the two above mentioned performance criteria. We do not envisage at this time making purchases under the arrangement, but could do so if economic circumstances were to be more adverse than expected. We understand that the Fund staff will monitor the program on the basis of quarterly performance criteria for end-December and end-March, and a second program review will take place in the first half of 2001, as described in the SMEP.

5. In advance of the Executive Board's consideration of the first program review, one prior action will have been taken: Seimas approval of budgets for 2001 for the national government, the social insurance fund (SoDra), and the other extrabudgetary funds consistent with the general government budgetary framework described in the SMEP.

6. We believe that the policies described in the SMEP are adequate to achieve the objectives of the program, but will stand ready to take additional measures as necessary to achieve those objectives. During the period of the arrangement we will consult with the International Monetary Fund on the adoption of any such measures that may be appropriate in line with the Fund's policies on such consultations.

7. In line with our commitment to transparency in economic policies, we authorize the Fund to publish this letter and the SMEP following Executive Board approval of the program.

Sincerely yours
 
/s/
Rolandas Paksas
Prime Minister
 
      /s/
Reinoldijus Šarkinas
Governor, Bank of Lithuania
 

 

Attachment: Supplementary Memorandum of Economic Policies

 

Supplementary Memorandum of Economic Policies

I. Introduction

1. The key economic objectives of the new Lithuanian government are to promote sustained economic growth and complete the transition to a fully-functioning market economy, with a view to EU accession. Together with the Bank of Lithuania (BoL), the government is committed to the policy framework supported by the stand-by arrangement (SBA) agreed with the IMF in late-1999 and approved by the Fund's Executive Board in March 2000, and in order to attain its objectives, it will maintain sound financial policies, accelerate structural reforms, and seek to improve the business environment.

2. The economic program supported by the precautionary SBA is being implemented with positive results. A substantial reduction in the general government budget deficit and a strengthening of budgetary management have contributed to financial stabilization, enhanced credibility of the currency board arrangement, and faster-than-expected external adjustment. Economic growth has resumed, after the very deep recession experienced in 1999, mainly owing to the good export performance. Significant progress has been registered in a wide range of structural reforms, in particular with the restructuring of the energy sector, while progress in privatization and trade reforms should lay the ground for improved economic performance in the medium term. Confidence in Lithuania's policy-making has been renewed, access to markets on favorable terms has been restored, and inflation remains subdued. However, the economic adjustment this year has been difficult, with expenditure cuts and utility tariff increases, while the recovery of domestic demand has been slower than expected, and unemployment has reached a high level. The government's economic program aims at consolidating the economic gains achieved so far and addressing remaining weaknesses.

3. The economic program supported by the SBA remains broadly on track. The implementation of the 2000 budget posed challenges during the first nine months, given revenue shortfalls largely resulting from the erosion of tax bases attributable to weak domestic demand. In particular, the revenue of the Social Insurance Fund (SoDra) has been undermined by high unemployment and lower-than-expected nominal wages. In addition, measures agreed under the program to limit SoDra's expenditures and to strengthen SoDra's budget in the medium term were submitted to Seimas in late 1999 and again in 2000 but were not approved. Nevertheless, despite revenue shortfalls and expenditure pressures, the performance criterion on the general government fiscal balance was observed at end-September. However, the performance criterion for the reduction of general government expenditure arrears has not been met, mainly due to delays in arrears clearance by municipalities, which are autonomous from the central government in implementing their budgets.

4. All structural benchmarks under the program have been implemented. The new Organic Budget Law was passed by Seimas in July 2000. The Agricultural Bank was brought to the point of sale in May 2000, and the Savings Bank in October 2000. The hiring of privatization advisors in gas and electricity sectors, as well as the passage of the Law on Gas and the Law on Electricity, led to the preparation of restructuring and privatization strategies in these sectors. Moreover, temporary trade restrictions introduced in the wake of the Russian financial crisis in late 1998 were abolished as of November 1, 2000. Finally, necessary steps are being taken to establish a reserve stabilization fund for the management of privatization receipts, in line with the recommendations of the IMF technical assistance mission that visited Vilnius in July.

II. The Government Program for the Fourth Quarter of 2000 and 2001

A. Macroeconomic Outlook

5. The macroeconomic outlook for 2000 and 2001 has been modified in light of unforeseen developments this year. In 2000, the economy is projected to grow by around 2.3 percent, in line with expectations, although growth is expected to continue to be driven by a strong export performance. Exports grew by approximately 28 percent in the first nine months of 2000 relative to the same period in 1999, despite the real appreciation of the litas. By contrast, domestic demand remained weak during the first half, showing a modest recovery only as of the third quarter. Hence, the current account deficit is expected to be contained to below 7 percent of GDP, compared with an initial target of 9.1 percent. Period-average inflation is projected at around 1.0 percent and the unemployment rate would remain at nearly 12 percent.

6. For 2001, the continuation of the fiscal adjustment and structural reforms will be crucial to maintaining the credibility of the currency board arrangement (CBA), improving competitiveness of the economy, and ensuring a further strengthening of medium-term external sustainability. The program projection of real growth for 2001 has been revised from 4 percent to 3.2 percent, given the slow pick-up in domestic demand. The current account deficit is projected to decline further to 6.8 percent of GDP (compared with an earlier projection of 8.4 percent), with exports growing by 6.4 percent. Inflation is expected to remain below 2 percent, and unemployment would decline.

7. Over the medium term, the government is committed to pursuing prudent macroeconomic policies and deepening structural reforms in order to ensure sustained, high-quality growth and reduce unemployment. The government aims at achieving a cyclically balanced budget by 2003, which, together with an improvement of external competitiveness as structural reforms bear fruit, would contribute to a steady reduction of the current account deficit and a further strengthening of Lithuania's external sustainability.

B. Currency Board Arrangement

8. The currency board arrangement will continue to anchor macroeconomic policies, providing a stable monetary framework, helping to keep inflation low and bolstering confidence. Accordingly, no changes in the current arrangement are envisaged during the program period. External competitiveness has been sustained by productivity increases, favorable conditions in partner countries, terms of trade gains and a reduction in the cost of imported inputs from the euro-zone, helping Lithuanian producers to cope with competitiveness pressures emanating from the real appreciation of the litas. Further improvements in external competitiveness will be achieved through increases in productivity associated with advances in structural reforms, a pick-up in investment, and improvements to the business environment.

9. The original targets for end-December 2000 and end-March 2001 on gross and net international reserves coverage of the CBA remain appropriate, while the required reserve ratio was reduced from 10 to 8 percent in October, consistent with the objective of reaching EU levels over the medium term. No further reductions of the reserve requirements are scheduled by the BoL at this time.

C. Fiscal Policy and Budget Management

10. Fiscal policy is the major instrument of macroeconomic management under the CBA. A revision of the fiscal deficit targets for both 2000 and 2001 appears warranted in light of the revised macroeconomic conditions in 2000 and 2001, in particular the faster-than-envisaged external adjustment. For 2000, an increase in the program target for the general government deficit from 2.8 percent of GDP to 3.3 percent of GDP (compared with 8.6 percent of GDP in 1999) would be consistent with maintaining macroeconomic stability and furthering the ambitious external objectives. In light of revenue shortfalls estimated at 1.8 percentage points of GDP, the failure of the Seimas to adopt the agreed package of SoDra expenditure measures (0.2 percent of GDP), and initially non-budgeted defaults on government-guaranteed loans (0.3 percent of GDP), the government has undertaken a number of expenditure measures to ensure the achievement of the revised deficit target for 2000. In addition to savings in interest expenditure attributable to lower interest rates (0.2 percent of GDP), and savings on transfers to households (0.1 percent of GDP), the government is reducing expenditure of the state budget and extra-budgetary funds by 1.3 percent of GDP, and the administrative expenditure of SoDra. In the event that revenue shortfalls were greater than foreseen, the government will implement additional offsetting expenditure cuts, primarily at the level of the state budget, without incurring additional expenditure arrears.

11. For 2001, a general government fiscal deficit of 1.4 percent of GDP, compared with an initial program target of a balanced budget, has been submitted to Seimas. In establishing this target, a number of considerations have been weighed. First, the fast external adjustment has reduced the needed magnitude of fiscal adjustment. Second, a modest deficit for SoDra may be unavoidable in the short term, even if remedial measures are taken promptly. Finally, given the availability of foreign financing from some IFIs and privatization proceeds, it would be possible to run a small general government deficit without crowding out domestic financing of the private sector, while maintaining net external public debt at acceptable levels. At the same time, external sustainability considerations and recognition of certain medium-term fiscal costs, such as pension reform, the costs of EU and NATO accession, and environmental programs, call for maintaining a tight fiscal stance.

12. A range of revenue and expenditure measures is envisaged for 2001 to achieve the targeted reduction in the fiscal deficit. We believe that the scope for additional revenue measures in 2001 is limited. Nonetheless, the government will submit the budget with a proposal to introduce an excise tax on liquefied gas. Moreover, in early 2001, the government will submit to Seimas a proposal to increase the excise tax on cigarettes and raise certain alcohol excises to bring them closer to EU levels. Expenditure measures include a further reduction in net lending, purchases of goods and services and the rationalization of capital spending. In addition, the government is firmly committed to implementation of expenditure cuts by SoDra, including: (i) accelerating the increase in the pension age - a key measure to achieve long-term financial viability; (ii) increasing the number of days of sick leave paid by employers; (iii) limiting the entitlement of working pensioners to a reduced pension; and (iv) freezing the basic pension. In order to strengthen the finances of the Health Insurance Fund, the government intends to reduce the coefficient of reimbursement by 5 percent by end-December. The government will also examine the introduction of other measures for the Health Insurance Fund, such as service copayments and rationalization of facilities. The program target on the general government deficit for the first quarter of 2001 has been set at LTL 271 million (2.6 percent of the estimated quarterly GDP), reflecting seasonality. Yet, this target represents a deficit reduction of 2.3 percent of GDP compared with the first quarter of 2000. At the same time, the government targets an increase in expenditure on education and limited support for district heating and residential construction. Recognizing the tight fiscal situation, no other forms of new support will be provided--in particular via tax benefits--to other sectors or companies.

13. As a result of restored confidence in Lithuania's economic policies and a prudent debt management policy, the fiscal deficit can be financed domestically and internationally at significantly reduced interest rates. In 2001, the government intends to pursue a cautious, carefully planned and well-timed debt strategy that would aim to limit exposure to market sentiments in both domestic and international capital markets, thereby avoiding sharp increases of borrowing costs, while lengthening the maturity of government securities. The spending of privatization proceeds will be limited to LTL 181 million (0.4 percent of GDP). The medium-term sustainability of public debt is expected to improve in 2001, as net public and publicly guaranteed debt is expected to decline from 24.6 percent of GDP in 2000 to 23.7 percent of GDP in 2001, mainly on account of the sterilization of a large part of privatization proceeds at the BoL, and the continuation of policies of reduction in domestic and external contingent liabilities. In particular, in view of the increase in defaults on direct ("on-lending") and budgetary guaranteed loans to domestic enterprises, the government will limit the concession of such guarantees and tighten the conditions for eligibility, while redoubling its collection efforts. The government will make its best effort to refrain from providing guarantees for additional borrowing by Mazeikiu Nafta in 2001.

14. The government will eliminate central government arrears by end-December 2000. To this end, the government will provide any necessary bridge financing to the Privatization Fund and revise the budget of the Health Insurance Fund. More time will be needed, however, to resolve the issue of nonpayment by municipalities. The 2001 Budget Law will require that municipalities allocate necessary appropriations to clear the arrears outstanding at end-December 2000. Moreover, the government will submit to Seimas by end-December 2000 a draft Law on Budgetary Organizations, defining responsibilities of appropriation managers of municipal and state budgets, and penalties for incurring expenditure arrears. The government targets the reduction of municipalities' expenditure arrears by about 30 percent from end-June to end-December and their full elimination by end-June 2001. The government recognizes the risks to financial discipline posed by the use of mutual debt settlements ("offsets"), and will refrain from such settlements, including in relations with municipalities and extra budgetary funds. The government will continue monitoring the reduction of arrears on a monthly basis at the level of the Prime Minister's Office.

15. The government will continue its efforts in strengthening budgetary management, improving tax administration, and revising tax legislation. The treasury project envisaging the creation of a single treasury account and direct payments for budget organizations is expected to be completed on schedule by early 2001. The government will adopt an action plan on the integration of the SoDra's payroll collection unit and the State Tax Inspectorate by end-December 2000. This action plan will envisage a gradual integration of the two agencies to be completed by end-2001. The government will submit to Seimas a new draft law on tax administration by end-March 2001.

16. To enhance transparency and effectiveness of management of privatization proceeds, the government will set up a reserve stabilization fund (RSF) by end-March 2001. The use of RSF resources will be determined in the context of the consolidated budget. To this end, a draft decision of Seimas on the creation of the RSF will be submitted to Seimas by end-March. This draft decision will outline a transparent framework of operations of the RSF, including provisions on: (i) asset management by the BoL, with special attention paid in the BoL annual audit to the operation of this fund, (ii) a clear definition of authorized expenditure items of the RSF, (iii) Seimas approval of all inflows and outflows of the RSF in the context of the approval of the national budget, and (iv) a requirement to publish annual reports and results of the audit of the RSF. The operational guidelines for the RSF will be approved by the government.

17. In order to determine medium-term fiscal priorities, assess the impact of proposed tax reforms, address future expenditure pressures, and seek ways to achieve the medium-term goal of a balanced budget (before the diversion of a portion of the payroll tax to a mandatory privately funded pension scheme), the Ministry of Finance, on behalf of the government, will prepare a comprehensive study on tax reform and expenditure restructuring by end-March 2001. On the revenue side, this study will incorporate an analysis of the proposals to reduce the personal income tax and eliminate the corporate income tax, as well as potential revenue gains from higher excises, the elimination of exemptions, and additional taxes. Attention will be paid to the need to maintain an adequate level of resources for municipalities, and alternative sources of tax revenue will be explored, including a municipal real estate tax. Furthermore, appropriate consideration will be given to the need to preserve a balance between the taxation of capital and labor, in order to promote employment-creating growth. On the expenditure side, the study will define ways to restructure expenditure with a view to addressing potential costs of EU and NATO accession, the Ignalina power plant closure and pension reform.

D. Structural Policies

18. Financial sector reforms are geared toward fostering competition in the banking sector and development of capital markets and nonbank financial institutions. The government is determined to complete the privatization of three state-owned banks--Savings Bank, Agricultural Bank, and Development Bank--in an expedient and transparent manner. The sale of the Development Bank is being completed; negotiations are ongoing with one bidder for the Savings Bank, and after the withdrawal of the consortium bidding for the Agricultural Bank, a new privatization tender should be announced by end-March 2001. The government and the Bank of Lithuania reaffirm their commitment to privatize these remaining state-owned commercial banks, with a view to improving the functioning of the banking system. The new law on the Bank of Lithuania, which ensures the autonomy and accountability of the BoL in line with ECB requirements, has been submitted to Seimas, with the support of government. Laws governing capital markets and nonbank financial institutions will be prepared for parliamentary consideration in 2001, and a new commercial banking law is also under preparation. In order to promote the development of capital markets, amendments to the Law on Public Trading in Securities in line with EU directives will be submitted to Seimas consideration by early 2001.

19. The government attaches great importance to the continuation of the energy sector restructuring with a view to privatizing major energy companies. Concerning the Lithuanian Power Company (LPC), the government has proposed to Seimas an amendment of the Law on Reorganization of LPC that would allow the restructuring and privatization of the company to proceed. It is expected that the amendment would be approved by Seimas by end-December 2000. The approval of the restructuring plan prepared with the support of an international investment bank by the shareholders of LPC will take place by end-January 2001, and the registration of the LPC successor companies (transmission, generation and distribution) is expected by end-February. The tender for the privatization of a majority stake of the distribution network of LPC will be announced by end-March 2001. Electricity tariffs will not be reduced during the pre-privatization period. For Lithuanian Gas, expressions of interest from potential participants in the privatization will be sought in early December 2000, with the announcement of a tender for privatization of the company to be made by February 1, 2001. Gas tariffs for households are expected to be adjusted further, to bring them more in line with tariffs charged to other customers. The government will conduct a review of Mazeikiu Nafta's investment program and action plan to deal with obligations excluded from the privatization and investment agreements, with a view to limiting potential fiscal costs in the medium term.

20. Considerable progress was made in 2000 to rationalize government agricultural programs and financial support to agriculture, with a view to EU accession. The changes have aimed to reduce the government's role in price support and market intervention. The new government intends to continue these policies, with government support to the sector targeted to investment, including with EU cofinancing, and income support.

21. One of the key objectives of the new government is to improve substantially the business environment in Lithuania: to promote economic growth, to seek higher employment, to reduce red tape and to abolish excessive government regulation. At the beginning of this year, the Program for Business Environment Improvement (the "Sunrise Program") was initiated. This program will be continued and deepened. Tax administration procedures will be simplified, including in the context of forthcoming tax reforms. The program also envisages the simplification of procedures of customs clearance, sales and purchase of land, restitution of ownership rights, coordination of construction projects, as well as the reform of labor relations and labor contracts, and actions in regard to bankruptcies and company insolvency. A comprehensive plan of actions to resolve the problems of insolvent companies has been approved. The revised Company Bankruptcy and Company Restructuring Laws are expected to be approved by Seimas by end-December 2000. The new bankruptcy law is expected to facilitate the bankruptcy process and to permit the state to increase the number of initiated bankruptcy proceedings to 1,200 next year, with technical assistance and training from EU-PHARE. The government will undertake measures to liberalize the labor market, by reducing firing and hiring costs and by increasing labor contract flexibility, with a view to fostering a more dynamic labor market and encouraging employment growth. Amendments to the law on labor contracts have already been submitted for Seimas consideration.

22. The WTO accession negotiations were completed in mid-2000, with an official announcement on December 8, 2000, and the accession treaty is expected to be ratified by the Seimas in early 2001. The temporary trade measures introduced as a response to the Russian crisis have been removed, and the remaining export taxes have been abolished, with effect from January 1, 2001. The other remaining trade protection measures will be reduced over time in line with the provisions under the WTO accession agreement, including import duties on some agriculture and petroleum products.

E. Program Monitoring

23. The adoption of the laws on the national budget, SoDra, the Health Insurance Fund, and the Privatization Fund for 2001, consistent with program commitments, will constitute a prior action for the completion of the first review. The program is monitored on the basis of quarterly quantitative performance criteria and benchmarks and a set of structural policy benchmarks for end-December 2000 and end-March 2001 consistent with the revised economic program (specified in the attached tables), and the second review by the Fund's Executive Board. The definitions of program targets are provided in the Technical Memorandum of Understanding.

24. The second review will be based on end-December 2000 outcomes and is expected to be completed by end-March 2001. The review will focus on the implementation of fiscal and structural measures envisaged under the program, as well as progress in the preparation of a medium-term fiscal strategy.

REPUBLIC OF LITHUANIA

Technical Memorandum of Understanding
For the 2000/2001 Stand-By Arrangement

1. This Memorandum defines variables that constitute quantitative performance criteria and benchmarks for the stand-by arrangement and sets out the reporting requirements for the government and the Bank of Lithuania.

I. Performance Criteria on the Operation of the Currency Board Arrangement

Maintenance of exchange rate under currency arrangement

2. The present exchange rate of LTL 1=US$0.25 will be maintained throughout the period of the stand-by arrangement.

Cover for currency board arrangement

3. The Bank of Lithuania will ensure the maintenance of not less than 100 percent foreign reserve backing for the Bank of Lithuania's liabilities, as defined in paragraph 4 below under the currency board arrangement for the duration of the stand-by arrangement.

4. Foreign reserves backing will consist of the gross foreign reserves of the Bank of Lithuania, as defined in paragraph 10, expressed in Litai at the official exchange rates of the Bank of Lithuania. The Bank of Lithuania's Litai liabilities under the currency board arrangement comprise:

    (i) Litas notes and coins in circulation

    (ii) correspondent accounts of and certificates of deposit and other Litas liabilities to commercial banks and nonbank financial institutions;

    (iii) government deposits;

    (iv) staff and other private sector deposits;

    (v) correspondent accounts of foreign central banks.

Required reserves of the banking system

5. Average reserve deposits of the banking system over each required reserve holding period established by the Bank of Lithuania shall not be permitted to be below required reserve deposits of the banking system, as defined in paragraph 6, by more than 2 percentage points of eligible liabilities, as defined in paragraph 6.

6. All banks will be required to hold reserve deposits on account with the Bank of Lithuania of not less than 8 percent of their domestic and foreign currency deposit liabilities. Together, these shall constitute the required reserve deposits of the banking system. The deposit aggregates against which required reserves of the banking system shall be calculated will be referred to as "eligible liabilities," as defined in the 28. December 1993 Resolution No. 52 of the Board of the Bank of Lithuania ("On Confirmation of the Rules for Required Reserves for Commercial Banks"). Average reserve deposits of the banking system for each reserve maintenance period will be calculated at the end of each holding period as a percentage of eligible commercial bank liabilities.

7. The Bank of Lithuania will extend new credits to banks only and in amounts that do not violate (i) the performance criterion requiring full foreign currency backing for currency board liabilities or (ii) the performance criterion specifying the minimum targets for net international reserves.

Performance criterion on floor on net foreign exchange coverage of the currency board arrangement

8. International reserve assets and liabilities shall be valued in U.S. dollars using the Bank of Lithuania's official rates prevailing at each test date. For the period of the program, monetary gold will be valued at US$ 252.8 per ounce.

9. Net foreign exchange coverage of the currency board arrangement is defined as:

10. Gross foreign reserves of the Bank of Lithuania shall be defined as:

    (i) monetary gold holdings;

    (ii) holdings of SDRs;

    (iii) reserve position in the IMF; and

    (iv) holdings of foreign exchange in convertible currencies by the Bank of Lithuania.

11. Excluded from gross foreign reserves are:

    (i) capital subscriptions to foreign financial institutions;

    (ii) long-term nonfinancial assets of the Bank of Lithuania;

    (iii) convertible currency-denominated claims on domestic banks;

    (iv) assets in nonconvertible currencies; and

    (v) foreign assets pledged as collateral or otherwise encumbered.

12. Fund staff will be informed of details of any gold sales, purchases, or swap and derivative operations during the program period, and any resulting changes in the level of gross foreign reserves that arise from revaluation of gold carried out according to the accounting practice of the Bank of Lithuania will be excluded from gross reserves as measured herein.

13. Foreign currency-denominated reserve liabilities of the Bank of Lithuania shall be defined as:

    (i) the Bank of Lithuania's convertible foreign currency liabilities to nonresidents, with an original maturity of up to and including one year;

    (ii) the outstanding use of Fund credit.

14. Excluded from foreign reserve liabilities are any liabilities arising from balance of payments support loans of maturity longer than one year, including such loans from the EU, the BIS or other international financial institutions, foreign governments or foreign banks.

15. Foreign currency-denominated liabilities to domestic residents shall include convertible currency deposits of the general government, and liabilities to banks and non-bank financial institutions, including deposits under the reserve requirement. Bank of Lithuania Litai liabilities under the currency board arrangement are defined in paragraph 4.

II. Performance Criteria on General Government Fiscal Balance, Net Lending, Guarantees for Domestic Borrowing, and Arrears

16. The general government encompasses the national government (comprising the state and municipal governments) and the extrabudgetary funds. The extrabudgetary funds include the Social Insurance Fund (SoDra), Health Insurance Fund, Privatization Fund, Road Fund, Ignalina Closure and Decommissioning Fund, Privatization Fund for Housing, General Support for Construction or Purchase of Housing, Bankruptcy Fund, Fund for Small and Medium-Sized Firms, and Agricultural Reform Fund. The central government encompasses the general government excluding municipalities.

17. The general government fiscal deficit is defined, on a cash basis, as the sum of the general government financial deficit and general government net lending, as defined in 22.

18. The general government balance is defined, on a cash basis, as the negative sum of:

    (i) the change in the stock of net claims of the domestic and foreign banking systems and other residents and nonresidents on the general government; less the sum of

    (i) net privatization proceeds;2 and

    (ii) change in the stock of debt claims in relation with bank rescue operations mentioned in paragraph 20 (ii) (Table 1).

19. The general government balance shall be measured excluding valuation gains and losses on all foreign currency denominated assets and liabilities arising from exchange rate fluctuations.

20. The change in the stock of net claims of the domestic and foreign banking systems on the consolidated general government is defined as the change in the stock of claims of these banking systems on the general government less the change in the stock of all deposits of the general government with these banking systems. The claims of these banking systems on the general government include (i) bank loans to general government, (ii) securities or bills issued by the general government held by banks, with the exception of those issued in relation with bank rescue operations, and (iii) overdrafts on the current accounts of the general government with banks.

21. Deposits of the general government include (i) deposits with banks, and (ii) securities issued by banks held by the general government. They exclude the acquisition of equity in banks.

22. General government net lending consists of lending operations by the general government to government and non-government entities, less repayments. Lending operations include:

    (i) loans extended to government and non-government entities, comprising total disbursements of all government loans (including by nonbanks) and purchases of equity, including in relation with bank rescue operations except the purchases mentioned in footnote 2, less repayments of those loans. For the purpose of assessing the observance of the ceilings on the general government fiscal balance and net lending, the program targets will be adjusted upwards by the amount actually disbursed and on-lent under already committed foreign loans from International Financial Institutions (including the World Bank, the EBRD, the EIB, and the NIB) as specified in Table 2 are higher than the amounts assumed under the program with a 50 percent implementation rate of the total annual commitment. The ceilings assume disbursements of LTL193 million in 2000; and

    (ii) payments of interest or amortization on debts of others, which generate equivalent claims against the original debtors.

23. The implementation of general government investment projects carried out by budgetary organizations, including but not limited to the Ministry of Defense, is specified in Table 3 (to be submitted upon approval of the budget by Seimas) on a quarterly project-by-project basis, assuming a 50 percent implementation rate of the total annual commitment. The performance criterion on the fiscal deficit for the first quarter of 2001 will be adjusted by the amount equal to the excess of the actual appropriations over the programmed quarterly amount for every project. The adjusted amount for every project for each test date shall not exceed the annual appropriation for each project based on a 100 percent implementation rate.

24. General government guarantees on domestic borrowing include all guarantee commitments for (i) borrowing in domestic currency from residents and nonresidents and (ii) borrowing in foreign currency issued for the Agricultural Marketing Agency, the Export and Import Credit Insurance Agency, and SoDra. The performance criteria apply to the stock of outstanding government guarantees, which will be adjusted downwards by the amount of government guarantees used and cancellation of guarantees issued for reasons other than expiry. The performance criteria shall be applied on the basis of an outstanding stock of general government guarantees of LTL 593 million at end-1999 (Table 4).

25. Outstanding payment obligations of the general government include all identified obligations incurred by the state government, municipalities, SoDra, the Health Insurance Fund, and other extrabudgetary funds as covered by the definition of general government provided above. Outstanding payment obligations are defined as delayed payments for deliveries of goods and services when a bill has been received but not paid after 45 days. For wages and salaries, and pensions, outstanding payment obligations are defined to exist when payments are delayed by more than 7 days. Outstanding payments obligations of the central government are defined as outstanding payments obligations of the general government minus outstanding payments obligations of the municipalities. A full inventory of the stock of outstanding payment obligations of the general government as of December 31, 1999 has been established by the Ministry of Finance. Such an inventory will be updated monthly (Table 5).3 In the context of the first program review, the quantitative indicative targets on the general government fiscal balance set out in Table 1 in the MEP may be revised in light of any revision to the end-1999 estimate of the stock of arrears. The presumption is that the indicative targets would be adjusted downwards by the absolute amounts of any reduction in the estimate of general government arrears outstanding at end-1999 from the current estimate of LTL 590 million. In case the revised estimate of general government arrears at end-1999 is higher than LTL 590 million, both the indicative targets on the general government fiscal balance and on the stock of outstanding payment obligations would remain as specified in Table 1 in the MEP.

III. Performance Criteria on Contracting and Guaranteeing of External Debt of or on behalf of the General Government and of the Bank of Lithuania

26. External debt limits apply to the contracting of medium- and long-term external debt denominated in foreign currency, including issuance of bonds in foreign currency, or with a foreign currency guarantee, of original maturities of more than one year that are contracted or guaranteed by the general government, the Bank of Lithuania or other agencies on behalf of the general government, with sub-ceilings on such debt of maturities of one year and up to and including five years.4 Excluded from the limits are use of IMF resources. Other balance of payments support and loans to the government of maturity of longer than one year are covered by these limits, including lending from official creditors and foreign banks (Table 6). Guarantees of foreign currency-denominated borrowing of the Agricultural Marketing Agency, the Export and Import Credit Insurance Agency, and SoDra covered under paragraph 24 and foreign currency borrowing of municipalities from resident banks which is not guaranteed by the central government are excluded from the limits defined in paragraph 26.

27. The general government will not accumulate external payments arrears on any expenditure item or external debt as defined paragraph 25, and will not contract or guarantee external debts with a maturity of less than one year, with the exception of normal import-related credits, which are defined to include liabilities on the correspondent accounts with central banks of countries of the FSU and short-term credit lines of resident banks to municipalities. Transactions subject to these ceilings shall be valued in the contracted currency and converted into U.S. dollars at the time the loan agreement is entered into at the exchange rate for the end of the month.

IV. Reporting

28. The authorities will provide the IMF with information needed to monitor the implementation of the program on a regular basis and in accordance with the timetable indicated below. Fund staff will review together with the authorities the data reporting on an ongoing basis and revise the reporting whenever necessary.

Information on money and banking

29. On a monthly basis, the Bank of Lithuania will provide information on:

  • international reserves;

  • the balance sheet of the Bank of Lithuania, deposit money banks, other banking institutions, and the consolidated monetary survey;

  • the structure of bank assets and liabilities;

  • the currency exchange between the Bank of Lithuania, commercial banks, and the general government.

30. In line with SDDS requirements, the data on international reserves of the Bank of Lithuania will be provided to the Fund on the 7th day after the end of the month at the latest; the balance sheet of the Bank of Lithuania will be provided to the Fund on the 14th day after the end of the month at the latest throughout the program period in the agreed format. The other data referred to in paragraph 28 will be provided to the Fund on the 24th day after the end of each month at the latest throughout the program period in the agreed format.

General government budget implementation and financing

31. On a monthly basis, the Ministry of Finance will provide information on:

  • below the line financing of the consolidated general government;

  • revenue of the national government (state government and municipalities);

  • on-lending operations of the general government to the nongovernment sector;

  • revenue and expenditure of all extrabudgetary funds included in the calculation of the general government financial balance;

  • outstanding domestic government debt broken down by maturity and type of debt (direct and guaranteed), including disbursements and redemption;

  • domestic debt service;

  • use of resources borrowed abroad;

  • general government deposits held abroad;

  • disbursements and repayments of foreign loans;

  • borrowing by municipal governments;

  • domestic guarantees issued during the month and the stock of outstanding domestic guarantees at the end of the month (Table 3); and

  • the stock of outstanding payment obligations of the general government, broken down by state government, municipalities, the Social Insurance Fund, the Health Insurance Fund, and each of the other extrabudgetary funds (Table 4).5

32. These data will be reported to the Fund within 30 days after the end of each month throughout the program period in the agreed format.

33. On a quarterly basis, the Ministry of Finance will provide information on:

  • state government revenues and expenditures in terms of both economic and functional classification; and

  • local government revenues and expenditures in terms of both economic and functional classification.

34. For the state government, these data will be reported to the Fund within 30 days after the end of the quarter throughout the program period in the agreed format. Data for municipalities will be reported to the Fund within 90 days after the end of the quarter throughout the program period in the agreed format.

Information on the External Sector

35. On an monthly basis, the Ministry of Finance and the Bank of Lithuania will provide information on:6

  • short-term and long-term external debt stock of the public and private sector7 including non-concessional loans from multilateral organizations; and

  • external debt service for short-term and long-term external debt of the public sector.

36. These data will be reported to the Fund within 30 days after the end of each month throughout the program period in the agreed format.

37. The above reporting requirements will be assessed on an ongoing basis, and may be revised at the initiative of the Fund and with the consent of the government and the Bank of Lithuania.

December 18, 2000

Sincerely yours
 
//s//
Mr. M. Jonikas
Vice Minister of Finance
Ministry of Finance
     
//s//
Mr. A. Kregzde
Vice Governor
Bank of Lithuania


1 The Single Treasury System will remain outside the Bank of Lithuania during the program period.
2 Expenditures necessary for, and directly related to, the privatization of state-owned enterprises shall be deducted from gross privatization proceeds and will not be classified as expenditure above the line in the fiscal accounts. These are limited to (i) outlays for consultants and advisers, (ii) increases in authorized capital prior to the sale of an enterprise, and (iii) outlays due to assuming the clean-up of environmental damages as identified in specific privatization agreements.
3 Except for municipalities, for which the table will be provided on a quarterly basis.
4 This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000 by the Executive Board of the IMF (Decision No. 6320-(79/140), but also to commitments contracted or guaranteed for which value has not been received.
5 Outstanding payment obligations of municipalities will be reported on a quarterly basis.
6 The Ministry of Finance will provide data on public debt and the Bank of Lithuania will report data on private debt.
7 Information on registered private sector loans will be provided on a monthly basis, actual figures for the external debt stock of the private sector will be reported on a quarterly basis.


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