A. Clarity of Roles and Responsibilities

2. Lithuania maintains various domestic definitions of the scope of government fiscal activity that are different from more common international definitions. Key domestic fiscal concepts are the state budget and the national budget, which classify some transactions differently than standard international concepts, and exclude a number of extrabudgetary fiscal operations.² In general, the domestic definitions are used for the annual budget documents and budget monitoring, and maintained in parallel to standard international definitions. As a subscriber to the SDDS, the Ministry of Finance (MoF) also prepares, on the basis of GFS86, annual data on consolidated general government operations, and summary monthly, quarterly, and annual data on central government operations.³ A recent “ROSC—Data Module”⁴ comments on the extent to which the reported data comply with GFS86 and makes recommendations for improving coverage and classification. Data on the nonfinancial public enterprise sector and the consolidated nonfinancial public sector are not compiled.⁵

3. In general, government activities are separated from the activities of the public enterprise sector, but fiscal risks from public enterprise operations remain. Rapid progress with privatization, and the establishment of a comprehensive legal framework based on individual property rights have helped significantly to reduce the scope for quasi-fiscal activities (QFAs) and fiscal risk, particularly at the central government level. The government does not require public enterprises to provide services on a noncommercial basis, although some public tariffs (e.g., for public transportation and district heating) have not always been fully adjusted to reflect cost developments. Also, the government continues to be exposed to fiscal risks resulting from potential losses of the remaining financial and nonfinancial state enterprises.⁶ Similarly, the government continues to incur contingent liabilities by extending loan guarantees to state enterprises. Finally, progress on separating government activities from the activities of the public enterprise sector has been less pronounced at the municipal level.

4. The central bank is independent and does not play a fiscal role or carry out QFAs, and the financial public sector is small. Under the currency board arrangement, the Bank of Lithuania (BoL), as the country’s central bank, is prohibited from lending to the government or purchasing government securities in the primary market.⁷ This prohibition covers all types of lending operations (also including, for example, overdrafts), and extends to all institutions of executive authority, and to state and municipal enterprises. The BoL acts as treasury agent: it holds government deposits on which it pays interest, and carries out payment operations on behalf of the government for which it is remunerated.⁸ Also, while the BoL may purchase government securities in the secondary market (i.e., for monetary policy purposes) or obtain them as collateral in its open market or overnight lending operations, in practice these operations have been extremely limited. In general, the government is not liable for BoL obligations, and the BoL is not liable for obligations of the government. The BoL is accountable to the Seimas. The scale of the rest of the financial public sector⁹ is now relatively small, following the recent sales of the Lithuanian Savings Bank and the Lithuanian Agricultural Bank, which completed the privatization of the public banking sector.

5. Government regulations for the nonbank private sector are fairly transparent. The existing laws and regulations—including laws on enterprise establishment and operation, types of business establishments, investments, tax and customs administration, property rights, and other laws regulating corresponding fields of business activities¹⁰—provide a comprehensive framework for private sector operations, although further streamlining of administrative procedures and regulations would facilitate private sector activity. While regulated prices are maintained for roughly 20 percent of the CPI consumption basket (including for electricity, gas, domestic heating, public transport, and water supply services), most, but not all, of these are maintained at market levels. Recent changes to the Company Law enhance shareholders’ and creditors’ rights, and elaborate on corporate reorganizations in line with EU guidelines. Similarly, various legal acts on intellectual property have been introduced and the framework for a competition policy was established in line with EU requirements.¹¹ The government is currently working on strengthening private sector auditing and accounting procedures and supervision.

6. The transparency of the privatization process has significantly increased. Since 1998, the State Property Fund (SPF) has been increasingly entrusted with the ongoing privatization program.¹² The SPF is governed by a board of directors, consisting of representatives from different Ministries (e.g., Finance and Justice), and it reports on its operations quarterly to Seimas. The SPF is also audited annually by an independent external auditor and the State Control Office (SCO). An independent Privatization Commission, set up by Seimas, supervises the privatization process and the approval of privatization contracts; the sale of large or strategic enterprises may also require direct government approval. Foreign and domestic investors have equal rights to acquire state-owned assets, and information on currently available privatization opportunities is widely disseminated. Prior to 2000, some large privatization transactions were completed without SPF involvement, which adversely affected transparency, and politicized the privatization process. Municipalities may still privatize the assets they hold without SPF involvement.¹³

7. Privatization in key economic sectors is nearing completion, but the recording of remaining government asset holdings could be improved. The privatization of the insurance and banking sectors was fully completed in 1999 and 2002, respectively, and much of the privatization of the telecommunications sector was completed during 1998-2000. The planned disposal of assets in the energy (gas & electricity) and transportation (air & rail transport) sectors will largely complete the government’s strategic privatization agenda.¹⁴ About two-thirds of privatization receipts have been deposited into the government’s Privatization Fund and earmarked for specific uses (including savings restitution, investment programs, reserve stabilization, and debt service), the remainder has not been subject to earmarking.¹⁵ While the SPF oversees government asset and equity holdings that are slated to be privatized,¹⁶ there is no requirement that government agencies register their holdings with the SPF, and, hence, there is no comprehensive government asset registry.

8. The roles and responsibilities of the executive, legislative, and judicial branches of government in the budgetary process are clearly defined. The Constitution¹⁷ sets out the separation of the three branches of government, and defines their responsibilities in separate chapters on the Seimas (Chapter 5); the President of the Republic (Chapter 6) and the government (Prime Minister and Ministers) (Chapter 7); and the court system (Chapters 8 and 9). The Constitution also has a separate chapter on State Finances and the State Budget (Chapter 11), and stipulates that the government prepare a draft state budget, and submit it to Seimas no later than 75 days before the end of the budget year, which then has to consider and approve it by the beginning of the new budget year.¹⁸ In considering the draft state budget, Seimas may only increase expenditures upon specifying their sources of financing; Seimas may change the budget during the budget year. The government is responsible for executing the state budget. In addition, in practice the Constitutional Court can play an important role in fiscal issues through its decisions on matters referred to it by the government.¹⁹

9. The legal bases for fiscal management are comprehensive but the administrative framework is significantly fragmented. A number of laws and government resolutions define the legal bases for fiscal management;²⁰ they are primarily focused on ensuring accountability and financial compliance. In addition, the legal framework supports the government’s strategic planning efforts within a multi-year framework, and provides a basis for the program budgeting framework that has been put in place since 2000. While the various laws are adhered to, the fiscal decision-making process remains fragmented by a number of factors, including the maintenance of separate extrabudgetary funds, programs, and operations; the maintenance of a separate public investment program (PIP); and a lack of synchronization of planning cycles.²¹ In addition, the budget is not always revised in the light of changes in policies, which adversely affects the integrity of the budget process.²²

10. Inter-governmental fiscal relations are being strengthened, but the issue of municipal arrears still requires a comprehensive solution. The 2002 reform of municipal finances was a significant achievement (Box 1).

In this context, expenditure assignments were revised, and municipalities were given more control over the management of delegated expenditure functions (e.g., teacher salaries),²³ while central government transfer payments to carry out these functions were based on specific need indicators (e.g., number of students). Municipalities receive transfers from the state budget to carry out delegated functions, take part in revenue sharing (which is subject to horizontal equalization arrangements), and have some own sources of revenue (e.g., municipal fees, and centrally-administered local taxes).²⁴ The equalization arrangements are complex but transparent. Within the borrowing limits approved by Seimas, municipalities may borrow domestically and abroad,²⁵ and cover temporary shortfalls of revenue during the budget year by short-term bridge-financing that is to be repaid in the current budget year. However, in practice, these arrangements have not prevented municipalities from accumulating significant arrears, including to suppliers, their municipal enterprises, and the central government.²⁶

11. The existence of extrabudgetary funds (EBFs), activities, and programs adversely affects fiscal transparency. The scope of extrabudgetary activity has been significantly reduced, with the integration into the state budget of a number of extrabudgetary funds. In 2002, there were a total of eight EBFs, including the two main social funds.²⁷ This is a substantial improvement compared even to 2000, when 22 EBFs were still functioning. All EBFs operate on the basis of specific government decrees, and have their operations audited annually by the SCO. While the government exercises financial supervision and control over the EBFs, their continued existence adversely affects fiscal transparency as they remain outside of the scope of the state budget. More generally, mechanisms for managing and coordinating the interactions between budgeted and extrabudgetary activities could be improved. While, in principle, extrabudgetary funds are required to be in surplus or balance after state budget transfers, this requirement has not always been adhered to. For example, both the SoDra and the HIF have been permitted to borrow from commercial banks to finance their deficits.

12. Tax legislation is transparent, but the rules governing public input in the drafting process for new laws could be strengthened to further enhance transparency. A comprehensive set of new tax laws has recently been introduced, aimed, among others, at providing an equitable and proportional distribution of the tax burden and fostering fair competition and proper harmonization of Lithuania’s tax legislation with the EU.²⁸ All tax laws are applied uniformly, and tax incentives are clearly specified. Existing tax laws and explanatory notes are available on the website of the state tax inspectorate (STI). New tax laws benefit from comments by the general public during the legislative process in Seimas. At the drafting stage, the public may also be invited to comment (via dissemination of copies to interested parties, and publication on the MoF website) although the consultative process is not yet formalized or implemented in a uniform fashion.

13. Ethics standards for civil servants have been strengthened, and a formal Ethics Code is to be introduced by end-2002. Since 1997, significant progress has been made in strengthening ethics regulations, but changes are still ongoing, and the actual impact of the new regulations still remains to be fully evaluated. Among others, the rights and responsibilities for civil servants have been clarified; a framework for disciplinary sanctions was established; recruitment and dismissal procedures were elaborated; and remuneration structures were streamlined and made more transparent.²⁹ Preparations are underway for introducing, by end-2002, a new Ethics Code, and establishing a Civil Service Management Agency.³⁰ In addition, an Independent Ethics Commission, that was set up by Seimas, is responsible for monitoring potential conflicts of interest of civil servants. Specific groups of civil servants are obliged to prepare annually a declaration of assets and a declaration of conflicts of interest.³¹ To combat corruption, a National Anti-Corruption Strategy was approved in 2001, administrative capacities to follow up on allegations of corruption against civil servants were strengthened, and an inter-institutional Cooperation Agreement on Anti-Corruption Operations was signed by different government institutions.

B. Public Availability of Information

14. The annual budget law, which follows a domestic classification, is available to the public together with some supporting information. The annual budget document sent to Seimas contains an explanatory letter by the Minister of Finance, a draft of the annual budget law for the national budget, and a large amount of supporting data. The national budget covers the state budget (budgetary central government) and the budgets of the municipalities. The 2002 budget document also included overview budgets for the SoDra and the HIF, and the budgets of the Privatization Fund, the Reserve Stabilization Fund, and the Ignalina Fund; information on the other three EBFs was not presented in the budget document.³² More detailed information on the SoDra and the HIF budgets was provided in separate budget documents for each institution. The budget document shows consolidated national budget revenues and expenditures within a functional classification, institutional presentations with summary data on the cost of programs, and considerable detail on economic input costs for each state budget institution. However, the analytical framework, coverage, and budget classifications used differ from international standards, and the budget presentation itself remains fragmented.³³ While the finalized version of the annual budget law and the summary budget tables are made available on the Seimas web site, the full supporting information is not provided to the public; the MoF web site provides a hyperlink to the budget information on the Seimas web site.

15. Defense expenditures are comprehensively reported in the budget. As part of its commitment to joining NATO, Lithuania has adopted a target to maintain defense spending at a minimum of about 2 percent of GDP. In 2002, budget outlays for current defense expenditures account for about 65 percent of the total, while defense-related investment spending through the PIP accounts for the remainder. Overview data by programs and activities are provided in the budget document.

16. The annual budget document provides an overview of historical fiscal data, but does not compare the initial budget and projected outcomes for the current fiscal year. The budget document for 2002 provided overview tables on actual state and municipal revenues and expenditures for 1997-2000, projected outcomes for 2001, and the detailed budget amounts for 2002. However, the 2002 budget did not provide information on how projected 2001 outcomes compared with the original 2001 budget. Instead, it provided a comparison between the budget estimates for 2002 and 2001.

17. The budget document contains few details beyond the upcoming fiscal year. The budget document does not provide detailed medium-term projections. A separate government resolution, sent to Seimas together with the draft budget document, sets out, for a three-year period, the main budget parameters: national budget revenues, municipal expenditures, state budget expenditures, and ceilings for providing new state guarantees.³⁴ However, no details are provided on individual budget items (e.g., specific taxes or spending programs). While ministries prepare detailed three-year programs for government approval, they are only presented to Seimas after the annual budget is approved.³⁵

The budget contains only partial information on contingent liabilities. Explicit government obligations, such as government guarantees, are included in the state budget debt estimates at their full principal amount. The state budget also makes provisions for possible payments resulting from guaranteed loans. Other contingent liabilities, such as commercial borrowing by state-owned enterprises and government obligations to the people (restitution of real estate ownership rights and restitution of savings), are also registered and monitored to the extent they are known, but these are not presently reported in the budget documents. The government’s annual “Pre-Accession Economic Programme” contains a comprehensive account of potential fiscal risks (see Box 2).³⁶

18. There are no comprehensive data on tax expenditures. In the context of the ongoing tax reform, some progress has been made in reducing tax expenditures, and some further tax expenditures may be eliminated in the context of EU accession.³⁷ In general, however, the extent of tax expenditures remains significant. There is no comprehensive statement of tax expenditures, but the authorities do make available to Seimas cost estimates of newly proposed exemptions and deductions, particularly for the discussion of tax policy changes during budget deliberations and when specific laws are changed or introduced.

19. There are no comprehensive data on quasi-fiscal activities. While the scope for QFAs has been reduced significantly over the last several years, also as a result of privatization, the government does not provide estimates on the extent of its remaining QFAs. While the operations of the remaining (nonbank) public financial institutions continue to pose a potential fiscal risk, their operations are likely to contain only small quasi-fiscal elements. Similarly, QFAs of state enterprises have been limited through transparent regulation and oversight. The scope for QFAs remains more pronounced at the municipal level, as reflected, for example, by the maintenance of administered prices for some municipal services (e.g., transportation and district heating), and the existence of significant municipal arrears (including to their own municipal enterprises and the state government).

20. Timely data on government debt are published regularly, but their comprehensiveness could be enhanced. The MoF regularly provides detailed information on central government debt,³⁸ and the DoS is responsible for compiling general government debt data. The MoF’s annual debt review—which includes information on liabilities classified by creditor, type of debt instrument, and debt maturity, and data on the composition by currencies and interest rates payable—is approved by Seimas together with the annual budget execution statement. Also, there is a comprehensive register of all central government guarantees, and total central government debt data include government guarantees (in the form of “contingent debt”). As discussed in the recent “ROSC—Data Module,” the comprehensiveness of the government debt data could be enhanced by including the debt contracted by the EBFs and the municipalities;³⁹ also, the inclusion of non-securitized debt (e.g., municipal arrears, which are currently accounted for separately by the MoF) would further enhance fiscal transparency.

21. Comprehensive data on government financial assets are not yet available. Using MoF data, the DoS is compiling for EUROSTAT annual historical data for the financial assets of the general government. When the exercise is completed—which is likely to be the case later in the year—it will be possible to estimate historical net debt data for the general government.

22. Lithuania has been subscribing to SDDS since May 1996. Advance release calendars, as well as information on the coverage of the fiscal accounts, are available at both the MoF and BoL websites. A recent mission by the IMF’s Statistics Department has made a number of suggestions for improving the quality, coverage, dissemination of the data provided, and for enhancing the supporting and explanatory information.

C. Open Budget Preparation, Execution, and Reporting

23. The annual budget process is open with an emphasis on financial compliance. The budget process is clearly defined in the Law on the Budget Structure (Organic Budget Law), which specifies the fundamental requirements for the preparation and execution of the national budget, budget reporting, and the auditing of government accounts.⁴⁰ The stated goals of the law are to ensure that budget formation and execution are directed toward the overall economic and social welfare of Lithuania’s citizens, and that financial resources are used effectively. As outlined below, the law also provides for the development of performance budgeting and medium-term planning.

24. The overall balance of the general government is used as a main indicator of the fiscal position in the context of the program with the IMF, but not in the budget documents. The annual budget focuses on the state budget and national budget balances; standard international definitions of the budget deficit are used in the context of the current standby arrangement with the IMF and interactions with other international organizations and international financial market participants.

25. Increased emphasis is being given to medium- and long-term planning. The government has elaborated a long-term strategy that sets key strategic goals.⁴¹ These long-term plans provide qualitative guidance for preparing three-year estimates of revenue and expenditure. In the same context, since 2000, the government has also been working on establishing program-based medium-term budgeting to link its national strategic plans with the spending priorities of individual budget institutions.⁴² While the system has been formally introduced, it remains to be made fully operational, In general, in formulating program structures at the institutional level, attention is given to establishing mission goals for each institution as well as the objectives, activities and budget requirements of each program managed by the institution. The new system also encompasses an ambitious performance measurement and evaluation framework that requires collecting considerable detail from budget institutions. The government is seeking to improve the quality and systematic preparation of program information, coordinate activities across agencies, enhance public awareness of programs, and evaluate the results.

26. The PIP has been maintained as a separate three-year planning and management mechanism. The PIP allocates funding to high-priority capital projects within an overall capital spending ceiling proposed by the government and approved by Seimas.⁴³ The PIP identifies four sources of funding for these projects: state and municipal government budget funds; the Privatization Fund; the approved state and municipal borrowing programs; and guaranteed borrowing and grants from the EU and international financial institutions.⁴⁴

27. Multi-year plans remain to be fully integrated into the annual budget process. Each year, the MoF provides expenditure ceilings for elaborating sectoral spending plans for a three-year period. In planning their activities, ministries and agencies are asked to take account of inter-sector relationships, although this process is still being developed. The draft budget document presented to Seimas shows aggregate spending plans for each function and program only for the relevant budget year. The detailed multi-year plans of the ministries and agencies are provided to Seimas and published after the annual budget document has been approved. Estimates beyond the relevant budget year are purely indicative and do not carry a formal endorsement by the government. Further work is required to integrate the strategic and medium-term planning frameworks with the annual budget approval process.⁴⁵

28. The government’s planning efforts have been supported by significantly strengthened macroeconomic analyses. The MoF accompanies the budget preparation and execution process with regular updates of macroeconomic projections and forecasts. Official forecasts are provided every four months. The government’s annual “Pre-Accession Economic Programme” provides a comprehensive review and analysis of recent macroeconomic developments and policies, and detailed medium-term fiscal projections.

29. Budget documents do not analyze how changes in the macroeconomic assumptions would affect the budget estimates. The MOF prepares a baseline macroeconomic scenario on which the budget estimates are based. It also produces 3-year ahead forecasts that include some general risk assessments and information on key assumptions. Overall, however, the budget documents contain limited information on the macroeconomic assumptions used in preparing the budget and do not contain a comprehensive sensitivity analysis that shows how changes in key macroeconomic variables would affect budget outcomes. Nevertheless some detailed additional risk assessments are provided in the government’s pre-accession economic programs for 2001 and 2002, which are available to the public (including on the Internet).

30. Fiscal sustainability issues are examined in the contexts of the program with the IMF and EU Accession, but are not an integral part of the budget process. There is no formal sustainability analysis contained in the annual budget documents or in other information regularly elaborated by the MoF. However, fiscal sustainability issues are examined in the context of the current standby arrangement (SBA) with the IMF, and the EU accession documents.

31. Binding debt rules are applied to both state and municipal governments. The annual budget law specifies limits on new net borrowing by the state and the municipalities.⁴⁶ Within the limit on new net borrowing by the state, there are additional limits for the state government on issuing securities and contracting loans for the purposes of financing the state budget deficit, financing public investment, and covering temporary shortfalls of SoDra funds. The law also states that short-term interest free loans from the state budget used for bridging temporary municipal revenue shortfalls shall not be included in the borrowing limits. Also, borrowing operations by municipal enterprises without government guarantees are not covered by these arrangements.

32. The Budget documents do not provide estimates of the costs of new policy initiatives. While the new program budgeting framework makes provisions for the separate identification of new polices within each program, the budget documents do not provide separate data on the aggregate costs of ongoing and of new programs and initiatives.

33. Internal financial control procedures are in place, but their efficiency and scope could be enhanced. Since 1999, the government has put strong emphasis on developing effective internal control mechanisms.⁴⁷ Financial compliance controls over budget execution by the state budget units have been put in place, using a system of appropriation managers.⁴⁸ While the system is broadly effective in controlling state budget expenditures, it is not very efficient due to the maintenance of a large number of budget units (over 1,000) and appropriation managers (about 200).⁴⁹ In addition, the system does not exert control over extrabudgetary resources or the municipalities. Also, the financial control procedures do not explicitly cover Hexaentity “special programs” of budget units. In particular, budget units that receive revenue for services provided, are allowed to keep and carry forward in the coming fiscal year, revenues collected in excess of the amount of income initially foreseen for the special programs, as if they were new appropriations, thereby reducing the extent of extrabudgetary activity.⁵⁰ Within this overall framework, the MoF oversees budget revisions, and supplementary budgets are used infrequently.

34. Internal audit procedures are being strengthened. The organization of internal audits is rooted in a government resolution from early 2000,⁵¹ which requires that internal audit services be established in all ministries and regional administrations. This affected some 110 government institutions and agencies, and audit units have already been established in all ministries and regional administrations.⁵² The fairly dispersed institutional organization means that many internal audit structures are of comparatively small scale, and, in practice, there are many one-person audit units. An internal audit charter has already been approved, an internal audit manual has been prepared.⁵³ The new internal audit methodology is based on international best practice, with an emphasis on risk assessment of budget management processes within each organization and a focus on both performance and financial compliance. The internal audit units provide to the head of the institution an annual report on the activity performed by the Internal Audit Unit; the report is copied to the MoF. These reports may also be released to the SCO if approved by the relevant appropriation manager. Technical assistance on internal auditing is being provided by the EU, which has emphasized the need to maintain the impetus of the reform, and to construct detailed action programs with defined objectives, targets, responsibilities, and deadlines for achievement in a comprehensive and systematic manner.⁵⁴

35. Clear public procurement legislation and procedures have been established. The existing Public Procurement Law complies with international standards in its strong emphasis on open tendering processes, clear advertising rules, and absence of discriminatory provisions.⁵⁵ The procurement system is operated in a decentralized fashion, where individual procuring entities bear the responsibility for the conduct of procurement planning, the tender process, and contract management. The procuring entities are required to report to the SPA. In general, procuring entities create their own tender commissions that conduct the tender process and make recommendations. Given the fairly large number of fairly small procuring entities, there are only few permanent procurement units and few permanent professional procurement staff, fn 2002. In Independent Committee for Public Procurement Complaint Review was established to investigate contractors’ complaints.⁵⁶

36. The automated accounting system is not yet capable of producing complete and accurate in-year reports on central and general government budget outturns. The automated accounting system provides reports on state budget operations on both a monthly basis (with a lag of one month), and a quarterly basis (presented two months after the end of the quarter). The monthly data cover cash transferred to appropriation managers, while the quarterly data cover actual cash payments by budget institutions. GFS data on central and general government operations, must be compiled separately, using personal computer spreadsheet applications, based on reports by the extrabudgetary funds and the municipalities, and recorded inflows of grants and loans (and spending from these flows). The monthly and quarterly GFS data on central government operations are subject to frequent revisions, and it is difficult to consolidate data from different sources. The appropriation structures adopted in the state budget also contribute to difficulties in distinguishing debt interest and amortization payments from capital spending, particularly at the municipal level. Also, no aggregate balance sheet data can presently be generated from the accounting system.

37. The status of tax administration, and tax payers’ rights and obligations are defined clearly. Current legislation⁵⁷ establishes the State Tax Inspectorate (STI) as an institution of the Ministry of Finance. The head of the STI is appointed and relieved of his duties by the Minister of Finance; there are no stipulations or mechanisms for protecting the head of the STI from political interference. The law on tax administration outlines tax payers’ rights and obligations, as well as dispute procedures. Tax administrators are obliged to respond in writing or over the phone to inquiries by taxpayers. Taxpayers may dispute all actions of the tax administrator or his/her supervising officer, following certain steps. There exists a comprehensive three-step procedure for handling tax disputes, which consists of an initial appeal to the central tax administration, followed, if necessary, by mediation proceedings by a tax dispute commission, and, as a possible final step, court proceedings. The latter is a two-step process, where lower-court decisions can be appealed to a higher court.

38. Seimas reviews the state budget at least once a year, but there is no formal “mid-year” review requirement. The government provides to Seimas regular monthly and quarterly progress reports on budget implementation, and ministerial officials provide additional information to Seimas upon request. The official macroeconomic forecasts are revised three times a year (February, June, and October). While these revisions affect budget planning for the coming year, the government is not required to present to Seimas formal revisions of budget forecasts for the current year.

39. Audited final accounts are usually available within six months after the end of the fiscal year. The government presents final accounts for the state budget within three months after the end of the budget year, and the SCO provides its audit report three months later (by June). This report is then discussed by Seimas, and final approval is required by November. Separate annual audit reports are also prepared on the main EBFs, but they do not have to be presented jointly with the state budget reports. The municipal budget laws do not require municipalities to prepare audited annual reports.⁵⁸

D. Assurances of Integrity

40. Budget estimates have improved significantly, and differences between budgeted and actual outturns are disclosed and analyzed. The regular publication of monthly state budget execution reports, and the periodic updates of the macroeconomic framework, have helped to enhance fiscal transparency and public budgetary oversight. While the accuracy of budget forecasts has improved, it has been particularly challenging to provide good revenue forecasts. Revenue forecasting is always a difficult task in a small open economy like Lithuania, but the task has been further complicated by the many changes in the legal and regulatory frameworks that have occurred over the last decade. Revenue shortfalls have often required amending the expenditure side of the budget to adhere to agreed fiscal targets.

41. Statements of accounting policy are not included in the budget and final accounts documents. Accounting is currently on a cash basis, but consideration is being given to supplementing this, by 2004, with a system based on accrual accounting. This, and fiscal reporting more generally, would be greatly assisted by the early implementation of the State Treasury’s new system for accounting and payments,⁵⁹ and a comprehensive set of accounting standards for preparing and reporting budget execution data.⁶⁰

42. There are difficulties in reconciling fiscal data with monetary and balance-of-payments data. As noted in the ROSC-Data Module, there remain problems in preparing GFS reports that provide a consistent picture between central and general government operations and government debt data, In particular, the “below-the-line” (financing) data drawn from the monetary survey and the balance-of-payments are difficult to reconcile with the available “above-the-line” data on revenues and expenditures. The discrepancy between these two sets of data appears to reflect a number of problems, including differences in coverage, timing, and classification.⁶¹ The authorities plan to establish a working group of experts from the BoL, the MoF, and the DoS for reconciling fiscal (including debt) and balance-of-payments data, and ensuring methodological consistency.

43. External audit is independent of the executive branch and accountable to Seimas. The status of the SCO, which is defined in the Constitution as well as the Law on State Control, complies with the main conditions of independence laid down in the lima Declaration of INTOSAI.⁶² The Constitution stipulates that a State Controller be appointed for a five-year term by Seimas upon the nomination of the President, authorizes him/her to supervise state budget execution, and requests him/her to provide to Seimas an annual account of state budget execution. The SCO budget is prepared using the same procedures as for other budget institutions. It has the authority to audit all institutions and bodies which receive funds from the state budget or which manage and use state-owned assets, including the BoL and the municipalities; it can carry out both financial audits and performance audits, although much of the emphasis has remained on financial compliance. The SCO prepares an audit program at the beginning of the year, which is shown to Seimas. The State Controller is free to accept Seimas suggestion, but retains the final determination on the bodies that are to be audited. In practice, the audit program is set with a view to cover at least 75 percent of state-budget spending, and any areas identified as being of high risk.

44. A strengthening of external audit capacity is required to handle likely future increases in demand. At present, about 60 percent of resources are devoted to financial auditing. There is likely to be strong growth in the demand for auditing services resulting from the further development of the program budgeting system (which will require reports on performance measurement), and from the audit requirements for EU funds. At present, the SCO has a total staff of only about 290, of which about 70 percent are involved in auditing. The SCO also has only moderate technical capacities and will need additional computer-assisted audit software and equipment to meet the required standards; the EU has been providing technical support and training to the SCO.

45. Municipal audits are in need of strengthening. Municipal controllers, who are elected by a majority of the local council and accountable to the mayor, manage municipal finances, and organize control and audit of the finances of the municipalities and their enterprises. The municipal controllers currently combine internal and external audit functions, and there are no specific external audit requirements for municipalities (although they may be audited by the SCO). In general, municipal control and audit appear to be of variable quality. The government has been considering several reform initiatives, including the separation of internal and external audit and control functions, and the development of an internal audit institute under SCO oversight, which would encourage municipalities to adopt common standards and procedures for internal control and auditing. Municipalities would also be encouraged to audit and publish annual reports. No decision on these initiatives has been taken yet, although a Law on Internal Control and Internal Audit has been drafted.

46. The legislature follows up on external audit reports. Each year, the SCO submits to Seimas a conclusion on the accounts of the state budget, the Government’s report on public debt, the report on the management of state property, and about 40 or more audit reports and findings on specific issues. The SCO also prepares for Seimas a conclusion on the draft budget for the year ahead. The SCO sends copies of its reports the government and the budget institutions concerned to inform them of its findings. Seimas may follow up issues by requesting the government and the institutions concerned to respond to the issues raised. Where criminal or fraud issues are involved, the SCO may alert Seimas and the government, but any follow up is the sole responsibility of the relevant law enforcement authorities. SCO audit reports are also available on the web and are discussed in the press. Seimas has decided to establish a parliamentary sub-committee on public accounts to ensure a systematic follow-up on SCO audit reports.⁶³

47. Macroeconomic models, assumptions, and forecasts are reviewed in different government agencies, and in the context of the IMF program. The MoF coordinates macroeconomic and budget forecasting, and interacts with forecasters in the BoL and different line ministries who are involved in producing various budget forecasts. Approved forecasts and general macroeconomic assumptions are published on the MoF website regularly. The MoF also discusses its forecasts with international organizations that prepare forecasts for the Lithuanian economy, including IMF and EU staff. There is no formal forum for consultations or interactions on macroeconomic forecasts with the private sector.

48. The statistics-producing entities have an adequate legal and institutional framework. Three entities have legal authority for providing fiscal data and statistics—the FPAD and SDMD of the MoF, and the DoS. The authority for the MoF departments to produce GFS and debt data is provided by decrees and resolutions;⁶⁴ the DoS has statutory assurance of technical independence under the Law on Public Statistics.⁶⁵ Although the ROSC—Data Module judged the DoS arrangements to be adequate, it recommended that the legal basis for confidentiality be enhanced by eliminating the exclusions from the confidentiality provision in the Law on Statistics which ensure that the input of no single respondent can be identified, or derived, in any statistical series without express permission.

Enhancing the comprehensiveness of the budget

53. The maintenance of different budget concepts, and of various extrabudgetary funds, activities, and programs, adversely affects fiscal transparency. The significant fragmentation of Lithuania’s budget process—with its maintenance of separate accounting frameworks and budget cycles for the national budget and the extrabudgetary funds; and different and largely partial concepts for planning, monitoring, and reporting budget activity—adversely affects fiscal transparency and weakens the position of the Ministry of Finance in implementing sound fiscal policies. It also increases administrative burdens, fragments administrative resources, and has contributed to a situation where, in practice, the fiscal data do not fully comply with international standards.

54. A single and comprehensive framework for budgetary decision making, and fiscal accounting and reporting should be adopted. A clear advantage of having—for all purposes, including the annual budget cycle—a single GFS-consistent accounting framework for central and general government operations, would be that it conforms to international standards and practices, and allows for a better focusing of government resources, thereby strengthening the ability of the Ministry of Finance to implement sound fiscal policies.⁶⁶ Such a broadly-recognized standard becomes particularly important as Lithuania readies itself to join the EU. Conceptually, adopting a GFS-consistent framework for all accounting and reporting purposes, would require consolidating into the budget accounts the accounts of all extrabudgetary funds, activities, and programs, as well as all foreign grants and net lending operations.⁶⁷ Having a comprehensive fiscal accounting framework is also a precondition for achieving a satisfactory degree of correspondence of between revenue and expenditure (above-the-line) data, and the available (below-the-line) data on financing of the government balance. More broadly, it would help to improve the consistency between fiscal and monetary data.

55. Additional efforts should be undertaken to strengthen the available information on government debt and assets. Comprehensive general government debt statistics are indispensable for a variety of purposes, including carrying out meaningful analyses of the fiscal policy stance (and its overall fiscal adjustment needs) in the light of assessing fiscal sustainability. This will become particularly important in an EU context, where fiscal policies have to be coordinated between governments. Similarly, developing a comprehensive and timely data base on general government assets (both financial and nonfinancial), would facilitate estimating the government’s net debt, which is a key indicator fiscal sustainability.

Streamlining fiscal management procedures and practices

56. Streamlining fiscal management procedures and practices would further help to enhance fiscal transparency. Particular issues that should be addressed in this regard are:

• Strengthening the automated accounting system. Efforts to improve the comprehensiveness of the budget will need to be accompanied by improvements in the automated accounting system with the goal to produce complete and accurate in-year reports on central and general government budget outturns in a standard international format.

• Integrating the annual budget process with strategic planning. While progress has been made in developing fiscal planning, there is a need to establish a clear quantitative correspondence between annual, medium-term, and long-term planning models, which is a precondition for fiscal transparency. This would facilitate adapting annual budgets to changing longer-term priorities, and updating longer-term priorities in line with annual budget outcomes. A key step in this process will be to improve the quality of the medium-term estimates so that they can be published in the annual budget document as representing a firm policy commitment of the government (but not a legal obligation beyond the annual appropriation). The published medium-term estimates should then become the basis for initial discussion for the preparation of the next annual budget, and the government should fully explain the reasons for deviations between actual outcomes and projections, and the reasons behind changes in its fiscal and budgetary forecasts.

• Establishing a formal mid-year review of fiscal and macroeconomic policies. While various reviews already take place, including in the context of preparing the annual budget for the coming fiscal year, having a single, formal mid-year review of budget implementation for the current year, and of fiscal and macroeconomic policies, would help the Ministry of Finance to focus and channel the discussions in this area, and enhance its communication with the public. This review could take place each June, in the context of presenting the macroeconomic forecasts for the upcoming budget year. As part of the review, the Ministry of Finance should present a comparison between the original budget and projected/actual budget outcomes. In addition, updated information on actual budgetary outturns should be presented in this context and the budget discussions.

• Implementing policies to contain arrears on a permanent basis, and further reducing the scope for quasi-fiscal activity. While the government has made good progress in addressing these issues, its efforts have focused on mechanisms to reduce the existing stock of arrears, which is clearly the first priority. In addition, however, efforts need to be made to address the various sources of arrears. This would include, among others, further advancing with administered price adjustments (also to further reduce the scope for quasi-fiscal activity); enhancing supervision and control of municipalities and their enterprises; and exploring the scope for new own municipal revenue sources. While many of the root problems are known, resuming regular high-level discussions (that include representatives of ministries, extrabudgetary funds, and municipalities) would facilitate finding a comprehensive and permanent solution.

• Strengthening financial controls, as well as internal and external audits. With the demand for financial controls and audits inevitably increasing, there is a strong need to build-up capacities, including in new fields such as performance-oriented audits. The administrative streamlining suggested by the staff, including the harmonization of the budget frameworks and processes should facilitate the streamlining of control and audit structures and processes, and allow building up stronger units. At the municipal level, internal auditing and financial reporting functions should be strengthened, and formal and compulsory annual external audit procedures should be established.

• Establishing clear and uniform procedures for interactions with the public. Having clear and transparent procedures for interacting with the public, for example for inviting public comments on macroeconomic forecasts, and on tax and other legislation at the drafting stage, would help to guide public expectations and channel public comments, and could be a useful forum for explaining the government’s views.

• Establishing a broader set of release schedules for fiscal information. Establishing clear release schedules for all fiscal information, and beyond the fairly narrow confines of SDDS requirement (i.e., also for the various documents that provide fiscal information according to domestic classifications), would help the Ministry of Finance to strengthen its position vis-à-vis other parts of the government in requesting information in a timely fashion, and it would help to focus administrative resources on producing this information.

Strengthening documentation and analysis

57. Further improvements in fiscal documentation and analysis would help to improve transparency. While a good fiscal accounting framework would provide transparent, comprehensive, and timely information to fiscal policy makers, it needs to be complemented by good documentation and analysis. In this regards, various pieces of information should be presented in a routine fashion. In particular:

• An estimate of the cost of all new policies would facilitate decision making in Seimas, and the government’s dialogue with the public. Hence, the budget documents should clearly identify the cost of newly proposed policies, and separate them from the cost of existing policies; the information should be publicly available.

• A statement of existing tax expenditures should be introduced, included in the budget documents, and provided to the public. This will ensure transparency with regard to the tax revenue foregone due to the existing and proposed special treatment provisions in the tax laws.

• A comprehensive analysis of fiscal risks— similar to the analysis already presented in the government’s pre-accession economic program—should be included in the budget documents and provided to the public. This should cover the state and municipalities, and include all contingent liabilities.

• A long-term debt sustainability assessment, should accompany all medium-term fiscal projections and forecasts, forcing these projections to be addressed in the context of a discussion on the sustainability of fiscal policies.

• A more detailed sensitivity analysis of the budget estimates should be included the budget documents, and made public. This would give the Seimas and other budget users a better understanding of how various macroeconomic shocks (or other changes in the underlying macroeconomic assumptions) could effect budgetary outcomes. This would allow policy makers to assess the budget estimates in the context of potential macroeconomic risks, and will be particularly important, given the increased emphasis on strategic and medium-term planning.

• Strengthening overall communication with the public. As Lithuania moves toward EU accession, the demand for interactions with the general public (both domestic and foreign) will increase, including in the area of fiscal policy, which will remain the government’s main policy tool. In this context, consideration should be given to developing a regular (e.g., quarterly) publication of fiscal policy implementation and prospects which would complement the already available information with analysis prepared by the staff of the Ministry of Finance, hi addition, regular methodological notes to document various assessments (e.g. the debt sustainability analysis) should be published. This will help to improve communication with market participants and other users of fiscal information, including in Seimas. There is no need to provide detailed model assumptions, but only broad outlines of the analysis.