In 2002, the International Monetary Fund's (IMF) most recent Report on the Observance of Standards and Codes (ROSC) found that Lithuania was, in many areas, compliant with the Code of Good Practices on Fiscal Transparency. However, the IMF ROSC did find problems with the degree to which the budget process is fragmented across the various levels of government, and in particular with budget planning, execution, and reporting at the municipal level. Since 2004, the IMF has consistently urged that Lithuania enact a Fiscal Responsibilities Act that would enhance transparency by reducing confusion and the potential for politicizing the system through the consolidation of tax and expenditure reforms. The IMF's Special Data Dissemination Standard website discloses that Lithuania is a subscriber to the standard and that it meets all requirements for coverage, timeliness, and periodicity, makes summary methodologies publicly available, and publishes advance release calendars in all appropriate datasets. Lithuania acceded to the European Union in May 2004 and is currently working to meet the Maastricht requirements in order to join the Euro zone.

General Overview

The International Monetary Fund (IMF) published its last Report on the Observance of Standards and Codes (ROSC) - Fiscal Module on Lithuania in 2002 (an update is expected to appear in late 2007). In the 2002 report, IMF staffers wrote that "Lithuania's fiscal institutional framework meets many requirements of the Code of Good Practices on Fiscal Transparency" (p. 1). Singled out for praise were the clear definitions of governmental roles and responsibilities, which distinguished between the three levels (local, state, and federal); the limitations placed on the central government's ability to indulge in quasi-fiscal activities; and the regulation of the assumption of binding debt by government agencies at all levels. However, the IMF found that the budget framework and processes were significantly fragmented, allowing too much extra-budgetary activity, and that the planning, monitoring, and reporting procedures of the budget process did not employ consistent conceptual frameworks. Fiscal management and planning systems were also found to be deficient in many areas. The 2002 ROSC suggested that the budget framework be made more comprehensive and that fiscal management be streamlined. In addition, it called for stronger analysis and documentation on the fiscal front and a reduction in the quasi-fiscal activities permitted at the municipal level. At the heart of its recommendations is the adoption of a unified budget framework that would rationalize the decision-making, accounting, and reporting processes.

Lithuania acceded to the European Union (EU) on May 1, 2004. On June 28, 2004, it entered the European Exchange Rate Mechanism, Phase II (ERM-II). At the time, it planned to adopt the Euro in early 2007. The IMF's 2007 report notes that this deadline was not met, and that plans are now for Euro adoption to take place in 2009 or 2010, if problems with the level of inflation can be resolved. As was reported in the IMF's 2004 Article IV Consultation report (published in 2005), the desire to join the euro zone made meeting the Maastricht criteria a requirement, which provided "a further policy anchor to its currency board arrangement" (p. 5). The 2004 report recommended improvements on the design and management of public expenditures, to include the documentation of government cash flows, including the explicit identification of contingencies. The IMF also recommended that the multiplicity of government accounts be consolidated, and that decentralization be made more effective. Also recommended were a reduction in the dependency of municipalities on state-budget financing and the passage of a Fiscal Responsibility Act that would consolidate tax and expenditure reform. According to the 2007 IMF Article IV Consultation report, this legislation had not yet been passed, but was in progress. The IMF views the passage of this act as an important step towards greater transparency and clarity in the fiscal policy-making process.

The IMF's 2007 report notes that central government budget execution data is published quarterly but is frequently revised. The treasury currently has a project underway that is expected to dramatically improve the quality of budget execution data. The 2007 report specifically points out that "further work is needed to clarify the treatment of public health care providers and of EU transactions, and the consolidation procedure for government operations" (p. 6). Since 2003, when Lithuania adopted classification standards consistent with the Government Finance Statistics Manual (2001), accrual-based accounting methods have been added alongside the older, cash-based method at the state and federal level. Local governments still use cash-based accounting, only. Annual government data is submitted for inclusion in the Government Finance Statistics Yearbook. Lithuania became a subscriber to the IMF's Special Data Dissemination Standard (SDDS) in 1997, and the SDDS website discloses that the country now meets or exceeds all requirements for timeliness, coverage, and periodicity, makes available advance release calendars on all appropriate datasets, and provides summary methodologies on all datasets.

The Principles

Clarity of roles and responsibilities.

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The 2002 IMF ROSC found that Lithuanian law clearly defines the various roles and responsibilities allocated across the three branches of government (executive, legislative, and judicial) through provisions of the Constitution. Chapter 11 of the Constitution explicitly deals with state finances and the state budget. According to the Constitution, the government must prepare a budget draft for submission to the parliament at least 75 days before the start of the new budget year. When the parliament debates the draft budget, it is restricted from adding expenditures unless it can show how these additions will be funded. In the course of the budget year, however, parliament does have the ability to make changes. Responsibility for budget execution falls to the state. The Constitutional Court is also able to influence fiscal issues by way of its decisions on issues that the government submits to it for consideration.

In 2002, the IMF found that Lithuania's definitions and concepts employed in the fiscal process diverged somewhat from internationally accepted standards, with the result that some extra-budgetary fiscal operations are excluded that might not otherwise be left out. However, the IMF found that "in general, the domestic definitions are used for the annual budget documents and budget monitoring, and maintained in parallel to standard international definitions" (p. 5). At the time of the ROSC's writing, privatization was proceeding rapidly, and new legislation dealing with individual property rights was diminishing the scope for quasi-fiscal activity. Continued government exposure to fiscal risk arising from the loss of state-owned financial and non-financial enterprises was singled out for comment, as was the fact that the government continued to guarantee loans made to state enterprises. Significantly, the IMF noted that progress on the municipal level to resolve these types of problems lagged behind progress occurring at higher levels of government. The ROSC pointed out that the Bank of Lithuania (BoL, the nation's central bank) is legally defined as independent from government control. It is not implicated in the fiscal policy process. It is barred from acting as the government's lender under its currency board arrangement and from purchasing government securities in the primary market.

The ROSC adds that the government regulation of the non-bank private sector also enjoys a fair degree of transparency. Private sector operations are subject to a comprehensive legal framework, but the ROSC suggests that streamlining both administrative procedures and regulations would be desirable. The ongoing privatization process has become increasingly transparent, as well. This process has been given over to the management of the State Property Fund since 1998. The fund's board of directors, drawn from several central government ministries, must report to the parliament every quarter and submits to annual outside audits. The Privatization Commission, an independent body created by the parliament, handles oversight and must approve all privatization contracts. If the enterprise in question is large enough or is of strategic importance, the government's formal approval may also be required. Enterprises eligible for acquisition are publicly announced, and the acquisition of such enterprises is equally open to both foreign and domestic investors. Since 2000, changes were made to the privatization process that helped reduce the degree to which it was politicized (p. 8). At the time of the 2002 ROSC, most key economic sectors had completed the privatization process. Both the insurance and banking sectors were fully privatized by 2002, as was much of the telecommunications sector. The energy and transportation sectors remained to be privatized. Funds realized through privatization were, for the most part (two-thirds), dedicated for specific uses. The remaining third was not earmarked. Although the State Property Fund maintains a register of government holdings destined for privatization, the registry is not comprehensive because registration is not mandatory.

While the 2002 ROSC found that there is comprehensive legislation covering fiscal management, administration was found to be piecemeal. Much of the legislation concerns itself with issues of accountability and compliance. However, the fragmentation of the various extra-budgetary funds and programs and the unsynchronized planning cycles diminish the effectiveness of oversight and reduce transparency. Strategic planning is carried out within the context of a multi-year framework, but the government does not always conduct interim budget revisions when changes in policy are introduced. The overall fiscal process is undergoing improvement, but the municipal level still presents serious problems. Reforms at the municipal level in 2002 were aimed at addressing some of this difficulty by revising the assignment of expenditures and conferring greater municipal-level control over the management of local expenditures. Tax law was also found to be transparent, and the ROSC noted that recent tax reforms had been passed to improve fairness and to harmonize domestic legislation with European Union law. The text of Lithuania's tax legislation is publicly available through the State Tax Inspectorate's website. Public commentary on draft tax laws is invited on an informal basis, through the Ministry of Finance's website. A formal Code of Ethics was under discussion in 2002, according to the ROSC, and was expected to be brought before the parliament in the near future.

Open budget processes

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The IMF's 2002 ROSC found that Lithuania's annual budget process was "open with an emphasis on financial compliance" (p. 17). The Law on the Budget Structure (Organic Budget Law) sets forth the requisite steps in the budget preparation process, execution, reporting, and auditing. At the time of the ROSC, Lithuania was beginning to emphasize medium and long term budget planning in order to better guide its revenue and expenditure estimates and spending prioritization processes. In 2002, it had not yet been fully operationalized, however. The ROSC recommended that the budget documents should begin to include detailed risk-sensitivity analyses, and that the annual budget process more fully integrate multi-year planning in order to enhance strategic planning capabilities. At the time of the ROSC, Lithuania did treat fiscal sustainability issues in its work with the IMF, but omitted such considerations in its annual budget documents. The ROSC noted that both state and municipal governments were subject to debt regulation, and their limits are set forth in the budget document. The ROSC suggested that the budget documents should be expanded to include the cost of new policy initiatives, which were not included at the time of the report.

Other recommended improvements, according to the ROSC, were the enhancement of internal financial controls, which it deemed inadequately efficient in 2002. The ROSC also called for a reduction of the number of budget units, and a discontinuation of the policy of carrying forward "excess" (greater than estimated) revenues from one budget year to the next, which disguises the actual degree of extra-budgetary activity. The ROSC applauded ongoing efforts to strengthen the Lithuanian audit process. These efforts have included the development of an internal audit charter, methodology, and manual. The new methodology is based on international standards, and focuses on performance and compliance. The ROSC also commented upon improvements in the transparency of the procurement process, citing the passage of the Public Procurement Law, which is based on international standards regarding planning, tendering, and contract management. The 2005 IMF report on its 2004 Article IV Consultations noted that there remained a problem in the level of detail provided in the documentation of government expenditures and cash flows. Specifically, the report remarked that "contingencies and buffers for dealing with an unexpected requirement to reduce government expenditures are not clearly identified" (p. 18). As of the 2007 report, the IMF noted that these reforms had not yet been implemented (p. 8)

Public availability of information.

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The government's annual budget, including both the state and municipal budgets, is publicly available, and is accompanied by some supporting materials. It is first submitted to the parliament along with a letter from the MoF that explains its provisions, and supporting data is appended to the draft. According to the IMF's 2002 ROSC, overview budgets covering the state pension, health insurance, and privatization funds were included with the budget documents for the first time that year. The national revenues and expenditures are consolidated by function, whereas institutional budgets provide only summary data on program costs, but include detailed input costs. At the time of the ROSC, the analysis and classifications used differed from international standards, however. The final budget is published on the website of the Lithuanian parliament, but without complete supporting documentation. It offers a historical fiscal overview, without explicit comparison of the budget to the outcomes projected for the current fiscal year. It lacks any presentation of medium-term estimates in any detail. Under separate cover, the government sends to the parliament the primary parameters of the budget, which the ROSC lists as "national budget revenues, municipal expenditures, state budget expenditures, and ceilings for providing new state guarantees" (p. 14). Forward-looking estimates prepared by individual ministries are not presented to the parliament until after the annual budget has been approved. Tax expenditures are not detailed in the budget document.

Quasi-fiscal activity, particularly at the municipal level, remained a problem at the time of the 2002 ROSC, even though the scope for it had been reduced from past levels. Reductions in these activities were achieved through privatization, legislative action, and improved oversight. Government debt data was found to be insufficiently comprehensive by the 2002 ROSC staff, Provision of this data is the responsibility of the MoF, and its compilation is done by Statistics Lithuania (then the Department of Statistics). The MoF also produces an annual debt review, which is submitted along with the annual budget execution statement and must be approved by the parliament. As of the 2002 ROSC, the government did not yet make available comprehensive financial asset data, but this was being addressed by the Department of Statistics.

In 1997, Lithuania became a subscriber to the IMF's SDDS and by 1999 had met SDDS requirements of coverage, periodicity, and timeliness of its data. The IMF SDDS website today discloses that Lithuania also provides advance release calendars for all the appropriate datasets, along with summary methodologies. The 2005 IMF report on it's 2004 Article IV Consultations noted that there remained a problem in the level of detail provided in the documentation of government expenditure and cash flows. Specifically, the report remarked that "contingencies and buffers for dealing with an unexpected requirement to reduce government expenditures are not clearly identified" (p. 18). As of the 2007 report, the IMF noted that these reforms had not yet been implemented (p. 8).

The IMF's 2007 report added that central government budget execution data is published quarterly, but is frequently revised. The treasury currently has a project underway that is expected to dramatically improve the quality of budget execution data. The 2007 report specifically pointed out that "further work is needed to clarify the treatment of public health care providers and of EU transactions, and the consolidation procedure for government operations" (p. 6). Since 2003, when Lithuania adopted classification standards consistent with the Government Finance Statistics Manual (2001), accrual based accounting methods have been added alongside the older, cash-based method at the state and federal level. Local governments still use case-based accounting, only. Annual government data is submitted for inclusion in the Government Finance Statistics Yearbook.

Independent assurances of integrity.

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In 2002, the IMF ROSC reported that audit capacity needed to be strengthened. Streamlining of audit staff and the harmonization of the various budget elements, both ongoing processes, were applauded as important steps in this regard. The ROSC also noted that the capability to generate budget estimates had greatly improved, permitting more useful post-facto analyses. Stepped up reporting of budget execution to a monthly schedule was credited with improving transparency and oversight. Revenue forecasting, however, remained a challenge, and underestimates have led to the frequent need to amend planned expenditures to avoid exceeding fiscal targets.

The 2002 ROSC noted that the budget and final accounts documents did not include a statement of the accounting policy employed therein. At the time of the ROSC, Lithuania employed cash-based accounting methods, but was moving toward an accrual-based system, and the State Treasury had developed a new accounting and payments system that had not yet been implemented. The reconciliation of fiscal, monetary, and balance-of-payments data was also problematic. On the positive side, the ROSC noted the legal independence of the external audit. The Constitution and the Law on State Control provide the legislative underpinning for the independence of the State Control Office. According to the Constitution, the president of Lithuania nominates a state controller to serve for a five-year term, subject to approval of the parliament. The state controller supervises budget execution and reports directly to the parliament at least once a year. The Constitution provides the State Control Office with the authority to audit all state-funded entities and all organizations that handle state-owned assets. It focuses on both financial and performance issues. It is required to elaborate an annual audit program at the start of each year, to which the parliament may append non-binding suggestions. The 2002 ROSC suggested that an expected increase in demand for performance-based external audits would require additional staff and technological capacity. It also noted that municipal audits were not yet robust enough. At the municipal level, both internal and external audit functions were handled by municipal controllers, and were of uneven quality. Greater oversight by the State Control Office was recommended, as was the introduction of a requirement that municipalities publish annual audit reports. Oversight of external audits is carried out by the parliament, according to the 2002 ROSC. The State Control Office sends to parliament an annual report on the state budget accounts, government public debt, and state property management, along with a number of other audit documents and its assessment of the upcoming year's budget draft. As of 2002, parliament delegates this review process to a formally constituted sub-committee on public accounts.

The 2002 ROSC also reported that the Ministry of Finance handles the coordination of macroeconomic and budget forecasting, working with the other ministries and the Bank of Lithuania. The MoF website publishes both forecasts and macroeconomic assumptions, and consults with both IMF and EU agencies on the forecasts. The Law on Statistics is a strong piece of legislation that applies to the three data-generating bodies: The Ministry of Finance, the Department of Statistics (now Statistics Lithuania), and the Bank of Lithuania. The law covers a wide range of issues, including provisions for ethical behavior, professionalism, and confidentiality.