LIETUVOS RESPUBLIKOS VALSTYBËS SKOLA, 2000 TURINYS / CONTENTS I. ÁVADAS II. LIETUVOS VALSTYBËS SKOLA IR JOS STRUKTÛRA III. LIETUVOS VALSTYBËS SKOLINIM

LIETUVOS State debt RESPUBLIKOS of the Republic VALSTYBËS of SKOLA, Lithuania, 2000 2000 MINISTRY OF FINANCE OF THE REPUBLIC OF LITHUANIA STATE DEBT OF THE REPUBLIC OF LITHUANIA 2000 Vilnius 2001 23

LIETUVOS RESPUBLIKOS VALSTYBËS SKOLA, 2000 TURINYS / CONTENTS I. ÁVADAS II. LIETUVOS VALSTYBËS SKOLA IR JOS STRUKTÛRA III. LIETUVOS VALSTYBËS SKOLINIMASIS 3.1. Valstybës skolinimasis pinigø ir kapitalo rinkose 3.2. Valstybës skolinimasis ið tarptautiniø finansiniø institucijø 3.3. Valstybës garantijø teikimas IV. PABAIGA 5 7 13 13 18 20 21 I. INTRODUCTION II. STATE REPUBLIC OF LITHUANIA AND ITS STRUCTURE III. GOVERNMENT BORROWING OF LITHUANIA 3.1. Government borrowing in money and capital markets 3.2. Government borrowing from international financial institutions 3.3. Issue of Government guarantees IV. Final comments 24 25 31 31 36 38 40 3

24 I. LIETUVOS STATE RESPUBLIKOS INTRODUCTION The annual publication on state debt gives an overview of state debt developments over 2000, outlines economic and financial situation of the country, introduces statistical and analytical data about domestic and external state debt. Overview of the Lithuanian economy. Macroeconomic situation last year improved in comparison to that in 1999. Year 2000 may be called the year of economic stabilisation. By preliminary estimations, the Gross Domestic Product grew by 3.3 per cent. As stated by the Statistics Department of the Republic of Lithuania, annual inflation in 2000 was 1%. In 2000, foreign trade started recovering after a slow-down that had resulted from the Russian crisis of 1999. The recovery manifests itself in growing volumes of export and import of goods and services. The Statistics Department of the Republic of Lithuania announced that exports in 2000 constituted LTL 15237.5 mill.; imports LTL 21826 mill.; trade deficit amounted to LTL 6588.5 mill. Despite unfavourable Euro/Dollar exchange rate last year (Lithuanian Litas is pegged against US Dollar), exports in 2000 grew by LTL 3222.3 mill. (26.8 per cent) and imports increased by LTL 2488.1 mill. (12.9 per cent). Growth of imports was predetermined by the recovery in the domestic market, while exports were promoted by re-orientation from Eastern markets such as Russia, Byelorussia, etc. over to the European Union states. According to the data of the Bank of Lithuania, international official reserves of Lithuania in December of 2000 totalled USD 1358.6 mill. During 2000, the reserves increased by USD 116.5 mill. It is projected that the current account deficit over 2000 will make 6.0 per cent of GDP. If compared to 1999, the current account deficit in 2000 was reduced by LTL 2076.7 mill. (43.48%). Principally, this reduction was the result of the reduction of foreign trade deficit. A very important factor influencing the macroeconomic stability of the country was the Memorandum of Economic Policy signed in 2000 between the Government of the Republic of Lithuania and the International Monetary Fund. The Memorandum was signed with the aim to continuously reduce the current account deficit and the fiscal deficit of the country and to lay ground for sustainable growth of the economy. According to the preliminary data for 2000, the general government fiscal deficit was reduced from 7.8 per cent of GDP in 1999 to 2.8 per cent of GDP in 2000. Foreign direct investments as of 31 December 2000 amounted to LTL 9338.0 mill., which is LTL 2524,8 per capita or 13.2 per cent more than as of 31 December 1999. Elections to the Parliament of the Republic of Lithuania did not have much impact either on the domestic capital market or the Government securities market. The average interest rate decreased by 203 basis points in comparison to that in 1999. The lowest set interest rate was 4.8 per cent (for 3-month Treasury bills), whereas the highest one was 16.5 per cent (for 2-year bonds). In 2000, the maturity of Government securities was extended. For the first time ever, 5-year Litas denominated Eurobond issue with the total value of LTL 100 million and the interest rate at 10.50 per cent was launched. Commercial banks set their interest rates on loans by taking account of average interest rates on GS (Government securities) being issued. At the end of last year, the average annual interest rate was 11.03 per cent on loans in Litas (12.98 per cent in 1999), and 9.65 per cent on loans in foreign currencies (11.41 per cent in 1999). In 2000, credit ratings assigned to Lithuania by international rating agencies remained unchanged. The rating set by Standard & Poor s for long-term foreign loans remained BBB-, by Moody s Ba1, and by Fitch BB+. Economic development perspectives are assessed as stable.

STATE DEBT OF LITHUANIA AND ITS STRUCTURE II. Total domestic debt. The total domestic and external debt of the country as of December 31, 2000 amounted to LTL 12724.7 mill. Within the year, the total debt grew by LTL 655 mill. and accounted for 28.3 % of the projected GDP (LTL 44900 mill.) (see Diagram 1). LIETUVOS STATE RESPUBLIKOS Under the State Debt Law of the Republic of Lithuania, total debt is classified by the type of currency and is divided into domestic debt, i.e. liabilities denominated in Litas, and foreign debt, i.e. liabilities denominated in foreign currency. State foreign debt (including Government guarantees extended in foreign currency) increased during the year concerned from LTL 9715 mill. to LTL 9897.3 mill. and as of the end of 2000 constituted 22% of the projected GDP. Foreign debt was mainly formed of long-term loans 59.2 per cent, and of bonds issued in external markets 39.9 per cent. Short-term loans account only for 0.9 per cent of the total foreign debt (see Diagram 2). As of the end of the year, foreign debt structure by creditors was as follows: debt to foreign commercial banks and financial institutions LTL 6195.8 mill. or 62.6 per cent of the total foreign debt; debt to international development organisations (the International Bank 25

LIETUVOS STATE RESPUBLIKOS for Reconstruction and Development, the European Bank for Reconstruction and Development, the European Investment Bank and the Nordic Investment Bank, and other international organisations) LTL 1930.2 mill. or 19.5 per cent of the total foreign debt; debt to foreign governments and authorities (the European Union, the European Investment Bank, etc.) LTL 1003.8 mill. or 10.1 per cent of the total foreign debt; debt to the International Monetary Fund LTL 767.5 mill. or 7.8 per cent of the total foreign debt. With the improvement of the situation in the Lithuanian financial market, the share of Government borrowing in the domestic market increased. State domestic debt (including Government guarantees extended in Litas). The state domestic debt over the year increased by LTL 473.2 mill. and by the end of the year constituted LTL 2827.4 mill. or 6.3 per cent of the projected GDP. As of the end of the year, the structure of the domestic debt by the type of instrument was as follows: Bonds 50.7 per cent; Treasury bills and saving notes 37.1 per cent; other liabilities (acknowledged state domestic debt) 7.6 per cent; long-term loans 4.2 per cent; and short-term loans 0.4 per cent (see Diagram 3). As of the end of the year, the structure of the domestic debt by creditors was as follows: debt to Lithuanian commercial banks LTL 1690.8 mill.; debt to financial institutions and private persons LTL 1064.1 mill.; debt to other state authorities LTL 72.5 mill. With the view to minimise debt management risks, the Government was further increasing the maturity of its debt liabilities. As of the end of 2000, the total long-term debt amounted to LTL 11573.7 mill. or 91 per cent of the total state debt, whereas the short-term debt (i.e. liabilities of less than one year) amounted to LTL 1151 mill. or 9 per cent of the total state debt (see Diagram 4). As much as 91.2 per cent (LTL 1050 mill.) of the short-term debt was constituted of Treasury bills and saving notes issued in the domestic market. 26

LIETUVOS STATE RESPUBLIKOS Direct state liabilities (undertaken on behalf of the state and denominated in Litas and foreign currency) grew by LTL 975 mill. and amounted to LTL 10541.7 mill.; and contingent liabilities (Government guarantees granted in Litas and foreign currency) decreased by LTL 320 mill. and constituted LTL 2183 mill. Direct domestic debt (Government liabilities in Litas) as of the end of 2000 totalled LTL 2762 mill. or 21.7 per cent of the total state debt. Short-term Government securities (T-bills and saving notes) by the end of the year amounted to LTL 1050 mill. or 38 per cent of the total direct domestic debt; long-term liabilities (bonds, GS issued for special purposes, loans, etc.) totalled LTL 1712 mill. or 62 per cent. Over the year, the Government has borrowed in the national currency by issuing the following instruments: T-bills LTL 1857.8 mill.; saving notes - LTL 132.4 mill.; bonds and GS issued for special purposes - LTL 815.2 mill. Redemption was as follows: T-bills - LTL 1998.1 mill.; saving notes - LTL 54.1 mill.; and GS issued for special purposes - LTL 349 mill. In 2000, the Government was increasing the volumes of issues of Government securities with the maturity of more than one year and for the first time ever issued three-year bonds. Moreover, the first Litas-denominated fiveyear maturity Government securities were issued in foreign capital markets (see Diagram 5). 27

LIETUVOS STATE RESPUBLIKOS Direct foreign debt (Government liabilities in foreign currencies) over the year grew by LTL 364 mill. and by the end of 2000 amounted to LTL 7779.8 mill. or 61.1 per cent of the total state debt (see Diagram 6). In December, the Government redeemed the outstanding short-term GS issued in foreign markets and as of the end of the year all direct Government liabilities denominated in foreign currency (bonds and loans) were long-term only. In 2000, the Government borrowing in foreign currency amounted to LTL 1620.3 mill.; repayment - LTL 957.9 mill. The major debt instruments used in 2000 to borrow in foreign markets were bonds and long-term loans: the state borrowed LTL 1209.4 mill. by issue of bonds; obtained LTL 410.9 mill. by signing long-term loan agreements with international development organisations and foreign governments. Greater portion of funds borrowed in foreign markets (approximately LTL 1450 mill.) was received in Euro, this portion of the debt (together with the currencies of the Euro zone) by the end of 2000 comprised 53.9% of the direct external debt (see Diagram 7). Another big share of the debt was comprised by loans and bonds in US dollars 32.8% of the total direct external debt. Debt to the International Monetary Fund in the special currency (SDR) constituted 9.9 %, debt in other currencies 3.4% of the total external debt. 28

Total repayments during the year were: LTL 141 mill. of short-term GS issued in foreign markets; LTL 108 mill. to the International Monetary Fund; LTL 17 mill. to the European Bank for Reconstruction and Development; LTL 37 mill. to the World Bank; and LTL 654.9 mill. to other international organisations and commercial lenders. As of the end of the year the structure of the state debt in foreign currency was as follows: to foreign commercial banks and financial institutions LTL 4446.9 mill.; to the World Bank, the European Bank for Reconstruction and Development, the European Investment Bank and the Nordic Investment Bank LTL 1796.7 mill; to foreign governing institutions LTL 768.7 mill.; to the International Monetary Fund LTL 767.5 mill. Contingent domestic debt by the end of 2000, amounted to LTL 65.4 mill. and accounted for 0.5% of the total debt. Within the year the debt decreased by LTL 137.6 mill. As of the end of 2000, publicly guaranteed loans had not been repaid: to Lithuanian commercial banks LTL 61.6 mill., other lenders LTL 3.8 mill., the largest amount was owed to commercial banks of Lithuania by the Board of the State Social Insurance Fund (SODRA) LTL 20 mill.; Outstanding short-term loans with Government guarantees in Litas, amounted to LTL 11.2 mill., or 17.1% of the total contingent domestic debt. Contingent external debt by December 31, 2000, amounted to approximately LTL 2117.5 mill. and accounted for 16.6% of the total state debt. Short-term debt amounted to LTL 89.8 mill., i.e. 4.2% of the total liabilities in foreign currency, the execution of which had been guaranteed by the state; long-term LTL 2027.7 mill., i.e. 95.8% of the total liabilities in foreign currency, the execution of which had been guaranteed by the state. In 2000, the Government issued guarantees with regard to LTL 691.08 mill. of loans in foreign currency, the creditors were repaid in foreign currency about LTL 636.3 mill. of loans with Government guarantees, including repayment of LTL 57.8 mill. of short-term and LTL 521.4 mill. of long-term loans to commercial lenders and LTL 57.1 mill. to international organisations foreign governing institutions. For the repayment of problem loans (Private Company UAB Ðiauliø Aerouostas, Public Company AB Lietuvos Tara, AB Inkaras, AB Oruva, etc.) the Government repaid foreign creditors LTL 80.0 mill. of loans and LTL 23.5 of interest from LTL 112 mill. allocated in the state budget. As of the end of 2000, publicly guaranteed loans had not been repaid: to foreign commercial banks, companies and financial institutions LTL 1383.4 mill.; Lithuanian commercial banks LTL 308.0 mill. foreign governing institutions LTL 235.1 mill.; European Bank for Reconstruction and Development LTL 90.6 mill., European Investment Bank LTL 33.0 mill., other international financial institutions LTL 9.9 mill. LIETUVOS STATE RESPUBLIKOS Government borrowing limits for 2000 The Law on Approval of Financial Indicators of the State and Municipal Budgets for 2000 had set the government net borrowing limit of LTL 1600 mill. (loans taken less repayments). The actual net state borrowing in 2000 amounted to LTL 777.3 mill. 29

LIETUVOS STATE RESPUBLIKOS No borrowing limits set by the Government of the Republic of Lithuania for 2000 were exceeded (see Table 1). Debt limits as of 31 December 2000: Limit set by the Government of the Republic of Lithuania Table 1 Actual figure share of the state external debt to the total debt, in per cent 85.0 77.8 share of the state loan interest expenditure to the annual state budget revenues, in per cent 15.0 11.9 share of short-term debt to the total debt, in per cent 25.0 9.0 liabilities of UAB Agricultural Loans Guarantees Fund, LTL mill. 240.5 215.75 liabilities of UAB Lithuanian Export and Import Insurance, LTL mill. 30.0 12.6 30

GOVERNMENT BORROWING III. 3.1. Government borrowing in money and capital markets Government borrowing in financial and capital markets include issue of Government Securities of the Republic of Lithuania in domestic and foreign markets and borrowing from foreign commercial banks. The key debt instrument used by the Government of the Republic of Lithuania is issue of Government Securities (hereinafter referred to as GS). Debt from issued GS comprises 51 per cent of the state debt (www.finmin.lt// State Debt/ / Government Securities). GS issued in Lithuania. The following three types of GS are issued in Lithuania: treasury bills of the Republic of Lithuania GS, the maturity of which at the time of issue does not exceed one year; bonds of the Government of the Republic of Lithuania - GS, the maturity of which at the time of issue is longer than one year; and saving notes of the Government of the Republic of Lithuania GS issued through the network of commercial banks and finance brokerage companies are offered for sale in the primary market only to natural persons. As of the end of 2000, the state debt for outstanding GS issued in Litas in Lithuania amounted to LTL 2383.07 mill. Portion of the state debt in GS denominated in Litas grew by LTL 304.2 mill. if compared to 1999. As of the end of 2000, the amount of Lithuanian GS acquired by foreign investors, if compared to 1999, increased to 6.7% of the total outstanding securities (including GS in Litas issued abroad). As of December 1999, the amount of Lithuanian GS acquired by foreign investors comprised 4.7%. The major part of GS in the domestic market, similarly to the previous year, was held by commercial, savings banks and insurance companies 48.2% and 19.2% respectively (see Diagram 8). LIETUVOS STATE RESPUBLIKOS GS issued by auction. The major portion of GS issued in Litas is comprised of securities sold by auction treasury bills of the Republic of Lithuania and Government bonds of the Republic of Lithuania. GS auctions are organised by the Bank of Lithuania in accordance with the agreement concluded by the Bank of Lithuania and the Ministry of Finance of the Republic of Lithuania, as well as Regulations of Securities Auctions approved by the Bank of Lithuania. Since October 1, 1999, auctions have been open only to those Lithuanian and 31

LIETUVOS STATE RESPUBLIKOS foreign commercial banks and brokerage companies, which have entered with the Lithuanian Bank into Auction Participant s Agreement and which meet the requirements applied by the Bank of Lithuania to auction participants, namely: auction participants must acquire at least 1 per cent of the total GS sold by auction during a quarter and announce the yield rate for buying and selling of the most recent GS issue. The said requirements make up the first step towards the introduction of primary dealers system in the GS market of Lithuania. GS auctions are held once or twice a week, usually on Mondays and Tuesdays. The payment date for the newly sold securities is T + 3 and usually coincides with the day of redemption of the previous issue GS. Notices about GS issues and preliminary schedules of quarterly issues are published by the Ministry of Finance in advance in the official bulletin Informaciniai praneðimai. All GS denominated in Litas are issued in a book-entry form. Title is evidenced by relevant records in personal securities accounts. Lithuanian GS acquired in the primary market are exempted from corporate income, personal income or value added taxation. In 2000, the Ministry of Finance launched 60 GS auctions, including: 6 auctions for three-year maturity bonds (including 2 due to an additional issue of GS of previous issue), 9 for two-year maturity bonds (including 4 due to an additional issue of GS of previous issue), 17 auctions for one-year maturity treasury bills, 15 auctions for six-month maturity treasury bills, 13 auctions for three-month maturity treasury bills. The first auction for three-year maturity bonds with coupons was held on March 28, 2000, during which the total amount of bonds with the nominal value of LTL 20 mill., was sold. The coupon rate was 11.6 per cent. This issue of 3-year maturity GS issue was successful demand for the LTL 20 mill. issue offered by the Ministry of Finance exceeded the supply volume by more than 3 times. In 2000, if compared to 1999, the state debt for GS sold by auction increased from LTL 1198.59 mill to LTL 1447.2 mill. and comprised 58.3 per cent of all issued GS denominated in Litas. As of the end of 2000, the largest part of the nominal value of the outstanding GS sold by auction (LTL 776.3 mill., or 51%) was built by 12-month maturity treasury bills (see Diagram 9) 32

The weighted average annual interest rate on GS issued in domestic market by auction in 2000 was 9.34%, which shows a decrease by 203 basis points if compared to 1999, and 993 basis points more than the average annual inflation rate (see Table 2). Lower borrowing costs reflect stronger investment capacity of domestic market participants as a result of the changes in the country s economy. The lowest weighted average annual interest rate was observed on 3-month maturity treasury bills, i.e. 4.8% (auction of August 8, 2000), the highest - on 2-year maturity treasury bonds i.e. 16.5% (auction of February 1, 2000). Table 2 WEIGHTED AVERAGE INTEREST OVER GOVERNMENT SECURITIES SOLD BY AUCTION IN 1994-2000, in per cent LIETUVOS STATE RESPUBLIKOS Treasury Bills Up to 1 3 6 12 All month months months months maturities bonds with All Saving maturity of treasury notes 2 years bills and and more bonds 1994, average 11.26 21.25 - - 20.38-20.38 1995, average 27.55 26.09 27.22 20.15 26.65-26.65 1996, average 20.64 20.02 15.81 20.13 19.80-19.80 1997, average 6.83 8.79 9.20 9.25 8.90-8.90 1998, average 8.78 10.70 11.28 12.29 11.00-11.00 1999, average 8.12 10.33 12.25 13.65 11.40 13.73 11.43 10.45 2000 January - 9.12 9.97 12.57 10.10-10.10 10.50 February - 8.43 10.21 13.01 10.21 14.62 10.45 10.92 March - 6.50 8.38 9.94 7.92 11.31 8.63 11.00 Quarter I - 8.19 9.92 12.11 9.76 12.41 9.94 10.90 April - 5.17 6.78 8.17 7.20 12.12 8.60 10.65 May - 6.03 7.29 9.77 8.33 12.98 8.59 10.50 June - 6.78-10.21 9.56 12.61 9.90 10.00 Quarter II - 6.10 7.14 9.64 8.45 12.40 8.98 10.39 July - 6.97 7.74 10.45 8.94 12.60 9.94 10.00 August - 5.70 6.60 8.58 7.50 10.59 8.37 9.90 September - - 5.78 7.49 6.76 9.99 8.25 9.41 Quarter III - 6.25 7.16 9.30 8.14 11.31 9.12 9.82 October - - - 7.00 7.00 9.94 9.34 9.00 November - - 5.86-5.86 9.13 7.83 8.60 December - - - - - - - 8.50 Quarter IV - - 5.86 7.00 6.43 9.72 8.82 8.62 2000, average - 7.49 8.54 9.90 8.85 10.99 9.34 9.85 33

LIETUVOS STATE RESPUBLIKOS As of the end of 2000, the nominal average maturity of outstanding GS issued in Lithuania in Litas was 523 days; as of the end of 1999-264 days. Increase of this indicator also resulted from issues of two-year and three-year maturity bonds issued in 2000. In future it is planned to maintain the growth tendency of medium-term maturity GS issued in Litas by holding auctions on GS with the maturity of more than three years on a regular basis. Secondary market of GS sold in auctions may be performed inside and outside the National Stock Exchange following the rules set by the Stock Exchange. In 2000, the secondary market of GS in the National Stock Exchange was LTL 930.01 mill., while in 1999 LTL 1094.46 mill (see Diagram 10). Saving notes. In 2000, issuance of saving notes, which were first launched in April 1999, was continued. The saving notes are offered only to natural persons and provide an opportunity to invest a smaller amount than in case of securities sold in auctions. Besides, they can be redeemed before their final maturity date. Saving notes are offered for sale in commercial banks and brokerage companies. 34

As of the end of 2000, there had been 23 issues of 6 and 12-month maturity saving notes, the nominal value amounting to LTL 132.43 mill. The total nominal value of saving notes issued since their first launch amounts to LTL 268.15 mill. Debt for the outstanding saving notes comprised 5.3% of the value of all outstanding GS in Litas. LIETUVOS STATE RESPUBLIKOS Government Securities issued for special purposes. In 2000, part of the debt for GS, issued for the purpose of execution of certain state property liabilities, was restructured: GS for settlement of accounts with creditors (legal persons) of the Lithuanian Stock Innovation Bank were converted into GS of five new issues. Secondary market restrictions applied to other GS issued for special purposes are not applied to the said issues. The total volume of GS of these issues amounted to LTL 228.9 mill. The first issue will be redeemed on April 25, 2003, and the last on April 25, 2007. At the end of 2000, the value of GS for restructuring of banks and settlement of accounts with creditors of the Lithuanian Stock Innovation Bank comprised LTL 805.2 mill., i.e. LTL 120.2 mill. less than at the end of 1999. As of the end of 2000, the total nominal value of the outstanding GS issued in Litas was LTL 2560.01 mill., of which GS for restructuring of banks and settlement of accounts with creditors of the liquidated Lithuanian Stock Innovation Bank accounted for 31.5%. Borrowing in foreign capital markets. To issue GS in foreign capital markets in foreign currency the Ministry of Finance uses services of foreign investment banks. All GS issued in 2000 in foreign currency are eurobonds. The major currency for borrowing in foreign finance markets in 2000, as in 1999, was EURO. There were two issues in foreign currency with the total value of EUR 325 mill. (EUR 250 mill. on February 17 and EUR 75 mill. on August 9) with the 7.75% annual coupon and five-year maturity, issued by the banks Credit Suisse First Boston and Deutsche Bank AG. On December 21, 2000 the remaining share of bonds (DM 21.96 mill.) which had been issued in 1998 the value of which was DM 40 mill. was redeemed. Also, on August 31, 2000, the Ministry of Finance completely repaid a syndicated loan of USD 100 mill. Eurobonds issued in foreign markets have been listed in stock exchanges in London, Frankfurt and Luxembourg. Secondary market of these eurobonds is performed following the rules set by these stock exchanges. Data for the secondary market of GS issued in foreign currency in 2000 is given the chart (see page 36). In 2000, the first issue of bonds denominated in Litas was launched. In October 2000, with the help of the banks J.P. Morgan and Hansabank the Ministry of Finance issued five-year maturity securities with the total value of LTL 100 mill. in foreign capital markets with the annual interest rate at 10.5%. In implementing this new instrument, the Ministry of Finance aimed to provide better opportunities for foreign investors to invest into GS denominated in Litas, restructure the state debt, improve the liquidity of GS issued in Litas and the convertibility of the Litas. Upon issuing eurobonds denominated in Litas, the Litas, Lithuania s national currency, was registered for the first time at the International Transaction Clearing Centre Euroclear. The largest share 35

LIETUVOS STATE RESPUBLIKOS the issue of GS denominated in Litas - 58% - was acquired by foreign investors (of which 13% - by investors of the Baltic States), and 42% by Lithuanian investors. As of the end of 2000, the state debt for GS issued in Litas in Lithuania and abroad was LTL 2483.07 mill. If compared to 1999, the share of the state debt for GS issued in Litas in Lithuania and abroad increased by LTL 404.2 mill. 36 3.2. Government Borrowing from International Financial Institutions The Republic of Lithuania is a member of several large international financial organisations, i.e. the International Monetary Fund, the European Bank for Reconstruction and Development and three institutions of the World Bank Group: the International Bank for Reconstruction and Development, the International Finance Corporation and Multilateral Investment Guarantee Agency. Among all international financial institutions, Lithuania s biggest lender is the International Monetary Fund. Lithuania joined the International Monetary Fund in 1992. At that time Lithuania s quota in special drawing rights was SDR 103.5 mill. In the beginning of 1999, it was increased to SDR 144.2 mill. The International Monetary Fund granted to Lithuania 3 loans and disbursed them in instalments. The loans were granted under three programs: Stand-by Arrangement, Structural Transformation Facility and Extended Fund Arrangement. The first loan received in 1992 was allocated for the purpose of currency stabilisation. The other two loans were extended to support the Government Stabilisation Programme in 1993 and 1994. Since 1998 no more loans have been taken from the International Monetary Fund. Currently the International Monetary Fund provides consulting assistance in macroeconomic area and technical assistance for market operations, monetary policy, banking supervision, national accounts and adjusting of payments balance to the Government of the Republic of Lithuania. In March 2000, on the basis of the Memorandum of Economic Policy concluded by the Government of the Republic

of Lithuania, the Bank of Lithuania and the International Monetary Fund, the Government of the Republic of Lithuania and the International Monetary Fund signed a Stand-by Agreement for a loan of SDR 61.8 mill. (USD 83 mill.). This Agreement provides that in the event of negative economic developments Lithuania would be eligible to borrow from the IMF within the limits not exceeding the established amount. The main objective of the aforementioned Agreement is to consistently reduce the deficit of the current account and ensure a stable economic growth. Out of the total amount of previously granted loans comprising USD 324.1 mill., USD 132.2 mill. have been repaid. As of the end of 2000, the debt to the IMF amounted to USD 191.9 mill. The second biggest lender includes the financial institutions of the World Bank Group: the International Bank for Reconstruction and Development, the International Finance Corporation and Multilateral Investment Guarantee Agency. Lithuania holds 1507 shares of the International Bank for Reconstruction and Development, 2341 shares of the International Finance Corporation and 187 shares of the Multilateral Investment Guarantee Agency. The total amount granted to Lithuania by the International Bank for Reconstruction and Development amounts to USD 410.7 mill. Out of which USD 19.5 mill. have been repaid. The first loan of USD 60 mill. for the purpose of import rehabilitation was granted in 1992. This loan was granted to support the Government in the transition period to the market economy. The loan proceeds were used to finance the sectors of health care, energy and agriculture. Currently, the International Bank for Reconstruction and Development is financing energy, environmental and social sector projects, i.e.: Power Rehabilitation project USD 26.4 mill.: Klaipëda Environment Project USD 7.0 mill.; Ðiauliai Environment Project USD 6.2 mill.; Enterprise and Financial Sector Assistance Project USD 25.0 mill.; Klaipëda Geothermal Demonstration Project USD 5.9 mill.; Highway Maintenance Project USD 19.0 mill.; Energy Efficiency/ Housing Pilot Project - USD 10.0 mill.; Private Agriculture Development Project USD 30.0 mill.; Social Policy and Community Social Services Development Project USD 3.7 mill., Municipal Development Project - EUR 18.89 mill. In 2000, the Bank granted a loan of USD 21.24 mill. to finance Health Project. The above-mentioned projects are supported by donor funds raised by the International Bank for Reconstruction and Development for project co-financing. The International Bank for Reconstruction and Development granted two structural adjustment loans (USD 80.0 mill. and EUR 108.29 mill.) to finance the state budget deficit. The second structural adjustment loan (EUR 108.29 mill.) was granted in 2000. Lithuania holds 2000 shares of the European Bank for Reconstruction and Development. The Bank granted to Lithuania loans amounting to USD 80.3 mill., out of which USD 26.7 mill. have been repaid. The first loan of USD 18.0 mill. and DM 42.42 mill. was granted to support the energy sector in the transition period towards market economy in 1992. The European Bank financed industrial, banking and infrastructure sectors projects, including Transport Project USD 18.9 mill.; Via Baltica and Roads Project USD 23,2 mill. The European Bank for Reconstruction and Development granted no new loans in 2000. In addition to the above-mentioned international institutions, the European Investment Bank, the Nordic Investment Bank and the European Union granted loans to the Republic of Lithuania. LIETUVOS STATE RESPUBLIKOS 37

LIETUVOS STATE RESPUBLIKOS The European Investment Bank granted to Lithuania loans amounting to USD 152.6 mill. out of which USD 2.3 mill. have been repaid. The Bank mainly invested into transport, telecommunications, energy, industry and environmental sectors. Loans were granted for the reconstruction of Vilnius Airport EUR 10 mill.; the reconstruction of Klaipeda Port Embankment EUR 14 mill.; the development of the main gas pipe network of AB Lietuvos dujos EUR 10 mill. Currently, the following projects are financed: Via Baltica and Roads Project EUR 20 mill.; Lithuanian Railways Project EUR 40 mill.; Gravel Roads Project EUR 40 mill., Municipal Development Project - EUR 15 mill., Project on the Reconstruction of the Waste Water Treatment Plant in Panevëþys. The European Investment Bank granted no new loans in 2000. The Nordic Investment Bank together with the International Bank for Reconstruction and Development, the European Bank and the European Investment Bank are financing Via Baltica and Roads Project USD 6.7 mill. The Nordic Investment Bank granted a loan in amount of EUR 20 mill. to finance environmental and municipal investment projects. As of the end of 2000, the Republic of Lithuania was indebted to the international financial organisations: the International Monetary Fund, the European Bank for Reconstruction and Development, institutions of the World Bank Group, the European Investment Bank, the Nordic Investment Bank and the European Union LTL 2.5 bill., i.e. 27.3% of the total external debt. As of the end of 2000, LTL 913 mill. had been repaid to the above-mentioned financial institutions. LTL 362.1 mill. were repaid in the year 2000. 3.3. Issue of Government Guarantees In 2000 foreign loans with the Government guarantees (loans granted by foreign lenders and Lithuanian commercial banks in foreign currency) amounted to LTL 691.08 mill. Compared to 1999 (in 1999 the loans with the Government guarantees amounted to LTL 852.80 mill.), in 2000 the amount of foreign loans with the Government guarantees decreased by LTL 161.72 mill, i.e. 18.96% (see Diagram 11). In 2000, the Government guarantees were issued on the loans to finance: projects of national significance (investment projects included in the 38

Public Investment Programme). The largest portion of these loans included the loans to Klaipeda State Seaport Authority (LTL 178.65 mill.); Ignalina State Nuclear Power Plant (LTL 72.62 mill.), Special Purpose Private Company UAB Vilnius Water (LTL 42.69 mill.) and AB Lithuanian Airlines (LTL 30 mill.); LIETUVOS STATE RESPUBLIKOS Debt liabilities of state funds and balance cash flows of these funds. Out of the total amount the Government guarantees in amount of LTL 159.08 mill. were issued on the Board of the State Social Insurance Fund loans for balancing the cash flows and repayment of outstanding loans; The main creditors in favour of which the Government guarantees were provided were: Foreign banks and other financial institutions having granted loans in total amount of LTL 351.61 mill. The largest foreign loan with a Government guarantee was granted by the International Bank for Reconstruction and Development to finance Klaipeda Seaport Rehabilitation Project; Commercial banks having granted loans in total amount of LTL 339.47 mill. As of the end of 2000 domestic loans with the Government guarantees (loans granted by Lithuanian commercial banks in Litas) amounted to LTL 65.792 mill. (in 1999 LTL 268 mill.), i.e. decreased by 75.45% compared with 1999. By the end of 2000 liabilities of UAB Agricultural Loans Guarantees Fund to commercial banks amounted to LTL 215.8 mill., the repayment risk of which was partially (30% or 35% depending on the maturity) assumed by the State. As of December 31, 2000 this portion consisted of LTL 57.6 mill. in foreign currency and LTL 12.3 mill. in the national currency. 39

IV. FINAL COMMENTS LIETUVOS STATE RESPUBLIKOS Continuing to pursue tight fiscal policies, the Government plans to reduce the volume of Government borrowing. The Law on Approval of Financial Indicators of the State Budget and the Budgets of Local Governments for 2001 establishes a limit of Government net borrowing of LTL 1400 mill. This is by LTL 200 mill. less than in 2000 (LTL 1600 mill.). In 2001, the Ministry of Finance intends to gradually reduce debt obligations in foreign currency and increase the borrowing volume in the domestic market as well as increase loan maturity. In 2001, it is planned to issue 7-10-year maturity GS in the domestic market. This way the country s capital market will be further developed. The volume of Government guarantees will be reduced. This is aimed at creating uniform business and borrowing conditions for all entities and thus induce greater activity of commercial banks in financing of promising investment projects. Taking into consideration the fact that it is planned to re-peg the national currency to the EURO at the beginning of 2002, steps will be taken in order to reduce the exchange risk. In 2001, the major part of foreign loans on behalf of the state will be taken in EURO, while loans already taken will be denominated in EURO. In order to reduce the risk of interest volatility and volatility in debt servicing costs, priority will be given to loans at a fixed interest rate. LIETUVOS RESPUBLIKOS VALSTYBËS SKOLA, 2000 STATE REPUBLIC OF LITHUANIA, 2000 40 Iðleido Lietuvos Respublikos finansø ministerija, 2001 Spausdino Lietuvos banko spaustuvë, Þirmûnø g. 151, LT-2012 Vilnius. Uþs. 211