annual report of the bank of lithuania 2004 · lithuania of ltl 137 thousand was 3.3 times higher...

VILNIUS

2005

ANNUAL REPORT

OF THE BANK OF LITHUANIA

2004

© Lietuvos bankas, 2005

ISSN 1392-4702

ISSN 1648-9039 (ONLINE)

The Annual Report was prepared on the basis of the information systems of the Bank of

Lithuania, Ministry of Finance of the Republic of Lithuania, Department of Statistics to the

Government of the Republic of Lithuania, the company Central Securities Depository of

Lithuania, the company Vilnius Securities Exchange, the company Maþeikiø Nafta, Eurostat,

Bloomberg and other data.

The amounts and percentages in some tables and figures do not correspond to total data

due to rounding (total and 100%).

The year 2004 was marked by important events: Lithuania

became a member of NATO and the European Union. On

Lithuania’s accession to the European Union, the Bank of

Lithuania became a member of the European System of Central

Banks.

When implementing its primary objective of maintaining price

stability, the Bank of Lithuania continued to apply the strategy

of a fixed exchange rate of the litas against the euro. The fixed

exchange rate regime has served as a major factor of macro-

economic stability of the country since 1994, whereas the stability

of the national currency against the euro has been a very

important factor for the economic development of Lithuania.

According to provisional data, in 2004 the real gross domestic

product grew by 6.7 per cent and the gross domestic product

per capita increased by 7.3 per cent. In 2004, the average annual inflation was 1.2 per cent.

When acceding to the European Union, Lithuania was committed to adopting the euro. Therefore,

the year 2004 witnessed active preparation for the participation in Exchange Rate Mechanism II.

After competent European Union institutions adopted relevant decisions, on 28 June 2004

Lithuania became a member of Exchange Rate Mechanism II. Lithuania assumed a unilateral

obligation to maintain the current fixed exchange rate regime and the current exchange rate of

the litas against the euro during its participation in Exchange Rate Mechanism II. The convergence

reports of the European Central Bank and the European Commission published in 2004

acknowledged that Lithuania was in compliance with the criteria on price stability, general

government budgetary position and long-term interest rates.

In order to be fully prepared for the adoption of the euro and to guarantee smooth implementation

of this process, at the end of 2004 the Bank of Lithuania prepared a comprehensive action plan

for the adoption of the euro. The plan outlines the necessary measures for the alignment of the

legal framework, preparation for the changeover, conduct of monetary policy in the new

environment, the public information campaign, institutional preparation by the Bank of Lithuania,

and other organisational measures.

The entry to Exchange Rate Mechanism II has not changed the national monetary policy, but it

strengthened the expectations about the adoption of the euro immediately after the minimal

two-year participation in Exchange Rate Mechanism II. This boosted confidence in the national

economy and financial stability, and encouraged investment in Lithuania.

The Bank of Lithuania’s monetary policy instruments are used to ensure the liquidity in the

banking system under the conditions of the fixed exchange rate of litas and self-regulation of

money supply. These instruments include the exchange of the anchor currency into the litas and

vice versa, reserve requirements and lending facilities of the Bank of Lithuania.

On 24 March 2004, the revised Rules for Concluding and Executing Litas and Anchor Currency

Euro Exchange Transactions between the Bank of Lithuania and Banks came into effect. The

Bank of Lithuania concludes unlimited litas and euro exchange transactions with the banks that

are authorised to carry out foreign exchange transactions and are subject to reserve requirements.

The new rules reinforced the bank liquidity management potential and approximated the safety

assurance standards for the operations of the Bank of Lithuania to the practices of the European

Union central banks within Exchange Rate Mechanism II.

The Bank of Lithuania applies reserve requirements to domestic commercial banks and foreign

bank branches to ensure liquidity in the banking system. In view of Lithuania’s aspirations to

become a member of the euro area in the near future, the macroeconomic situation and the

stability of the banking system, the Bank of Lithuania has been gradually bringing the system of

reserve requirements in compliance with the system applied by the European Central Bank. The

reserve requirement ratio was reduced from 10 to 6 per cent.

In 2004, the Bank of Lithuania continued work in implementing the credit institution supervisory

system complying with the international practice, encouraged banks to improve their internal

control systems, adequately assess, control and manage traditional risks, identify emerging

problems in time and provide for measures to maintain the stability of banking activities under

unfavourable circumstances in the market. While conducting off-site monitoring and on-site

inspections of credit institutions, the Bank of Lithuania monitored their adherence to the

established prudential and other requirements of sound banking.

As a result of Lithuania’s accession to the European Union and new provisions of the Republic of

Lithuania Law on Banks and the Law on the Bank of Lithuania, a number of amendments to

legal acts regulating banking operations were introduced. Several rules regulating the licensing

procedure were amended and changes in the calculation of the capital adequacy ratio were

approved. In order to establish equal competitive conditions for the Lithuanian banks in the

European Union environment, the capital adequacy ratio was reduced from 10 to 8 per cent and

the requirement on the maximum open position in foreign currency and precious metals was

changed by removing the limit on the euro position. The legislation regulating accounting and

reporting was adjusted. The revised Rules on Consolidation of Financial Group Accounts and

Joint (Consolidated) Supervision, and the Rules for Outsourcing Bank Ancillary Services were

adopted. A new procedure for calculating the liquidity ratio was introduced, whereby the banks

are encouraged to entrust their funds to the financial and credit institutions in more reliable and

stable countries. A new revision of the General Provisions Pertaining to the Organisation of the

Internal Audit of the Bank was approved. The provisions expand the functions of internal audit

committees, define the composition, subordination and accountability of the audit committee,

and assign a more important role to the supervisory council of a bank.

One of the most important tasks of the Bank of Lithuania in the area of supervision of credit

institutions in 2004 was the preparation for the implementation of the New Capital Accord and

the new European Union Capital Directive. To this end, the Bank of Lithuania organised a number

of meetings with bank representatives. At the end of 2004, the Bank of Lithuania started developing

the procedure for the calculation of capital adequacy under the requirements of the new European

Union Capital Directive with respect to the planned calculations in the transitional period.

Taking into consideration the progressive practices of foreign supervisory authorities, the Bank

of Lithuania further enhanced its supervisory methods and tools. In 2004, the Bank of Lithuania

reviewed its inspection procedures as one of the key tools of ongoing supervision. The previous

CAMELS rating-based inspection methodology was replaced by the risk-focused inspection system.

In 2004, considerable attention was given to issues of cross-border cooperation: the Bank of

Lithuania concluded an agreement with the Swedish financial supervisory authority, participated

in a working meeting with representatives of German and Finish financial supervisory authorities

and the staff of the National Bank of Ukraine.

In 2004, four banks increased their share capital and three banks strengthened their capital base

with subordinated loans to ensure the basis for the development of their business. At the end of

2004, the total bank share capital amounted to LTL 1.3 billion and increased by 8.6 per cent, the

assets of domestic commercial banks totalled LTL 29.2 billion and rose by 32.3 per cent. Foreign

bank branches were also active in expanding their business. Their assets increased from 8.7 per

cent to 9.8 per cent of the total banking system assets.

Domestic banks started expanding to the neighbouring markets in 2004. The Board of the Bank

of Lithuania authorised Ûkio Bank to open its representative office in the Ukraine (Kiev) and,

later, in Moscow. An authorization was granted to Vilniaus Bank to acquire a qualifying holding

in the Ukrainian Bank AGIO.

All domestic banks and foreign bank branches were profitable in 2004 earning a total profit of

LTL 299.3 million. Bank profits grew for a third consecutive year, while the profit in 2004 was the

largest from the re-establishment of the independence.

The number of credit unions continued to increase in 2004. The Board of the Bank of Lithuania

issued licences to four newly established credit unions. Over the year, the membership of credit

unions grew by more than 12 thousand and their share capital went up by 50.6 per cent. At the

end of 2004, the assets of credit unions amounted to LTL 185.2 million with the share of loans

granted by credit institutions accounting for 70.5 per cent. The Central Credit Union of Lithuania,

whose membership included 53 credit unions, also continued to develop its business. At the end

of the year, assets held by the Central Credit Union of Lithuania made up LTL 45.0 million.

In 2004, 45 credit unions were profitable. The total profit of credit unions amounted to

LTL 907.5 thousand and was the largest from 1995. The profit of the Central Credit Union of

Lithuania of LTL 137 thousand was 3.3 times higher than in 2003.

When performing its function of encouraging sustainable and efficient functioning of payment

and securities settlement systems, the Bank of Lithuania provides settlement services, operates

and develops the payment system LITAS, which is designed to process payments in real time and

at designated time. Advanced credit, liquidity and operational risk management measures are

applied in the system. In 2004, the Board of the Bank of Lithuania approved the Methodology

for Assessment of Systemically Important Payment Systems, as the Bank of Lithuania also carries

out the oversight of payment and securities settlement systems.

The Bank of Lithuania is preparing for participation in the payment system of the European

System of Central Banks TARGET and/or TARGET2. Following the adoption of the euro, participa-

tion of the Bank of Lithuania in one of these payment systems will be mandatory in order to

ensure smooth implementation of the single monetary policy and will allow making cross-border

payments in real time. On 23 December 2004, the Board of the Bank of Lithuania approved the

guidelines of integration of the Bank of Lithuania into the TARGET payment system, outlining

the main work and final dates of the preparation for the participation in these systems.

The Bank of Lithuania performs its functions following international standards and transparency

principles formed in central bank practice.

The Bank of Lithuania encouraged timely and proper preparation for the adoption of the euro by

focusing much attention on informing the public about this important event.

At the beginning of March 2004, the Board of the Bank of Lithuania and the Government

announced their decisions to authorise the Chairman of the Board of the Bank of Lithuania,

together with the Minister of Finance, to submit an application to the European Economic and

Financial Affairs Council for joining Exchange Rate Mechanism II and to sign related agreements.

After the European Union institutions endorsed Lithuania’s participation in the mechanism, the

Bank of Lithuania informed the public about this event.

The Bank of Lithuania regularly informs the public about its most important activities in the

preparation for the cash changeover. For this purpose, it actively cooperates with the media by

preparing press releases, organising press conferences and making comments. Much information

about the planned adoption of the euro, including questions and answers related to this issue, is

provided on the website of the Bank of Lithuania.

Representatives of the Bank of Lithuania participate in special working groups of the European

Commission and the European Central Bank for the development of an effective public information

strategy for the adoption of the euro. It allows taking over the best practices of euro area countries.

In view of the plans of minting euro coins in Lithuania, a survey was conducted for selecting the

image that would best represent Lithuania on euro coins. The majority of respondents indicated

the images of the Vytis and the Gediminas Castle. In 2004, the Bank of Lithuania organised an

open tender for the design of plaster models for the national side (obverse) of Lithuanian euro

and euro cent coins and provided detailed information to the public about its results.

In the autumn of 2004, the Bank of Lithuania and the European Central Bank arranged an

international exhibition entitled “The Making of the Euro” that helped the Lithuanian population

to get to know the single European Union currency better. This European touring exhibition of

unique photographs illustrated the adoption of the single currency in euro area Member States

and was on display in Kaunas. The exhibition was met with great interest. On this occasion, the

Bank of Lithuania published and distributed publications in the Lithuanian language on the euro

banknotes and coins.

After becoming a part of the European System of Central Banks, the Bank of Lithuania joined its

information system. Following the reporting commitment defined by the Statute of the European

System of Central Banks and of the European Central Bank, the first translated European Central

Bank monthly bulletin (quarterly version) was published on the websites of the Bank of Lithuania

and the European Central Bank in June 2004. Three European Central Bank bulletins in the

Lithuanian language were published on the website in 2004.

The Bank of Lithuania regularly publishes banking surveys, information on its balance sheet,

interest rates, balance of payments, international investment position, official reserve assets,

exchange rate and other information in statistical publications, press releases and on the website.

The Bank of Lithuania also informs the public about the work of the Board of the Bank of

Lithuania. The public is regularly acquainted with the activities of commercial banks, foreign

bank branches, credit unions operating in Lithuania, and with the results of the credit institution

inspections conducted by the Bank of Lithuania.

The National Summary Data Page “Economic and Financial Data for Lithuania” published on the

Bank of Lithuania website was renewed and expanded in 2004. New indicators for general

government operations, central government operations and central government debt, calculated

according to the methodology presented in the IMF Government Finance Statistics Manual 2001,

were included, the description of indicators of general and central government sectors, posted

on the IMF Dissemination Standards Bulletin Board, was substantially renewed.

The Bank of Lithuania continues its cooperation with the non-governmental and non-profit

education institution “Junior Achievement Lithuania”, a leading organisation in youth economic

education programmes, the Economic Education Centre and other institutions. It also contributes

to the cherishing of the national culture and history of the currency. Commissioned by the Bank

of Lithuania, a documentary by the director Rimtautas Ðilinis From the History of the Litas. Coins

was produced in 2004, presenting the history of Lithuanian coins from the ancient times to the

restoration of the state of Lithuania in the 20th century.

In 2004, the Bank of Lithuania published the book by Mindaugas Vinkus Behind the Scenes. The

Role of Kæstutis Lynikas in the Story of Reintroducing the Litas dedicated to Kæstutis Jonas Lynikas

(16 June 1924–3 August 1997), an Australian of Lithuanian descent and long-serving Bank of

Lithuania consultant for currency production.

The Bank of Lithuania continued issuing commemorative coins. A commemorative 50 litas silver

coin and 1 litas circulation coin were issued to mark the 450th anniversary of Vilnius University in

April 2004; a commemorative 50 litas silver coin dedicated to the Paþaislis Camaldolese monastery,

the third from the series “Historical and Architectural Monuments of Lithuania”, was issued in

June; a commemorative 50 litas coin to mark the 475th Anniversary of the First Statute of Lithuania

was issued in September, and a commemorative 50 litas coin dedicated to the Curonian Spit

(UNESCO World Heritage) was issued in December.

In the future, the Bank of Lithuania will continue to implement its primary objective of maintaining

price stability, will seek to ensure the stability of the financial system and create favourable conditions

for further business development. It will aim to ensure complete and smooth preparation for the

adoption of the euro in Lithuania and proper participation in the European System of Central

Banks. The Bank of Lithuania will further strengthen credit institution supervisory system and

encourage reliable and efficient operation of payment and securities settlement systems.

Reinoldijus Ðarkinas Chairman of the Board of the Bank of Lithuania

Contents

I. World Economic Environment / 13

European Union Member States / 13

Old European Union Member States / 13

New European Union Member States / 14

North American Countries / 15

Commonwealth of Independent States / 16

Asian Countries / 17

II. Review of the Economy of Lithuania / 19

Prices and Costs / 19

Consumer Prices / 19

Influence of Administered Prices and

Indirect Taxes on Consumer Prices / 21

Influence of World Oil Prices / 22

Import Prices / 22

Producer Prices / 24

Labour Costs / 25

Inflation Outlook / 26

Gross Domestic Product / 26

Foreign Trade / 29

Labour Market, Wages and Salaries / 34

Government Finance / 38

Deficit / 38

Revenues / 39

Expenditure / 39

Debt / 40

III. Review of the Balance of Payments of the Republic of Lithuania / 43

IV. Monetary Policy of the Bank of Lithuania and

Monetary Policy Instruments / 49

Key Monetary Policy Directions / 49

Preparatory Work for the Adoption of the Euro / 49

Monetary Policy Instruments and Foreign Exchange Operations / 52

Improving the Possibilities for Banks to Conclude Litas and Euro Exchange

Transactions with the Bank of Lithuania / 52

Compliance with Reserve Requirements / 52

Bank of Lithuania Lending Facility / 54

Currency Exchange Operations / 54

V. Money and the Financial System / 57

Monetary Base / 57

Money Supply / 60

Deposit and Loan Market / 63

Deposits with Banks and Their Interest Rates / 63

Bank Loans and Their Interest Rates / 67

Interbank Market / 71

Interbank Foreign Exchange Lending and Swap Market / 72

Interbank Litas Lending and Swap Market / 73

Securities Market of Lithuania / 75

Government Securities / 75

Corporate Securities Market / 79

Primary Market / 80

Secondary Market / 80

Corporate Debt Securities Market / 85

VI. Foreign Reserve Management / 87

Official Reserve Assets / 87

Foreign Reserve Portfolios and Key Management Principles / 88

Liquidity of Foreign Reserves / 89

Safety of Foreign Reserves / 89

Return on Foreign Reserves / 92

VII. Cash Management / 93

Currency Issue and Withdrawal / 93

Composition of Banknotes and Coins in Circulation / 93

Safekeeping of Inventories of Currency and Destruction of Banknotes / 95

VIII. Supervision of Credit Institutions / 97

Key Trends and Priorities in Credit Institution Supervision / 97

Review of the Business of Credit Institutions / 100

Banking Sector / 100

The Central Credit Union of Lithuania / 105

Credit Unions / 105

Compliance of Credit Institutions with Prudential Requirements / 106

IX. Payment and Securities Settlement Systems / 109

The Role of the Bank of Lithuania in the Area of Payment and Securities

Settlement Systems / 109

Integration to the Payment Systems of the ESCB / 109

Payment System LITAS / 110

Non-Cash Payments / 111

X. Participation in the ESCB and Cooperation with

International Financial Organisations / 115

Participation in the ESCB / 115

Cooperation with International Financial Organisations / 116

XI. Transparency of the Bank of Lithuania / 119

Transparency of Monetary Policy / 119

Information on Preparation for the Adoption of the Euro / 119

Information on the ESCB / 121

Transparency of Other Activities. Presentation of the Activities of

the Bank of Lithuania / 121

Application of Special Data Dissemination Standards / 123

Improvement of Statistics / 123

XII. Administration of State Treasury and

Government Institution Accounts / 125

XIII. Organisational Structure and Staff / 127

XIV. The Annual Financial Statements of the Bank of Lithuania 2004 / 129

Independent Auditors’ Report / 130

Balance Sheet of the Bank of Lithuania / 131

Profit (Loss) Statement of the Bank of Lithuania / 132

Explanatory Notes to the Financial Statements

of the Bank of Lithuania / 133

Main Objective and Functions of the Bank of Lithuania / 133

Basis for Preparation and Presentation of Financial Statements / 133

Accounting Policy / 134

Risk and Risk Management / 138

Other Information / 138

Notes / 139

Legal Acts Regulating Credit Institutions Activities Adopted in 2004 / 151

List of tables and figures

Table 1. GDP by Expenditure Approach / 27

Table 2. GDP by Production Approach (by enlarged activity groups) / 28

Table 3. GDP by Income Approach / 29

Table 4. Ratio of General Government Debt to GDP / 41

Table 5. Current Account Deficit / 43

Table 6. Development of the Current Account Balance, Composite Balances,

and Contributions / 43

Table 7. Development and Composition of Export and Import of Services,

and Contributions / 44

Table 8. Development of the Capital and Financial Accounts,

Composite Balances, and Contributions / 46

Table 9. Net Sale of Foreign Exchange to the Bank of Lithuania / 55

Table 10. Sources of Changes of the Monetary Base / 58

Table 11. Development of M2 Components and Counterparts / 62

Table 12. Margin of Average Interest Rates on Loans / 71

Table 13. Turnover of Interbank Market Transactions / 72

Table 14. GS Sale and Redemption / 76

Table 15. Investors into Negotiable GS / 79

Table 16. Contributions to Foreign Reserve Development / 88

Table 17. Composition of Foreign Reserves (net) by Currencies / 91

Table 18. Average Annual Modified Duration of Foreign Reserve Portfolios / 91

Table 19. VAR of Net Foreign Reserves / 92

Table 20. Return on Foreign Reserve Portfolios / 92

Table 21. Net Currency Issue and Withdrawal (–) / 93

Table 22. Banknotes and Coins in Circulation / 94

Table 23. Payment System LITAS Flows / 111

Table 24. Composition of Payments Processed by the Payment System LITAS / 111

Table 25. Non-Cash Payments in 2004 / 112

Table 26. Payment Cards / 113

Table 27. Payments by Payment Cards in 2004 / 113

Table 28. ATMs and POS-terminals / 114

Table 29. Account Management Services to the State Treasury and

Government Institutions / 125

TABLES

FIGURES

Fig. 1. HICP Inflation in the Euro Area, Lithuania, Latvia and Estonia / 19

Fig. 2. Contributions to Annual HICP Inflation / 20

Fig. 3. Food Prices / 20

Fig. 4. Contributions to Annual Net Inflation / 21

Fig. 5. World Oil Prices / 22

Fig. 6. Import Prices and USD/LTL Exchange Rate / 23

Fig. 7. Contributions to the Annual Growth Rate of Import Unit Value Index / 23

Fig. 8. Producer Prices for Industrial Production Sold in the Domestic Market / 24

Fig. 9. Earnings, Labour Productivity and Unit Labour Costs / 25

Fig. 10. Labour Costs in the Tradable Sector / 25

Fig. 11. Labour Costs in the Non-Tradable Sector / 26

Fig. 12. Real GDP Dynamics in the Baltic States and the Euro Area / 27

Fig. 13. Foreign Trade in Lithuania / 29

Fig. 14. Composition of Foreign Trade (excluding fuel and motor spirit) Deficit / 30

Fig. 15. Contributions to Annual Growth Rate of Imports / 31

Fig. 16. Contributions to Annual Growth Rate of Exports / 31

Fig. 17. Exports and Imports Unit Value and Terms of Trade Indices / 32

Fig. 18. Real Effective Exchange Rate Indices of the Litas / 33

Fig. 19. Share of Lithuania in the Main Export Markets / 33

Fig. 20. Development of Real Earnings and GDP, Unemployment Rate / 34

Fig. 21. Activity of Population in Lithuania / 34

Fig. 22. Unemployment Rate by Population Group / 35

Fig. 23. The Unemployed by Duration of Unemployment / 36

Fig. 24. Beveridge Curve / 36

Fig. 25. Unemployment Rate in Lithuania and other European Countries / 37

Fig. 26. Growth of Average Monthly Gross Earnings in 2004 / 37

Fig. 27. Change in the Ratio of the General Government Deficit to GDP / 38

Fig. 28. General Government Revenues / 39

Fig. 29. General Government Expenditure / 40

Fig. 30. Change in the Ratio of the General Government Debt to GDP / 41

Fig. 31. Balance of Payments / 47

Fig. 32. Commercial Bank Required Reserves with the Bank of Lithuania / 53

Fig. 33. Foreign Currency Purchase and Sale / 55

Fig. 34. Monetary Base / 57

Fig. 35. Composition of the Monetary Base / 58

Fig. 36. Net Issue of Litas into Circulation by Anchor Currency

Exchange Transactions / 59

Fig. 37. Backing of Bank of Lithuania Liabilities in Litas with Gold and

Foreign Currency Reserves / 59

Fig. 38. Money Supply / 60

Fig. 39. Development of Monetary Aggregates / 61

Fig. 40. Composition of Money Supply / 61

Fig. 41. Money Multipliers / 63

Fig. 42. Development of Deposits / 63

Fig. 43. Composition of Deposits / 64

Fig. 44. Composition of Individuals’ Deposits / 65

Fig. 45. Concentration in the Deposit Market / 65

Fig. 46. Interest Rate Margin on Time Deposits of Individuals / 66

Fig. 47. Interest Rates on Time Deposits of Individuals / 66

Fig. 48. Development of Loans / 67

Fig. 49. Development of Loans by Borrowers / 68

Fig. 50. Concentration in the Loan Market / 69

Fig. 51. Share of Foreign Bank Branches in the Loan Market / 69

Fig. 52. Contributions to Growth of Loans to Economic Activities in 2004 / 70

Fig. 53. Composition of Loans to Economic Activities by Currencies / 70

Fig. 54. Interest Rates on Housing Loans / 71

Fig. 55. Net Transfer of Treasury Funds / 73

Fig. 56. Development of Interbank Litas Lending Transactions and VILIBOR in 2004 / 74

Fig. 57. Composition of Interbank Litas Lending Transactions by Maturity / 75

Fig. 58. Ratio of GS Demand to GS Sold at Auctions / 76

Fig. 59. Average Yield on GS at Auctions / 77

Fig. 60. Average Maturity of GS in Circulation / 77

Fig. 61. GS Net Issue by Maturity / 78

Fig. 62. Main Investors into GS / 78

Fig. 63. Ratio of Securities Market Capitalisation to GDP / 80

Fig. 64. Ratio of Share Capital Attracted by Additional Contributions to GDP / 80

Fig. 65. Changes in Equity Indices in 2004 / 81

Fig. 66. Dynamics of Equity Indices in the Baltic States / 81

Fig. 67. Investors into Equity / 82

Fig. 68. Equity Investment by Individuals / 82

Fig. 69. Cash Inflows and Outflows of Equity Investment / 83

Fig. 70. Equity Turnover on the VSE / 83

Fig. 71. Volatility of Equity Indices / 84

Fig. 72. Changes of Listed Equity Capitalisation in 2004 / 85

Fig. 73. Foreign Reserve Development Trends / 87

Fig. 74. Development of Foreign Reserves in 2004 / 87

Fig. 75. Composition of Investment by Financial Instruments in 2004 / 89

Fig. 76. Composition of Investment by Ratings in 2004 / 90

Fig. 77. Composition of Banknotes in Circulation / 94

Fig. 78. Composition of Coins in Circulation / 94

Fig. 79. Composition of Share Capital of Commercial Banks by Form of Ownership / 100

Fig. 80. Asset Share Managed by Banks / 101

Fig. 81. Key Indicators of Banks / 102

Fig. 82. Composition of Bank Assets / 103

Fig. 83. Composition of Bank Liabilities / 103

Fig. 84. Net Profit of Banks / 104

Fig. 85. Key Indicators of Credit Unions / 106

Fig. 86. Payment Instructions from the State Treasury Account of the Republic of Lithuania and the

Accounts of Government Institutions / 126

I. World Economic Environment

13


Economic growth accelerated in all regions of the world in 2004. Expansion was firm in

the USA, China and the emerging economies of South East Asia, while economic growth

in the euro area and Japan was more moderate. The depreciation of the USD had an

impact on the economies of most countries of the world, but it did not help to bring

down the foreign trade deficit and the current account deficit (CAD) in the USA. An

exceptional situation in the world economy emerged in the areas of savings and

investment, as the largest balance of payments current account surpluses (saving surplus

compared to domestic investment) in 2004 were recorded in other fast developing

Asian countries rather than in China.

Increasing world demand and uncertainty about undisrupted oil supply from some of

the oil exporting countries determined rising oil prices which reached a historical peak

at the end of 2004. However, the impact of the changes in oil prices varied across

different economies depending on the oil-exporter/ importer position and the intensity

of use of oil in the national economies.

EUROPEAN UNION MEMBER STATES

The most significant event in the European Union (EU) in 2004 was its largest enlargement

from the date of its foundation with 10 new countries of Central and Eastern Europe

(CEE) acceding in May. The population of the EU grew from 379 million to 455 million,

and the share of the EU in the world gross domestic product (GDP) increased from 26.7

per cent (EU-15) to 28 per cent (EU-25)1 .

OLD EUROPEAN UNION MEMBER STATES

Regardless of the continuing euro appreciation against the USD, economic growth in

the old EU Member States (EU-15) was pushed up by a gradual recovery of domestic

demand and by rising exports fuelled by a high external demand. Increase in energy

prices had a negative impact on economic development. Real GDP in this group of

Member States grew by 2.2 per cent over the year (0.8% in 2003).

Economic developments in the largest euro area Member States varied. Thus, in France

and Italy investment and household consumption increased, while export growth was

relatively low. In Germany industrial production recovered due to fast export growth,

while investment and consumption continued on the downward trend.

In 2004, the euro area GDP grew by 2.0 per cent (0.5% in 2003). Prices increased but

slightly in the first half of the year. As oil prices shot up, inflation accelerated in the

1 Based on the GDP of 2002.

2004

� Annual Report of the Bank of Lithuania

14

second half, and average annual inflation equaled 2.1 per cent as in 2003. Labour

productivity growth was slow. The average euro area unemployment rate was 8.8 per

cent in 2004. The unemployment rate in the largest Member States of the euro area

(Germany, France and Spain) stood at 9.5–11.0 per cent. Meanwhile, in Ireland, the

Netherlands and Austria the unemployment rate was below 5 per cent.

The general government deficit made up 2.7 per cent of GDP in 2004, increasing by

0.1 percentage points against 2003, while 3 Member States (Greece, France and

Germany) exceeded the 3 per cent budget deficit to GDP ratio set in the Stability and

Growth Pact. The general government budget deficit in Italy was 3 per cent of GDP.

The European Central Bank (ECB) did not change its official interest rates in 2004. At

the start of the year there were expectations among market participants that interest

rates may be lowered because of rising oil prices and sluggish economic growth. However,

the ECB position to keep interest rates steady was based on the attitude that the current

interest rate level was appropriate to ensure the economic growth of the area, while

high oil prices continued to pose inflation risks.

Economic developments in the United Kingdom, a country outside the euro area, were

primarily based on rising domestic demand and improved corporate profitability.

Economic growth was comparatively stable. Real GDP grew by 3 per cent over the year

(2.2% in 2003). The unemployment rate went down to 4.7 per cent and was among

the lowest in the EU Member States. However, strong domestic demand accelerated

import growth causing the CAD to widen to 2.4 per cent of GDP (1.7% in 2003). The

general government deficit made up 3.2 per cent of GDP in 2004 (3.4% in 2003).

In 2004, the Bank of England pursued a policy of gradually raising interest rates. The

key refinancing rate was increased from 3.75 per cent at the start of 2004 to 4.75 per

cent in August 2004.

NEW EUROPEAN UNION MEMBER STATES

Macroeconomic developments in the ten new EU Member States were generally

favourable in 2004. Economic growth in the first half of the year was pushed by a

substantial economic recovery in Western Europe and higher domestic demand brought

by the preparation for EU membership. While in the second half economic growth

slowed down somewhat as the contribution of factors related to EU accession declined

and a less favourable external environment emerged (higher energy prices, lower than

expected economic growth in Western Europe and the appreciation of the euro against

the USD), it remained sufficiently strong. The fastest growth was recorded in the Baltic

States and in Poland. Exports of most new EU Member States increased in 2004, as did

foreign direct investment, which showed the fastest growth in Slovakia and Hungary. A

sizeable increase of foreign direct investment was also recorded in Latvia and Lithuania.

Poland, Slovakia and Slovenia showed a low current account deficit, while it was widening

further in the Baltic States and Hungary.

Price developments in the new EU Member States were determined by factors related

to EU accession, fast growth of domestic demand and rising energy prices in 2004. In

four of the ten new EU Member States (Czech Republic, Estonia, Cyprus and Lithuania)

inflation was lower than the 2.4 per cent convergence criterion used for the assessment


15

of price stability1. In Poland and Malta inflation was close to this level and exceeded it in

the other new EU Member States.

Rapid economic growth in most new EU Member States raised labour force demand

and increased employment. At the same time, shortage of qualified labour force became

apparent in certain activities, which put upward pressure on earnings. The average

unemployment rate remained virtually unchanged in the countries with the highest

unemployment rate, i.e. Poland (18.8%) and Slovakia (18.0%).

Economic expansion and harmonisation of tax systems provided additional possibilities

to cut down general government deficits, especially in the countries with sizeable deficits.

However, the new EU Member States failed to use increased revenues for the fiscal

consolidation. Poland, Cyprus, Malta and Hungary recorded deficits above 4 per cent of

GDP, and the deficits in the Czech Republic and Slovakia were also above the 3 per cent

convergence criterion. Latvia had the lowest budget deficit, while Estonia posted a

budget surplus.

General government debt continued to grow in the countries with the highest debt

ratios. In Malta and Cyprus debt stood above 70 per cent of GDP. The general government

debt to GDP ratio in Hungary moved very close to the set ceiling (60%). It also increased

in Slovakia and remained unchanged in other countries. General government debt

continued to be the lowest in Estonia (about 5% of GDP).

The key interest rates were raised in the Czech Republic (to 2.5% in August), Latvia (to

4% in December), Poland (to 6.5% in August) and Cyprus (to 5.5% in April). Slovakia

intervened in the currency markets to ease the pressure on the national currency, and

interest rates were reduced from 6.25 per cent in early 2004 to 4 per cent by the end of

2004. In Hungary interest rates were brought down to 10 per cent at the end of the year.

Lithuania, Estonia and Slovenia were the first to join Exchange Rate Mechanism II (ERM II)

at the end of June 2004. It is therefore expected that these countries will be the first to

adopt the euro in a not-too-distant future.

NORTH AMERICAN COUNTRIES

The USA economy recorded the fastest growth in 2004 over the past five years. Its GDP

increased by 4.4 per cent (3.0% in 2003), and unemployment rate declined to 5.5 per

cent (6.0% in 2003). However, the rate of growth was not even as GDP growth slowed

down from 5.0 per cent in the first quarter to 3.7 per cent in the fourth quarter of

2004. The lower economic growth in the second half of the year was influenced by

higher oil prices and a slowdown in export growth. Fast economic growth resulted in

higher government revenues, but increasing defence and social programme expenditures

prevented the fiscal deficit from going down and in the fiscal year of 20042 it made up

3.6 per cent of GDP (3.5% in 2003).

In addition to growing private consumption, rapid growth of investment, which went

up by 12.9 per cent in 2004 (4.4% in 2003), also contributed to the economic

1 The criterion of price stability is an average rate of inflation that does not exceed by more than one and a half

percentage points that of the three best performing EU Member States in terms of price stability. In the ECB

convergence report the criterion of price stability was assessed on the basis of August 2004 data.2 From 1 October 2003 to 30 September 2004.

2004


16

development in the USA. However, domestic demand growth outpaced that of external

demand, while the private sector savings remained very low, and the balance of payments

CAD reached a record high of USD 165 billion (5.6% of GDP). The persistent external

imbalances have become an important factor for the USA economic growth outlook.

The Federal Open Market Committee raised the target for the federal funds rate by 25

basis points on five occasions from 1.00 per cent to 2.25 per cent in the course of 2004.

These decisions were mostly influenced by the view that high oil prices caused uncertainty

about inflation forecasts. In 2004, inflation was 2.7 per cent (2.3% in 2003).

In Canada, economic expansion accelerated in 2004. Real GDP grew by 3 per cent

(2.0% in 2003). Economic growth was driven by strengthening external demand which

offset the negative impact of the strong Canadian dollar on exports. The balance of

payments current account surplus was 3.1 per cent of GDP (1.9% in 2003). There was

some inflationary pressure due to increasing energy prices, but the annual price increase

was 1.7 per cent (2.7% in 2003). Unemployment rate declined to 7.3 per cent.

The Bank of Canada raised its official interest rate in the second half of 2004 after

decreasing it to 2.25 in the first half of the year. In November the official rate was 2.75

per cent.

COMMONWEALTH OF INDEPENDENT STATES

In 2004, the economic growth of the countries of the Commonwealth of Independent

States (CIS) continued to be strong. Real GDP of the region grew by approximately 8

per cent (7.4% in 2003). Economic expansion in the oil and metal exporting countries

was supported by high world prices for these commodities. Fast growth of exports in

2004 was driven by high domestic demand and increasing investment. The negative

impact of high energy prices in the countries of the CIS importing petroleum products

was offset by the rising prices for the exports of these countries – cotton and aluminium

(Tajikistan) and gold (Armenia and Kyrgyzstan). However, the economies of the countries

of the CIS may be vulnerable over the medium-term because of too high dependency

on changes in certain sectors (insufficient economic diversification).

Real GDP in Russia grew by 6.4 per cent in 2004 (7.3% in 2003). In addition to high oil

prices, growth was supported by investment and strong domestic demand driven by

increasing disposable household income. However, economic developments in Russia

continue to be dependent to a large extent on the external environment, primarily

world oil prices. Investment that grew fast in the first half of 2004 also increased in

non-energy sectors. Real GDP is projected to grow at a slightly slower rate (6%) in

2005. The federal budget surplus of Russia in 2004 made up 4 per cent of GDP (1.7%

of GDP in 2003). The balance of payments continued to improve. According to preliminary

data, the balance of payments current account surplus went up to 10.2 per cent of

GDP (8.3% in 2003). The relatively moderate increases of regulated prices in 2004

acted as the key factor supporting decreasing inflation which was 11 per cent at the

end of the year (13.6% in 2003). Price increases were driven by rising earnings that

outpaced labour productivity. The unemployment rate was on a downward trend and

stood at 7.6 per cent at the end of the year (8.7% in 2003).


17

The Central Bank of Russia reduced its key interest rate by 3 percentage points in 2004.

The 13 per cent interest rate set in June remained unchanged throughout the second

half of the year. After signs of instability in the banking sector emerged in 2004, the

Central Bank of Russia intervened in the currency market to restore the confidence of

the depositors in the domestic commercial banks. Gold and foreign reserves of Russia

continued to grow fast and at the end of the year totalled USD 124.5 billion (USD 77.8

billion at the end of 2003).

Economic growth in the Ukraine in 2004 was driven by fast export growth and rising

domestic demand fuelled by increasing credit to the private sector and growing household

income. Real GDP increased by 12 per cent (9.6% in 2003), and the balance of payments

current account surplus amounted to 11 per cent of GDP (5.8% in 2003). Nonetheless,

the unemployment rate remained high (about 9%) despite the buoyant economic

growth. Pushed by high prices on energy and metals and rapid earnings growth, inflation

accelerated to 8.3 per cent (5.2% in 2003). General government debt continued to

decline in 2004 to approximately 27 per cent of GDP (30.3% in 2003), and access to

capital markets improved. Foreign reserves of the Ukraine increased from USD 6.9 billion

in 2003 to USD 11.9 billion in 2004. The key interest rates were raised starting with the

second half of 2004 to reach 9 per cent by the end of the year.

ASIAN COUNTRIES

Japanese economic performance was stronger in 2004 than in 2003. According to

preliminary data, real GDP in Japan grew by 2.7 per cent in 2004 (1.4% in 2003). The

first quarter of 2004 was the best in terms of economic expansion, when real GDP

increased by 4.3 per cent. Improving export performance was the key factor supporting

growth. Thus, export grew by 15.6 per cent over three quarters of the year, and import

increased by 8.5 per cent. Fast export growth supported manufacturing, industrial

production rose by 5.6 per cent over the year. Household spending was on the rise

driven by the improving labour market, a favourable economic outlook and lower inflation

expectations. High oil prices and an adjustment of indirect taxes in 2004 were the

factors that helped to bring deflation down to 0.1 per cent (0.3% in 2003). Economic

growth and the earlier implementation of employment-supporting reforms had a positive

impact on the situation in the labour market. The unemployment rate fell by 0.6

percentage points over the year to the record low 4.7 per cent since 1999, and

employment in manufacturing and services increased significantly. The Bank of Japan

intervened in the currency market in the first quarter of 2004 to contain the appreciation

of the yen. In the course of the year Japan’s foreign reserves went up by 25.4 per cent

to USD 844.5 billion.

In China, the economy continued to grow strongly in 2004. According to preliminary

data, real GDP grew by 9.5 per cent (9.3% in 2003), while inflation was 3.9 per cent,

up from 1.2 per cent in 2003. Economic development was driven by rising investment,

domestic and external demand and export. Foreign reserves increased from USD 415.7

billion at the beginning of 2004 to USD 609.9 billion at the end of the year, to rank

second in the world following Japan. China’s authorities used proactive measures seeking

to contain the threat of overheating caused by surging investment. For the first time in

2004


18

nine years the People’s Bank of Chine undertook interest rate hikes in October 2004,

signalling the use of market oriented measures to control credit and investment growth.

Another step of no lesser importance was the removal of the lending ceiling, allowing

credit institutions to impose interest rates that were more in line with lending risks.

Growth of South East Asian economies considerably outpaced the USA, Japan and the

euro area Member States. The region’s real GDP average annual growth was 6.5 per

cent. Such growth in South East Asia was driven by exports, especially the increasing

volume of trade with China, and low interest rates, which brought down debt servicing

costs. However, projections for 2005 seem to be lower as interest rates have started to

rise, the development of the information technology sector has been weakening and

high energy prices have put pressure on domestic demand.

II. Review of the Economy of Lithuania

19


PRICES AND COSTS

CONSUMER PRICES

Upward trends in consumer prices became evident in 2004. Already in May, annual

Harmonised Index of Consumer Prices (HICP) inflation was positive, reaching 2.8 per

cent in December, while the average annual inflation rate was 1.1 per cent.

In December, Estonian consumer prices increased by 4.8 per cent, and Latvian by 7.4

per cent (year on year), whereas in the euro area Member States consumer prices were

rising at a constant pace for the past several years and in December 2004, the annual

growth rate of consumer prices in these states stood at 2.3 per cent.

Fig. 1. HICP Inflation in the Euro Area, Lithuania, Latvia and Estonia*

* Annual growth rate.

Faster growth of food prices, together with changes in administered prices1 and indirect

taxes (that were mostly related to EU membership), as well as world oil price acceleration

that started in April 2004 were the main factors behind the change in inflationary

trends. In 2004, rising food prices contributed to the annual inflation rate by 1.6

percentage points, administered prices and indirect taxes by 0.7 percentage points, and

higher fuel prices due to the oil price shock drove the annual inflation rate up by 0.5

percentage points.

1 Prices of goods and services that are subject to administrative decisions: water supply, sanitation services, sewage

services, electricity, gas, heat energy, pharmaceutical products, other medical goods, medical services in hospitals,

passenger transport via railways, passenger transport by road, post services, education. In 2004, administered

prices accounted for 16 per cent of the overall HICP.

2004


20

Fig. 2. Contributions to Annual HICP Inflation

In the third quarter of 2004, the annual growth rate of the purchase prices of agricultural

products increased to 9.8 per cent, and the annual growth rate of retail and wholesale

trade deflator stood at 3.8 per cent. EU membership also had an impact on the

agricultural sector and the food industry. Abolition of quotas and availability of subsidies

on export to the third countries opened new markets and encouraged the convergence

of food prices in Lithuania and the EU. This resulted in growth of food prices in the

second and third quarters of 2004.

Fig. 3. Food Prices*


** Wholesale and retail trade deflator.

In December 2004, the annual rate of net inflation (HICP excluding food, fuels and

administered prices) was 0.4 per cent. In the first three quarters of 2004, prices of

telecommunication services reduced the annual rate of inflation on average by 1.5

percentage points. In the fourth quarter of the year, these trends weakened and in


21

December prices of telecommunication services pushed the annual inflation rate down

by 0.3 percentage points. In December, a 0.2 percentage point rise of the annual net

inflation rate stemmed from the increase of prices on vehicle insurance services which

became more expensive due to administrative decisions. Robust expansion of the housing

market drove prices of house furnishing and decoration goods and services up – in

December they contributed to the annual net inflation rate by 0.2 percentage points.

Prices of services picked up modestly as well. Rising prices of restaurant services in

December contributed to the annual net inflation by 0.4 percentage points. In the

medium-term, however, these factors are not expected to accelerate inflation.

Fig. 4. Contributions to Annual Net Inflation

* HICP (excluding prices for food, fuels and lubricants and administered prices).

INFLUENCE OF ADMINISTERED PRICES AND INDIRECT TAXES ON CONSUMER PRICES

In 2004, administered prices and indirect taxes contributed by 0.7 percentage points to

the annual inflation rate. EU harmonisation of indirect taxes had the strongest impact

on consumer prices, in particular the introduction of a 5 per cent value added tax (VAT)

on pharmaceutical products and other medical goods1. This decision contributed to the

annual rate of inflation by 0.2 percentage points. The overall rise of prices on

pharmaceutical products (including the impact of the VAT) in December drove the annual

rate of inflation up by 0.6 percentage points.

Another decision associated with the harmonisation of indirect taxes was the abolition

of concessions for VAT on residential heat energy. However, according to the Government

decision of 1 July 2004, 13 percentage points of this VAT is compensated from the state

budget. Thus, de facto the price of residential heat energy went down, reducing the

annual inflation rate by 0.3 percentage points in December.

The EU membership had a substantial impact on the vehicle insurance market. Following

EU requirements, as from 1 May 2004 the insurance cover of the motor third party

liability insurance increased 35 times (up to EUR 100,000 for the damage to property and

1 As from 1 May 2004. Until then, pharmaceutical and other medical goods were not subject to the VAT.

2004


22

up to EUR 500,000 for personal injury). Higher insurance premiums lead to price rises for

vehicle insurance (they peaked by 64.8% per month), thus contributing to the annual

inflation rate by 0.2 percentage points. Currently this pressure has become more subdued:

in December its contribution to the inflation rate was 0.1 percentage points.

INFLUENCE OF WORLD OIL PRICES

World oil prices in USD started to increase rapidly already since mid-2003. However, a

nominal depreciation of the USD against the euro (litas) cushioned the growth of world

oil prices in litas. In October 2004, the oil price in litas reached its peak (LTL 136.7 per

barrel), subsequently declining to LTL 103.9 per barrel in December.

Fig. 5. World Oil Prices

(January 2000 = 1.0)

Increasing world oil prices may have both direct (due to a large weight of the group of

petroleum products) as well as indirect effects (via costs) on consumer and producer

prices. The buoyant growth of oil prices drove producer prices of refined petroleum

products up by 23.8 per cent. This increase contributed to the annual growth rate of

producer prices by 3.4 percentage points. In December 2004, compared to December

2003, prices of fuels and lubricants rose by 11.5 per cent and contributed by 0.5

percentage points to the overall HICP1.

Irrespective of recent acceleration in inflation, so far it is difficult to draw conclusions as

to the contribution of higher oil prices to producer costs and their influence on consumers.

Over a longer period price increases may result in higher earnings demands based on

the need to maintain the purchasing power, which would increase producer costs even

further and provoke higher inflation.

IMPORT PRICES

For the past three years, import prices (import unit value) were decreasing (mainly due

to the appreciating litas). However, in the second quarter of 2004 this trend changed

1 Fluctuations of fuel retail prices are substantially smaller than the development of respective producer prices

because the quantity excise is added to the base price and it is not proportional to the price increase.


23

largely due to a jump of oil prices and a temporarily more stable USD rate against the

euro. Import prices were increasing and in the fourth quarter of the year this growth

amounted to 1.0 per cent.

Fig. 6. Import Prices and USD/LTL Exchange Rate*


In 2004, the annual growth rate of the import (excluding mineral products) unit value

was stable (about – 2%), except for the fourth quarter, when import prices declined by

4.1 per cent year on year. There was a substantial change in contributions. Raw materials

prices were growing rapidly, the negative impact of food prices subsided, and the prices

of vehicles, machinery and mechanical appliances kept decreasing.

Fig. 7. Contributions to the Annual Growth Rate of Import Unit Value Index

* Plastics and articles thereof; rubber and articles thereof; base metals and articles of base metal.

** Annual growth rate.

2004


24

Decreasing import prices of vehicles, machinery and mechanical appliances was the

main determinant of declining import (excluding mineral products) prices. In 2004,

their influence was strengthening gradually, and in the fourth quarter the annual growth

rate of import (excluding minerals products) unit value index fell by 4.6 percentage

points due to decreasing prices of these groups of goods.

A robust growth of demand in China and the recovery in the USA economy drove up

the prices for base metals in the world markets. The increase of base metal prices was

also supported by a stronger demand for futures on the world metals exchanges. A 0.8

percentage point rise of import prices1 stemmed from a 14.3 per cent increase of prices

for imported metals in the fourth quarter of 2004. Prices of other imported raw materials

were rising as well. The rise of prices of imported plastics that started in the second

quarter of 2004 contributed by 0.4 percentage points to the growth rate of import

prices in the fourth quarter of the year.

PRODUCER PRICES

The annual growth rate of producer prices for industrial production sold in the domestic

market started to accelerate in the second half of 2003. In July 2004, the annual growth

rate of producer prices for industrial production sold in the domestic market reached its

peak (2.7%), and was later followed by a modest slowdown. The rise of prices of non-

durable consumer goods was considerably faster in May 2004 when the prices of food

accounting for almost 30 per cent of all manufacturing production sold in the domestic

market started to go up. The rise of producer prices for industrial production was also

supported by increasing prices of intermediate goods, which accelerated until August

2004 (going up by 5.4% year on year), but weakened later on.

Fig. 8. Producer Prices for Industrial Production Sold in the Domestic Market*


1 Annual growth rate of the import (excluding mineral products) unit value index.


25

LABOUR COSTS

The developments of unit labour costs in recent years have reflected a similar rise in

labour costs (average monthly gross earnings) and labour productivity. From 2002 to

mid-2004, the annual rate of change of the unit labour costs was close to zero, whereas

earnings and labour productivity grew on average by about 5 per cent annually. This

indicates that, despite a rather robust growth of earnings, they were in line with the

rise of labour productivity and did not put pressure on prices. In the second half of

2004, labour productivity growth started to modestly lag behind a more robust earnings

growth. In the fourth quarter, unit labour costs went up by 2.4 per cent year on year.

Fig. 9. Earnings, Labour Productivity and Unit Labour Costs*


The trends of labour cost developments in non-tradable and tradable sectors differ

distinctly. Cases when labour costs in the tradable sector exceed labour productivity

growth are rare.

Fig. 10. Labour Costs in the Tradable Sector*


2004


26

As from early 2004, labour cost pressure on prices in the non-tradable sector

strengthened. In the third quarter of 2004, unit labour costs in this sector rose by 7.2

per cent, whereas labour productivity increased by 1.9 per cent year on year. The earnings

rises not supported by labour productivity growth were strongly driven by excess labour

demand due to migration in some sectors. This was particularly obvious in construction

and real estate sectors. The increase of the minimum monthly wage resulted in a rise of

earnings of employees with a low level of productivity.

Fig. 11. Labour Costs in the Non-Tradable Sector*


INFLATION OUTLOOK

The analysis of the nearest inflation expectations shows inflation stemming from higher

prices of food and administrative decisions of 2004 and 2005, in particular increased

price of electricity. Long-term developments in the domestic economy such as labour

productivity growth in line with rising earnings suggest that the medium-term inflation

should not be pushed up by these factors. However, the potential for decreasing prices

is gradually disappearing. A possible increase of raw materials (oil, base metals, and

other raw materials) prices in the world markets is the key source of inflation risk.

GROSS DOMESTIC PRODUCT

According to preliminary data of the Department of Statistics to the Government of the

Republic of Lithuania (Statistics Lithuania), the GDP at current prices totalled LTL 61.9

billion, or LTL 18.0 thousand per capita in 2004. Year on year, real GDP increased by 6.7

per cent, and real GDP per capita rose by 7.3 per cent. However, economic growth in

2004 was substantially lower than in 2003 (real GDP grew by 9.7% in 2003). GDP

growth in Lithuania was among the strongest in the EU.


27

Fig. 12. Real GDP Dynamics in the Baltic States and the Euro Area*


In 2004, economic growth was further driven by strong domestic demand, which was

largely bolstered by rapid credit expansion and rising real household income. Higher

final consumption expenditure contributed 7.2 percentage points to the overall GDP

growth, and gross fixed capital formation expenditure contributed 2.7 percentage points.

In contrast, net exports (due to a more robust growth of imports rather than exports)

impeded the overall GDP growth by 6.0 percentage points.

Table 1. GDP by Expenditure Approach

Per cent

Composition of GDP GDP change Contributions to GDP

(at current prices) (compared with 2003) growth (compared with

2003)

2004 2003 Change, Real GDP Nominal Real GDP Nominal

percentage GDP GDP

points

GDP 100.0 100.0 x 6.7 10.2 6.7 10.2

Households consumption expenditure 65.0 64.6 0.4 9.3 10.9 6.0 7.0

General Government consumption

expenditure 17.8 18.5 –0.7 6.7 6.4 1.2 1.2

Gross domestic investment 23.3 22.5 0.8 23.0 14.0 5.5 3.1

Gross fixed capital formation 21.9 21.4 0.5 12.3 13.0 2.7 2.8

Exports of goods and services 52.7 51.8 0.9 4.3 12.1 2.7 6.3

Imports of goods and services (minus) 59.0 57.6 1.4 13.4 12.8 –8.4 –7.4

Year on year, real final consumption expenditure rose by 8.7 per cent, household

consumption expenditure grew by 9.3 per cent, and general government consumption

expenditure increased by 6.7 per cent.

The rise of consumption expenditure was primarily driven by the increasing income of

the population. In the fourth quarter of 2004, average gross earnings were 8.5 per cent

higher compared with the same period in 2003.

Low interest rates and favourable conditions on credits to households had an impact on

household consumption as well. This fostered both private consumption expenditure

and house purchase, i.e. residential investment. In any case, increasing domestic demand

2004


28

driven by robust credit to the economy encouraged producers to utilise more actively

industrial capacities and raise earnings (e.g., gross earnings of employees engaged in

construction rose by 22.5% in the fourth quarter of 2004, compared with the same

period in 2003), and resulting higher income, as has been noted, further drove growth

of consumption expenditure.

Consumer confidence surveys conducted by the Statistics Lithuania suggested a subs-

tantial improvement of assessments of general economic situation in the country and

the financial state of individual households in 2004. These surveys also reflected a

prevailing opinion that the time was not favourable for saving but favourable for the

purchase of durable consumer goods. In 2004, the overall consumer confidence indicator

was rising gradually, thus explaining the rather rapid growth of consumption expenditure.

Very low interest rate levels and higher profitability of enterprises drove investment in

2004, as real gross fixed capital formation expenditure soared by 12.3 per cent. However,

when assessing this growth, account must be taken of a rapid expansion of investment

related with the construction of dwelling houses and house purchase. Under the impact

of negative raw materials price shocks and the decline of corporate profitability at the

end of the year, the investment growth rate subsided.

In 2004, GDP growth was driven by a robust growth of principal economic activities –

real value added created in manufacturing soared by 11.4 per cent, in wholesale and

retail trade by 10.4 per cent, in transport, storage and communication activity by 7.8

per cent. Despite high real activity in the above sectors, the growth rate of the economy

slackened, which was primarily attributed to slower growth in construction and real

estate, renting and business activities. The growth rate of real value added in construction

contracted from 22 per cent (2003) to 4 per cent (2004), real estate, renting and business

activities from 7.4 to 2.3 per cent, respectively. The real value added in these activities

was increasing slower due to several factors: a very high comparative base, shortage of

qualified labour force in construction, higher construction costs due to increasing prices

of raw materials and rising labour costs.

Table 2. GDP by Production Approach (by enlarged activity groups)

Per cent

Composition of GDP GDP change Contributions to GDP

(at current prices) (compared with 2003) growth (compared with

2003)

2004 2003 Change, Real GDP Nominal Real GDP Nominal

percentage GDP GDP

points

GDP 100.0 100.0 x 6.7 10.2 6.7 10.2

Agriculture, fishing 5.2 5.6 –0.4 –0.1 2.1 0.0 0.1

Industry, electricity, gas and

water supply 23.2 22.5 0.7 9.8 13.9 2.3 3.1

Construction 6.4 6.4 0.0 4.0 10.3 0.3 0.7

Trade , restaurants, transport 29.8 29.4 0.4 9.3 11.7 2.6 3.4

Financial intermediation, real estate 11.0 11.2 –0.2 2.8 8.0 0.3 0.9

Other activities 15.0 15.5 –0.5 3.6 6.7 0.5 1.0

Gross value added 89.2 89.4 –0.1 6.7 10.0 5.9 8.9

The analysis of GDP by income approach suggests that the overall income structure barely

changed in 2004. Compensation of employees (including social contributions) made up


29

39.0 per cent, operating surplus and mixed income 37.6 per cent of GDP. The growth of

the main GDP income components was rather balanced: in 2004, operating surplus and

mixed income (at current prices) increased by 12.4 per cent, compensation of employees

(at current prices) by 9.3 per cent, production and import taxes by 9.5 per cent.

Table 3. GDP by Income Approach

Per cent

Composition of GDP Nominal GDP Contributions to

(at current prices) change (compared nominal GDP growth

with 2003) (compared with 2003)

2004 2003 Change,

percentage

points

GDP 100.0 100.0 x 10.2 10.2

Compensation of employees 39.0 39.3 –0.3 9.3 3.7

Wages and salaries 31.1 31.5 –0.4 8.9 2.8

Employers social contributions 7.9 7.8 0.1 11.1 0.9

Operating surplus and mixed income 37.6 36.9 0.7 12.4 4.6

Consumption of fixed capital 12.3 12.7 –0.4 6.6 0.8

Taxes on production and imports 11.8 11.9 –0.1 9.5 1.1

Subsidies (minus) 0.7 0.8 –0.1 0.8 0.0

FOREIGN TRADE1

Subdued foreign trade turnover in previous years accelerated in 2004 and grew by 17.3

per cent. This was mainly determined by larger import and export volumes of petroleum

products (in 2004, world oil prices rose sharply, as well as the production of the company

Maþeikiø Nafta). Foreign trade turnover (excluding mineral products) expanded by 7.2

per cent.

Fig. 13. Foreign Trade in Lithuania*


1 Due to changes in the methodology of export and import accounting after joining the EU data for different

periods are not fully comparable. Foreign trade data of the special trade system based on the statistical reporting of

enterprises importing and exporting goods have been published as from 1 May 2004.

2004


30

The 4-quarter moving sum of foreign trade (excluding fuel and motor spirit)1 deficit

increased somewhat and in the third quarter stood at 14.3 per cent of GDP. In 2004,

the foreign trade deficit was 13.5 per cent of GDP (13.2% in 2003).

The change in the deficit of capital goods continued to be the main driving force in the

development of foreign trade deficit. In the environment of very low interest rates and

favourable borrowing conditions, trade deficit of capital goods was also expanding

throughout the first three quarters of 2004 due to rapidly increasing domestic

investment2. However, in the fourth quarter the deficit of capital goods contracted.

Fig. 14. Composition* of Foreign Trade (excluding fuel and motor

spirit) Deficit

* 4-quarter moving sum, per cent of GDP.

In 2004, the import growth was more robust than a year ago, and its nominal value

expanded by 12.9 per cent. This, however, was mainly associated with the base and

price effects. The decline of re-exports of passenger motor cars to Russia in 2003 resulted

in the growth rate of import of 6.9 per cent, while in 2001–2002 it was at

18–19 per cent.

In the first quarter of 2004, import rose by 19.1 per cent year on year, slowing down

afterwards and reaching 7.1 per cent in the fourth quarter. Robust import growth in

the first quarter was associated with consumer expectations stemming from the change

of terms of trade after joining the EU. Prior to the change of the customs regime with

the countries outside the EU, producers sought to accumulate stocks of imported

intermediate consumption and capital goods. With Lithuania’s membership in the EU,

lower imports of capital goods resulted in a slower growth of total imports. In the

second and fourth quarters, the nominal value of imports of intermediate consumption

goods continued to grow, largely due to the fast rising raw materials prices (base metals

and plastics) in the world markets.

1 Export and import volumes are further analysed after excluding fuel and motor spirit due to large random fluctuations

characteristic of exports and imports of petroleum products.2 4-quarter moving sum in the corresponding quarter.


31

Fig. 15. Contributions to Annual Growth Rate of Imports

A slower increase of the nominal value of exports in 2003 was followed by its somewhat

faster growth resulting in a 12.9 per cent rise in 2004. A modest increase of exports

(9.8%) in the first quarter of 2004 was followed by a gradual acceleration until year-end

(in the fourth quarter, exports went up by 16.7%). Exports of other consumer goods

and intermediate goods had the largest impact on export growth. With Lithuania’s

membership in the EU, exports of other consumer goods (processed and unprocessed

food for final consumption) was supported by the EU export subsidies. In the fourth

quarter of 2004, exports of these goods made up 3.8 percentage points of the total

exports growth (0.8 percentage points in the first quarter). The contribution of

intermediate goods to export growth also increased from 6.1 percentage points (in the

first quarter of 2004) to 12.0 percentage points (in the second quarter of 2004) and

remained broadly stable.

Fig. 16. Contributions to Annual Growth Rate of Exports

2004


32

The growth of exports suffered a strong negative impact from lower exports of capital

goods (in the fourth quarter, exports of capital goods reduced total exports by 4.1

percentage points). Fast growth of investment in the domestic market and a more rapid

decrease of capital goods exports compared to imports suggested that the sales of

these goods were shifting towards the domestic market.

In 2004, the terms of trade continued to improve. In the fourth quarter, the terms of

trade index represented by the ratio of export unit value to import unit value increased

by 2.8 per cent year on year.

Fig. 17. Exports and Imports Unit Value and Terms of Trade Indices*


In 2004, the relative price level in Lithuania vis-a-vis the main trading partners, which is

reflected by the real effective exchange rate index of the litas, remained almost stable.

This was largely determined by a rather stable relative price level against 15 old Member

States of the EU. The competitiveness of Lithuanian goods vis-a-vis the new EU Member

States improved. In 2004, the real effective exchange rate of the litas against the new

EU Member States depreciated by 5.4 per cent. The sharp appreciation of the Russian

rouble against the euro in the first half of 2004 made Lithuanian goods cheaper relative

to the CIS goods. However, later the real value of litas against these currencies rose

modestly. In December 2004, compared with December 2003, the real effective exchange

rate of the litas against the CIS currencies was lower by 3.4 per cent.


33

Fig. 18. Real Effective Exchange Rate Indices of the Litas

(January 2003 = 1.0)

The analysis of the main Lithuanian export markets suggests that the external

macroeconomic environment became more favourable. In 2004, the euro area real

GDP grew by 2 per cent (0.5% in 2003). Although this rise stemmed from higher

exports due to increased foreign demand, domestic demand also saw a somewhat

faster growth rate than in previous years. In 2004, the economies of the new EU Member

States and the CIS continued to grow robustly, in particular in Latvia, Estonia and Poland,

which are the main trading partners of Lithuania among the new EU Member States.

In 2004, the Lithuanian market share1

in import markets of the new EU Member States

was stable.

Fig. 19. Share of Lithuania in the Main Export Markets

Between 2000 and the beginning of 2004 the market share in euro area expanded fast

and doubled during this period, subsiding modestly in the second half of 2004.

1 The share of Lithuanian exports (excluding mineral products) in total imports of a particular country group.

2004


34

LABOUR MARKET, WAGES AND SALARIES

In 2004, the average rate of unemployment stood at 11.4 per cent (12.4% in 2003).

The lower unemployment level was basically driven by the contraction of labour force

due to migration into labour markets that opened in some EU countries.

Fig. 20. Development of Real Earnings and GDP*, Unemployment

Rate


According to the data of the Statistics Lithuania, labour force decreased by 1.3 per cent

to 1.6 million in 2004. Longer hours worked by the employed stemming from higher

labour demand, on the one hand, and a rather high level of unemployment, on the

other, suggested a shortage of qualified labour force in Lithuania, particularly in some

activities (e.g., construction).

Fig. 21. Activity of Population in Lithuania

(Data of labour force survey)


35

According to the labour force surveys, the largest number of the employed was engaged

in industry where the share of employees did not change as from the fourth quarter of

2003 and made up about 18 per cent. During the first three quarters of 2004, compared

with the same period in 2003, the number of the employed in industry dropped by 5.8

per cent. Within this period, the number of the employed in agriculture, hunting and

forestry contracted by 8.3 per cent and their share from 18 per cent (in 2003) decreased

to almost 16 per cent (in the second half of 2004). This was a positive trend: the number

of the employed in agriculture in developed countries is substantially lower than in

other activities. Robust construction growth in 2003 remained buoyant in the first half

of 2004. The number of the employed in construction increased by 9.6 per cent in

2004 (three quarter average) compared with the same period of 2003. The largest rise

of the number of the employed was recorded in the hotels and restaurants activity.

Their number soared by 10.9 per cent in 2004 (three quarter average) compared with

the same period in 2003. The employed in this activity accounted for almost 2 per cent

of the total number of the employed persons.

Higher female unemployment rate than the country average was recorded for the first

time in 2004. This could be related to more intensive mobility of males due to the

opening of EU labour market and the expansion of construction, where males are

predominantly employed.

Fig. 22. Unemployment Rate by Population Group

According to data of the Labour Exchange, the lowest rate of unemployment was

registered in Vilnius, Kaunas and Klaipëda regions.

In 2004, the unemployed composition by the duration of unemployment was similar to

2003. The large share of long-term (over 1 year) unemployment, which was over 50 per

cent, and increasing unemployment duration reflected structural problems in the labour

market.

2004


36

Fig. 23. The Unemployed by Duration of Unemployment

With a decline of the unemployment rate in 2004 the number of job vacancies increased.

Insufficient labour force professional and/or geographical mobility, as well as declining

number of unemployed persons made it more difficult to find suitable employees.

Fig. 24. Beveridge Curve

Compared with the neighbouring states, Lithuania’s unemployment rate was approaching

the EU average. However, it was still considerably higher than in the USA, United Kingdom

and Ireland.

According to the preliminary data of the Statistics Lithuania, the average monthly gross

earnings of employees in the whole economy amounted to LTL 1,157.8, representing

an increase of 7.9 per cent year on year, and the average monthly net earnings made

up LTL 840.9 (up by 6.9%). Real earnings rose by 5.6 per cent (9.3% in 2003). In 2004,

earnings grew in line with the rise of labour productivity.


37

Fig. 25. Unemployment Rate in Lithuania and Other European

Countries

(Data of labour force survey)

In the public sector real earnings grew faster than in the private sector, increasing by

7.3 and 2.0 per cent, respectively, in the fourth quarter of 2004 year on year. In the

fourth quarter of 2004, the average monthly net earnings of the public sector employees

amounted to LTL 987.5 and were 10.6 per cent higher compared with the fourth quarter

of 2003, and in the private sector (excluding personal enterprises) they rose to LTL

900.6 (by 5.2%).

The largest increase of the average monthly gross earnings was recorded in fishing

(48.9%) and construction (22.5%). The earnings growth of those employed in

construction was driven by higher construction demand and slower rise of the number

of the employed. The lowest rise of earnings was recorded in wholesale and retail trade

(1.9%). In 2004, a 4.2 per cent drop of the average monthly gross earnings was observed

only in financial intermediation.

Fig. 26. Growth of Average Monthly Gross Earnings in 2004

In 2004, the highest average monthly gross earnings were recorded in financial

intermediation (LTL 2,640.2) as well as public administration and defence, and compulsory

social security (LTL 2,067.1). Earnings in these activities were 2.0 and 1.6 times above

2004


38

the country average. In the fourth quarter of 2004, the smallest average monthly gross

earnings were paid to persons employed in hotels and restaurants (LTL 817.7, or 62.4%

of the country average), agriculture, hunting and forestry (LTL 1,021.8, or 78.0% of the

country average), as well as health and social work (LTL 1,064.3, or 81.2% of the

country average) activities. These divergences were primarily driven by labour productivity

differentials in various activities, and administrative decisions in the public sector.

GOVERNMENT FINANCE

DEFICIT

Lithuania’s report on excessive deficit presented to the European Commission1 pointed

out that according to preliminary estimates the general government deficit made up

2.5 per cent of GDP in 2004 and was by 0.2 percentage points lower than defined in

Lithuania’s Convergence Programme. In 2004, excess budget revenue was used to finance

additional expenditure rather than to reduce the budget deficit.

Fig. 27. Change* in the Ratio of the General Government Deficit

to GDP

* A negative value of the indicator is a deficit ratio increasing factor, a positive

value – a reducing factor.

In 2004, compared to 2003, the general government deficit to GDP ratio increased by

0.6 percentage points. This rise was mainly driven by structural reasons, whereas the

impact of cyclical factors to the change of the ratio was insignificant. According to the

Bank of Lithuania staff estimates, this impact was close to zero. The updated Lithuania’s

Convergence Programme envisages in the medium-term a gradual reduction of the

deficit to GDP ratio from 2.5 per cent (in 2005) to 1.5 per cent (in 2007). However,

these medium-term fiscal policy plans are insufficient in order to attain the objective of

the Stability and Growth Pact of having a budget close to balance or in surplus.

1 Data on the government deficit and debt are presented to the European Commission according to the excessive

deficit procedure defined in Council Regulation (EC) No. 3605/93, as amended by Council Regulation (EC) No. 475/2000,

and Commission Regulation (EC) No. 351/2002.


39

1 According to company data, in the year 2002, which is the basis for the payment of the 2004 advance profit tax,

pre-tax profit soared by 27 per cent, compared with 2001.2 According to Eurostat data, wages and salaries in the euro area countries in 2003 made up 40 per cent of GDP on

average.

REVENUES

The robust economic growth over the recent period resulted in a relative increase of the

general government revenues. In 2004, the increase of profit tax revenues, one of the

budget revenue items most dependent on cyclical fluctuations of the economy, was

rather rapid. In 2002–2003, corporate profit increased considerably1. Moreover, a positive

factor for the collection of this tax revenue was amendments to the Law on Profit Tax

(unification of taxes charged on economic entities and broadening of the tax base).

Higher growth of earnings had a positive impact on personal income tax and social

contributions developments. In 2004, the ratio of these receipts to GDP stopped declining

and even increased. However, the structural problems remained: the share of personal

income and social contribution tax base (wages and salaries) in GDP was relatively

small2 (accounted approximately for 30% of GDP).

Increasing private consumption expenditure in 2004 resulted in a rise of indirect tax

revenues. However, VAT (comprising about 60% of indirect taxes) to GDP ratio continued

to decline.

Fig. 28. General Government Revenues*


EXPENDITURE

In 2004, the general government current expenditure growth was rather buoyant: the

base pension and insured income was increased, early retirement pensions were

introduced, and payment periods of benefits to families with children were prolonged.

Earnings for the public sector employees were increased on average by 10 per cent.

2004


40

According to recommendations of the European Commission, funds allocated by the

EU to farmers are not included in the general government accounts. In 2004, compared

with 2003, subsidies financed solely from the State budget contracted by 9 per cent.

Borrowing conditions that improved for several consecutive years and diminishing interest

rates had an impact on the reduction of debt administration expenditure. In 2004, the

ratio of general government interest expenses to GDP declined by 0.3 percentage points

to 1 per cent.

The development of public investment (which makes up over 70% of capital expenditure)

was slower than provided in Lithuania’s Convergence Programme. In 2004, general

government investment accounted to 3.2 per cent of GDP (instead of the projected

3.4%). This was caused by slower utilisation of the EU funds than expected.

Fig. 29. General Government Expenditure*


Changes in other general government capital expenditure (expenses on savings

restitution, compensations for land and remaining real estate) stemmed from the political

will. According to preliminary data, LTL 178 million, or 33 per cent less funds than in

2003 were transferred in 2004 for savings restitution. In contrast, the largest amount

during the entire period of such payments was transferred for compensations for land

and remaining real estate, i.e. LTL 458.7 million, or 9 times more than in 2003.

DEBT

In 2004, the general government debt made up 19.6 per cent of GDP, or 1.8 percentage

points less than in 2003. The largest impact for the reduction of debt to GDP ratio

resulted from the deficit-debt adjustments, and the growth interest rate differential.

These factors offset the impact of the higher primary general government deficit.


41

Fig. 30. Change* in the Ratio of the General Government Debt to

GDP

* A negative value of the indicator is a deficit ratio reducing factor, a positive value –

an increasing factor.

In 2004, the largest part of the government borrowing demand was financed by the

issue of long-term Government securities (GS), which made up approximately 77 per

cent of total debt. At the end of 2004, all long-term liabilities undertaken on behalf of

the State (94% of total debt) made up 18.6 per cent, and short-term liabilities 1.1 per

cent of GDP, or, respectively, 1.4 and 0.4 percentage points less than in 2003.

Table 4. Ratio of General Government Debt to GDP

Per cent

2001 2002 2003 2004

General government debt 22.9 22.4 21.4 19.7

Currency and deposits 0.4 0.9 1.1 0.5

Short-term securities 1.1 1.1 1.0 0.5

Long-term securities 12.2 13.6 14.2 15.1

Loans 9.3 6.8 5.2 3.5

Short-term loans 0.2 0.1 0.5 0.6

Long-term loans 9.1 6.7 4.6 2.9

III. Review of the Balance of Payments of the Republic of Lithuania

43

III. Review of the Balance of Payments of theRepublic of Lithuania

Current account. In 2004, the current account deficit of the Balance of Payments of

the Republic of Lithuania made up LTL 4.44 billion (7.2% of GDP). Year on year, it rose

by LTL 587.5 million, or 15.2 per cent.

Table 5. Current Account Deficit

LTL million Ratio to GDP, %

2004 –4,441.54 –7.2

Q1 –982.04 –7.5

Q2 –1,518.49 –9.8

Q3 –1,107.02 –6.7

Q4 –833.99 –4.9

2003 –3,854.00 –6.9

Q1 –476.21 –3.8

Q2 –1,158.06 –8.3

Q3 –734.76 –5.0

Q4 –1,484.97 –9.8

The widening of the 2004 current account deficit was mostly determined by the increased

foreign trade deficit, while the main factor reducing it was a higher positive surplus in

the balance of services. Fast economic development of the country, increasing income

and favourable borrowing terms fuelled domestic demand, which accelerated imports

of consumption goods and worsened the foreign trade deficit.

Table 6. Development of the Current Account Balance, Composite Balances, and

Contributions

LTL million Change, % Contributions, %

2004 2003

Current account balance –4,441.54 –3,854.00 15.2 15.2

Trade balance –6,452.11 –5,140.76 25.5 34.0

Balance of services 2,557.75 1,887.91 35.5 –17.4

Income balance –1,478.09 –1,490.74 –0.8 –0.3

Balance of current transfers 930.91 889.59 4.6 –1.1

Services. In 2004, compared to 2003, export of services increased by 20.4 per cent,

while import of services grew by 13 per cent. The total positive balance of services

amounted to LTL 2.56 billion in 2004 (LTL 1.89 billion in 2003). Growth in the export of

services accelerated over the first three quarters of 2004, the third quarter in particular

(26.6%), slowing down in the fourth quarter (23%). The highest growth in the import

of services was recorded in the first quarter of 2004 (18.3%). Import growth then

2004


44

decelerated over the next three quarters. The highest positive balance of services was

recorded in the third quarter of 2004 (LTL 847.1 million). The overall changes in the

export and import of services were determined by the development of transport and

travel services. These services totalled 87.4 per cent of the overall export of services and

81.6 per cent of the overall import of services.

Table 7. Development and Composition of Export and Import of Services, and Contributions

Per cent

Exports Imports

Change Composition Contributions Change Composition Contributions

(year on year) (2004) (year on year) (2004)

Total services 20.4 100.0 20.4 13.0 100.0 13.0

Transport services 31.9 54.4 15.8 14.3 40.7 5.8

Total transport services 31.9 100.0 31.9 14.3 100.0 14.3

Sea transport –25.9 13.5 –6.2 21.5 25.8 5.2

Air transport 11.6 6.1 0.8 1.7 5.0 0.1

Rail transport 97.7 21.1 13.8 –2.7 17.7 –0.6

Road transport 19.9 40.4 8.9 0.9 28.3 0.3

Pipeline transport –38.3 2.2 –1.8 2.8 11.9 0.4

Other transport services 294.4 16.7 16.4 219.5 11.3 8.8

Travel services 16.9 32.9 5.7 23.9 40.8 8.9

Other services –7.2 12.7 –1.1 –7.3 18.5 –1.6

Railway transport services exhibited the strongest growth among all kinds of transport

to account for 43.2 per cent of the increase in the export of transport services and for

33.6 per cent in the increase of total export of services. The growth in the export of

road transport services made up 27.8 per cent of the total growth in the export of

transport services, and the positive balance of these services amounted to LTL 1.02

billion, or 51.2 per cent of the positive balance of all transport services.

The total number of visitors to Lithuania in 2004 was 4 million. The largest number of

visitors was recorded in the third quarter (1.49 million people) and the lowest in the first

quarter (624 thousand people). Year on year, the total number of visitors to Lithuania

increased by 388.5 thousand people (10.7%). In 2004, the number of visitors from the

EU Member States increased by 709 thousand (34.2%), while the number of visitors

from the CIS countries – due to a lower number of one-day tourists (mostly coming

from Russia and Belarus) – declined by 316.6 thousand (21.6%). Year on year, owing to

a larger number of visitors from the EU Member States and other countries, income

from the export of travel services increased by LTL 488.5 million, while the lower number

of visitors from the CIS countries reduced travel income by LTL 159.3 million.

In 2004, the number of Lithuanian residents travelling abroad amounted to 4.13 million

and increased year on year by 18 per cent. This development increased the expenditure

on the import of travel services by 23.9 per cent resulting in a decline of the positive

travel balance by LTL 13.7 million to LTL 497.3 million.

Export of services to the EU-25 and the CIS countries accounted for 51.6 per cent and

36.1 per cent of the total export of services, and 53 per cent and 39.3 per cent of the

total export of transport services, respectively. Export of travel services to the EU made


45

up 45.5 per cent, and other services 61.5 per cent of the export of the respective

service type.

Income. The deficit in the income balance made up LTL 1.48 billion in 2004. Year on year

the income balance deficit declined by LTL 12.7 million. Non-resident reinvested earnings

(total flow of LTL 1.14 billion), which grew by more than 1.5 times, was a factor increasing

the income balance deficit. In 2004, compared to 2003, dividends paid to non-residents

on foreign direct investment increased by 23.5 per cent. Over the period under review,

the income of Lithuanian economic entities from investment abroad went up by 13.3

per cent, while income of non-residents from their investment in Lithuania increased by

24.8 per cent.

The income balance deficit was offset by the fast growth in the surplus of compensation

of employees. In 2004, compared to 2003, compensation of employees derived abroad

and transferred or brought to Lithuania increased by LTL 433.8 million, or 2.7 times.

Such developments emerged as Lithuania became an EU Member State, after which

the number of people leaving to EU Member States increased (including the individuals

who had left earlier and later acquired a legal employment or residence status).

Current transfers. The positive balance of current transfers stood at LTL 930.9 million

in 2004 (LTL 889.6 million in 2003). Year on year, current transfers to Lithuania grew by

LTL 445 million, of which LTL 370.9 million was an increase of support funds from the

EU. In 2004, Lithuania’s contribution to the EU budget made up LTL 411.9 million (there

were no such contributions in 2003), thus the overall positive balance of current transfers

increased by as little as 4.6 per cent year on year. The final result of the balance was

influenced by the fact that much more funds from the EU support funds were directed

to investment projects.

Capital and financial accounts. The total foreign investment flow in the country’s

balance of payments, excluding official reserve assets, reflected net inflows of LTL 3.6

billion in 2004. The current account deficit was mostly financed by foreign direct

investment. Net inflows of this investment accounted for 32 per cent (49.7% including

capital transfers from EU support funds) of the current account deficit. Net portfolio

investment inflows made up 13.2 per cent, and other investment inflows accounted for

18.0 per cent of the current account deficit.

Investment abroad. Foreign investment by domestic economic entities made up

LTL 3.12 billion in 2004, increasing year on year by LTL 2.88 billion. Most of the foreign

investment, i.e. LTL 2.13 billion, consisted of investment by Lithuanian commercial banks

(of which LTL 1.16 billion were loans to non-residents). In addition commercial bank

investment in non-resident debt securities and money market instruments amounted

to LTL 450.9 million. In 2004, foreign investment flow by other domestic economic

entities made up LTL 982.7 million, of which foreign direct investment was LTL 730.6

million. Foreign direct investment flows of domestic economic entities went up 6.3

times year on year.

Foreign investment flow by pension funds established in the country amounted to

LTL 89.2 million in 2004.

Foreign investment in Lithuania. Foreign investment flow in Lithuania made up

LTL 5.93 billion in 2004 and increased by LTL 887.1 million.

2004


46

Table 8. Development of the Capital and Financial Accounts, Composite Balances, and

Contributions

LTL million Change, % Contributions, %

2004 2003

Capital and financial account balance

(including errors and omissions) 4,441.54 3,854.00 15.2 15.2

Capital account balance 786.97 204.97 283.9 15.1

Direct investment 1,420.70 435.91 225.9 25.6

Portfolio investment 587.52 845.34 –30.5 –6.7

Financial derivatives 6.91 –86.92 –107.9 2.4

Other investment 800.25 3,611.57 –77.8 –73.0

Reserve assets 342.55 –1,647.66 –120.8 51.6

Errors and omissions 496.64 490.79 1.2 0.2

Foreign direct investment in Lithuania. Foreign direct investment flow in Lithuania

made up LTL 2.15 billion in 2004 (LTL 552.2 million in 2003). Investment in equity

capital amounted to LTL 874.7 million, while reinvested earnings made up LTL 1.14

billion. Inflows classified as foreign direct investment from privatisation made up 114.8

million in 2004, or as little as 5.3 per cent of the total foreign direct investment flow.

On 31 December 2004, accumulated foreign direct investment in Lithuania stood at

LTL 16.19 billion (EUR 4.69 billion), or LTL 4,727 (EUR 1,369) per capita.

In 2004, the largest foreign direct investment flow was recorded in manufacturing

(LTL 1,176.1 million), electricity, gas and water supply (LTL 261.4 million), wholesale

and retail trade (LTL 246.4 million) and monetary intermediation (LTL 221.1 million). At

the end of the year, investment in manufacturing accounted for 34 per cent, wholesale

and retail trade for 16 per cent, financial intermediation for 14.4 per cent, transport,

storage and communication for 14.3 per cent of total foreign direct investment in

Lithuania. The largest investors by country were Denmark (15.2%), Sweden (15.0%),

Germany (11.4%), Russia (8.4%), Finland (7.8%), and Estonia (7.6%). Investment of

the EU-25 Member States accounted for 76.3 per cent, while that of the EU-15 Member

States made up 63.7 per cent, and the CIS countries equalled to 8.7 per cent of total

investment.

Portfolio investment. In 2004, portfolio investment flow in Lithuania made up LTL 1.2

billion. 93.4 per cent of the portfolio investment flow consisted of inflows from the

new Government Eurobond issue in the first quarter of 2004.

Other investment. The flow of other investment in Lithuania made up LTL 2.74 billion,

i.e. it dropped by LTL 1.18 billion year on year. Loans received by commercial banks and

non-resident deposits in domestic commercial banks accounted for the larges share of

this investment. The flow of loans received on behalf of the State was negative (LTL 923.5

million), since more foreign loans were repaid.

Reserve assets. In 2004, the reserve asset flow was negative (LTL 342.6 million). At

the end of the year, it made up LTL 9.11 billion (EUR 2.64 billion).

Reserve assets decreased owing to the decline in both central government deposits

with the Bank of Lithuania (LTL 742.9 million) and the Bank of Lithuania repurchase

agreements with non-residents (LTL 185.4 million). Factors increasing reserve assets


47

were increased currency outside the Bank of Lithuania (LTL 457.4 million) and other net

liabilities of the Bank of Lithuania (LTL 41.6 million).

Fig. 31. Balance of Payments

International investment position of the Republic of Lithuania. On 31 December

2004, total foreign financial assets of the country made up LTL 18.78 billion and total

international financial liabilities stood at LTL 40.43 billion. The negative international

investment balance made up LTL 21.65 billion, i.e. Lithuania was a debtor vis-a -vis the

rest of the world. In 2004, total foreign assets grew by LTL 2.99 billion, international

financial liabilities went up by LTL 5.69 billion, thus, the negative international investment

balance widened by LTL 2.71 billion. Other investment accounted for 42.3 per cent,

foreign direct investment for 40.1 per cent, and portfolio investment for 17.6 per cent

of the country’s total international financial liabilities.

IV. Monetary Policy of the Bank of Lithuania and Monetary Policy Instruments

49

IV. Monetary Policy of the Bank of Lithuania andMonetary Policy Instruments

KEY MONETARY POLICY DIRECTIONS

PREPARATORY WORK FOR THE ADOPTION OF THE EURO

Upon entering the EU, Lithuania made a commitment to adopt the euro, which requires

participation in ERM II for at least two years. In early March 2004, the Bank of Lithuania

agreed with the Government of the Republic of Lithuania on seeking to join ERM II as

soon as possible following EU membership with the current fixed exchange rate of the

litas.

ERM II operating principles of are set forth in the Agreement between the ECB and the

National Central Banks of the Member States outside the Euro Area. The Bank of Lithuania

and the central banks of the other nine acceding countries joined the Agreement on

the eve of their entrance to the EU, i.e. on 29 April.

Lithuania, Estonia and Slovenia were the first among the new EU Member States to join

ERM II. On 27 June, economics or finance ministers, representing euro area countries

within the European Economic and Financial Affairs Council (Ecofin), President of the

ECB, and ministers of finance and governors of the central banks of Denmark (the only

participant in ERM II at the time) and Lithuania by mutual agreement decided to allow

Lithuania to join the Mechanism and participate in it according to the established

conditions. Lithuania’s participation in ERM II started on 28 June.

Lithuania joined ERM II with the current litas exchange rate, i.e. LTL 3.45280 for EUR 1.

Formally, the exchange rate of the national currency against the euro may move within

the standard fluctuation band of ±15 per cent. However, Lithuania undertook a unilateral

commitment to retain the fixed exchange rate regime and a stable exchange rate of the

national currency against the euro. The EU competent authorities agreed that this national

currency regime of Lithuania was appropriate in the run up to the euro.

The national monetary policy did not change following the start of participation in

ERM II, although the expectations that the euro would be adopted immediately after

the minimal two-year participation in ERM II grew stronger. This boosted confidence in

the national economy and financial stability, and encouraged investment in Lithuania.

Lithuania’s participation in ERM II will contribute to the further strengthening of the

reliability of the exchange rate regime and, together with structural reforms and tight

fiscal discipline, will ensure the necessary conditions for further convergence with the

EU Member States and the adoption of the euro.

As Lithuania joined ERM II, the international rating agency Fitch on 7 July 2004 upgraded

Lithuania’s long-term foreign currency rating on account of the good prospects of the

country to seek prompt adoption of the euro.

2004


50

Lithuania’s participation in ERM II and the anticipated adoption of the euro further

strengthened the confidence in the fixed litas exchange rate, and the domestic interest

rate levels came closer to the respective euro area interest rates.

In addition the process was also influenced by the following decisions of the Bank of

Lithuania:

- as from 24 March 2004, the fees charged on foreign exchange transactions by banks

were considerably reduced (the fee of 0,025% of transaction amount charged on the

sale and purchase of euro from the Bank of Lithuania was replaced by a fixed LTL 50

fee irrespective of the transaction value);

- as from 1 December 2004, restrictions on the open euro position were lifted, which

enhanced considerably the abilities of banks to adjust the composition of deposits

and other liabilities as well as loans and other assets both in litas and euro.

The yield on long-term Eurobond of the Government of Lithuania, redeemable in March

2013, fell from 4.7 to 3.7 per cent in the international secondary market in 2004. The

spread between the Eurobonds and the benchmark government securities of the euro

area, which indicates country risk, went down from 0.5 to 0.2 percentage points.

The monthly average yield on long-term Lithuanian GS, redeemable in January 2013,

used for the assessment of convergence, declined from 4.81 to 3.85 per cent in the

primary market in 2004. The spread between these GS and the benchmark GS of the

euro area, indicating both country and litas exchange rate risk, declined from 0.60 to

0.45 percentage points.

Despite the fixed exchange rate of the litas, the national currency does not enjoy some

of the key benefits of the single currency of the EU. Lithuanian economic entities have

to bear foreign currency exchange costs, which are relatively high given the small-size

and openness of the Lithuanian economy. Settlements with the EU countries that have

adopted the euro are slower and more expensive. Interest rates on debt securities with

longer maturities and loans in litas are still higher than interest rates on euro investment

of comparable risk. A protracted period until the adoption of the euro would increase

the costs to the Lithuanian economy, uncertainty and investment risk, and would provoke

speculations about fiscal and monetary policy discipline.

In the opinion of the Bank of Lithuania, given the necessity to be fully prepared for the

changeover, 1 January 2007 is the most adequate date for the adoption of the euro in

Lithuania. Following the two-year period of Lithuania’s participation in ERM II, an

assessment of Lithuania’s economic, legal and institutional readiness to adopt the euro

is to be made in the convergence reports of the European Commission and the European

Central Bank. In the event of a positive assessment, the EU Council should adopt a

decision on the exact date of adoption of the euro in Lithuania as well as on the

irrevocably fixed exchange rate between the litas and the euro. Following the above

assumptions, the Bank of Lithuania has determined its key tasks in preparation for the

adoption of the euro.

Under the plan, the Bank of Lithuania drafted the Law on the Adoption of the Euro in

Lithuania and presented it for consideration by the concerned institutions and

organisations. After the consideration of their comments and proposals, the Draft Law

will then be submitted to the Government of the Republic of Lithuania. It will be proposed


51

that the Law on the Adoption of the Euro in Lithuania should be passed as soon as

possible to enable public authorities, businesses and the population to get ready for the

cash changeover.

Along with the Draft Law, and taking into account its provisions, necessary amendments

to the Law on the Bank of Lithuania, Law on the Credibility of the Litas, Law on Money,

Law on Foreign Currency in the Republic of Lithuania and other laws will be drafted or

proposals on their revocation will be put forward. In addition the necessity of potential

amendments of the Constitution of the Republic of Lithuania will have to be considered.

As for logistic and organisational preparation, the Bank of Lithuania intends to procure

the necessary stocks of euro banknotes and coins, and be prepared to meet the requests

of domestic banks for frontloading with banknotes and coins by late 2006. The Bank of

Lithuania will closely cooperate with banks on issues of flexible working hours of the

latter during the changeover, adaptation of ATMs to euro, presentation of banknotes

and coins, and other organisational issues of customer service.

If the EU Council makes a decision on the date of the adoption of the euro in Lithuania

in the middle of 2006, the Bank of Lithuania will submit a proposal to put in force the

provision of the Law on the Adoption of the Euro in Lithuania introducing the obligation

of dual display of prices for goods and services in litas and in euro. In the Bank of

Lithuania’s opinion, until the adoption of the EU Council decision on the adoption of

the euro in Lithuania, this provision could be viewed as a recommendation.

By 31 December 2006, the Bank of Lithuania has to develop an organisational and

technical infrastructure necessary for both the adoption of the euro and full-fledged

participation in the euro area. The primary tasks include preparation for ECB monetary

policy operations, establishing a link between the national settlement system and the

Trans-European Automated Real-time Gross settlement Express Transfer system (TARGET),

adapting the Bank of Lithuania accounting and reporting framework for banking statistics

in line with ECB requirements, and restructuring financial assets managed by the Bank

of Lithuania.

In preparation for the euro changeover, the Bank of Lithuania is going to initiate an

extensive dialogue with different Lithuanian and the EU institutions and business

structures, take into account their opinions, and coordinate the formation and activity

of working groups as well as other forms of cooperation. The Bank of Lithuania intends

to emphasise the importance of the readiness by public authorities and business

representatives for the euro changeover.

As mentioned above, the anticipated date of the adoption of the euro in Lithuania is

Monday, 1 January 2007, subject to the decision of the EU Council. On this day the

euro would become legal tender in Lithuania; company balance sheets, liabilities and

agreements of institutions, companies and individuals, and all litas accounts of the

population in the banks would be converted to euro in accordance with the established

procedures.

According to the preliminary estimates of the Bank of Lithuania, the dual circulation

period could last for the first two weeks of 2007. In other words, the euro would be

legal tender, but cash payments for goods and services would also be acceptable in

litas. Later, the euro would become the sole legal tender.

2004


52

The Bank of Lithuania will propose that commercial banks should exchange litas

banknotes and coins into euro free of charge for a period of 3 months following the

adoption of the euro. Later, banks could continue exchanging litas into euro for some

time for a commission.

The exchange of litas into euro by the Bank of Lithuania will be free of charge for an

unlimited period at the cash offices of the Bank of Lithuania in Vilnius, Kaunas, and

Klaipëda.

MONETARY POLICY INSTRUMENTS AND FOREIGN EXCHANGE OPERATIONS

IMPROVING THE POSSIBILITIES FOR BANKS TO CONCLUDE LITAS AND EURO EXCHANGE

TRANSACTIONS WITH THE BANK OF LITHUANIA

On 24 March 2004, with the start of the reserve requirement maintenance period, new

Rules for Concluding and Executing Litas and Anchor Currency Euro Exchange

Transactions between the Bank of Lithuania and Banks came into effect. The Bank of

Lithuania concludes unlimited litas and euro exchange transactions with the banks that

are authorised to carry out foreign exchange transactions and are subject to reserve

requirements. The new rules expanded the bank liquidity management potential and

aligned the safety assurance standards for the operations of the Bank of Lithuania with

the practice of the EU central banks within ERM II. As mentioned above, a new procedure

for calculating the fee charged for the purchase of the anchor currency from and the

sale of anchor currency to the Bank of Lithuania reduced the fee to LTL 50 per transaction.

From 1 April 1994 to 4 November 2001, banks were charged a fee equal to 0.05 per

cent of the transaction value, which was later reduced to 0.025 per cent. The choice of

a percentage-based fee principle was determined by the intentions to promote the

development of the domestic interbank market. At first this was an effective instrument;

however, later domestic banks strengthened their links with West European banks and

became more active in using additional liquidity management opportunities in the

international euro market.

COMPLIANCE WITH RESERVE REQUIREMENTS

Reserve requirements are applied by the Bank of Lithuania to domestic commercial

banks and foreign bank branches to ensure sufficient liquidity in the banking system.

Having regard to Lithuania’s aspirations to become a member of the euro area in the

near future and taking into consideration the macroeconomic situation and the stability

of the banking system, the Bank of Lithuania has been gradually bringing the system of

reserve requirements in line with the system applied by the ECB. The reserve requirement

ratio was reduced from 10 per cent to 6 per cent. In 2003 and 2004, the bank loan

portfolio saw particularly rapid growth. Hence, in order to avoid additional incentives to

the process, the reserve requirement ratio was not reduced further.

Taking into consideration a large share of commercial bank liabilities in foreign currencies,

the Bank of Lithuania kept the requirement of holding reserves on liabilities in foreign

currencies in euro and/or USD. Commercial banks are required to hold reserves on

liabilities in litas in the national currency (euro area credit institutions are required to

hold all reserves solely in euro).


53

In 2004 (from 24 December 2003 to 24 December 2004), the amount of required

reserves grew by LTL 271.6 million (27.5%) to LTL 1.3 billion. Required reserves in the

national currency increased by 30.5 per cent (to LTL 746.9 million); required reserves in

foreign currency went up by 23.4 per cent (to LTL 512.6 million). The share of required

reserves in litas grew by 1point to 59 per cent at the end of the year, compared to a

2-point increase in 2003.

Fig. 32. Commercial Bank Required Reserves with the Bank of

Lithuania

As in 2003, changes in required reserves in 2004 were determined by changes in liabilities

subject to required reserves.

Changes in liabilities resembled those in 2003. The growth of required reserves in litas

was determined by deposits of residents in the national currency. At the end of November

2004, if compared with the same period of 2003, deposits of individuals and private

undertakings increased by LTL 1.6 billion (30.9%) and LTL 538.1 million (20.2%),

respectively. In addition at the beginning of 2004 banks held LTL 10.3 million of domestic

market debt securities subject to the positive reserve requirement ratio, while at the

end of the year these holdings stood at LTL 168.6 million.

The rise in required reserves in foreign currency was mostly determined by deposits of

private undertakings, which grew by LTL 764.3 million (50.3%). Moreover, foreign

liabilities of domestic banks with the original maturity (or the maturity of the first

repayment) of up to and including 2 years, which are subject to reserve requirements,

increased by LTL 558.6 million (21.8%). These liabilities consisted mostly of funds lent

by parent banks for financing domestic loan growth.

A considerable increase was recorded in bank liabilities to which the zero reserve ratio

is applicable. These liabilities amounted to LTL 1.2 billion at the end of November 2003

and LTL 2.5 billion at the end of November 2004 (respectively 6.6% and 10.5% of the

total reserve requirement base), of which liabilities in foreign currency made up LTL 2.2

billion. As a rule, however, the share of such liabilities in the euro area is considerably

2004


54

higher, where it comprised from 42 per cent to 44 per cent in the period from 2002 to

2004.

Like before, the major share (68.5%) of bank liabilities to which the zero reserve ratio is

applicable consisted of funds lent by parent banks with the maturity of over 2 years. In

addition banks that previously never issued debt securities with the original maturity of

over 2 years issued such debt securities in domestic and foreign markets of LTL 444

million, LTL 344 million of which were denominated in euro.

During the reserve requirement maintenance periods starting from December 2003 to

February 2004 average excess bank reserves in litas ranged from 23 to 45 per cent.

However, since 24 March 2004 excess reserves have shrank considerably, when banks

became more active in using cheaper litas and euro exchange facilities at the Bank of

Lithuania. Average excess reserves for maintenance periods starting from March to

December 2004 stood at 7.2 per cent of the required reserves (in 2003 and 2002 the

average excess reserves in litas made up 23% and 16%, respectively).

BANK OF LITHUANIA LENDING FACILITY

Banks participating in the payment system LITAS and subject to the reserve requirement

may conclude GS intraday repurchase agreements with the Bank of Lithuania. In case a

bank does not redeem GS on the same day, it should do so on the next business day on

the terms of overnight repurchase agreements. Like the ECB, the Bank of Lithuania

concludes interest-free intraday transactions, and applies the interest rate set by the

ECB on the marginal lending facility on overnight transactions which increase end-of-day

bank reserves subject to reserve requirements. In 2004, this interest rate was 3 per cent.

Intraday and overnight GS repurchase agreements are used to enhance the stability of

interbank settlements in real time and at a designated time. In 2004, domestic banks

did not apply to the Bank of Lithuania for such transactions. Required reserves, an

effective interbank settlement system, the interbank market, and the litas and euro

exchange facilities at the Bank of Lithuania enabled banks to manage their liquidity

efficiently by themselves.

CURRENCY EXCHANGE OPERATIONS

In 2004, the Bank of Lithuania concluded foreign currency exchange transactions with

its depositors (mainly the Ministry of Finance) for LTL 22.6 billion, or twice as much as in

2003. Transactions of the Bank of Lithuania with its depositors and banks amounted

respectively to 50.3 per cent and 49.7 per cent of total transactions. In 2004, the highest

foreign exchange turnover was recorded in the fourth quarter (LTL 8.8 billion), while

the lowest in the first quarter (LTL 2.6 billion).

As mentioned above, from March 2004 the Bank of Lithuania cancelled the fees on

litas and euro exchange operations, retaining a fixed fee to cover operating expenses.

As a result, the turnover of transactions with banks grew 4 times in 2004.


55

Fig. 33. Foreign Currency Purchase and Sale

Net sale of foreign exchange to banks by the Bank of Lithuania totalled LTL 1.6 billion in

2004, while the net purchase of foreign exchange from its depositors made up LTL 1.8

billion. The overall result of currency trade was positive (LTL 218.0 million). As a

consequence, the amount of litas put into circulation increased.

In 2004, anchor currency sale to banks was mostly influenced by higher excess liquidity

in the banking sector due to a large fiscal issue conducted by the authorities.

Foreign exchange operations of the Bank of Lithuania depositors were related to the

State budget expenditure, GS issue and redemption in domestic and international

markets, repayment of foreign loans, interest payments, absorption of EU funds, and

investment of free funds.

Table 9. Net Sale of Foreign Exchange to the Bank of Lithuania

LTL million

2004 2003

Q1 Q2 Q3 Q4 Q1–Q4

Banks –374.3 –600.8 –62.8 –569.7 –1,607.6 699.7

Bank of Lithuania depositors –60.6 703.3 88.4 1,112.5 1,843.6 240.1

Total –437.9 102.5 7.6 542.8 218.0 946.7

V. Money and the Financial System

57


MONETARY BASE

At the end of 2004, the monetary base M0 amounted to LTL 7.0 billion. Over the year,

it rose by LTL 457.5 million, or 7.0 per cent (LTL 1.4 billion, or 26.7% in 2003).

In 2004, currency outside the Bank of Lithuania was LTL 457.4 million (8.9%) more

than in 2003. This was determined by robust economic development together with low

alternative costs for currency holding.

Fig. 34. Monetary Base

The annual average share of currency outside the Bank of Lithuania equalled 81.5 per

cent of the monetary base M0 in 2004 (82.4% in 2003). The annual average share of

commercial bank required reserves in foreign currencies increased from 6.6 per cent to

7.6 per cent. In contrast, the share of these reserves in litas remained almost stable.

2004


58

Fig. 35. Composition of the Monetary Base

(End-of-period)

The main sources of changes of the monetary base M0 in 2004 were Bank of Lithuania

transactions with commercial banks and central government institutions (reducing the

monetary base by LTL 1.5 billion and increasing it by LTL 2.2 billion, respectively). Other

sources reduced the monetary base by LTL 263.0 million.

Table 10. Sources of Changes of the Monetary Base

(Over the period; LTL million)

2004 2003

Q1 Q2 Q3 Q4 Q1–Q4

Transactions with commercial banks –292.7 –576.0 –93.8 –538.7 –1,501.2 758.4

Net purchase of foreign currency –374.3 –600.8 –62.8 –569.7 –1,607.6 699.7

Required reserves in foreign

currencies 81.6 24.8 –31.0 31.0 106.4 58.7

Transactions with central government

institutions –125.3 759.0 234.6 1,353.4 2,221.7 539.9

Net purchase of foreign currency –59.6 700.3 320.1 1,272.0 2,232.8 262.0

Net claims on central government

institutions in litas –65.7 58.7 –85.5 81.4 –11.1 277.9

Open market operations – – – – – –

Other sources 86.9 –68.3 –160.1 –121.5 –263.0 75.0

Monetary base M0 –331.1 114.7 –19.3 693.2 457.5 1,373.3

Traditionally, the strongest influence on the change of the monetary base stemmed

from foreign currency exchange transactions at the Bank of Lithuania. Over the year,

net purchase of foreign exchange by commercial banks from the Bank of Lithuania was

LTL 1.6 billion, reducing the monetary base M0 accordingly. Net sale of foreign currency

by the central government institutions to the Bank of Lithuania was LTL 2.2 billion.


59

Fig. 36. Net Issue of Litas into Circulation by Anchor Currency

Exchange Transactions

The backing of Bank of Lithuania liabilities in litas with gold and foreign currency reserves

was in full compliance with the provisions of the Republic of Lithuania Law on the

Credibility of the Litas. At the end of 2004, gold and foreign currency reserves exceeded

Bank of Lithuania liabilities in litas by LTL 2.4 billion and the backing ratio was 136.3 per

cent (LTL 3.2 billion, or 151.5%, respectively, at the end of 2003).

Fig. 37. Backing of Bank of Lithuania Liabilities in Litas with Gold and Foreign Currency* Reserves

* Excluding accrued interest on securities.

2004


60

MONEY SUPPLY

At the end of 2004, broad money M21 made up LTL 21.8 billion. Over the year, it

soared by LTL 4.2 billion, or 24.1 per cent (LTL 2.7 billion, or 18.2%, in 2003).

Fig. 38. Money Supply

During the year, money M1 grew by LTL 1.9 billion, or 18.4 per cent. In 2004, currency

in circulation increased by LTL 489.2 million, demand deposits of individuals in litas

grew by LTL 845.3 million. Demand deposits of non-financial enterprises and other

institutions in litas went up by LTL 380.1 million and LTL 222.3 million, respectively.

Quasi-money increased by LTL 2.3 billion, or 32.7 per cent over the year. The change in

quasi-money was basically driven by the change in deposits of individuals. Regardless

of a continued decline of deposit interest rates, time and savings deposits of individuals

in litas increased by LTL 1.0 billion. Time and savings deposits of non-financial enterprises

grew by LTL 339.4 million. Deposits in foreign currency increased in 2004 as well: deposits

of non-financial enterprises went up by LTL 784.8 million and of individuals by LTL 93.9

million.

1 Broad money M2 consists of money M1 and quasi-money.

The money-creating sector includes the following residents: the Bank of Lithuania, commercial banks, foreign bank

branches and credit unions.

The money-holding sector includes the following residents: local government institutions, non-financial enterprises,

individuals, non-profit institutions and non-bank financial institutions.

The money-neutral sector includes the following residents: central government institutions and social security funds.

Money M1 consists of currency in circulation and demand deposits in litas of the money-holding sector held at the

money-creating sector. Currency in circulation consists of currency outside the Bank of Lithuania, less cash owned

by the money-creating sector.

Quasi-money consists of time and savings deposits in litas and all foreign currency deposits of the money-holding

sector held at the money-creating sector.


61

Fig. 39. Development of Monetary Aggregates*


In 2004, as in 2003, broad money M2 composition development trends were similar.

The annual average share of currency in circulation contracted from 26.4 per cent (in

2003) to 25.0 per cent (in 2004), and the share of demand deposits increased respectively

from 31.2 per cent to 32.5 per cent. The annual average share of time and savings

deposits grew from 20.4 per cent (in 2003) to 22.5 per cent (in 2004). In 2004, as in

2003, the annual average share of deposits in foreign currency continued to decline

(from 22.0% to 20.0% of broad money M2).

Fig. 40. Composition of Money Supply

(End-of-period)

In 2004, net foreign assets of the money-creating sector rose by LTL 49.4 million. An

increase of LTL 345.4 million was also registered in net credit to the central government

institutions and social security funds. Further buoyant growth was observed in credit to

2004


62

other residents: over the year, it increased by LTL 5.1 billion, or 37.8 per cent. This was

mainly driven by an LTL 1.8 billion growth of loans in litas and LTL 3.3 billion rise of

loans in foreign currency. Investment in debt and equity securities dropped by LTL 78.8

million. Economic growth and favourable borrowing terms supported a further increase

of demand for loans to economic entities. Therefore, loans to non-financial enterprises

rose over the year by LTL 2.4 billion.

The low level of interest rates and liberalisation of borrowing terms due to strong

competition among banks resulted in a rise of the amount of loans to individuals. In

2004, the amount of such loans increased by LTL 2.1 billion.

Loans to other institutions (local government institutions, non-profit institutions and

non-bank financial institutions) soared by LTL 562.5 million mainly due to bank loans

granted to their subsidiary financial institutions.

Table 11. Development of M2 Components and Counterparts

(Over the period; LTL million)

2004 2003

Q1 Q2 Q3 Q4 Q1–Q4

Money M1 –237.4 574.9 242.6 1,356.7 1,936.8 2,206.0

Currency in circulation –71.1 143.0 144.1 273.2 489.2 875.7

Demand deposits –166.3 431.9 98.6 1,083.5 1,447.6 1,330.3

Quasi-money 649.5 324.3 510.4 807.6 2,291.8 496.2

Time and savings deposits 399.2 296.0 145.3 558.6 1,399.2 683.0

Foreign currency deposits 250.3 28.2 365.1 249.1 892.7 –186.8

Broad money M2 412.1 899.2 753.0 2,164.3 4,228.6 2,702.2

Net foreign assets 457.0 –667.1 251.8 7.7 49.4 –314.3

Net credit to central government

institutions and social security funds –761.1 311.6 –36.5 831.4 345.4 –751.3

Credit to other residents 978.1 1,600.9 1,037.9 1,436.2 5,053.1 4,670.8

Non-financial enterprises 509.9 696.6 368.8 846.0 2,421.2 2,934.0

Individuals 383.9 564.0 524.6 597.0 2,069.4 1,262.4

Other institutions 84.4 340.2 144.6 –6.7 562.5 474.5

Other counterparts –261.9 –346.2 –500.2 –110.9 –1,219.3 –903.0

At the end of 2004, as at the end of 2003, money M1 multiplier (M1/M0) 3-month

moving average was 1.7, and broad money M2 multiplier (M2/M0) 3-month moving

average increased from 2.8 to 3.1. Money M2 in litas multiplier (M2 /M0) 3-month

moving average that is a more suitable indicator of the money creating process in

Lithuania also saw a rise from 2.4 (in 2003) to 2.6 (in 2004).


63

Fig. 41. Money Multipliers*

* 3-month moving average.

DEPOSIT AND LOAN MARKET

DEPOSITS WITH BANKS AND THEIR INTEREST RATES

At the end of 2004, deposits of individuals, enterprises, management institutions and

non-profit organisations with commercial banks totalled LTL 17.9 billion. The deposit

growth rate accelerated over the recent years. In 2004, deposits increased by LTL 4.3

billion, or 31.6 per cent, representing the largest increase from 1997. In 2003, deposits

grew by 16.2 per cent (12.1% in 2002). The share of non-resident deposits was

insignificant. However, irrespective of a robust growth of overall deposits, this share

expanded from 5 per cent to 6 per cent over the year. The growth of non-resident

deposits might be associated with market participant expectations linked with Lithuania’s

accession to the EU. Lithuania’s EU membership made domestic banks more attractive

to non-residents as it mitigated country risk. At the same time, there have been no

signs suggesting more intensive moves of speculative capital from abroad.

Fig. 42. Development of Deposits*


2004


64

The ratio of deposits to GDP was on an upward trend due to a more robust growth of

deposits than GDP. At the end of 2004, this ratio was almost 29 per cent (24% in 2003

and 19% in 2000).

The composition of deposits in 2004 remained largely stable: deposits in the national

currency made up 70 per cent, and foreign currency deposits accounted for 30 per cent

of total deposits. Despite the decreasing USD exchange rate (8%), foreign currency

deposits did not drop for the first time after 2001, but rose by LTL 0.6 billion (13%). The

share of euro deposits in resident foreign currency deposits went up from 29 per cent

(in 2002) to 43 per cent (end of 2004).

The share of time deposits in litas grew from 60 per cent (end of 2003) to 65 per cent

(end of 2004) of total time deposits. In contrast, demand deposits in litas contracted

from 79 per cent to 74 per cent of total demand deposits. The share of time foreign

currency deposits has been gradually shrinking as from the end of 2000 when these

deposits accounted for 71 per cent of total time deposits.

Fig. 43. Composition of Deposits

In 2004, deposits of individuals grew by LTL 1.9 billion, or 24.4 per cent. This was driven

by a LTL 873 million increase of demand deposits. The growth of time deposits made up

27 per cent and time deposits in litas 39 per cent. In 2004, the Government redeemed

savings notes of LTL 290 million. Even if the total amount received from the redemption

of saving notes was transferred to time deposits, this would make up only 30 per cent

of the total growth of time deposits of individuals.

The spread of payment cards supported a further increase of demand deposits of

individuals. Notwithstanding the slackening of this growth from 28 per cent (in 2003)

to 25 per cent (in 2004), their share remained stable and accounted for 44 per cent of

total deposits of individuals. Banks became very active in offering debit cards providing

a credit limit to their customers and reduced the requirements for the minimum income

needed for the acquisition of credit cards. These factors entailed a buoyant growth of

demand deposits, as credit cards and debit cards with a credit limit create the

opportunities to individuals to borrow funds immediately, thus making bank cards a

more popular alternative to cash payments.


65

The share of deposits of enterprises expanded from 36 per cent (in 2003) to 38 per cent

(in 2004), and of management institutions from 4 per cent to 5 per cent of total deposits.

Deposits made up 61 per cent of the bank liabilities and equity. In 2004, this indicator

remained almost unchanged.

Fig. 44. Composition of Individuals’ Deposits

In 2004, the share of three largest banks in the deposit market contracted by 3 percentage

points. A more pronounced trend of decreasing concentration was observed in the

enterprise deposit market, where the share of three largest banks shrank by more than

7 percentage points. The reduction of concentration in the enterprise deposit market

was basically driven by foreign bank branches, which expanded their market share

from 6 per cent (at the beginning of 2004) to 12 per cent (at the end of 2004).

Fig. 45. Concentration in the Deposit Market*

* The share of three largest banks.

In 2004, the ECB interest rates did not change and the minimum bid rate on the main

refinancing operations was kept at 2 per cent. In the context of cautious expectations

2004


66

of higher ECB rates in the future, interest rates on 3–12 month transactions in the

cross-border euro money market rose over the year by 1–7 basis points. 6-month EUR

LIBOR increased from 2.15 per cent to 2.21 per cent during the year, and 12-month

EUR LIBOR grew from 2.27 per cent to 2.35 per cent.

Fig. 46. Interest Rate Margin* on Time Deposits of Individuals

* Over monthly average of 6-month VILIBOR, USD LIBOR and EUR LIBOR.

Fig. 47. Interest Rates on Time Deposits of Individuals

Following a rapid decline of loan and deposit rates in previous years driven by interbank

competition, decreased costs and lower key interest rates as well as currency and credit

risks, in 2004 banks kept the level of rates on loans and deposits in litas and euro

almost stable, which was very attractive for borrowing. Moreover, banks started to

offer more alternative investment instruments to their depositors, such as bonds,

investment units, index-linked or return-linked deposits or bonds. It was only at the end

of 2004 that rates on time deposits increased modestly.


67

When the Federal Reserve System started to gradually increase interest rates in the

second quarter of 2004, domestic banks also slightly raised the rates on deposits in

USD. Soon after the Bank of Lithuania’s decision of 2 September 2004 to remove the

limits for banks on the open euro position, a number of domestic commercial banks

unified interest rates on deposits of respective terms in litas and euro.

BANK LOANS AND THEIR INTEREST RATES

At the end of 2004, the amount of loans (excluding loans to banks and financial

institutions) of domestic commercial banks to their clients made up LTL 16.9 billion.

Compared with the end of 2003, they soared by LTL 4.8 billion, or 39.7 per cent. Low

rates on loans, the expectations driven by Lithuania’s membership in the EU, possibilities

for accessing structural funds were the preconditions that determined buoyant loan

growth. Traditionally the largest share of loans was granted to residents, while loans

granted to non-residents at the end of 2004 made up only 0.7 per cent of total loans

granted by banks (1.9% at the end of 2003).

Fig. 48. Development* of Loans


The loan growth rate slowed down from 52.5 per cent (in 2003) to 39.7 per cent (in

2004). The slower growth rate was influenced by a substantially increased loan base.

The ratio of domestic credit to GDP expanded over the year from 23 per cent to 30 per

cent, but was among the lowest among the EU Member States (EU-15 average made

up 120% of GDP in 2003).

According to the estimates made by the Bank of Lithuania, the attraction of more

domestic resources drove down the growth of bank domestic loans financed with funds

borrowed abroad from 50 per cent (in 2003) to approximately 30 per cent (in 2004).

Banks became more active in issuing bonds. At the end of 2003, banks had attracted as

little as LTL 15 million by issuing bonds in the domestic market, whereas at the end of

2004 this amount reached LTL 331 million. The amount of financing in the form of

bonds attracted in foreign markets rose from LTL 176 million to LTL 345 million.

2004


68

In 2004, the leasing portfolio of leasing companies surged by LTL 1.2 billion, or 44.1per

cent. At the end of 2004, this portfolio made up LTL 3.9 billion1, or 23 per cent of total

bank loans.

Fig. 49. Development* of Loans by Borrowers


In 2004, compared with 2003, loans to enterprises increased by LTL 2.4 billion and

loans to individuals grew by LTL 2 billion. Loans to management institutions rose by

LTL 354 million, or as much as by 86 per cent. However, loans to management institutions

made up only slightly more than 5 per cent of the total loan portfolio of banks.

The share of loans to individuals expanded from 20 per cent (in 2003) to 26 per cent (in

2004) of total loans. The largest share of loans consisted of housing loans, but consumer

credit was also increasing. The growth of these loans was driven by a higher popularity

of debit and credit cards with a credit limit. Loans in euro accounted for the largest part

of housing loans (78%), in contrast to the share of loans in USD which remained

insignificant. The popularity of loans in euro was supported by low interest rates on

loans in this currency and expectations of the future adoption of the euro.

The share of loans in litas kept on shrinking. In 2004, it contracted by 3 percentage

points. The majority of these loans were long-term loans and their growth was more

robust than that of short-term loans. Therefore, the average maturity of loans became

longer to reach 40 months at the end of 2004.

Active bank crediting strategies aiming at increasing the loan portfolio drove a rise of

loans issued during the year from 55 per cent to 58 per cent of bank assets, suggesting

a stronger tendency among banks to assume credit risk.

1 According to the data of the Lithuanian Leasing Association. These data do not include companies that are not

members of the Association.


69

Fig. 50. Concentration in the Loan Market*

* The share of three largest banks.

In 2004, concentration in the loan market remained unchanged as the share of three

largest banks made up 71 per cent of the total loan market.

Fig. 51. Share of Foreign Bank Branches in the Loan Market

The share of foreign bank branches in the loan market expanded by as little as 0.4

percentage points in 2004. However, loans to management institutions went up from

24 per cent to 52 per cent. This was related to a large loan (compared with the total

amount of loans granted to management institutions) extended to the central

government by one of foreign bank branches.

In 2004, bank loans to all economic activities (including loans to banks and financial

institutions) made up LTL 14 billion, or 75 per cent of total loans (excluding housing

loans and consumer credits).

The growth of the portfolio of bank loans to economic activities was driven by loans

granted for the acquisition of real estate, renting and business activity (increased by

2004


70

LTL 824 million), financial intermediation (LTL 615 million), public administration (LTL

450 million), manufacturing (LTL 400 million), and wholesale and retail trade (LTL 398

million). In 2004, compared with 2003, a particular drop of growth was observed in

loans to manufacturing (LTL 648 million), and wholesale and retail trade (LTL 414 million).

In contrast, loans for the acquisition of real estate, renting and business activity doubled.

The portfolio of loans for public administration, which had decreased in 2003, expanded

in 2004 by LTL 451 million.

Fig. 52. Contributions to Growth of Loans to Economic Activities in

2004

The robust growth of loans to real estate was related to large real estate projects and

the rising housing market.

The composition of loans to economic activities by currencies changed only slightly in

2004: the share of loans in litas declined from 40 per cent (end of 2003) to 37 per cent

(end of 2004) and loans in USD shrank from 11 per cent to 8 per cent. In contrast, the

share of loans in euro expanded from 49 per cent to 55 per cent.

Fig. 53. Composition of Loans to Economic Activities by Currencies

At the end of 2004, the amount of loans in USD to economic activities made up USD 1.15

billion (USD 1.14 billion at the end of 2003). The largest share of loans in USD was


71

comprised of loans to industrial and transport enterprises. The growth of loans in USD

was driven by the fluctuating USD exchange rate against the euro and reflected market

participant expectations related with the decreasing USD rate against the euro. Decisions

of market participants were also influenced by increasing interest rates on loans in USD

in the world markets, and the relative share of loans in USD was declining. The amount

of loans in euro soared from 1.5 billion euro (end of 2003) to 2.2 billion euro (end of

2004), and loans in litas grew from LTL 4.3 to LTL 5.2 billion.

Driven by tight competition among banks, the average interest rates on loans in euro to

enterprises kept on decreasing further in 2004. They dropped from 4.34 per cent (in

December 2003) to 3.48 per cent (in December 2004). The average rates on loans in

litas to enterprises increased from 4.83 per cent to 4.98 per cent, and on loans in USD

went up from 4.33 per cent to 4.57 per cent. The comparison of interest rates on loans

with VILIBOR, USD LIBOR and EUR LIBOR suggests that the margin of loans in euro

continued to be the lowest.

Table 12. Margin of Average Interest Rates on Loans

(basis points; over monthly averages of 6-month of VILIBOR, USD LIBOR and EUR LIBOR)

2004 Change, compared to 2003

In litas In USD In euro In litas In USD In euro

Loans to enterprises 239 316 176 –43 –11 –28

Housing loans 174 261 163 –20 –36 –19

Interest rates on housing loans in litas and euro declined by 5 basis points, whereas

they increased by more than 160 basis points in USD. This was not related to the margin

of base rates but rather to the increase of USD LIBOR.

Fig. 54. Interest Rates on Housing Loans

INTERBANK MARKET

Due to a highly open economy, the fixed litas exchange rate, and free capital movement,

the interbank money market in Lithuania is closely linked with foreign exchange markets.

2004


72

Litas and euro markets became more interrelated when the Bank of Lithuania reduced

the fees charged on the anchor currency purchase and sale transactions with the Bank

of Lithuania as from 24 March 2004, and removed the limits on the open euro position

as from December 2004.

Table 13. Turnover of Interbank Market Transactions

LTL billion

2004 2003

Interbank lending and currency swap transactions 410.6 231.8

Litas (including litas and foreign exchange swaps) 84.5 53.8

Between resident banks* 30.5 18.5

of which swaps 4.7 4.5

Between resident and non-resident banks 54.0 35.3


Foreign currencies 326.1 178.0





Trading of GS between resident banks* 0.7 0.5

of which trading of GS with residual maturity of up to 1 year 0.2 0.2

Foreign exchange transactions (excluding swaps) 290.9 245.8

Transactions by type

Spot transactions 285.0 242.4

Forwards 5.8 3.3

Futures – 0.0

Options 0.0 0.0

Transactions by currency

Litas and foreign currencies 59.5 118.9

Litas and anchor currency 58.8 118.3



With the Bank of Lithuania (only spot transactions) 11.2 2.8

Foreign currencies 231.4 126.8



* Resident banks are commercial banks holding a banking licence issued by the Bank of Lithuania and foreign bank

branches holding the permission of the Bank of Lithuania to operate in Lithuania.

INTERBANK FOREIGN EXCHANGE LENDING AND SWAP MARKET

In 2004, as before, the main share of interbank lending and swap transactions (79.4%)

consisted of foreign exchange lending and swap transactions (76.8% in 2003). These

transactions were mainly concluded with foreign banks, since foreign markets are important

to Lithuanian banks in managing reserves in foreign exchange and currency positions.

Short-term transactions predominated among foreign exchange transactions. In 2004,

overnight transactions between resident and non-resident banks made up LTL 275.5

million. This represented only a slight change and comprised 87.8 per cent of the total

turnover of transactions (88.3% in 2003). The turnover of transactions between resident


73

banks was LTL 11.0 million, or 90.1 per cent of the total turnover of transactions (76.6%

in 2003).

Interest rates in the interbank foreign currency lending market of Lithuania were similar to

those in international markets, except for the average euro rates on overnight lending in

the domestic market: they were 0.15 points above the respective base interest rates (EONIA).

INTERBANK LITAS LENDING AND SWAP MARKET

In 2004, the turnover of litas lending transactions and swaps totalled LTL 84.5 billion,

or 57.1 per cent above the 2003 level. These transactions made up 20.6 per cent of the

total interbank lending and swap transactions (23.2% in 2003).

The largest expansion (64.9%) was observed in the interbank domestic market: in 2004,

its turnover was equal to LTL 30.5 billion (LTL 18.5 billion in 2003). This was accompanied

by a continuously large turnover of the interbank lending market as the decline of excess

reserves strengthened the demand in the interbank market for offsetting inconsistent

allocation of bank reserves due to client orders and the effects of autonomous factors. In

2004, as before, the strongest impact on bank reserves was exercised by such an

autonomous factor as the transfer of funds of the state treasury of the Republic of

Lithuania from the banking system to the Bank of Lithuania, and vice versa.

Fig. 55. Net Transfer* of Treasury Funds

* The share of required reserves.

From January to March 2004, until the reduction of fees charged for anchor currency

purchase and sale transactions by the Bank of Lithuania mentioned above, the average

daily turnover of the currency exchange between the Bank of Lithuania and commercial

banks amounted to LTL 8.1 million. Under the new procedure, it expanded to LTL 54.2

million. In 2004, the average daily turnover of currency exchange transactions between

the Bank of Lithuania and commercial banks made up LTL 44.1 million (LTL 10.8 million

in 2003). The average daily turnover in the interbank domestic market also grew from

LTL 72.7 million (in 2003) to LTL 119.7 million (in 2004). Short-term VILIBOR fluctuations

smoothed significantly. More stable interest rates could also have been a factor stirring

up the interbank market.

The turnover of litas transactions between resident and non-resident banks amounted

to LTL 54.0 billion (LTL 35.3 billion in 2003). It increased by 53 per cent over the year. In

2004


74

addition the number of longer-term transactions increased (the average maturity increased

from 10 to 12.5 days), thus raising resident bank claims in litas on non-resident banks in

2004, which reached LTL 2.7 billion in August and November. However, in December, on

the contrary, they decreased and at the end of the year stood at LTL 1.1 billion. The

largest share of euro and litas swap transactions with non-resident banks was concluded

by resident banks in order to satisfy euro demand and at the same time stay in compliance

with the maximum open euro position requirement. With the abolition of the open euro

position limitation as from 1 December 2004, banks did not extend some of the swap

transactions and bought euro directly upon their termination.

Fig. 56. Development of Interbank Litas Lending Transactions and

VILIBOR in 2004

Uncollateralised lending transactions were more popular among resident banks: in 2004

they made up 84.6 per cent of all the above bank transactions (75.7% in 2003). Resident

and non-resident banks concluded swaps more often: they made up 69.6 per cent of

all the above bank transactions (78.5% in 2003). Higher activity in the interbank domestic

market drove the number of litas lending transactions up last year. As a consequence,

the share of swaps declined to 50 per cent (59.8% in 2003). The majority of swaps

(84.4%) were litas and anchor currency swap transactions (90% in 2003). The value of

litas and anchor currency swaps increased by 23.1 per cent from LTL 29.0 billion (in

2003) to LTL 35.7 billion (in 2004). However, after the litas was pegged to the euro, litas

and USD swaps were still concluded.

Traditionally, the majority of interbank lending transactions in litas were short-term.

Transactions with the maturity of up to one month made up 92.9 per cent, out of

which overnight transactions accounted for 57.5 per cent of the turnover (97% and

54.3%, respectively, in 2003). Usually overnight transactions in the domestic market

are uncollateralized lending transactions, and swaps are made as longer-term

transactions, while swaps with non-resident banks dominate among overnight

transactions.


75

Fig. 57. Composition of Interbank Litas Lending Transactions by

Maturity

Interest rates on interbank market transactions in litas most frequently fluctuated within

VILIBID and VILIBOR of a corresponding term. In 2004, the average spread between the

overnight VILIBID and VILIBOR stood at 0.68 points (1.04 points in 2003) and the average

spread between 12-month VILIBID and VILIBOR was 0.85 points (1.00 point in 2003).

The declining spreads between VILIBID and VILIBOR mirrored growing stability in the

interbank market.

Litas and foreign currency exchange transactions were a very important liquidity

management instrument for the Lithuanian banks. In 2004, the turnover of foreign

currency exchange transactions was LTL 290.9 billion, 18.3 per cent above the level in

2003. Foreign currency exchange transactions made up 79.5 per cent of the overall

turnover, while litas and foreign currency exchange transactions accounted for 20.5 per

cent. Traditionally, among the latter transactions the turnover of spot litas and anchor

currency exchange transactions with non-resident banks was the largest. However, in

2004 it was LTL 45.9 billion, or twice as low as in 2003 due to the fact that resident

banks began to more actively use combinations of currency exchange transactions and

swaps for the management of the euro position. Similar to 2003, in 2004 interbank

litas and anchor currency exchange transactions between resident banks made up an

insignificant share. Furthermore, in 2004 their amount dropped twice, while the share

of transaction with the Bank of Lithuania rose from 2.4 per cent to 19 per cent.

In counterbalancing the overal effect of autonomous factors that increase bank reserves,

which was entailed by transfers of funds borrowed abroad by the state treasury or of

the funds held at the Bank of Lithuania to the banking system for financing domestic

expenditure, resident banks bought from the Bank of Lithuania more euro than sold to

it in order to maintain a rational insignificant excess of litas reserves. In contrast, in

2003 autonomous factors drove bank reserves down, and the net sale of euro to the

Bank of Lithuania amounted to LTL 0.7 billion.

SECURITIES MARKET OF LITHUANIA

GOVERNMENT SECURITIES

In 2004, 44 auctions (47 auctions in 2003) of Government Securities, including 16

Treasury bill auctions and 28 Government bond auctions, were conducted at the Bank

of Lithuania.

2004


76

Table 14. GS Sale and Redemption

LTL million

2004 2003

Q1 Q2 Q3 Q4 Q1–Q4

GS sold at nominal value

Treasury bills 100.0 106.9 159.5 93.4 459.7 659.6

Government bonds 180.5 189.6 105.6 115.0 590.6 994.2

GS redeemed

Treasury bills 90.0 237.4 170.0 194.1 691.5 725.3

Government bonds 100.0 100.0 85.0 126.4 411.4 367.6

In 2004, LTL 1.1 billion nominal value GS were sold at auctions. Total GS demand at

auctions amounted to LTL 3.0 billion, and was 2.9 times higher than the total nominal

value of GS sold at auctions (LTL 1.7 billion nominal value GS were sold at auctions,

total demand made up LTL 2.7 billion, or 1.6 times above the total nominal value of GS

sold at auctions in 2003).

Fig. 58. Ratio of GS Demand to GS Sold at Auctions

Government debt to investors for GS sold at auctions decreased over the year by LTL 52.5

million, or 1.7 per cent (grew by LTL 560.9 million, or 22.6% in 2003).

In 2004, low base interest rates on GS in euro had an influence on the decline of

domestic GS yield in the primary market. The average yield on GS of all maturities sold

at auctions fell from 3.6 per cent (in 2003) to 3.0 per cent (in 2004). In 2004, compared

to 2003, the total average yield on Treasury bill went down from 2.5 per cent to 2.1 per

cent, and the yield on Government bond declined from 4.4 per cent to 3.7 per cent.

The spread between the Lithuanian GS yield and the yield of the euro area debt securities

narrowed: the average yield of 6-month GS at auctions was on average 0.07 percentage

points above the yield on the German Government debt securities of the same maturity

(higher by 0.13 percentage points in 2003). The average yield on the longest maturity

(10-year) GS at auctions was 0.53 percentage points above the yield on the German

Government debt securities of the same maturity (1.26 percentage points in 2003).


77

Fig. 59. Average Yield on GS at Auctions

In 2004, Government bonds comprised 56.2 per cent of total GS sold at auctions (60.1%

in 2003). Regular extension of the average maturity of domestic debt resulted in 2004,

as in the previous year, in the sale of longer maturity GS at auctions. As a result, the

average maturity of GS in circulation grew from 1,102 days1 (at the end of 2003) to

1,126 days (at the end of 2004).

Fig. 60. Average Maturity of GS in Circulation

The issue of longer maturity Government bonds resulted in a smaller number of auctions

to refinance outstanding debt, and GS volume in circulation was maintained by organising

more auctions of additional offers of earlier GS issues already in circulation. Therefore,

there were only 15 new GS issues in 2004. At the end of 2004, GS of 30 different issues

sold at auctions were in circulation (Treasury bills of 7 issues and Government bonds of

23 issues). At the end of 2003, GS of 33 issues were in circulation (Treasury bills of

9 issues and Government bonds of 24 issues).

1 The average domestic debt maturity, including non-negotiable GS transferred to the legal entities, creditors of the

Innovation Bank, holding the right to Government guarantees for the implementation of their financial claims (in

2000, these GS were substituted by negotiable five issues of GS with different maturities), was 1,098 days at the

end of 2004.

2004


78

Fig. 61. GS Net Issue by Maturity

At the end of 2004, the largest share of circulating GS sold at auctions (80.8%) consisted

of securities with the residual maturity of over one year (69.0% at the end of 2003).

According to the data of the Joint-Stock Company Central Securities Depository of

Lithuania (CSDL), at the end of 2004, as in the previous year, commercial banks and

insurance companies (excluding compulsory social security) of Lithuania remained the

main investors in GS. Compared to 2003, bank investment decreased by LTL 287.6 million

and investment of insurance companies went up by LTL 62.5 million. At the end of

2004, banks held 48.9 per cent and insurance companies 19.8 per cent of total securities

in circulation sold at auctions (57.5% and 17.4%, respectively, at the end of 2003).

Fig. 62. Main Investors into GS

(End-of-period)

In 2004, investment into GS by persons grew by LTL 33.2 million and amounted to LTL 57.5

million at the end of the year (LTL 24.4 million at the end of 2003). At the end of the year,

persons held 1.9 per cent of total GS in circulation (0.8% at the end of 2003).


79

Table 15. Investors into Negotiable GS*

Groups of investors 31 December 2004 31 December 2003

LTL million** % LTL million*** LTL million** % LTL million***

RESIDENTS

Brokerage firms 1.4 0.0 1.1 1.4 0.0 0.1

Central banks – – 4.0 – – 5.4

Commercial banks 1,464.0 48.9 46.2 1,751.6 57.5 66.5

Insurance companies

(excluding compulsory social security) 594.0 19.8 52.6 531.5 17.4 69.8

Pension funds

(including compulsory social security) 25.7 0.9 0.0 – – –

Investment companies (funds) 30.3 1.0 0.1 9.0 0.3 0.0

Other financial intermediaries 30.9 1.0 2.1 23.9 0.8 0.0

Public and local government

enterprises 355.6 11.9 9.7 282.7 9.3 13.0

Private enterprises 37.7 1.3 9.9 63.9 2.1 13.4

Public management institutions 232.6 7.8 1.2 241.7 7.9 1.5

Persons 57.5 1.9 1.2 24.4 0.8 1.0

Other 10.9 0.4 7.3 10.9 0.4 9.9

Total residents 2,840.6 94.9 135.4 2,941.0 96.5 180.6

Non-residents 155.0 5.2 1.5 107.2 3.5 2.0

Total residents and non-residents 2,995.6 100.0 136.9 3,048.2 100.0 182.6

*At nominal value.

**GS sold at the auctions organised by the Bank of Lithuania.

*** GS of the creditors of the Innovation Bank (issues No. 60401, 60502, 60601, 60701).

In 2004, non-resident investment into GS sold at auctions increased. At the end of the

year, foreign investors held LTL 155.0 million of nominal value GS, or 5.2 per cent of

total GS in circulation (LTL 107.2 million or 3.5%, respectively, at the end of 2003). The

largest investment was made by Estonian investors amounting to LTL 154.3 million

(they held 5.1% of total GS in circulation).

According to the data of the Joint-Stock Company Vilnius Stock Exchange (VSE), the

secondary GS turnover in 2004 amounted to LTL 2,212.4 million and was 59.7 per cent

higher than in 2003. In 2004, the GS with the residual maturity of over one year

accounted for the largest share (80.4%) of the secondary turnover (69.5% in 2003). As

in the previous year, the largest share (99.3 %) of trade in GS in the secondary market

consisted of block transactions (97.4% in 2003).

The largest GS turnover was recorded in the fourth quarter of 2004, at LTL 887.3 million,

or 40.1 per cent of the total annual GS turnover at the VSE.

The turnover ratio of GS increased. In 2004, the secondary GS turnover made up 68.5

per cent of total GS that were in circulation during the year (47.9% in 2003).

CORPORATE SECURITIES MARKET

At the end of 2004, equities of 43 companies were listed on the VSE. Though market

tendencies varied quite significantly in the course of the year, equity prices increased

considerably. The total capitalisation of listed equities made up LTL 16.4 billion at the

end of the year, growing from 18 per cent to 27 per cent of GDP over the period.

2004


80

1 When the Scandinavian operator OMHEX (later changed to OMX) acquired the National Stock Exchange of

Lithuania, indices of Lithuanian equities were changed: the overall LITIN-G index of listed equities was replaced by

VILSE and the LITIN equity index of the Official Trade List was discontinued.

Fig. 63. Ratio of Securities Market Capitalisation to GDP

PRIMARY MARKET

In 2004, equities of 34 companies with the total issue value of LTL 600 million (of which

LTL 99 million was the amount of three issues registered by banks) were traded in this

market. The placement of these equities allowed companies to attract LTL 488 million

(0.8% of GDP), of which LTL 74 million were attracted by banks.

Fig. 64. Ratio of Share Capital Attracted by Additional Contributions to GDP

SECONDARY MARKET

During the recent two years, equity price indices increased robustly. The second quarter

of 2004 saw a slight and short-lived drop of equity prices followed by a buoyant rebound

in the second half of the year. The overall VILSE index of listed equities soared by 68 per

cent and the LITIN-10 index of the most traded equities ont the exchange grew by 41

per cent.1


811 See Hansabank Markets, Baltic Equity Markets (11 January 2005 issue).

Fig. 65. Changes in Equity Indices in 2004

(31 December 2003 = 1.0)

In recent years the general level of equity prices has been largely driven by external

factors. Investors, non-resident in particular, have been more inclined to treat the Baltic

States as a rather unified economic region with a broadly similar enterprise outlook and

comparable value of undertakings. These trends emerged in the mid-2003 when the

correlation of indices of these three equity markets became considerably stronger.

Fig. 66. Dynamics of Equity Indices in the Baltic States

(31 December 2001 = 1.0)

Some analysts attribute the growth of the equity markets of the Baltic States that has

surpassed all expectations to an unexpectedly large interest of foreign investors in equity

markets in the fourth quarter of 2004.1 Although the data of the Securities Commission

do not suggest any particular rush of foreign investors into Lithuania’s equity market,

given a substantial integration of the Baltic States, positive cash flows of foreign invest-

ment into any of these states might have a favourable impact on equity markets of the

other two.

Over the year, non-resident investment into Lithuania’s equity in the accounts of financial

intermediaries rose by 74 per cent (a roughly similar increase to that of equity prices).

2004


82

The rise of resident investment into equities was not as high, and the share of non-

resident investment expanded over the year by 3 percentage points to 55 per cent.

Fig. 67. Investors into Equity*

* Investment in the accounts of financial intermediaries.

In 2004, resident investment into equity in the accounts of financial intermediaries

soared by 51 per cent and made up over LTL 3 billion. The largest share of this investment

(64%) consisted of investment by private enterprises. Based on the data of accounts of

financial intermediaries, equity investment by insurance companies grew most rapidly

(2.7 times from the start of the year). However, the absolute value of their investment,

as well as of other institutional investors, was not large.

Fig. 68. Equity Investment by Individuals*

* Individuals who had credit balance in their personal accounts.

Equity investment by individuals accounted for 26 per cent of the funds on the accounts

of financial intermediaries. A noteworthy observation is that the number of individuals

who had a credit balance in the accounts of financial intermediaries dropped by as


83

much as 11 per cent over the year. At the end of 2004, their average portfolio investment

amounted to LTL 53 thousand, or 84 per cent more than a year ago. Generally, individuals’

involvement in equity investment activities remains rather low but should gradually

become higher as personal income growth continues further.

Fig. 69. Cash Inflows and Outflows of Equity Investment

In 2004, net inflows into the equity market were negative as cash outflows to investors

exceeded their inflows into equity by LTL 69 million. Net inflows into equity of Lithuanian

investors were positive and made up LTL 22 million, whereas net inflows of foreign

investors were negative: they were repaid LTL 91 million.

In 2004, the total equity turnover on the VSE, including the central market, block and

other transactions, made up LTL 1.3 billion, or 2.1 times more than in 2003. The equity

turnover in the central market amounted to LTL 514 million, or 66 per cent more than

in 2003. However, given a pronounced increase of indices of equity prices in 2004, the

central market turnover was similar to the previous year.

Fig. 70. Equity Turnover on the VSE

2004


84

The equity market volatility, as measured by volatility indicators of equity indices, turned

to be slightly lower in 2004. However, compared with equity markets of Latvia and

Estonia, Lithuania’s equity market was slightly more volatile.

Fig. 71. Volatility* of Equity Indices

* Standard deviation of monthly changes.

In 2004, equity capitalisation of 39 companies out of the 43 companies listed on the

VSE increased, capitalisation of 4 companies went down and capitalisation of one

company remained unchanged. This suggests that the main drivers of the market trends

were the positive expectations of the overall market perspectives and the general

perception of risk, rather than specific factors connected with company activities.

The capitalisation structure of equities of listed companies changed little in 2004. The

share of the equity capitalisation of energy companies went up from 38 per cent (in

2003) to 40 per cent (in 2004) and of industrial enterprises from 35 per cent to 36 per

cent, respectively, of the total capitalisation of listed equities. Equity capitalisation of

transport and communication companies shrank from 20 per cent (in 2003) to 16 per

cent (in 2004). As a result, total capitalisation of listed equities increased by 69 per cent.

Increasing capitalisation of energy companies contributed to the growth of total equity

capitalisation by 30 percentage points, capitalisation of industrial enterprises contributed

by 26 percentage points, and transport and communications by 8 percentage points.


85

Fig. 72. Changes of Listed Equity Capitalisation in 2004

The company Lietuvos Telekomas, the company Snaigë and the company Maþeikiø

Nafta stood out for the increases of their equity turnover in the central market – last

year they increased, respectively, by 17, 10 and 8 per cent.

The largest relative liquidity was observed in the equities of the company Vilniaus Vingis

(the ratio of traded equities to total equities made up 54%), the company Linas (27%)

and the company Anykðèiø Vynas (25%).

CORPORATE DEBT SECURITIES MARKET

In 2004, bond issues with the nominal value of LTL 344 million (of which LTL 320 million

bonds placed by banks) of 7 companies were registered and placed in Lithuania. Bond

placement by companies attracted 75 per cent of resident and 25 per cent of non-resident

funds.

According to the data of the Bank of Lithuania, at the end of 2004 the nominal value of

bonds issued by Lithuanian enterprises and registered in the country stood at LTL 526.4

million, and was 30 per cent higher than at the end of 2003. Bonds were issued in litas

or euro (there were two issues of bonds in euro at the end of 2004 making up 36% of

the total bond value).

The secondary market of bonds issued by Lithuanian enterprises was entirely

over-the-counter in 2004. In order to promote the corporate bond market in Lithuania

and bond trade on the Exchange, the VSE significantly shortened the listing and quotation

charges of corporate bonds and made them effectively equal to those applied to

government securities.

VI. Foreign Reserve Management

87


OFFICIAL RESERVE ASSETS

At the end of 2004, official reserve assets (hereinafter referred to as “foreign reserves”)

made up EUR 2,638.1 million (EUR 2,759.6 million at the end of 2003).

Fig. 73. Foreign Reserve Development Trends

Over the year, official foreign reserves decreased by EUR 121.5 million (4.4%).

Fig.74. Development of Foreign Reserves in 2004

Traditionally, foreign reserve development was mostly influenced by changes in the

balances of the Bank of Lithuania depositors and trade in the anchor currency with

2004


88

commercial banks. Operations of the Bank of Lithuania depositors – the largest of

which is the Ministry of Finance – increased foreign reserves by EUR 317.5 million over

the year. The Bank of Lithuania sold to commercial banks EUR 470.8 million. This was

the key factor reducing foreign reserves.

Table 16. Contributions to Foreign Reserve Development

Contributions Change over 2004, EUR million

Litas and anchor currency exchange

operations with commercial banks –470.8

Operations of LB depositors 317.5

Foreign currency exchange 533.5

Required reserves of commercial banks 30.8

Net asset value gain 56.6

Other –55.61

Total –121.5

FOREIGN RESERVE PORTFOLIOS AND KEY MANAGEMENT PRINCIPLES

The main objective of the Bank of Lithuania in managing foreign reserves is to ensure

such an amount of liquid financial resources that is sufficient to maintain the fixed exchange

rate of the litas against the anchor currency at any time. In pursuing this objective, foreign

reserve management is primarily guided by liquidity and safety principles. Subject to

meeting these requirements, foreign reserves are managed following the return principle.

In establishing the foreign reserve investment strategy, the Bank of Lithuania takes into

consideration the fact that under the fixed exchange rate regime frequent interventions

in domestic currency market evoke fluctuations in the amount of foreign reserves.

However, even in cases of stressed financial markets caused by internal or external

factors, part of the foreign reserves remains untouched. Taking this into consideration,

the Bank of Lithuania splits its foreign reserves into portfolios: the liquidity portfolio,

the investment portfolio, and the gold portfolio.

Individual foreign reserve portfolios are dedicated to different objectives. The liquidity

portfolio is primarily dedicated to meet the urgent need of liquidity by the Bank of

Lithuania, mostly when performing operations in the domestic currency market and

managing depositor accounts. Given that the assets in this portfolio may be called at

any time, in establishing the investment strategy of the liquidity portfolio a short

investment horizon of one month is applied. The Bank of Lithuania seeks to manage

the liquidity portfolio in a way that portfolio return over this period is never negative

and the return on the risk-free investment is systematically exceeded. Risk-free investment

in this case is the overnight interbank deposit rate.

Part of the foreign reserves is distinguished into the investment portfolio under the

assumption that, although these reserves may be utilised for interventions or for other

tasks whenever needed, it is quite unlikely that such a necessity will arise over the

predetermined period of time. An investment horizon of one year is applied when

defining an investment strategy for the investment portfolio. The Bank of Lithuania

1 Of which a decline of 53.7 million euro due to changes in repurchase agreements.


89

seeks to manage the investment portfolio so that every year the portfolio return is very

unlikely to be negative and over the long run the average annual portfolio return is

higher than the average annual return on an investment into a highly secure financial

instrument with the maturity of one calendar year.

As interest rates on gold investment fell to the minimum, gold investment strategy has

been changed. The volume of gold investment was gradually decreased and beginning

with December 2004 all gold has been held in the gold custody account.

LIQUIDITY OF FOREIGN RESERVES

Following the liquidity principle, the Bank of Lithuania manages foreign reserves in a

way that, if necessary, investments could be liquidated promptly and without significant

costs, and the inflows received could be used for interventions in the foreign exchange

market (or for other purposes).

The Bank of Lithuania invests the major part of foreign reserves in financial instruments

of the highest liquidity. Apart from the possibility of mobilising almost all foreign reserves

in a very short time, it also ensures relatively low cost of liquidating these investments

during the period of stressed financial markets. In 2004, the share of investment in

financial instruments of a very high liquidity accounted on average for 75 per cent of

foreign reserves. Investment into debt securities issued by central governments made

up 73 per cent of foreign reserves.

Fig. 75. Composition of Investment by Financial Instruments in 2004

In addition the Bank of Lithuania always holds a certain part of foreign reserves in a very

liquid form and may satisfy every-day demand for the anchor currency in the domestic

foreign exchange market without liquidating any investments.

SAFETY OF FOREIGN RESERVES

When investing foreign reserves, the Bank of Lithuania faces credit, exchange rate and

interest rate risks. Adhering to the safety principle, the Bank of Lithuania sets requirements

and limits to manage these risks.

Credit risk is limited by compiling the list of eligible counterparties and issuers and

establishing investment concentration and individual limits. In 2004, a number of changes

were made to improve the credit risk management system. An integrated credit risk

2004


90

management system that takes into account the probability of insolvency of

counterparties and issuers as well as the risk of the transactions was introduced at the

beginning of the year. The new system ensures more balanced allocation and efficient

use of limits.

The list of counterparties and issuers includes only those counterparties and issuers,

which have been assigned high credit ratings by international rating agencies. The

ratings are subject to continuous monitoring and their actual and potential changes

invoke immediate response. The composition of investment by ratings has been

influenced by attempts to always reach an optimum ratio between investment safety

and return. In 2004, investment in the most secure financial instruments, i.e. those

rated Aaa, accounted on average for 54 per cent of foreign reserves, while the average

credit rating of the Bank of Lithuania foreign reserve investment was Aa21.

Fig. 76. Composition of Investment by Ratings in 2004

Credit risk is reduced through a wide application of the diversification principle. According

to this principle, investment limits are assigned to financial instruments, groups of

counterparties and issuers, as well as to issuers and counterparties of a particular country.

In 2004, investments were spread over 20 countries. The major part of these investments

was made into securities issued by the issuers registered in Germany, France and Italy.

Individual limits established in respect of counterparties help to avoid excessively high

concentration of investment and operations with one counterparty.

Like other central banks, the Bank of Lithuania faces foreign exchange rate risk, when,

due to unfavourable developments in exchange rates, the value of foreign reserves in

the national currency may decline. As Lithuania has a fixed exchange rate of the litas

against the euro, the Bank of Lithuania reduces currency risk to the minimum by investing

almost all foreign reserves that are unrelated to foreign currency liabilities in euro.

However, exchange rate risk cannot be completely avoided due to investment in gold,

which is priced in USD. Gold price in USD grew by 5 per cent over the year. However,

the increase in gold price did not offset losses brought by the depreciation of the USD.

Over the year, the value of gold held by the Bank of Lithuania decreased by LTL 8

million. Exchange rate risk is best described by the currency and gold value-at-risk (VAR)

indicator2 . Over the year, this indicator made up on average 1.3 million euro (the

maximum was 1.7 million euro).

1 The calculation is based on Moody’s ten-year insolvency probabilities of corporates and governments as well as

average investment structure.2 VAR calculation is based on 36-day historical volatilities and correlation for foreign exchange rates and gold price.

This index represents, given a 95 per cent predetermined probability, a maximum amount, which could have been

lost over one working day by the Bank of Lithuania due to unfavourable exchange rate and gold price fluctuations.


91

Table 17. Composition of Foreign Reserves (net) by Currencies

(Annual average; percent)

Currency 2004 2003 Change, percentage points

Euro 96.8 96.5 0.3

Gold 3.2 3.5 –0.3

Total 100.0 100.0 –

In the function of the State Treasury agent the Bank of Lithuania manages accounts of

the State Treasury, public funds and some public institutions. In addition commercial

bank required reserves are held with the Bank of Lithuania. A substantial part of these

holdings is denominated in foreign currencies. In order to avoid exchange rate risk,

assets corresponding to foreign currency liabilities are invested in the currency of liabilities.

Over the year, liabilities in euro accounted on average for 83.4 per cent and liabilities in

USD accounted for 16.5 per cent of the liabilities in foreign currencies. Holdings of the

Bank of Lithuania depositors accounted on average for 82.3 per cent and required

reserves of commercial banks made up 17.7 per cent of the Bank of Lithuania liabilities

in foreign currencies.

To ensure compliance with the safety principle, in addition to credit and exchange rate

risks, the Bank of Lithuania also takes into account interest rate risk. Interest rate risk is

managed by establishing a benchmark with a certain level of modified duration (MD)

for each foreign reserves portfolio, and the allowed deviations (in terms of MD) for

portfolio managers. Also, certain restrictions apply as for individual investments.

At the beginning of 2004, the Bank of Lithuania enlarged the investment portfolio

taking into consideration the amount of the foreign reserves and liquidity needs, and

seeking to ensure higher return. As a result, MD of the reserves was extended and

exposure to interest rate risk became higher. In the second quarter of 2004, as interest

rate volatility increased, exposure interest rate risk was reduced by shortening the MD

of the benchmark for the investment portfolio.

Table 18. Average Annual Modified Duration of Foreign Reserve Portfolios

Portfolios 2004 2003

Liquidity portfolio 0.27 0.20

Share of euro 0.28 0.19

Share of USD 0.16 0.25

Investment portfolio 1.66 1.93

Gold portfolio 0.12 0.48

Total 0.94 1.02

The MD reflects the sensitivity of investment to changes in interest rates although it

does not represent an overall picture of the risk. The indicator that helps to get a more

comprehensive assessment of the assumed risk and, in addition to changes in interest

rates, takes into account interest rate volatilities as well as other factors is the VAR1.

1 VAR calculation is based on 36-day historical volatilities and correlation of securities, gold prices and foreign

exchange rates. This indicator represents, given a 95 per cent predetermined probability, a maximum amount,

which could have been lost over one working day by the Bank of Lithuania due to unfavourable fluctuations in

securities, gold prices and exchange rates.

2004


92

Table 19. VAR of Net Foreign Reserves

(End-of-year; EUR million)

2004 2003

Liquidity portfolio 0.01 0.17

Investment portfolio 0.87 1.13

Gold portfolio 1.02 1.36

Diversification effect –0.70 –1.13

Total 1.20 1.53

At the end of 2004, the VAR of net foreign reserves was on average 20 per cent lower

than at the end of 2003. This was mostly influenced by lower volatility of both interest

rates and gold price.

RETURN ON FOREIGN RESERVES

On compliance with the key requirements of safety and liquidity applied to foreign

reserve management, the foreign reserves are managed adhering to the principle of

return, i.e. they are invested so that the expected return on investment is maximized

over the long-term subject to mentioned constrains.

In 2004, the average return on foreign reserves was 2.60 per cent (2.61% in 2003). In

absolute terms over the year the return on foreign reserve investment was EUR 69 million.

Table 20. Return on Foreign Reserve Portfolios

Per cent

2000 2001 2002 2003 2004

Liquidity portfolio 6.06 4.41 3.03 2.27 2.02

Share of euro – – – 2.38 2.10

Share of USD – – – 1.18 1.32

Investment portfolio 8.72 7.30 8.12 3.09 3.28

Gold portfolio 1.17 1.25 0.88 0.34 0.09

Total 6.43 4.87 3.80 2.61 2.60

The return on foreign reserve portfolios complied with the main requirements set to

each respective portfolio: the return on the liquidity portfolio was not negative in any

month and was systemically higher than the return on risk-free investment (overnight

interbank deposit rate), while the annual return on the investment portfolio was positive

and higher than average return on investment into a highly secure financial instrument

with the maturity of one year. The results of the active portfolio management were also

positive: total return on all portfolios was higher by EUR 828 thousand than that of

implied (benchmark) investment.

VII. Cash Management

93


CURRENCY ISSUE AND WITHDRAWAL

In 2004, the amount of currency in circulation increased. The amount of currency outside

the Bank of Lithuania made up LTL 2,018.8 million and currency withdrawal was LTL

1,561.0 million over the year. The total amount of currency outside the Bank of Lithuania

increased by LTL 457.8 million.

A commemorative 50 litas silver coin and 1 litas circulation coin were issued to mark

the 450th anniversary of Vilnius University in April 2004; a commemorative 50 litas silver

coin dedicated to the Paþaislis Camaldolese monastery, the third in the series “Historical

and Architectural Monuments of Lithuania”, was issued in June; a commemorative 50

litas coin to mark the 475th Anniversary of the First Statute of Lithuania was issued in

September, and a commemorative 50 litas coin dedicated to the Curonian Spit (UNESCO

World Heritage) was issued in December.

On 31 December 2004, currency outside the Bank of Lithuania, including commemorative

coins and numismatic coin sets, amounted to LTL 5.6 billion (LTL 5.1 billion on 31

December 2003).

Table 21. Net Currency Issue and Withdrawal (–)

LTL million

Year Q1 Q2 Q3 Q4 Q1–Q4

2004 –153.2 203.4 104.1 303.5 457.8

2003 103.4 268.4 52.0 491.0 914.8

COMPOSITION OF BANKNOTES AND COINS IN CIRCULATION

On 31 December 2004, 60.9 million banknotes and 551.5 million coins were in

circulation. Over the year, the number of banknotes in circulation grew by 1.9 million

and their amount increased by LTL 447.5 million. The number of coins in circulation

rose by 57.8 million and their amount increased by LTL 10.3 million.

At the end of 2004, 100 litas banknotes accounted for the largest share (38.1%) of the

total amount of banknotes in circulation. Over the year, their share decreased by 2.6

percentage points. However, the share of 200 litas and 500 litas banknotes increased

by 2.4 and 1.4 percentage points, respectively.

2004


94

Fig. 77. Composition of Banknotes in Circulation

At the end of 2004, 1, 2 and 5 litas coins that replaced the banknotes of the same

denominations accounted for 68.3 per cent of the total amount of coins in circulation.

Over the year, the share of these coins in circulation remained relatively unchanged (the

share of 1 and 2 litas coins increased by 1.3 percentage points, and the share of 5 litas

coins decreased by 0.9 percentage points).

Fig. 78. Composition of Coins in Circulation

Table 22. Banknotes and Coins in Circulation

(End-of-period)

Denomination LTL million Millions of pieces

2004 2003 2004 2003

Banknotes

1 LTL 2.6 2.7 2.6 2.7

2 LTL 2.6 2.6 1.3 1.3

5 LTL 2.3 2.4 0.5 0.5

10 LTL 85.9 84.7 8.6 8.5

20 LTL 168.4 169.0 8.4 8.4

50 LTL 388.3 396.7 7.8 7.9

100 LTL 2,086.4 2,046.5 20.9 20.5

200 LTL 1,801.8 1,534.3 9.0 7.7

500 LTL 937.6 789.8 1.9 1.6

Total banknotes 5,476.0 5,028.5 60.9 59.0


95

Table 22. Banknotes and Coins in Circulation

continued

Denomination LTL million Millions of pieces

2004 2003 2004 2003

Coins

1 ct 2.0 1.7 198.8 174.0

2 ct 2.0 1.8 101.7 88.5

5 ct 2.2 1.9 43.2 38.8

10 ct 10.6 10.0 106.1 99.6

20 ct 8.9 8.3 44.7 41.3

50 ct 6.9 6.4 13.8 12.8

1 LTL 23.2 20.6 23.2 20.6

2 LTL 27.7 24.6 13.9 12.3

5 LTL 30.0 28.4 6.0 5.7

Commemorative coins and

numismatic coin sets 5.1 4.6 0.2 0.1

Total coins 118.6 108.3 551.5 493.7

SAFEKEEPING OF INVENTORIES OF CURRENCY AND DESTRUCTION OF BANKNOTES

In implementing its exclusive right to issue the currency of the Republic of Lithuania

into circulation and to withdraw it from circulation, the Bank of Lithuania holds cash

stocks (banknotes and coins) that are stored in the Bank of Lithuania vaults.

In order to guarantee high quality of currency in circulation, only banknotes that are fit

for circulation, are not worn out or soiled, and good quality coins are put into circulation.

In 2004, the inventories of banknotes and coins of all denominations were sufficient

and allowed satisfying the demand for cash. Over the year, the number of banknotes

and coins fit for circulation stored in the vaults decreased by 63.6 million. During the

year, 17 million 1 centas coins and 20 million 2 centas coins were minted.

Worn out banknotes and coins of all issues that are withdrawn from circulation are

destroyed. In 2004, over 40 million banknotes and 22 million coins withdrawn from

circulation were destroyed.

VIII. Supervision of Credit Institutions

97


KEY TRENDS AND PRIORITIES IN CREDIT INSTITUTION SUPERVISION

In 2004, the Bank of Lithuania continued to focus on the implementation of a credit

institution supervisory framework conforming to the international practice, encouraging

banks to improve their internal control systems, adequately assess, control and manage

traditional risks and identify in due time the emerging problems, as well as provide for

measures to be undertaken in order to maintain the stability of banking activity under

unfavourable market conditions. In addition, while conducting off-site monitoring and

on-site inspections, the Bank of Lithuania monitored adherence to the established

prudential and other requirements of sound banking.

The year 2004 was characterised by a large number of amendments introduced to legal

acts regulating bank operation stemming from Lithuania’s membership of the EU and

in line with the new provisions of the Law of the Republic of Lithuania on Banks and the

Law on the Bank of Lithuania. Seeking to ensure realisation of a simplified market entry

procedure for the banks outside the jurisdiction of the EU Member States that wish to

start operating in our country, amendments to some rules regulating licensing procedures

were introduced. In addition the procedure for the establishment of the banks of the

Republic of Lithuania and associated financial undertakings and/or the provision of

financial services in another EU Member State without establishing a branch as well as

the procedure for the implementation of the right to provide financial services in the

Republic of Lithuania by foreign banks licensed in other EU Member States and financial

undertakings under their control were defined.

Taking into account the changed conditions of banking activities after EU accession and

the development of the banking sector, amendments to the calculation of the capital

adequacy ratio were adopted in 2004. In order to establish equal competitive conditions

for the Lithuanian banks in the common EU area, the capital adequacy ratio applied to

the banks of the Republic of Lithuania was reduced and the requirement of the maximum

open position in foreign currency and precious metals was changed by removing the

limit on the euro position.

In 2004, the Bank of Lithuania adjusted a number of legal acts on accounting and

reporting. In implementing the EU regulation on improving the EU accounting framework

according to international financial reporting standards a new version of the Rules on

Consolidation of Financial Group Accounts and Joint (Consolidated) Supervision was

approved. They laid down the conditions and methods for the preparation of consolidated

statements of a financial group and the procedure for the submission of consolidated

statements to the Bank of Lithuania and their publication. Among other things, the

rules specify that the procedure of consolidated supervision performed by the Bank of

Lithuania will depend on whether the parent bank or the financial holding company

2004


98

falls under the jurisdiction of an EU Member State or the jurisdiction of a third country.

In addition new Rules for Supervision of Foreign Bank Branches Operating in the Republic

of Lithuania were approved. These rules establish different supervisory conditions for

foreign bank branches licensed in the EU Member States and foreign bank branches

licensed in the third countries other than the EU Member States. The rules also establish

the procedure of submitting statements by foreign bank branches to the Bank of Lithuania

and their publication.

The Bank of Lithuania continued to focus considerable attention on strengthening risk

management processes in banks in 2004. Considering the recent trends in the operations

of domestic banks related to abandoning certain activities (e.g. security, cash collection,

information system maintenance, and software development) and concluding

agreements with third parties with regard to outsourcing bank ancillary services, and in

order to ensure stability and reliability of bank operation after the conclusion of such

agreements as well as avoid obstacles for the supervision to perform its functions

effectively, the Rules for Outsourcing Bank Ancillary Services were approved. They define

certain key principles to be followed by banks as they enter into such agreements.

To ensure a more comprehensive reflection of operational risks faced by banks and

following the practice of other EU Member States and the provisions of the Basle

Committee on Banking Supervision, a new procedure for calculating the liquidity ratio

was introduced as from the date of EU membership, where by banks are encouraged to

entrust their funds to the financial and credit institutions in more reliable and stable

countries.

Following the recommendations and standards recognised by international practice, a

new revision of the General Provisions Pertaining to the Organisation of the Internal

Audit of the Bank were approved, effective as from 2005. The provisions expand the

functions of internal audit committees of banks, define the composition, subordination

and accountability of the audit committee, assign a more important role to the supervisory

council of a bank and internal audit committees and specify maximum independence

of the internal audit service.

The recent significant increase in the bank loan portfolio proves that this business area

requires continuous attention. The Bank of Lithuania has initiated the implementation

of a new concept of the centrally managed Loan Risk Database in 2004 in order to

improve credit risk management and to provide possibilities for banks for gradually

introducing internal borrower rating systems, as recommended in the New Capital Accord

and relevant EU directives. Subsequent to the planned changes, borrowers will be

classified into separate categories by the nature of their business and information will

be collected about cases of default on the basis of established criteria. Later on, the

collected information will enable computing the probability of defaults which is necessary

in preparation for the introduction of internal rating models. Moreover, plans have

been made to improve the accumulation of information about the accumulation of

collateral in the cases when collateral assets have been pledged to several creditors,

and include financial collateral as eligible assets in line with the provisions of the Republic

of Lithuania Law on Financial Collateral Agreements.

One of the most important tasks for the Bank of Lithuania in the area of supervision of

credit institutions in 2004 was preparation for the implementation of the New Capital


99

Accord and the new EU Capital Directive, still pending at the European Parliament, in

the country. To this end, the Bank of Lithuania has organised a number of meetings

with bank representatives to assess the level of preparation of banks for the

implementation of the new capital requirements, especially when assessing credit and

operational risk, to draw the attention of banks to the essential aspects of these

requirements, and to identify the key problems and the intentions of banks to move to

more complex capital requirement calculation methods in the future. Moreover, domestic

banks were requested to carry out preparatory work for the capital adequacy calculation

on the basis of the former and new requirements yet to be implemented. At the end of

2004, the Bank of Lithuania started developing the procedure for the calculation of

capital adequacy under the requirements of the new EU Capital Directive with respect

to the planned calculations in the transitional period.

Taking into consideration progressive practices of foreign supervisory authorities, the

Bank of Lithuania continues to enhance supervisory methods and tools. In 2004, the

Bank of Lithuania reviewed its inspection procedures as one of the key tools of ongoing

supervision. The previous CAMELS rating-based inspection methodology was replaced

by the risk-focused inspection system. The general inspection focuses on bank

management and internal control, the efficiency of the risk management system in the

key risk areas, including credit, liquidity, market and operational risks, to allow timely

identification, assessment, monitoring and management of the risks, while targeted

inspections focus on particular areas requiring special attention. Considering that the

General Regulations on the Assessment and Classification of Doubtful Assets and

Formation of Specific Provisions came into effect on 1 July 2004, inspection, among

other things, included analysis and assessment of the Rules on the Assessment and

Classification of Doubtful Assets, collateral assessment rules and other documents related

to these Rules, as well as instructions for their improvement.

In 2004, considerable attention was given to issues of cross-border cooperation.

Representatives of the Bank of Lithuania participated as full members in the work of

various EU institutions and ECB working groups, discussing further the issues related to

changes in the operation of the banking sector and supervisory institutions in the context

of the implementation of the common supervisory standards in line with the provisions

of the new EU Capital Directive and the New Capital Accord. At the beginning of 2004,

a cooperation agreement in the area of credit institution supervision was concluded

with the Swedish financial supervisory authority whose representatives later visited the

Bank of Lithuania and discussed issues related to the application of the new capital

requirements. At the invitation of the German financial supervisory authority,

representatives of the Bank of Lithuania participated in a working meeting in Bonn and

discussed the topics related to the issue of a single European Union licence for banks.

Members of staff of the Bank of Lithuania met with the representatives of the Finnish

financial supervisory authority to exchange information on the supervision of Sampo

Bank and Nordea Bank Finland Plc Lithuania Branch, and discuss issues of implementation

of the new capital requirements and possibilities for the renewal of the cooperation

agreement. Representatives of the National Bank of Ukraine visited the Bank of Lithuania

to get acquainted with the Lithuanian banking system, various aspects of the organisation

of banking supervision and applicable supervisory requirements.

2004


100

REVIEW OF THE BUSINESS OF CREDIT INSTITUTIONS

BANKING SECTOR

At the end of 2004, the same as a year before, ten banks with a network of 118

branches, two foreign bank branches, and three representative offices of foreign banks

operated in Lithuania. In addition the Bank of Lithuania received 48 notifications from

the financial services supervisory authorities of various EU countries informing about

the intentions of credit institutions supervised by them to exercise the freedom to provide

services and start activities in Lithuania without establishing local subdivisions (branches).

For the most part, these were banks from the United Kingdom (18 banks), Austria (9

banks), and Germany (8 banks).

In 2004, four out of ten banks operating under a license from the Bank of Lithuania

(Bank “NORD/LB Lietuva”, Bank “Hansabankas”, Sampo Bank and Ðiauliø Bank) increased

their share capital in order to ensure preconditions for their further development. The

total bank share capital grew by 8.6 per cent over the year and stood at LTL 1.3 billion at

the end of 2004. The share of Lithuanian bank capital held by foreign investors shrank

slightly in 2004; however these investors continued to hold 87.3 per cent of the bank

share capital. In 2004, 3 banks also strengthened their capital base with subordinated

loans that were allowed to be included in Tier II capital.

In 2004, domestic banks started expanding to the neighbouring CIS markets. The Board

of the Bank of Lithuania authorised Ûkio Bank to open its representative office in the

Ukraine (Kiev) and, later, in Moscow. At the end of the year, an authorisation was

granted to Vilniaus Bank to acquire a qualifying holding of the authorised capital and/

or voting rights of the Ukrainian Bank AGIO to the extent that Bank AGIO becomes its

associated undertaking, i.e. a subsidiary bank.

In addition the Board of the Bank of Lithuania authorised the open stock company of

the Republic of Belarus Djem-Bank to establish a representative office in Lithuania.

Fig. 79. Composition of Share Capital of Commercial Banks by Form of Ownership

(End-of-year)


101

The assets of domestic banks increased by 32.3 per cent over the year and stood at

LTL 29.2 billion at the end of 2004. Loans granted to customers made up LTL 16.9 billion,

39.7 per cent higher compared to the end of 2003. As has already been mentioned,

deposits with domestic banks totalled LTL 17.9 billion, of which LTL 9.8 billion were

deposits of individuals. The total amount of deposits grew by 31.6 per cent, and deposits

of individuals increased by 24.4 per cent. The competitive environment and differences

in the development of banks were reflected in the proportion of their assets. Compared

to 2003, the asset share of the three largest banks (Vilniaus Bank, Bank “Hansabankas”

and Bank “NORD/LB Lietuva”) contracted from 71.1 per cent to 67.6 per cent. At the

end of 2004, due to the active development of their business, foreign bank branches

held 9.8 per cent of assets while the asset share held by medium and smaller banks

went up to 22.6 per cent. The market of the deposits of individuals has remained one

of the most concentrated markets: deposits with the three larges banks made up 74.9

per cent, i.e. they contracted by 3.4 percentage points compared to the end of 2003. It

should also be noted that the concentration in most segments of the banking market

has been declining for four consecutive years.

Fig. 80. Asset Share Managed by Banks

Owing to ongoing economic expansion, favourable economic expectations and low

interest rates, loan demand has remained high. The loan portfolio growth rate has

been higher compared with the total bank asset growth, which resulted in changes in

the composition of assets managed by banks. The amount of granted loans increased

to a relatively high level: at the end of 2004, it accounted for 58.0 per cent of bank

assets (54.9% at the end of 2003). Such changes in the composition of bank assets

show that credit risk the most important of risks faced by banks.

At the end of 2004, the loan portfolio (including loans to financial institutions) of

Lithuanian banks accounted for merely 30 per cent of GDP in 2004, while the same

indicators were at least twice as high in Latvia and Estonia and even higher in other EU

countries. Although this means that there still remains considerable room for further

development of the loan market, it should be noted that the annual growth rate of the

total loan portfolio and of a number of its individual parts has been slowing down since

the second half of 2004. As has already been noted, similar to 2003, the highest increase

in 2004 was recorded in the amount of loans granted to private enterprises (LTL 2.4

billion) and individuals (LTL 2 billion).

2004


102

Fig. 81. Key Indicators of Banks

(End-of-year)

Housing loans to individuals, the amount of which made up more than three quarters

of total loans granted to individuals, remained one of the most dynamic items of bank

assets. The amount of such loans went up by LTL 1.5 billion (80.1%), although, compared

to Latvia and Estonia, the ratio of these loans to GDP was relatively low, reflecting

further potential for growth. Housing loans granted to individuals by the Lithuanian

banks accounted for 5.6 per cent of GDP.

Along with the new procedure for classifying doubtful assets, effective as from the

second half of 2004, a decision was made to abandon the strictly fixed rates of specific

provisions for each loan quality category and grant the right to the banks to establish

the amount of specific provisions by themselves in their own rules on the assessment

and classification of doubtful assets, drafted on the basis of minimum requirements

established by the Bank of Lithuania. In 2004, the total amount of specific provisions

on balance sheet assets increased by 35.7 per cent, therefore, the ratio of specific

provisions on loans to the loan portfolio went up over the year from 0.6 per cent to 0.7

per cent. This increase in specific provisions was determined mostly by the recently

introduced formation of specific provisions for category II (watch risk) doubtful assets,

since previously no such provisions were made.

In 2004, a decrease by 3.4 percentage points in the securities portfolio and an increase

by 4.9 percentage points in balances with credit institutions resulted in a number of

significant changes in the composition of bank assets. Such changes in the composition

of bank assets were mostly determined by the historically low level of interest rates, i.e.

banks limited their investment in debt securities, as a potential increase in interest rates

would have a negative impact on the debt securities market. Over the year, bank

investment in Lithuanian GS dropped on average by 10 per cent, while the share of

investment in GS (including foreign GS) declined by 12.4 per cent of bank assets, and

this was the lowest level over the past four years. Meanwhile, a growing share of liquid

bank reserves was channelled to short-term deposits in other credit institutions. In 2004,


103

the balances held with parent banks alone increased more than threefold and reached

close to 4 per cent of bank assets.

Fig. 82. Composition of Bank Assets

Over the year, the composition of bank liabilities also changed in a number of aspects.

Borrowing from (mostly foreign) banks and other credit and financial institutions remained

one of key sources of borrowing. In 2004, as in 2003, such loans made up a quarter of

total liabilities. The share of deposits of individuals shrank by 3 percentage points over

the year and accounted for 37 per cent of total liabilities at the end of the year. Moreover,

issuance of debt securities of banks, previously used rarely, was gaining importance as

a means of attracting financing. Such changes were determined by the high demand

for credit, to finance which deposit growth was insufficient, and domestic banks and

foreign bank branches operating in Lithuania turned to foreign banks for credit resources

(mainly from their own parent institutions) and started using alternative ways of

borrowing, such as the issue of debt securities.

Fig. 83. Composition of Bank Liabilities

2004


104

According to audited data, all domestic banks and foreign bank branches generated

profits in 2004; the total profit of domestic banks amounted to LTL 299.3 million, of

which commercial banks and two foreign bank branches earned LTL 293.2 million and

LTL 6.1 million, respectively. In 2003, the profit of Lithuanian banks was LTL 233.7

million. Bank profits grew for a third consecutive year, while the profit in 2004 was the

largest from the re-establishment of the independence.

Fig. 84. Net Profit of Banks

The analysis of banking performance in 2004 allows distinguishing several main business

segments, which, compared to 2003, had a positive effect on bank profitability. Bank

results were primarily influenced by income generated from the growing loan portfolio.

Such income was the main factor behind the increase in net interest income by 21.7

per cent. In addition a wider range of services and higher fees on services in some

banks resulted in the increase of net income from services and commissions of 14.6 per

cent. Rapid economic development of the country as well as the growing popularity of

leasing and insurance services had a positive impact on business results of bank

subsidiaries. In 2004, banks earned 2.8 times higher profits from investment into equity

of these companies. The growth of net profit was slowed down to some extent by the

increased expenditure on specific provisions related to rapid growth of the loan portfolio

of the banking system. Moreover, the growing amount of deposits with banks resulted

in higher expenses on deposit insurance contributions.

Banks continued to abandon certain activities and purchased ancillary services from

third parties, reducing in this way the number of employed. In 2004, the number of

bank employed went down by 5.7 per cent, yet the effect of this process on the operating

expenses was not that noticeable as they declined by a mere 1.1 per cent. These results

were related to the further development of the bank network.

In general banks succeeded in improving their efficiency indicators in 2004, reflecting

the proportion of the profit earned from core operations allotted for fixed expenses to

ensure banking business. In 2004, this indicator improved by more than 12 percentage

points and stood at 59.9 per cent at the end of the year, representing the share of the

profit earned from core operations to cover operating and amortisation expenses. Due


105

to a smaller number of employed and higher labour productivity brought by advanced

information technologies in some banks, the average proportion of bank assets per

employee and average income earning capacity per employee increased by 38.6 per

cent and 26 per cent, respectively.

Several factors worked behind the changes of relative profitability indicators of the

banks (return on assets and on equity) in 2004. Over the year, bank income base grew

considerably, as the share of interest earning assets went up from 83.9 per cent to 88.5

per cent of total assets. Banks, however, operated under the conditions of stronger

competition and low interest rate margins (over the year, the real interest margin declined

from 3.41% to 2.83%), and return on assets and return on equity remained relatively

unchanged (return on assets was 1.2% and return on equity 13.5%).

THE CENTRAL CREDIT UNION OF LITHUANIA

The Central Credit Union of Lithuania (CCUL) continued to develop its business in 2004.

Over the year, the number of credit unions (members of CCUL) grew from 47 to 53.

Assets managed by CCUL increased by 40.9 per cent and amounted to LTL 45.0 million

at the end of the year; deposits grew 1.5 times and equalled to LTL 36.6 million at the

end of 2004. To ensure financial assistance to credit unions, CCUL dealt with liquidity

problems of 4 credit unions, which were granted loans from the liquidity maintenance

reserve. Liquidity loans, however, made up just a small share of all loans granted to

CCUL members (less than 1%). GS accounted for the largest share of CCUL assets

(61%). The major part of the income earned by the CCUL consisted of interest income

accounting for 89 per cent of total income, while the largest share of expenses consisted

of interest expenses and operating expenses, comprising 46.6 per cent and 45 per cent

of total expenses, respectively. According to the financial statements, the CCUL earned

a profit of LTL 137 thousand in 2004, showing an increase of 3.3 times year on year.

The positive result was determined by the income from services and commissions which

doubled over the year, and reduced expenses on specific provisions.

CREDIT UNIONS

The number of credit unions continued to grow in 2004. The Board of the Bank of

Lithuania issued licences to four newly established credit unions. At the end of 2004,

there were 61 credit unions in Lithuania with total membership of 44.8 thousand natural

and legal persons, up by more than 12 thousand over the year. The share capital of

credit unions increased by 50.5 per cent. Farmers were the most active in establishing

credit unions (34).

In 2004, the assets managed by credit unions went up on average by 50 per cent to LTL

185.2 million at the end of the year; loans and deposits made up LTL 131.7 million and

LTL 148.4 million, respectively. Compared to banks, the share of credit unions remained

insignificant: at the end of 2004, assets held by credit unions totalled 0.64 per cent of

bank assets. The concentration level among credit unions continued to decline. At the

end of 2004, assets of ten largest credit unions made up 45.2 per cent of the total

assets of credit unions (47.1% at the end of 2003).

2004


106

Fig. 85. Key Indicators of Credit Unions

(End-of-period)

In 2004, credit unions continued to pursue active crediting policies: the share of loans

granted to the members amounted to 70.5 per cent of the total assets of credit unions.

At the end of the year, 46 credit unions held specific provisions on loans and accrued

income, and the total amount of specific provisions on loans went up 2.1 times over

the year. Since the growth rate of specific provisions on loans was higher compared to

the loan portfolio growth, the loan quality indicators deteriorated somewhat: the ratio

of specific provisions on loans to total loans increased over the year from 0.5 per cent to

0.7 per cent; the ratio of category III, IV and V loans increased from 1.6 per cent to 2.1

per cent of total loans.

In 2004, 45 credit unions whose operations were profitable earned a profit of LTL 1,138.8

thousand, while 16 credit unions incurred a loss of LTL 231.3 thousand. According to

the statements checked by inspectors of credit unions (independent auditors) and

approved by general meetings of the members, the profit of 907.5 thousand earned by

credit unions in 2004 was the highest from 1995.

Similar to previous years, interest income (88.8% of total income) was the main source

of income for credit unions. Changes in the composition of expenses was small, i.e.

operating expenses increased by 2.9 percentage points to 42.7 per cent of total expenses,

resulting in a decline of the share of interest expenses from 45.8 per cent to 42 per cent.

COMPLIANCE OF CREDIT INSTITUTIONS WITH PRUDENTIAL REQUIREMENTS

In accordance with the provisions of the Republic of Lithuania Law on Banks, banks

holding a licence issued by the Bank of Lithuania are subject to the following prudential

requirements: capital adequacy, liquidity, maximum open position in foreign currency

and precious metals, maximum exposure and large exposure.

Capital adequacy is one of the key requirements that the banks have to comply with. In

2004, capital adequacy was affected by the following factors: increasing share capital

and profitable business enhanced the capital base, however, asset risk related to the

fast expansion of the loan portfolio increased. As noted above, seeking to bring closer

the conditions of banking activities in Lithuania with the requirements applied in other


107

EU countries, the Bank of Lithuania reduced the capital adequacy ratio from 10 per

cent to 8 per cent (with the exception of the VB Mortgage Bank which remained subject

to the 10% capital adequacy ratio) as from 1 December 2004. In 2004, all domestic

banks complied with the capital adequacy ratio, and the overall capital adequacy of the

banking system made up 12.4 per cent. The capital base of the banks amounted to LTL

2.3 billion, of which the largest share (82.6%) consisted of Tier I capital, the most

stable part of the capital. LTL 1.4 billion of capital was allocated for reducing the risk of

the banking book, while LTL 39.6 million of capital was allocated to reduce the risk of

the trading book. According to capital adequacy statement data, 2.7 per cent of

risk-weighted bank assets and off-balance sheet items were sensitive to market risk

(interest rate, exchange rate risk and equity price risk). Across the banking system, the

highest need for capital in the trade book was related to interest rate risk, which is

allotted about three quarters of the trade book capital requirement.

Given excessive capital adequacy, under the same conditions and without breaching

the minimal requirement, banks would have been able to assume additional capital

reserves of LTL 9.9 billion. In other words, unused capital which complies with the

requirements and is held by banks, in case of unfavourable developments in the market,

would have enabled them to increase the volume of current specific provisions about

4.7 times without breaching the capital adequacy ratio.

At the end of 2004, the overall open position in foreign currencies made up 1.9 per

cent of the capital of the banking system; over the year, it declined by 8.9 percentage

points. After the limits applied on euro positions were removed, the open position in

this currency held by some banks grew considerably; however, the overall open position

in a number of banks fluctuated around 1.5 per cent, i.e. it was considerably lower

than the allowed maximum (the overall open position and the open position in a single

currency or precious metals may not exceed 25% and 15% of bank capital, respectively).

At the end of 2004, the standard liquidity ratio of the banking system stood at 41.7 per

cent, i.e. 12 percentage points above the minimum established by the Bank of Lithuania.

Liquidity risk could be more urgent for smaller-sized banks, while the banks whose

main shareholders are financially strong foreign banks are able to operate with

significantly lower liquidity reserves available as, if necessary, they can rely on immediate

support from their parent institutions.

Credit unions are currently subject to a higher capital adequacy requirement than banks:

this ratio shall be at least 13 per cent. The combined capital adequacy of credit unions

made up 16.5 per cent, i.e. it exceeded the minimum requirement. One credit union,

which started operations in the second half of 2004, encountered difficulties when

complying with this requirement. However, after an increase of the share capital, the

minimum requirements were met at the end of the year.

In 2004, the credit union liquidity requirement was fulfilled with a high reserve and

amounted to 85.6 per cent at the end of the year, i.e. it was nearly three times as high

as the established minimum ratio (30%). Yet in a number of credit unions negative cash

flows are projected for the upcoming half-year due to the financing of long-term loans

with short-terms deposits. Therefore, the Board of the Bank of Lithuania adopted a

decision to tighten the liquidity ratio for credit unions. In addition if necessary, credit

unions could rely on liquidity maintenance support from the CCUL, which complied

with all the established prudential requirements.

IX. Payment and Securities Settlement Systems

109


THE ROLE OF THE BANK OF LITHUANIA IN THE AREA OF PAYMENT AND SECURITIES

SETTLEMENT SYSTEMS

One of the functions of the Bank of Lithuania is to encourage stable and efficient

operation of payment and securities settlement systems. In performing this function,

the Bank of Lithuania provides settlement services and conducts the oversight of payment

and securities settlement systems (hereinafter referred to as “systems”).

The Bank of Lithuania manages and develops the payment system LITAS. The payment

system LITAS went live on 19 January 2004 and replaced the system TARPBANK that

was operating from 1993. The new system LITAS is designed to process payments in

real time and at a designated time. Advanced credit, liquidity and operational risk

management measures are applied in the system. The system LITAS was further developed

in 2004: the service of intraday and overnight repurchase agreements was offered to

participants of the system, conditions for performing conditional debit transfers were

established and the system monitoring possibilities were enhanced.

In performing the oversight function of systems, the Bank of Lithuania examined whether

the securities settlement system of the Central Securities Depository of Lithuania and

the payment system KUBAS of the Central Credit Union of Lithuania complied with the

requirements of the Law of the Republic of Lithuania on Settlement Finality in Payment

and Securities Settlement Systems. The Bank of Lithuania registered these systems on

12 February 2004 and, as a responsible institution, provided information on these systems

and the system LITAS to the European Commission.

In the area of system oversight the Bank of Lithuania gives priority to the oversight of

systemically important payment and securities settlement systems. For this purpose, the

Board of the Bank of Lithuania approved the Methodology for Assessment of Systemically

Important Payment Systems on 23 September 2004. On the basis of this methodology,

the system LITAS was assessed. Compliance of the system LITAS with ten core principles

for systemically important payment systems set by the BIS was assessed favourably.

INTEGRATION TO THE PAYMENT SYSTEMS OF THE ESCB

The Bank of Lithuania prepares for the participation in the payment systems TARGET

and/or TARGET2 of the ESCB. Following the adoption of the euro, participation of the

Bank of Lithuania in one of these payment systems will be mandatory in order to ensure

smooth implementation of the single monetary policy and will allow making cross-border

payments in real time. TARGET2 should replace TARGET at the beginning of 2007. If

the start of operation of TARGET2 is postponed due to any reasons, the Bank of Lithuania

will join TARGET.

2004


110

On 23 December 2004, the Board of the Bank of Lithuania approved the guidelines of

integration of the Bank of Lithuania into the TARGET payment system. They establish

the main tasks of the Bank of Lithuania and domestic banks and the final terms in the

preparation for the participation in these payment systems of the ESCB.

The Bank of Lithuania has opted for the solution of linking to TARGET through the

RTGSplus payment system of the Deutsche Bundesbank. The Bank of Lithuania would

become a direct participant of RTGSplus and TARGET systems and the commercial banks

of Lithuania and other participants of the payment system LITAS, in their own turn,

would have an opportunity to become indirect participants of RTGSplus and TARGET

systems by making payments through the Bank of Lithuania. For this purpose,

cooperation with Deutsche Bundesbank was started.

The Bank of Lithuania will be a direct participant of TARGET2. The participants of LITAS

will be able to participate in TARGET2 directly or indirectly (using the services of the

Bank of Lithuania or another direct participant). The participants of LITAS will be able to

make domestic and international payments in euro through the Bank of Lithuania during

the transition period, which will last up to four years depending on the decision of the

ESCB. This period will start when the Bank of Lithuania becomes the participant of

TARGET2 and will allow the countries to complete the implementation of the TARGET2

project.

In 2004, the Bank of Lithuania, together with the ECB and the Central Bank of

Luxembourg, started the assessment of compliance of the link between the securities

settlement system of the CSDL and the securities settlement system of the international

securities depository Clearstream Banking Plc. in Luxembourg with the standards for

the use of EU securities settlement systems in ESCB credit operations. The purpose of

this assessment is to establish whether the link between the said securities settlement

systems could be used for the provision of securities held at Clearstream Banking Plc. as

collateral to the Bank of Lithuania for securing its credit operations as Lithuania joins

the euro area.

PAYMENT SYSTEM LITAS

The payment system LITAS functioned smoothly in 2004. At the end of 2004, the

participants of the system LITAS were the Bank of Lithuania, 9 domestic banks, 2 foreign

bank branches, and the Central Credit Union of Lithuania. 11 securities market

participants used this system for processing securities settlements (the CSDL and

brokerage firms licensed and supervised by the Securities Commission).

In 2004, the system LITAS1 processed 15.8 million payment instructions the value of

which amounted to LTL 193.9 billion. The daily average volume processed by the system

was 62.1 thousand payments with the value of LTL 760.4 million. Compared to 2003,

this represents an increase of 15 per cent in terms of volume and 22 per cent in terms

of value. The average value per payment was LTL 12.3 thousand.

In 2004, real-time payments accounted for 3 per cent of the total volume of payments

in the system LITAS and made up 31.8 per cent of the total value of these payments. In

1 Including payments in the system TARPBANK from 2 January to 18 January 2004.


111

LITAS, as in most real-time systems of other countries, larger value payments are usually

processed in real time. In 2004, the average value of a real-time payment made up

approximately LTL 130 thousand, while the average value of a designated time payment

was LTL 8.6 thousand. Since 20 September 2004, as system participants started

processing conditional debit payments, the daily average volume of such payments was

413 transactions with the value of LTL 364.5 thousand. The average value of a conditional

debit payment was LTL 881.

Table 23. Payment System LITAS Flows

Year Volume of transactions, thousand Value of transactions, LTL million

Total Daily Concentration Total Daily average Concentration

average ratio1 % average ratio1 %

2004 15,824 62.1 76.3 193,907 760.4 62.2

20032 13,709 54.0 77.2 158,018 622.1 65.4

From 2002 to 2004, the share of very small value payments (up to LTL 5,000) kept

constantly increasing. In 2004, these payments made up 88.1 per cent of the total

volume of payments in LITAS. Larger value payments (over LTL 1 million) accounted for

a mere 0.1 per cent of total payments, however, their value made up 60.5 per cent.

Table 24. Composition of Payments Processed by the Payment System LITAS

(Compared to the total volume and the total value of payments; per cent)

Year Payment LTL 0–5,000 LTL 5,001–100,000 LTL 100,001–1,000,000 Over

transactions LTL 1,000,000

2004 Volume 88.1 11.0 0.8 0.1

Value 5.4 17.4 16.7 60.5

20032 Volume 87.6 11.5 0.8 0.1

Value 5.8 19.1 17.5 57.6

NON-CASH PAYMENTS

In 2004, the volume of non-cash payments in Lithuania was 86.6 million. The value of

these payments amounted to LTL 719 billion, of which LTL 415 billion (57.7% of the

total value of payments) were domestic payments and LTL 304 billion (42.3%) were

cross-border payments. In 2004, compared to 2003, the total volume of non-cash

payments increased by 28.4 per cent, the volume of domestic payments went up by

28.2 per cent, and the volume of cross-border payments grew by 39.8 per cent. During

this period, the total value of non-cash payments increased by 43.5 per cent, the value

of domestic payments went up by 32.4 per cent, and the value of cross-border payments

grew by 62.0 per cent.

Credit transfers accounted for 53.2 per cent of the total volume of non-cash payments

and made up 99.1 per cent of the total value of these payments. In 2004, customers

increasingly used non-paper based ways of transferring payment instructions (internet

1 Concentration ratio is the share of transactions of three banks with the largest volume of transactions in total

payment transactions.2 Flows of the payment system TARPBANK.

2004


112

and other electronic data transfer methods). Compared to 2003, the volume of credit

transfers initiated in non-paper based form increased by 54.7 per cent in 2004, while the

volume of credit transfers initiated in paper based form decreased by 4.8 per cent. In

2004, every other credit transfer was initiated in non-paper based form (38.2% in 2003).

In 2004, compared to 2003, the volume of debit transfers grew by 56.4 per cent, while

their value increased 2.6 times. Debit transfers accounted for 3.3 per cent of the total

volume of non-cash payments and made up 0.5 per cent of the total value of these

payments. Debit transfers were mainly used to pay for telecommunication, leasing,

insurance and other services.

The volume of payments by payment cards (debit, credit, electronic money and virtual

cards) increased by 42.1 per cent in 2004, compared to 2003, while the value of such

payments went up by 44.2 per cent. The volume of payment card payments constituted

43.5 per cent of the total volume of non-cash payments and 0.4 per cent of the total

value of such payments.

Table 25. Non-Cash Payments in 2004

Volume of transactions Value of transactions Average value

Thousand Compared to LTL million Compared to per transaction,

2003, % 2003, % LTL thousand

Total non-cash payments 86,587 28.4 719,263 43.5 8.3

Credit transfers 46,051 17.9 712,959 43.2 15.5

On-line PC 11,545 28.8 108,455 38.4 9.4

Internet 11,540 94.3 150,375 88.6 13.0

Telephone 5 –81.5 0.5 –77.3 0.1

Debit transfers 2,855 56.4 3,242 2.6 times 1.1

Payment cards (debit, credit,

electronic money, virtual) 37,675 42.1 3,050 44.2 0.1

Cheques 6 –45.5 12 –37.3 1.9

The number of payment cards was 2.7 million at the end of 2004, up by 17.1 per cent,

compared to the end of 2003. The increase of the total number of payment cards was

lower than in previous years due to slower growth of the number of debit cards. At the

end of 2004, debit cards accounted for 90.7 per cent of all payment cards in the market.

The number of Visa debit cards issued in 2004 was 4.8 times higher than the number of

MasterCard debit cards. Domestic debit cards accounted for only 0.4 per cent of all

debit cards.

The change of the number of credit cards was the most dynamic. In 2004, compared to

2003, the number of credit cards grew by 64.2 per cent and accounted for 3.2 per cent

of all payment cards at the end of the year. Contrary to the debit card market, MasterCard

cards prevail among credit cards in Lithuania. The number of MasterCard credit cards

issued in 2004 was 4.3 times higher than the number of Visa credit cards.

In 2004, compared to 2003, the number of electronic money cards grew by 2.8 percent

and accounted for 5.9 per cent of all payment cards at the end of year.


113

At the end of 2004, there were 789 payment cards per 1,000 population in Lithuania

(670 in 2003).

Table 26. Payment Cards

(End-of-period)

2004 2003

Total payment cards 2,702,833 2,308,670

Bank (debit/credit) cards 2,538,083 2,148,520

Debit cards 2,452,494 2,096,381

Domestic cards 8,870 7,676

International cards 2,443,624 2,088,705

Credit cards 85,589 52,139

Domestic cards 0 0

International cards 85,589 52,139

Electronic money cards 159,231 154,860

Virtual cards 5,519 5,290

In 2004, compared to 2003, the volume of payments by debit cards increased by 44.4

per cent, while the value of such payments went up by 49 per cent. The average value

of payment by debit cards (LTL 76) was the lowest of all card types, since debit cards are

widely used for daily settlements.

The average value of payment by credit cards (LTL 216) was the highest of all card types

in 2004. Compared to 2003, the volume of payments by credit cards increased by 39.5

per cent, while the value of such payments went up by 38.5 per cent.

The volume (140%) and the value (122%) of virtual card payments increased the most

in 2004, compared to 2003. These cards are only used for payment for goods purchased

online.

Electronic money cards were the only card type the volume and value of which decreased

in 2004 (5.5% and 10.5%, respectively).

Table 27. Payments by Payment Cards in 2004

Volume of transactions Value of transactions Average value

Thousand Compared to LTL million Compared to per transaction,

2003, % 2003, % LTL thousand

Debit cards 35,575 44.4 2,707.6 49.0 76

Credit cards 957 39.5 206.8 38.5 216

Electronic money cards 1,119 –5.5 130.6 –10.5 117

Virtual cards 24 140.0 4.7 122.0 197

At the end of 2004, there were 1,012 ATMs and 15,594 POS-terminals in Lithuania.

Compared to the end of 2003, the number of ATMs and POS-terminals increased by

1.8 per cent and 19.9 per cent, respectively. At the end of 2004, there were 295 ATMs

and 4,552 POS-terminals per 1,000,000 population in Lithuania.

2004


114

Table 28. ATMs and POS-terminals

(End-of-period)

2004 2003

Number of Number of machines Number of Number of machines

machines per 1,000,000 machines per 1,000,000

population population

ATMs 1,012 295 994 288

Payment card POS-terminals 15,594 4,552 13,002 3,773

Debit and credit card

POS-terminals 13,556 3,957 11,037 3,203

Electronic money card

POS-terminals 2,038 595 1,965 570

In 2004, the number of ATMs payments was 43.1 million and the value of payments

processed ATMs amounted to LTL 10.8 billion. Compared to 2003, the volume and

value of the said payments increased by 23.8 per cent and 28.5 per cent, respectively.

X. Participation in the ESCB and Cooperation with International Financial Organisations

115

X. Participation in the ESCB and Cooperation withInternational Financial Organisations

PARTICIPATION IN THE ESCB

On 1 May 2004, Lithuania became a Member State of the EU and the Bank of Lithuania

joined the ESCB. The Chairman of the Board of the Bank of Lithuania became a member

of the General Council of the ECB and representatives of the Bank of Lithuania

participated in the work of the ESCB committees and working groups. The Bank of

Lithuania was also represented in the work of EU institutions in developing and adopting

decisions in areas related to its functions.

In accordance with the Statute of the ESCB and of the ECB and the Rules of Procedure

of the General Council of the ECB, the Bank of Lithuania established a procedure for

preparation for the meetings of the General Council of the ECB. The application of this

procedure aims at adopting the necessary decisions by the Bank of Lithuania in time

and keeping its management and structural divisions informed about the issues discussed

at the ECB and at the EU institutions.

After EU institutions adopted the relevant decisions, Lithuania together with Estonia

and Slovenia made an important step towards the adoption of the euro by joining

ERM II in 2004. Lithuania’s participation in ERM II boosted confidence in the national

economy and financial stability.

Convergence reports of the ECB and of the European Commission published in October

2004 acknowledged that Lithuania was in compliance with the criteria on price stability,

government budgetary position and long-term interest rates. The requirement of the

exchange rate criterion to participate in ERM II for at least two years could not be met

since Lithuania only joined ERM II in June 2004. As regards the independence of the

Bank of Lithuania, the reports stated insufficient alignment of the national law with the

Treaty establishing the European Community and the Statute of the ESCB and of the

ECB in this area.

In order to be fully prepared for the adoption of the euro and to guarantee smooth

implementation of this process, at the end of 2004 the Bank of Lithuania prepared an

action plan for the adoption of the euro. The plan outlines the necessary measures for

the alignment of the legal framework, preparation for the changeover, conduct of

monetary policy in the new environment, the public information campaign, institutional

preparedness of the Bank of Lithuania, and other organisational measures.

2004


116

COOPERATION WITH INTERNATIONAL FINANCIAL ORGANISATIONS

Relations between Lithuania and the International Monetary Fund (IMF) have currently

been based on a twelve-month cycle economic consultations, conducted according to

Article IV of the IMF Articles of Agreement.

During the visit to Lithuania on 1–10 December 2004, the IMF mission gave a positive

assessment of economic and financial policy pursued by Lithuania and its further trends.

The IMF experts recommended to Lithuania to continue structural reforms and noted

the importance of the transparency and effective control of government finance, the

increasing Lithuania’s current account and other issues important to the Government

fiscal policy.

Lithuania is an active participant in forming a common position of the Nordic-Baltic

Constituency (NBC) on different issues discussed by the IMF Executive Board.

When coordinating a common position of all EU Member States on issues related to the

IMF, the representatives of the Bank of Lithuania participated in the bimonthly meetings

of the subcommittee on IMF issues of the Economic and Financial Committee (EFC).

During these meetings such issues as IMF crisis prevention, surveillance and resolution,

lending in arrears, credit concentration, future of the IMF as the preferred creditor,

Collective action clause (CAC), financing of the IMF Poverty Reduction and Growth

Facility, IMF assistance to low-income countries, initiatives for Heavily Indebted Poor

Countries (HIPC), consultations with strategic countries Turkey, Argentina and Brazil

according to Article IV of the IMF Articles of Agreement, financial system abuse and

fight against terrorism were discussed in 2004.

Four times a year representatives of the Bank of Lithuania attend meetings of full members

and alternates of the Nordic-Baltic Monetary and Financial Committee (NBMFC). During

the meetings held in 2004, decisions related to the preparation for annual and

semi-annual meetings of the Board of Governors of the IMF and the World Bank (WB)

were made; priorities in the IMF activities were discussed, including reports from the

Nordic-Baltic Constituency on current issues at the IMF and working methods within

the NBC, the Report on the Role of the International Monetary Fund, rotation in the

representative office of the Nordic-Baltic Constituency and other issues related to the

IMF policy.

On 24–25 April 2004, the IMF’s International Monetary and Financial Committee (IMFC)

held its 9th Spring Meeting in Washington, D.C. to discuss world economic and financial

markets, crisis prevention and surveillance, IMF assistance to low-income countries and

other issues.

On 2 October 2004, the IMFC held its 10th meeting in Washington, D.C. where it

continued discussions on world economic and financial markets and their growth

prospects for 2005, improvement of the effectiveness of IMF surveillance and

strengthening IMF crisis prevention, and increasing the international assistance to

low-income countries.

The report made on behalf of the NBC reviewed the world economic environment and

its changes, IMF crisis surveillance and prevention, private sector involvement in crisis

resolution, IMF assistance to low-income countries, HIPC initiatives, Poverty Reduction

and Growth Facility and IMF management.

X. Participation in the ESCB and Cooperation with International Financial Organisations

117

At the Annual meeting of the Board of Governors of the IMF and the WB held on

3 October 2004, such issues as the Annual Report of the IMF and the WB, the Report of

the Chairman of the IMF IMFC, the Report of the IMF Joint Development Committee,

the 2004 regular election of IMF Executive Directors and the IMF administrative and

budgetary issues for the financial year ending on 30 April 2005 were discussed.

The report made on behalf of the NBC reviewed world economy and its prospects, IMF

crisis surveillance, IMF management, international community efforts and the role of

the IMF in poverty reduction in low-income countries.

As a shareholder of the Bank for International Settlements (BIS), the Bank of Lithuania

was an active participant in its activities. On 25 June 2004, the Chairman of the Board

of the Bank of Lithuania took part in the 78th Annual Shareholders’ Meeting in Basel. At

this meeting, the BIS financial activity and its main aspects in 2003 and 2004 were

reviewed. Different BIS committees made presentations on internal management of

the BIS, its audit and risk control, legal and banking services, analytical and research

work. The Chairman of the Bank of Lithuania also participated in several BIS meetings

that take place on a bimonthly basis to discuss the New Basel Capital Accord, its

implementation, work in the ERM II environment, and other issues.

XI. Transparency of the Bank of Lithuania

119


The Bank of Lithuania performs its functions following international standards and

transparency principles formed in central bank practice. On 1 May 2004, Lithuania

became a Member State of the EU and the Bank of Lithuania joined the ESCB. As a

result, new requirements emerged in this area.

When acceding to the EU, Lithuania assumed the obligation to adopt the euro. Therefore,

the Bank of Lithuania supports timely and proper preparation for this important event

by paying much attention to informing the public about this relevant issue.

TRANSPARENCY OF MONETARY POLICY

At the beginning of March 2004, the Board of the Bank of Lithuania and the Government

announced their decisions to authorise the Chairman of the Board of the Bank of

Lithuania, together with the Minister of Finance, to submit an application to the European

Economic and Financial Affairs Council for joining Exchange Rate Mechanism II (ERM II)

and to sign related agreements. The Bank of Lithuania then explained to the public that

in view of the existing practices countries do not announce publicly the date of

application. Such procedures have been adopted on the grounds that decisions on

endorsing a country’s participation in ERM II are related not only to the joining country

but also to all euro area countries and countries already participating in ERM II.

After the EU institutions endorsed Lithuania’s participation in ERM II at the end of June

2004, the Bank of Lithuania informed the public about this event and emphasized that

Lithuania assumed a unilateral obligation to maintain the current fixed exchange rate

regime and the current exchange rate of litas against the euro with a zero fluctuation

band. The Bank of Lithuania also indicated that successful implementation of ERM II

requirements and compliance with the Maastricht convergence criteria would result in

the adoption of the euro in Lithuania at the end of 2006 or at the beginning of 2007.

The approximate time for the adoption of the euro was clearly communicated to the

public. This information influenced the formation of clearer market expectations.

INFORMATION ON PREPARATION FOR THE ADOPTION OF THE EURO

The Bank of Lithuania prepares for the cash changeover and regularly informs the public

about its most important activities in this area. For this purpose it actively cooperates

with the media by preparing press releases, organising press conferences and making

comments. Much information about the planned adoption of the euro, including

questions and answers related to this issue, is provided on the website of the Bank of

Lithuania (www.lb.lt).

2004


120

In view of the plans for minting euro coins in Lithuania and the fact that euro coins have

the common and national sides, Lithuania had to select an image for the national side

of the Lithuanian circulation euro and euro cent coins. According to the results of a

survey1, the majority of respondents (33%) indicated that an image of the Vytis would

be the best to represent Lithuania on the euro coins, whereas 18 per cent of respondents

named the Gediminas Castle. Other respondents mentioned the Vilnius Cathedral, Trakai

Castle, Columns of Gediminas, Vytautas Magnus and Jonas Basanavièius.

In 2004, the Bank of Lithuania organized an open tender for the design of plaster

models for the national side (obverse) of Lithuanian euro and euro cent coins. The

authors of the best works were honoured at the Museum of the Bank of Lithuania in

Vilnius. When the single EU currency is adopted in Lithuania, euro coins with the image

of the Vytis will become legal tender in the whole euro area.

In the autumn of 2004, the Bank of Lithuania and the ECB arranged an international

exhibition entitled “The Making of the Euro” that helped the Lithuanian population to

get to know the single EU currency better. This European touring exhibition of unique

photographs illustrated the adoption of the single currency in the euro area Member

States and was on a display in Kaunas for five weeks. The exhibition was met with great

interest and attracted more than 7,500 visitors from all over Lithuania. They had an

opportunity to see the exhibits as well as to get information about euro banknotes and

coins, their security features and the planned adoption of the euro in Lithuania. On this

occasion, the Bank of Lithuania published and distributed publications in the Lithuanian

language on euro banknotes and coins. The exhibition was an important information

signal to the public about the approaching adoption of the euro.

The Bank of Lithuania presented in detail its action plan on the adoption of the euro,

which was approved by the Board of the Bank of Lithuania on 23 December 2004, to

the public. Having assessed the benefits of the euro and the necessity to be fully prepared

for the changeover, the Bank of Lithuania indicated 1 January 2007 as the most adequate

date for the introduction of the euro in Lithuania. A multilateral decision on this issue

will be taken by the EU institutions.

The action plan on the adoption of the euro of the Bank of Lithuania includes important

actions related to the legal framework, necessary logistical and organizational preparation

that were described in detail in many national publications and presented to a large

radio and television audience as well as to the Internet users.

Foreign media and central banks of other countries closely follow the preparation of

the Bank of Lithuania for the adoption of the euro and are interested in the experience

of our country. On 14 July 2004, the National Bank of Poland held a seminar where

Reinoldijus Ðarkinas, Chairman of the Board of the Bank of Lithuania, made a presentation

“Lithuania’s Path to the Euro Area”. The event was covered by the Polish media.

1The survey was conducted by the joint Lithuanian and British market and public opinion polling company Baltijos

Tyrimai on 15–23 January 2004. 1015 respondents from 100 locations in Lithuania aged between 15 and 74 were

interviewed. The composition of the respondents met the composition of the Lithuanian population aged between

15 and 74 by sex, age, education, nationality and type of settlement. The respondents expressed the opinion of the

Lithuanian population aged between 15 and 74, as an error of the survey results is less than 3 per cent.


121

Representatives of the Bank of Lithuania participate in special working groups of the

European Commission and the ECB for the development of an effective public

information strategy for the adoption of the euro. This allows to adopt the best practices

of the euro area countries in this field.

INFORMATION ON THE ESCB

On 1 May 2004, the Bank of Lithuania joined the ESCB and its information system.

Following the reporting commitment defined by the Statute of the ESCB and of the ECB,

the first translated ECB monthly bulletin (quarterly version) was published on the websites

of the Bank of Lithuania and the ECB in June 2004. Three ECB bulletins in the Lithuanian

language were published on the website in 2004. In the autumn of 2004, the ECB’s

convergence report, where economic, legal and institutional preparation for the adoption

of the euro of Lithuania and other new EU Member States was assessed, was posted on

the websites of the Bank of Lithuania and the ECB and issued as a separate publication.

The Bank of Lithuania cooperates with the ECB on the preparation of publications and

in publishing information related to the ESCB.

TRANSPARENCY OF OTHER ACTIVITIES. PRESENTATION OF THE ACTIVITIES OF

THE BANK OF LITHUANIA

Twice a year the Bank of Lithuania presents reports to the Seimas of the Republic of

Lithuania on the implementation of its primary objective, performance of its functions

and the situation in the banking system. According to the Advance Release Calendar

under the requirements of the Special Data Dissemination Standards (SDDS) of the IMF,

the Bank of Lithuania regularly publishes banking surveys, statistics on its balance sheet,

interest rates, balance of payments, official reserve assets, balance of the international

investment position, exchange rate and other statistical data of the financial and external

sectors..

This data is posted on the Internet website of the Bank of Lithuania, published

in press releases and statistical publications in English and Lithuanian. Persons interested

in statistical and other periodicals published by the Bank of Lithuania may access them

free of charge on its website.

The Bank of Lithuania also informs the public about the work of the Board of the Bank

of Lithuania. The agendas for the meeting of the Board of the Bank of Lithuania are

released in advance, its decisions are published promptly and comments to the media

are provided on issues of interest.

The public is regularly acquainted with the activities of commercial banks, foreign bank

branches and credit unions operating in Lithuania, and with the results of the credit

institution inspections conducted by the Bank of Lithuania. This information helps market

participants in their assessment of risks in relation to important decisions.

A new payment system LITAS administer by the Bank of Lithuania, which started its

operation in January 2004, was introduced on the website of the Bank of Lithuania and

in press releases.

2004


122

The Bank of Lithuania continues its cooperation with a non-governmental and non-profit

education institution “Junior Achievement Lithuania”, a leading organisation in youth

economic education programmes, the Economic Education Centre, and other institutions.

The Bank of Lithuania has a member in the Board and Programmes Committee of

“Junior Achievement Lithuania”, who participates in the activities of this organisation.

In its cooperation with the latter organisation, the Bank of Lithuania prepared part of

the questions and tasks for the final stage of the School Children’s Economic Contest

during the academic year of 2003–2004.

In January–May 2004, the Bank of Lithuania took part in the contest for projects organised

by the Economic Education Centre for teachers (teaching economics and other subjects

with integrated economics to schoolchildren from pre-school groups to upper secondary

school or gymnasium classes), where its representative, together with the representatives

of the Ministry of Education and Science of the Republic of Lithuania, the Office of the

Government, Vilnius Pedagogical University, Confederation of Entrepreneurs and

Employers of Vilnius Region, and TEV publishing house assessed economic projects.

This contest was arranged to develop the ability of schoolchildren to apply their

knowledge of economics, entrepreneurship and financial wisdom in real life.

The Bank of Lithuania also disseminates information about its activities, preparation for

the adoption of the euro and participation in the ESCB to economic education

organisations, schools and the public.

Much attention is focused on answering questions of the public and the media, which

serves as one of the key educational tools.

The Bank of Lithuania contributes to the cherishing of the national culture and history

of the currency. Commissioned by the Bank of Lithuania, a documentary by the director

Rimtautas Ðilinis From the History of the Litas. Coins was produced in 2004, presenting

the history of Lithuanian coins from the ancient times to the restoration of the state of

Lithuania in the 20th century. Statesmen, bankers, collectors and journalists took part in

the opening night of the documentary.

The issue of several new commemorative coins received public response. In April 2004,

a 50 litas coin and 1 litas circulation coin were issued to mark the 450th anniversary of

Vilnius University and were presented at this oldest establishment of higher education

with the participation of representatives of the academic community. Under the initiative

of Vilnius University, the first ten coins were granted to ten Vilnius University scientists

for their significant work in spreading the fame of Lithuanian science and the name of

Vilnius University.

A 50 litas silver coin issued to mark the 475th anniversary of the First Statute of Lithuania,

a European monument of legal culture, was presented in the Houses of the Seimas in

Vilnius on 14 September 2004. The event was attended by the Members of the

Parliament, employees of the Bank of Lithuania and journalists.

In 2004, the Bank of Lithuania published the book by Mindaugas Vinkus Behind the

Scenes. The Role of Kæstutis Lynikas in the Story of Reintroducing the Litas dedicated to

Kæstutis Jonas Lynikas (16 June 1924–3 August 1997), an Australian of Lithuanian descent

and long-serving Bank of Lithuania consultant for currency production.


123

Since 1997, the Bank of Lithuania has published the quarterly journal Monetary Studies,

which is included in the list of acknowledged Lithuanian scientific publications for doctoral

or postdoctoral theses. Monetary Studies publishes scientific articles by Lithuanian and

foreign authors about the development of the economy, currency, banks and finance,

forecasting and modelling of macroeconomic processes.

APPLICATION OF SPECIAL DATA DISSEMINATION STANDARDS

As the coordinator of the application of Special Data Dissemination Standards (SDDS)

approved by the IMF, the Bank of Lithuania monitors the timeliness of the statistical

data provided by the Statistics Lithuania, Ministry of Finance, Bank of Lithuania and

other institutions on the National Summary Data Page (NSDP). The IMF Statistics

Department, performing regular monitoring of the timely updates of this page

hyperlinked to the IMF Dissemination Standards Bulletin Board (DSBB) and providing

the results of this monitoring on a monthly basis, had no comments to the Bank of

Lithuania in 2004.

The Advance Release Calendar of economic and financial data is regularly updated on

the website of the Bank of Lithuania and the IMF DSBB.

The NSDP “Economic and Financial Data of Lithuania” posted on the Bank of Lithuania

website was considerably expanded in 2004. New indicators for general government

operations, central government operations and central government debt, calculated by

the Ministry of Finance according to the methodology presented in the last version of

IMF Government Finance Statistics Manual 2001, were included in the part on the fiscal

sector. Instead of annual data, general government quarterly data was collected and

posted on the NSDP.

After the Ministry of Finance started collecting and publishing data according to the

IMF methodology, the description of indicators (metadata) of the general government

and central government sectors, posted on the IMF DSBB, was substantially renewed

last year. In addition the IMF DSBB provides descriptions of all other economic and

financial indicators prescribed by the SDDS and published by the Bank of Lithuania and

the Statistics Lithuania that was renewed and revised in the first half of 2004, following

the usual practice at the end of a year. The metadata is renewed with the purpose of

ensuring its accuracy and providing information users with the newest rules of data

collection and publication, methodological framework for the calculation of indicators,

ways of data publication and possibilities for obtaining comprehensive information.

IMPROVEMENT OF STATISTICS

One of the key functions of the Bank of Lithuania is compilation, processing and

publication of statistics. After the Bank of Lithuania joined the ESCB, its activity became

much broader in this area. In 2004, much attention was focused on new areas of

statistics and new requirements (statistics on quarterly financial accounts, other financial

intermediaries, securities, general government finance and general economy). One of

the key tasks was further improvement of statistics managed by the Bank of Lithuania

to comply with the requirements of the EU and the ECB.

2004


124

Significant progress was made in managing money and banking statistics. Following

the resolutions of the Board of the Bank of Lithuania on the Balance Sheet Statistical

Reporting of the Monetary Financial Institutions and on the Statistical Reporting of the

Interest Rates on Loans and Deposits of Monetary Financial Institutions, a data collection

system for credit institution balance sheet full statistical reporting was successfully

launched at the beginning of 2004. An analogical system for interest rates on loans and

deposits applied by the financial institutions to households and non-financial corporations

was launched half a year later. Methods of data collection from credit institutions subject

to reserve requirements comply with classification principles laid down in the European

System of Accounts (ESA 1995) and ECB requirements for monetary and banking

statistics.

In 2004, a short balance sheet statistical reporting form for credit and other institutions

was prepared and approved by the Board of the Bank of Lithuania. Following the above

resolution, starting with 2005 data will be collected from the Central Credit Union of

Lithuania, credit unions and other institutions that the Bank of Lithuania will select

from a the list of monetary financial institutions for statistical purposes.

Compilation of quarterly financial accounts is a big and difficult task. The Bank of

Lithuania studied methodological material and analysed data sources that could be

used to compile these accounts. It also continued its work in the field of statistics on

other financial intermediaries and securities issue. The Bank of Lithuania participated in

the ECB’s Centralised Securities Database (CSDB) project and prepared methodological

material. Moreover, collection of data on securities issued by residents started last year.

To enhance the balance of payments statistics, the Bank of Lithuania started collecting

data on investment abroad from pension funds, revised the sources and structure of

information about the support from the EU structural funds.

In 2004, the Bank of Lithuania continued its cooperation with the ECB, Eurostat, IMF,

BIS and other institutions in the field of statistics. The cooperation comprised the

development of international standards and reporting, verification of data quality and

their publication.

XII. Administration of State Treasury and Government Institution Accounts

125

XII. Administration of State Treasury and GovernmentInstitution Accounts

In 2004, acting as the fiscal agent as established by the Law on the Bank of Lithuania,

the Bank of Lithuania administered litas and foreign currency accounts of the State

Treasury and state funds. State monetary resources in these accounts accumulated and

used in accordance with the procedure set forth by the State Treasury Law of the Republic

of Lithuania and other legal acts, are managed by the institutions authorised by the

Government of the Republic of Lithuania. The Ministry of Finance manages the largest

share of these resources. The State Treasury Account consists of the State Budget Account

and accounts of other state monetary resources accounts.

In 2004, the Bank of Lithuania also managed litas and foreign currency accounts of

other government institutions as defined by the laws or resolutions of the Seimas of the

Republic of Lithuania or the Government of the Republic of Lithuania.

While managing the State Treasury Account of the Republic of Lithuania and accounts

of other government institutions, the Bank of Lithuania provided the following services:

- opening of bank accounts and time deposit accounts;

- crediting accounts;

- debiting accounts;

- exchanging funds into another currency;

- other services (revoking payment instructions, preparing and submitting account

statements and other information).

In addition to the above services, the service of cash collection and issue was provided

to some government institutions.

Table 29. Account Management Services to the State Treasury and Government

Institutions

(Number of operations)

Services 2004 2003

Opening bank accounts 38 71

Closing bank accounts 76 20

Opening and closing time

deposit accounts 129 18

Crediting funds to accounts 39,401 37,249

Debiting funds from accounts 529,221 476,138

Exchange of funds into another currency 1,397 1,305

Cash operations 537 600

2004

� The Annual Report of the Bank of Lithuania

126

Fig. 86. Payment Instructions from the State Treasury Account of the

Republic of Lithuania and the Accounts of Government Institutions

XIII. Organisational Structure and Staff

127

XIII. Organisational Structure and Staff

The new Law on the Bank of Lithuania brought changes in the Board of the Bank of

Lithuania. Its size was reduced from 11 to 5 members and the number of Deputy

Chairpersons decreased from 3 to 2.

The amended Law facilitated delegation of staff members for temporary work at the

ECB and other EU institutions creating an opportunity for staff members of the Bank to

gain valuable experience in international institutions and to use it in the Bank of Lithuania.

The number of staff members of the Bank of Lithuania continued to decrease from

1999 (during this period the number went down by 4.7%). At the end of 2004, the

Bank of Lithuania employed 855 members of staff: 417 males (48.8%) and 438 females

(51.2%). More than one third of staff members (302) were from 31 to 40 years of age.

The Code of Ethics of the Board of the Bank of Lithuania and the Code of Ethics of the

Staff of the Bank of Lithuania were drafted and adopted to allow performance of the

functions of the Bank of Lithuania in observance of high professional standards and to

clearly define the distinction between public and private interests.

To guarantee appropriate preparation for the membership in the EU and participation

of the Bank of Lithuania in the ESCB, training programmes were carried out for the

staff members of the Bank of Lithuania: the Programme for Preparation for EU

Membership and Participation in the ESCB, a long-term European Computer Driving

Licence (ECDL) Programme, and the English language courses. The Bank of Lithuania

continued to develop cooperation with the ECB, national central banks of the EU Member

States and other countries in the field of staff training.

Professional preparation of the staff members, their competence, performance and

further professional development needs are assessed and discussed during the annual

professional performance appraisal.

2004


128

ORGANISATIONAL STRUCTURE OF THE BANK OF LITHUANIA

XIV. The Annual Financial Statements of the Bank of Lithuania 2004

129

XIV. The Annual Financial Statements of the Bankof Lithuania 2004

2004


130


131

BALANCE SHEET OF THE BANK OF LITHUANIA

LTL million

Notes 31 December 2004 31 December 2003

ASSETS

1. Gold 1 206.30 214.60

2. Claims on foreign institutions denominated

in foreign currency 8,743.00 9,148.84

2.1. Receivables from the IMF 2 0.28 0.24

2.2. Deposits, securities and other investments

denominated in foreign currency 3 8,742.72 9,148.60

3. Claims on domestic credit institutions

denominated in foreign currency 4 9.93 9.92

4. Other assets 359.94 365.74

4.1. Intangible assets and property,

plant and equipment 5 160.71 162.18

4.2. Investments into equity instruments 6 19.19 13.24

4.3. Accrued income and deferred expenditure 7 163.47 173.94

4.4. Sundry 8 16.57 16.38

Total 9,319.17 9,739.10

LIABILITIES

5. Banknotes and coins in circulation 9 5,594.57 5,136.75

6. Liabilities to domestic credit institutions

denominated in litas 10 891.51 999.04

7. Liabilities to other domestic institutions

denominated in litas 11 108.24 93.75

7.1. Liabilities to Government institutions 94.92 85.13

7.2. Liabilities to other domestic institutions 13.32 8.62

8. Liabilities to foreign institutions denominated in litas 6.54 2.54

9. Liabilities to domestic institutions denominated

in foreign currency 12 1,880.41 2,531.10

9.1. Liabilities to credit institutions 504.39 397.97

9.2. Liabilities to Government institutions 1,376.02 2,133.13

10. Liabilities to foreign institutions denominated

in foreign currency 5.76 185.37

11. Items in the course of settlement 1.35 19.31

12. Other liabilities 13 7.34 9.95

12.1. Accrued expenditure and deferred income 3.78 3.97

12.2. Off-balance sheet instruments revaluation differences – 1.18

12.3. Sundry 3.56 4.80

13. Subsidies 14 29.38 29.01

14. Revaluation accounts 15 30.29 34.00

15. Capital 17 631.66 565.05

15.1. Authorised capital 100.00 100.00

15.2. Reserve capital 531.66 454.30

15.3. Reserves – 10.75

16. Profit for the year 26 132.12 133.23

Total 9,319.17 9,739.10

2004


132

PROFIT (LOSS) STATEMENT OF THE BANK OF LITHUANIA

LTL million

Notes 2004 2003

Interest income 18 216.55 205.99

Interest expense 19 (41.19) (44.47)

1. Net interest income 175.36 161.52

Realised gains (losses) arising from financial operations 20 26.53 47.30

Unrealised losses from revaluation 21 (2.86) (4.82)

2. Net result of financial operations and revaluation losses 23.67 42.48

Commission and fee income 6.63 7.89

Commission and fee expense (1.27) (1.06)

3. Net commission and fee income 22 5.36 6.83

4. Dividend income 6 1.25 1.04

5. Other income 23 7.63 2.77

NET INCOME 213.27 214.64

6. Staff costs 24 (48.62) (44.44)

7. Other administrative expenses 25 (14.46) (12.31)

8. Assets depreciation and amortisation 5 (13.40) (14.84)

9. Banknote and coin production and circulation expenses (5.23) (10.39)

10. Change in specific provisions 0.56 0.57

PROFIT FOR THE YEAR 26 132.12 133.23

The accompanying explanatory notes are an integral part of these Financial Statements.

The Annual Financial Statements of the Bank of Lithuania 2004 were approved on 24 March

2005 by Resolution No. 43 of the Board of the Bank of Lithuania.

Chairman of the Board Reinoldijus Ðarkinas


133

EXPLANATORY NOTES TO THE FINANCIAL STATEMENTS OF

THE BANK OF LITHUANIA

MAIN OBJECTIVE AND FUNCTIONS OF THE BANK OF LITHUANIA

In accordance with the Law Amending and Supplementing the Law on the Bank of Lithuania,

which came into effect on 1 May 2004, the main objective of the Bank of Lithuania is to

seek price stability.

The main functions of the Bank of Lithuania are the following:

- issuing the currency of the Republic of Lithuania, formulating and implementing monetary

policy, determining the litas exchange rate regulation system and announcing the official

exchange rate of the litas;

- managing, using and disposing of the foreign reserves of the Bank of Lithuania;

- acting as a State Treasury agent;

- issuing and revoking licenses of Lithuanian credit institutions and permissions for the

establishment and operation of branches and representative offices of foreign credit

institutions and supervising their activities;

- encouraging stable and efficient operation of payment and securities settlement systems;

- collecting monetary, banking and balance of payments statistics, as well as Lithuanian financial

and related statistical data, implementing standards for the collection, reporting and publishing

of said statistics and compiling the Balance of Payments of the Republic of Lithuania.

Subsequent to Lithuania’s accession to the European Union as of 1 May 2004, the Bank of

Lithuania became a member of the European System of Central Banks (ESCB).

Pursuant to respective decisions passed by European Commission, European Central Bank

(ECB), the Government of the Republic of Lithuania and the Bank of Lithuania, starting from

28 June 2004 Lithuania is a participant in the Exchange Rate Mechanism II.

BASIS FOR PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

The Bank of Lithuania prepares its Annual Financial Statements pursuant to Article 49 of the

Law on the Bank of Lithuania.

The financial accounting of the Bank of Lithuania is managed and the Financial Statements are

prepared in accordance with the Law on the Bank of Lithuania, other legislation of the Republic

of Lithuania applicable to the Bank of Lithuania and in accordance with the provisions set

forth in the Bank’s internal accounting policies being in line with the accounting and financial

reporting rules of the European System of Central Banks (ESCB)1, to the extent that such rules

are applicable within a national central bank of the Member State which has not yet adopted

the euro. The Bank of Lithuania follows the International Financial Reporting Standards in

those areas of accounting and financial reporting that are not regulated by the ECB and takes

into account the ECB recommendations concerning the application of these standards.

1 Accounting and financial reporting rules of the ESCB are laid down in the Decision of the Governing Council of

the ECB of 5 December 2002 (ECB/2002/10).

2004


134

For information consistency purposes, the respective comparative financial data for 2003

has been presented.

ACCOUNTING POLICY

GENERAL PRINCIPLES

In managing financial accounting and drawing up the financial statements, the Bank of

Lithuania observes the following accounting principles: economic reality and transparency,

prudence, materiality, going concern, accrual, consistency and comparability.

Gold held as part of foreign reserves, debt securities, other on-balance sheet and (or) off-

balance sheet assets and (or) liabilities denominated in foreign currency (“financial items”)

are recorded in the Financial Statements as at 31 December 2004 market prices and translated

into litas using the litas and foreign currency official exchange rates (“official exchange

rate”) quoted by the Bank of Lithuania on that date.

Official Exchange Rates of the Litas and the Main Foreign Currencies

Litas (LTL) per unit

Currency Code 31 December 2004 31 December 2003

Euro EUR 3.4528 3.4528

US Dollar USD 2.5345 2.7621

100 Japanese Yen JPY 2.4421 2.5823

Special Drawing Rights (SDR) XDR 3.9260 4.0888

Transactions in financial assets and financial liabilities are recorded in the on-balance sheet

and off-balance sheet accounts at acquisition cost on the transaction settlement date.

Revaluation results arising from revaluation of gold holdings, every security issue (on item-by-

item basis according to the same ISIN number) and any foreign currency (on a currency-by-

currency basis) are accounted for separately. Unrealised revaluation losses arising at the year-

end from the revaluation of gold, every security issue or any foreign currency at market price

and the official exchange rate when exceeding previous corresponding revaluation gains cannot

be reversed in subsequent years against new revaluation gain relating to the same financial

item or netted against unrealised revaluation gains related to another individual financial item.

GOLD

Gold holdings are revalued on the last business day of each month at market price at London

Bullion Market. Gold revaluation gains or losses are calculated on the basis of gold mid

market price in US dollars per one Troy ounce, translated into litas at the exchange rate of

the litas against the US dollar on the revaluation day.

No distinction is made between price and currency revaluation differences recorded in the

revaluation account for gold, which is held as part of foreign reserves.

In the event of recognition of unrealised revaluation losses on gold at year-end, the gold

average price is adjusted correspondingly to the gold market price prevailing on the last

business day of the financial year.


135

Transactions related to gold swaps are accounted for in the same way as repurchase

agreements.

FOREIGN CURRENCY TRANSACTIONS

On-balance sheet and off-balance sheet foreign currency financial items are revalued on a

currency-by-currency basis on each business day at the official exchange rate of that day,

and the revaluation gains or losses related to the respective foreign currency (including

SDRs) are recorded in separate revaluation accounts.

Revaluation of accrued interest income and expenses adjusts the respective balance sheet

and income/expenses accounts.

The average rate of the net foreign currency position is recalculated if the operations carried

out during the day (including the ones shown in off-balance sheet accounts) increase the

net position of that currency (in the case of a net asset position) or reduce it (in the case of

a net liability position).

The realised result of foreign currency is calculated if the operations carried out during the

day in a certain foreign currency decrease the net position of that currency (in the case of a

net asset position) or reduce it (in the case of a net liability position).

In the event of recognition of unrealised revaluation losses on any foreign currency at year-

end, the average rate of that currency position is adjusted correspondingly to the official

exchange rate on the last business day of the financial year.

Income and expenses in foreign currencies are translated at the official exchange rate on

the date on which they were recorded in the accounts.

SECURITIES

Debt securities are recognised in the accounts at acquisition cost. Coupon income purchased

is treated as a separate item and is not included in the cost of an asset.

Securities held as part of foreign reserves are revalued at market price on the last business

day on a monthly basis.

Revaluation gains or losses arising from securities price movements are accounted for

separately on an item-by-item basis (according to the same ISIN number).

The difference between the security acquisition cost and its nominal value – premium or

discount – is recognised as income or expenses over the remaining maturity of the securities.

Discounts or premiums arising on zero-coupon securities are amortised according to the

Internal Rate of Return method, on coupon securities – according to the straight-line method.

Unrealised revaluation losses of particular securities issue when exceeding previous

corresponding revaluation gains at the end of the financial year are recorded as expenses.

If unrealised revaluation losses from revaluation of a particular securities issue are recognised

as expenses at the end of the financial year, the average price of such securities is adjusted

according to their market price on the last business day of the financial year.

Long-term investments in equities held for the Bank needs are recorded at cost.

The value of zero-coupon debt securities taken over as foreclosed assets is adjusted by

making specific provisions.

2004


136

REPURCHASE AGREEMENTS

Repurchase agreements are recorded as collateralised inward deposits: the commitment to

repay funds is recorded on the liabilities side of the balance sheet, while the financial asset

that has been given as collateral (sold and repurchased under this agreement) remains on

the asset side of the balance sheet for the period of the transaction.

Reverse repurchase agreements are recorded as a collateralised outward loan to the other

party of the agreement on the asset side of the balance sheet. The collateral acquired under

this type of agreement for the transaction period is not shown in the balance sheet and is

not revalued.

The difference of the value between the purchase and repurchase price of the collateral

acquired under repurchase and reverse repurchase agreements is recognised as interest

income or expense on a straight-line basis over the transaction period.

LOANS

Loans granted by the Bank are recorded at their nominal value and their balances are

presented at net value, i.e. less specific provisions. These expenses are adjusted for changes

in the need for specific provisions.

Loans to credit institutions are classified and specific provisions are made each quarter. A

loan whose net value is zero and whose status has not improved for over a year is written-

off from the balance sheet, including accrued interest and other receivables.

The value of loans overtaken for satisfying part of claims and issued to the Bank employees

is adjusted for the year-end situation on a yearly basis.

INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT

Intangible assets and property, plant and equipment include such assets whose acquisition

cost (including VAT) is not less than LTL 500 and whose useful life is longer than one year.

Intangible assets and property, plant and equipment are recorded in the balance sheet at

cost less accumulated depreciation (amortisation). Depreciation (amortisation) is calculated

on a straight-line basis over the expected useful life of assets.

Depreciation (Amortisation) Rates of Intangible Assets and Property, Plant and

Equipment

Assets Annual rate, %

Buildings and structures 2.5–10

Cash calculation and computer equipment 10–50

Software 33–100

Vehicles 20

Furniture, office equipment and other inventory 5–50

If there are signals that the market value of real estate is declining more rapidly than expected

when estimating the useful life of the asset, then at the end of the financial year the value

of such assets is adjusted for recognised losses arising because of their significant impairment.


137

BANKNOTES AND COINS IN CIRCULATION

Banknotes and coins in circulation are presented at nominal value as liabilities in the balance

sheet. The cost of printing banknotes and minting coins, as well as other expenses associated

with the issue of the national currency into circulation are recorded as expenses as incurred

irrespectively when the coins and banknotes are put into circulation.

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

Foreign currency forward sales and purchases accounted in off-balance sheet accounts under

foreign exchange swap contracts are included into the net foreign currency position for the

purpose of calculating foreign exchange gains and losses. The foreign currency forward

position is revalued together with the respective on-balance sheet foreign currency position.

Interest rate derivative financial instruments are revalued on item-by-item basis. Daily changes

in the variation margin of interest rate futures are considered realised and recorded in the

respective income or expense accounts.

RECOGNITION OF INCOME AND EXPENSES

Interest income and expenses (including premiums and discounts of securities) related to

financial assets and liabilities are accrued on a daily basis and are recorded in profit and loss

accounts on the last business day of each month, regardless of the date when it was received

or incurred. Other income earned and expenses incurred within the current year are recorded

in the accounts on an annual basis.

Realised income and expenses are taken to the profit and loss accounts on the date on

which they are settled.

Unrealised gains are not recognised as income. Unrealised losses are recognised as expense

at year-end when exceeding previous revaluation gains registered in the corresponding

revaluation account.

The average price and (or) average rate method is used on a daily basis for realised and

unrealised income from gold, securities and foreign currency instruments in order to compute

the acquisition cost of items sold.

RELATIONS WITH THE BUDGET OF THE REPUBLIC OF LITHUANIA

The Bank of Lithuania transfers a part of the profit established by the Law of the Republic of

Lithuania on the Bank of Lithuania to the state budget (see Note 26).

Pursuant to the amendments to the Law on the Bank of Lithuania that came into effect on

1 May 2004, the Bank of Lithuania has registered as a VAT payer as of 1 July 2004.

Furthermore, starting from 2004, the Bank of Lithuania became a payer of the state land

rent tax.

POST-BALANCE-SHEET EVENTS

Annual financial statements are adjusted for post-balance-sheet events that occur between

the annual balance sheet date (i.e., last day of the reporting year) and the date, on which

financial statements are approved by the Board of the Bank of Lithuania, if these events

depend on circumstances that occurred before the balance sheet day (i.e., the last day of

the financial year) and therefore should have affected the data presented in the financial

statements at the balance sheet date.

2004


138

No adjustment is made for the data of annual financial statements of post-balance-sheet events

that depend on circumstances that affect the condition of the data of annual financial statements

at a later than the balance sheet day. Events which are of such importance that their non-

disclosure would affect the ability of users of the financial statements to make proper evaluations

and decisions are disclosed in the Explanatory Notes to the Annual Financial Statements.

RISK AND RISK MANAGEMENT

The main risk management tasks of the Bank of Lithuania are to ensure uninterrupted risk

assessment and monitoring, to provide adequate information on risks to respective bank

divisions and management chains and constantly assess the suitability of the accepted risk

level for implementing the objectives of the Bank of Lithuania. An appropriate organisational

and internal control system was established at the Bank of Lithuania in order to implement

the foregoing tasks.

The main object of risk are the foreign reserves of the Bank of Lithuania, that as at

31 December 2004 accounted for more than 96 per cent of the total assets of the Bank.

In managing foreign reserves the Bank of Lithuania is exposed to market, credit, liquidity,

settlement and operational risks. These risks are managed by an established broad system

of limits for risk exposures and other means aimed at reducing risks.

The main risk faced by the Bank of Lithuania in foreign reserve management that has the

strongest influence on financial results is market risk. Market risk consists of exchange rate

risk and interest rate risk.

In order to reduce exchange rate risk, the major part of foreign reserves not related to

liabilities in foreign currencies is invested in the anchor currency. The part of foreign reserves

related to liabilities is invested in the currency of the liabilities (see Note 27).

The Bank of Lithuania uses the indicator of modified duration (MD) as the main tool for

managing interest rate risk. In order to reduce interest rate risk, allowed deviations from MD

of the benchmarks are established to portfolios. The “value-at-risk” (VAR) method is used

as an additional risk management instrument.

Credit risk is managed by establishing strict financial reliability requirements to issuers and

counterparties. In order to reduce credit risk, investment limits are established for financial

instruments, issuers, counterparties and their groups.

Foreign reserve liquidity risk is managed by setting liquidity ratios and liquidity requirements

for financial instruments.

Various correspondent account management techniques are applied for managing settlement

risks, such as payment queuing, matching of debit and credit turnovers. These measures

facilitate reduction of loss due to settlement defaults by counterparties.

Operational risks are managed on the basis of clear procedural regulations.

OTHER INFORMATION

In accordance with the Law Amending and Supplementing the Law on the Bank of Lithuania

(No IX-1998, 2004-02-05, Official Gazette, 2004, No 28-869) the profit for the year is

distributed in accordance with the following sequence:


139

1) to cover the losses of the previous fiscal year;

2) a profit contribution of 50 per cent of the profit for the fiscal year or the part remaining

after the allocation of a part based on the provisions of Paragraph 1 is paid to the state

budget;

3) the part of the profit remaining after the allocation based on Paragraphs 1 and 2 above is

allocated in equal shares to the authorised and/or reserve capital.

NOTES

Note 1. Gold

31 December 2004 31 December 2003

Gold holdings in

Troy ounces 185,840.53 186,205.23

Kilograms 5,780.29 5,791.63

Price of one Troy ounce, USD 438.00 417.25

Value of gold, LTL million 206.30 214.60

Gold holdings in 2004, compared to 2003, decreased due to differences in the weight of

gold bars arising on settlements of gold lending transactions.

All gold as at 31 December 2004 was held as non-invested gold reserve in the Bank of

England. As of 31 December 2003 all gold holdings were invested in swap transactions

represented under the item “Liabilities to foreign institutions denominated in foreign

currency”.

Note 2. Receivables from the International Monetary Fund (IMF)

The Bank of Lithuania performs the function of depository of IMF funds.

The net reserve position in the IMF belongs to the Republic of Lithuania, which has been a

member of the IMF since 1992.

The Republic of Lithuania’s Quota (SDR 144.20 million) has not changed since 1999. A part

of this Quota (25%) was paid in SDR and another part was paid in non-marketable and

non-interest bearing Government securities denominated in the national currency. The value

of these Government securities issued in favour of the IMF as at 31 December 2004 amounted

to SDR 160.51 million.

Net Reserve Position in the IMF

SDR million


State Quota of IMF membership (total value) 144.20 144.20

IMF claims corresponding to Government

Securities in litas (160.51) (173.89)

IMF funds in accounts with the

Bank of Lithuania in litas (0.49) (0.48)

Disposition of IMF loans 16.82 30.19

Net reserve position in the IMF 0.02 0.02

2004


140

The IMF loan consists of the remaining part of this Extended Fund Facility with the value of

SDR 16.82 million as of 31 December 2004 (the Ministry of Finance of the Republic of

Lithuania repayed the remaining balance of the Extended Fund Facility at the beginning of

2005). The accrued interest on this state-administered loan equalled SDR 0.10 million as of

31 December 2004.

Funds Receivable from the IMF

LTL million


Net reserve position in the IMF 0.06 0.07

Balance in SDR account with the IMF 0.22 0.17

Total 0.28 0.24

Note 3. Deposits, Securities and Other Investments Denominated in Foreign Currency

LTL million


Correspondent accounts with foreign banks 57.93 509.22

Fixed-term deposits with foreign banks 469.36 167.98

Debt securities 7,485.91 7,190.42

Reverse repurchase agreements 729.52 1,280.98

Total 8,742.72 9,148.60

Breakdown of deposits, securities and other investments by currencies is shown in Note 27.

Breakdown of Correspondent Accounts, Fixed-Term Deposits and Reverse Repurchase

Transactions by Counterparties

LTL million


European Union Member States 7,894.65 7,811.09

USA 330.54 244.25

International financial institutions 481.40 586.18

Other countries 36.13 507.08

Total 8,742.72 9,148.60

Breakdown of Deposits, Securities and Other Investments Denominated in Foreign

Currency by Maturity 2

LTL million

Demand Up to 1 year 1–5 years Over 5 years Total

Deposits, securities and other

investments denominated

in foreign currency 57.93 6,301.80 2,355.61 27.38 8,742.72

The amount of deposits, securities and other investments denominated in foreign currency

and related to the variable interest rate is not significant.

2 Contractual maturity is presented.


141

Note 4. Claims on Domestic Credit Institutions Denominated in Foreign Currency

LTL million


Loans to commercial banks 9.86 9.86

Accounts with commercial banks 0.07 0.06

Total 9.93 9.92

Loans to banks are related to the implementation of the Small and Medium Size Enterprise

Financing Programme of the Republic of Lithuania.

Note 5. Intangible Assets and Property, Plant and Equipment

LTL million

Intangible Property, plant and equipment Total

assets Buildings Cash calculation Vehicles Other

and and computer property,

construction equipment plant and

in progress (including equipment

non-assem-

bled items)

Acquisition value as

at 31 December 2003 11.53 146.49 59.03 6.59 33.76 257.40

Additions in 2004 1.25 4.31 4.53 0.75 1.26 12.10

Disposals in 2004 (0.43) (0.28) (4.70) (0.46) (0.33) (6.20)

Redistribution in 2004 – – (0.03) – 0.03 –

Acquisition value as

at 31 December 2004 12.35 150.52 58.83 6.88 34.72 263.30

Accrued depreciation as

at 31 December 2003 (10.63) (14.04) (40.35) (5.15) (25.05) (95.22)

Depreciation in 2004 (1.16) (3.41) (6.13) (0.38) (2.32) (13.40)

Written-off depreciation in 2004 0.43 0.12 4.72 0.46 0.30 6.03

Accrued depreciation as

at 31 December 2004 (11.36) (17.33) (41.76) (5.07) (27.07) (102.59)

Net book value as

at 31 December 2004 0.99 133.19 17.07 1.81 7.65 160.71

Net book value as

at 31 December 2003 0.90 132.45 18.68 1.44 8.71 162.18

Note 6. Investments into Equity Instruments

LTL million


European Central Bank 5.95 –

Bank for International Settlements 7.77 7.77

Central Securities Depository of Lithuania 3.63 3.63

Lithuanian Mint 1.83 1.83

SWIFT 0.01 0.01

Total 19.19 13.24

On 1 May 2004 Lithuania joined the European Union and consequently the Bank of Lithuania

became a member of the ESCB (European System of Central Banks). In accordance with

2004


142

Article 28 of the Statute of the ESCB and the ECB the Bank of Lithuania became the subscriber

of the capital of the ECB. Sub-item “Investments into equity instruments” represents the

Bank of Lithuania participating interest in the ECB. Subscriptions depend on shares which are

fixed in accordance with Article 29.3 of the ESCB Statute and which must be adjusted every

five years. The share of Lithuania in the ECB’s capital is 0.4425 percent and was calculated in

accordance with Article 29 of the Statute of the ESCB, on the basis of population and GDP

data provided by the European Commission. As Lithuania does not participate in the euro

area, the transitional provisions of Article 48 of the Statute apply. Consequently, the Bank of

Lithuania was required to pay-up a minimal contribution of 7 percent of its subscribed capital

to the ECB upon entry to the ESCB on 1 May 2004 amounting to EUR 1.72 million.

The Bank of Lithuania is a member of the Bank for International Settlements (BIS) with

representation and voting rights equal to 1,000 shares with an acquisition cost of LTL 7.77

million and the nominal value of SDR 5,000 per share. The Bank of Lithuania has paid up 25

per cent of the value of these shares. The Bank of Lithuania received dividends of LTL 0.94

million for these BIS shares in 2004 (LTL 0.89 million in 2003).

The Bank of Lithuania owns 60 per cent of the shares of the Central Securities Depository of

Lithuania with an acquisition cost of LTL 3.63 million. In 2004 the Bank of Lithuania received

dividends of LTL 0.31 million for them (LTL 0.15 million in 2003).

As from 1995 the Bank of Lithuania was granted the rights of the founder of the Public

Company Lithuanian Mint. In 1998, the Bank of Lithuania made a LTL 1.83 million property

contribution to increase the authorised capital of this company.

The Bank of Lithuania holds one SWIFT share.

Note 7. Accrued Income and Deferred Expenditure

LTL million


Debt securities coupon payment purchased 65.61 81.81

Accrued interest income 94.87 89.19

Accrued debt securities coupon 94.24 87.77

Interest on reverse repurchase agreements 0.39 0.49

Interest from derivative financial instruments – 0.86

Other income 0.24 0.07

Other accrued income 0.89 0.75

Deferred expenses 2.10 2.19

Total 163.47 173.94

Note 8. Sundry

LTL million


Loans to the staff of the Bank of Lithuania 10.54 9.39

Foreclosed assets 4.39 5.56

Specific provisions (0.70) (0.99)

Foreclosed assets 4.39 5.56

Other assets 2.34 2.42

Total 16.57 16.38


143

Mortgage loans issued to the staff of the Bank of Lithuania amounted to LTL 9.50 million,

and the balance of consumer loans was LTL 1.04 million.

Foreclosed assets consist of non-interest bearing Lithuanian Government debt securities

denominated in the national currency of three issues with various maturities (LTL 4.05 million)

and the balance of the rights of claim to the debts of individuals taken over for satisfying

part of claims on loans granted by the Bank of Lithuania (LTL 0.34 million). Redemption of

securities taken over is planned to take place in proportionally equal shares until 2007 (LTL

1.35 million was redeemed in 2004).

The major portion of specific provisions related to sundry items as at 31 December 2004

(LTL 0.65 million) is against the foreclosed assets (LTL 0.96 million as at 31 December 2003).

Other assets consist of inventories amounting to LTL 2.03 million (LTL 2.07 million in 2003)

and amounts receivable amounting to LTL 0.31 million (LTL 0.35 million in 2003).

Note 9. Banknotes and Coins in Circulation

Banknotes and coins in circulation are litas and centas put into circulation by the Bank of

Lithuania. In 2004, the amount of cash put into circulation amounted to LTL 2,018.78 million

(LTL 2,252.16 million in 2003), and the amount withdrawn from circulation made up

LTL 1,560.96 million (LTL 1,337.37 million in 2003).

Banknotes and Coins in Circulation

LTL million


Banknotes 5,475.97 5,028.50

Coins 118.60 108.25

Total 5,594.57 5,136.75

The Bank of Lithuania issues commemorative (including gold and silver) coins.

Note 10. Liabilities to Domestic Credit Institutions Denominated in Litas

This item consists of the holdings of required reserves held by domestic banks in their

correspondent accounts with the Bank of Lithuania. Interest on the balances on these accounts

is not paid.

Note 11. Liabilities to Other Domestic Institutions Denominated in Litas

LTL million


Liabilities to Government institutions 94.92 85.13

Balances of accounts

of the Ministry of Finance 94.29 83.65

Balances of accounts of other

Government institutions 0.63 1.48

Other liabilities 13.32 8.62

Total 108.24 93.75

2004


144

Note 12. Liabilities to Domestic Institutions Denominated in Foreign Currency

LTL million


Liabilities to credit institutions 504.39 397.97

Liabilities to Government institutions 1,376.02 2,133.13

Balances of accounts of the Ministry of Finance 210.91 811.49

Fixed-term deposits of the Ministry of Finance 1,164.90 1,321.43

Balances of accounts of other

Government institutions 0.21 0.21

Total 1,880.41 2,531.10

Liabilities to credit institutions consist of the holdings of required reserves of domestic banks

in foreign currency held in accounts with the Bank of Lithuania.

Breakdown of Liabilities to Domestic Institutions Denominated in Foreign Currency by

Maturity

LTL million

Demand Up to 1 year Without term Total

Liabilities in foreign currency 211.06 1,164.90 504.45 1,880.41

The amount of liabilities in foreign currency with a variable interest rate is not significant.

Note 13. Other Liabilities

LTL million


Accrued expenses and deferred income 3.78 3.97

Accrued interest expenses 0.78 1.66

Other accrued expenses 2.75 2.00

Deferred income 0.25 0.31

Change in the value of

off-balance sheet instruments – 1.18

Other miscellaneous liabilities 3.56 4.80

Account balances 3.00 2.65

Other payables 0.56 2.15

Total 7.34 9.95

Note 14. Subsidies

According to trilateral agreements of 1993 and 1995 between the European Commission,

the Government of the Republic of Lithuania and the Bank of Lithuania, the Bank of Lithuania

administers non-repayable subsidies allocated to the Republic of Lithuania through commercial

banks for pursuing the Small and Medium Size Enterprise Financing Programme of the

Republic of Lithuania. The part of interest received, which is specified in agreements, is

allocated for the refinancing of credits.

Implementation of PHARE I programme of the European Commission is completed. The

banks involved in the Programme repaid the loans to the Bank of Lithuania. The European


145

Commission is considering further possibilities of using the funds. PHARE II programme is

being further implemented, and commercial banks participating in the programme will

continue using the funds until 15 June 2005.

Note 15. Revaluation Accounts

LTL million


Revaluation accounts

Gold 18.37 26.30

Securities 11.46 7.69

Foreign currency 0.46 0.01

Total 30.29 34.00

The balance accounted for in revaluation accounts shows unrealised gains arising from

revaluation of gold, every securities issue and each position of one foreign currency at market

price and/or the official exchange rate as at 31 December 2004.

Whereas unrealised revaluation losses when exceeding previous revaluation gains registered

in corresponding revaluation accounts of 31 December 2004 were recognised as expenses

(see Note 21).

Note 16. Derivative Financial Instruments

For the purpose of managing foreign reserves the Bank of Lithuania applies derivative financial

instruments – currency swap contracts and interest rate futures. These instruments are

accounted for in the off-balance sheet accounts.

As of 31 December 2004 the Bank of Lithuania had no open currency swap transactions.

During 2004 the Bank of Lithuania earned income of LTL 13.08 million on currency swap

transactions (see Note 18). The income is generated form the difference between the spot

currency rate and the expected future currency rate (forward) accrued gradually during the

transaction validity term.

As of 31 December 2004 the Bank of Lithuania had not conducted any interest rate future

contracts. The result of the change in the value of the daily interest rate of futures is presented

in Note 20.

Note 17. Capital

LTL million

31 December 2003 Increase Decrease 31 December 2004

Capital

Authorised capital 100.00 – – 100.00

Reserve capital 454.30 77.36 – 531.66

Other reserves 10.75 – (10.75) –

Total 565.05 77.36 (10.75) 631.66

The capital of the Bank of Lithuania consists of the authorised capital and the reserve capital.

The authorised capital provided for in the Law on the Bank of Lithuania is LTL 200 million. It

is formed of Lithuanian state funds and/or the profit if the Bank of Lithuania (see Note 26).

2004


146

The reserve capital was increased by the portion of profit for the year 2003 (LTL 66.615

million) (see Note 26) as well as the amounts from the reserves of the Bank of Lithuania: LTL

1.18 million from the general reserve and LTL 9.57 million from the tangible non-current

assets revaluation reserve, which were transferred to the reserve capital pursuant to the

requirements of the Law Amending and Supplementing the Law on the Bank of Lithuania

(No IX-1998, 05/02/2004, Official Gazette, 2004, No 28-869).

Note 18. Interest Income

LTL million

2004 2003

Interest on:

Investment in debt securities 187.26 175.65

Derivative transactions 13.08 1.38

Reverse repurchase agreements 8.22 20.42

Balances of correspondent accounts with

foreign banks 3.84 4.75

Fixed-term deposits in foreign banks 3.57 3.26

Other interest income 0.58 0.53

Total 216.55 205.99

Due to an overall decrease of the interest rate level in international financial markets, the

average interest rate on investments was 2.17 per cent (2.51 per cent in 2003).

Note 19. Interest Expense

LTL million

2004 2003

Interest on:

Fixed-term deposits of the Ministry of Finance 33.16 32.89

Balances of accounts of the Ministry of Finance 5.43 6.09

Liabilities to the IMF – 0.24

Liabilities related to repurchase agreements 2.60 5.25

Total 41.19 44.47

The average interest rate paid on liabilities was 1.64 per cent in 2004 (1.93 per cent in

2003).

Note 20. Realised Gains (Losses) Arising from Financial Operations

LTL million

2004 2003

Realised gains (losses) from realisation of:


Foreign currency 1.28 (0.53)

Gold 0.04 –

Derivative financial instruments (1.38) (0.29)

Total 26.53 47.30


147

Note 21. Unrealised Losses from Revaluation

LTL million

2004 2003

Unrealised losses from revaluation of


Foreign currency 1.90 0.09

Total 2.86 4.82

Note 22. Net Commission and Fee Income

LTL Million

2004 2003

Income from:

Settlement services 5.83 5.71

Sales of numismatic valuables 0.28 0.96

Auctions of securities 0.16 0.25

Trade in anchor currency 0.13 0.70

Other services 0.12 0.09

Management of the World Bank loan 0.11 0.18

Total 6.63 7.89

Fee expense for international

banking operations (1.27) (1.06)

Net commission and fee income 5.36 6.83

Note 23. Other Income

LTL million

2004 2003

Income for rent of assets 1.19 1.04

Other income 6.44 1.73

Total 7.63 2.77

The major part of other income consists of the compensation received from the US Banknote

Corporation in the amount of LTL 5.05 million for bad quality litas banknotes of 1991 issue.

Note 24. Staff Costs

LTL million

2004 2003

Expenses on wages and salaries 37.15 33.95

to the members of the Board 0.83 0.67

to the heads of structural divisions 1.85 1.66

to other staff of the Bank of Lithuania 34.47 31.62

Contributions to State Social Insurance Fund 11.47 10.49

Total 48.62 44.44

2004


148

Pursuant to the requirements of the Law Amending and Supplementing the Law on the

Bank of Lithuania (No IX-1998, 05/02/2004, Official Gazette, 2004, No 28-869), as of 1

May 2004 the Board of the Bank of Lithuania was changed. It currently consists of 1 Chairman,

2 Deputy Chairmen and 2 Board Members. Ten departments, five independent divisions

and two branches carried out their activities at the Bank. The total number of employees

was 855 (856 employees in 2003).

Note 25. Other Administrative Expenses

LTL million

2004 2003

Expenses

Maintenance expenses 6.78 6.10

Business trips 1.67 1.26

Mail and communication 1.49 1.04

Information subscriptions expenses 1.44 1.37

Training of staff 1.17 1.03

Library acquisitions and

press subscriptions 0.18 0.15

Other 1.73 1.36

Total 14.46 12.31

Note 26. Distribution of the Profit of the Bank of Lithuania

LTL million

2004 2003 2002

Transfer to the state budget (66.06) (66.615) (51.78)

Allocation to the authorised capital (33.03) – –

Allocation to the reserve capital (33.03) (66.615) (51.78)


149

Note 27. Assets and Liabilities of the Bank of Lithuania by Currencies

LTL million

LTL EUR USD JPY XDR XAU Other Total

31 December 2004

ASSETS

Gold – – – – – 206.30 – 206.30

Claims on foreign institutions

denominated in foreign

currency – 8,442.35 297.53 2.15 0.28 – 0.69 8,743.00

Receivables from the IMF – – – – 0.28 – – 0.28

Debt securities – 7,218.68 267.23 – – – – 7,485.91

Deposits and other investments – 1,223.67 30.30 2.15 – – 0.69 1,256.81

Claims on domestic credit

institutions denominated

in foreign currency – 9.87 0.06 0.00 – – 0.00 9.93

Other assets 193.41 163.81 2.72 0.00 0.00 – 0.00 359.94

Total assets 193.41 8,616.03 300.31 2.15 0.28 206.30 0.69 9,319.17

LIABILITIES

Banknotes and coins

in circulation 5,594.57 – – – – – – 5,594.57

Liabilities to domestic

credit institutions

denominated in litas 891.51 – – – – – – 891.51

Liabilities to other domestic


in litas 108.24 – – – – – – 108.24

Liabilities to foreign institutions

denominated in litas 6.54 – – – – – – 6.54

Liabilities to domestic


in foreign currency – 1,577.87 299.61 2.11 0.13 – 0.69 1,880.41

Liabilities to foreign institutions

denominated in foreign currency – 5.76 – – – – – 5.76

Items in the course

of settlement 1.35 – – – – – – 1.35

Other liabilities 6.44 0.90 0.00 – – – – 7.34

Subsidies – 29.38 – – – – – 29.38

Revaluation accounts 18.83 11.46 0.00 – – – – 30.29

Capital 631.66 – – – – – – 631.66

Profit for the year 132.12 – – – – – – 132.12

Total liabilities 7,391.26 1,625.37 299.61 2.11 0.13 – 0.69 9,319.17

NET BALANCE POSITION (7,197.85) 6,990.66 0.70 0.04 0.15 206.30 0.00 0.00

31 December 2003

Total assets 194.74 8,491.27 445.74 391.81 0.24 214.60 0.70 9,739.10

Total liabilities 6,983.19 2,175.28 573.05 6.92 0.08 – 0.58 9,739.10

NET BALANCE POSITION (6,788.45) 6,315.99 (127.31) 384.89 0.16 214.60 0.12 0.00

Legal Acts Regulating Credit Institutions Activities Adopted in 2004

151

27 January 2004

Republic of Lithuania Law on Ratifying the International Convention for the Suppression

of Counterfeiting Currency and Its Protocols (No. IX-1979)

� Having regard to item 16, Article 67 and item 6, Par. 1, Article 138 of the Constitution of the

Republic of Lithuania and in observance of the Presidential Decree No. 322 of 17 December

2003, the Seimas of the Republic of Lithuania ratified the International Convention for the

Suppression of Counterfeiting Currency signed on 20 April 1929 in Geneva.

� In observance of Article 12 of the Convention, the Police Department under the Ministry of

the Interior was appointed the central authority for performing the functions assigned under

the Convention.

29 January 2004

Bank of Lithuania Board Resolution No. 1

on Liquidity Requirement Calculation Rules

� The Rules for Liquidity Requirement Calculation and the Statement on Structure of Assets and

Liabilities by Maturity Form (7003) were approved. The new Rules were passed in line with the

provisions of the requirements set forth by the Basel Committee on Banking Supervision.

� The Rules establish the procedure of calculation of the liquidity requirement for banks registered

in the Republic of Lithuania and foreign bank branches.

� On monthly basis, the banks must furnish the Credit Institutions Supervision Department of

the Bank of Lithuania with the Statement on Structure of Assets and Liabilities by Maturity

Form (7003).

5 February 2004

Republic of Lithuania Law on the Amending and Supplementing Articles 1, 3, 6, 7, 10,

11, 12, 14, 16, 17, 18, 19, 20, 21, 23, 24, 37, 49 and 50, Inserting Articles 18¹, 46¹ and 54¹,

Changing the Title of Chapter 3, and Adding the Annex to the Republic of Lithuania

Law on the Bank of Lithuania (No. IX-1998)

� Amendments to the Law on the Bank of Lithuania specify that as from 1 May 2004 the Bank

of Lithuania becomes part of the European System of Central Banks. The Bank of Lithuania

shall be governed by the Treaty Establishing the European Community, the Protocol on the

Statute of the European System of Central Banks and of the European Central Bank annexed

to the Treaty Establishing the European Community, as well as other legal acts of the European

Union. The Bank of Lithuania shall be also governed by laws and other legal acts of the

Republic of Lithuania in as much as they are in compliance with the Treaty Establishing the

Legal Acts Regulating Credit Institutions ActivitiesAdopted in 2004

2004


152

European Community and the Protocol on the Statute of the European System of Central

Banks and of the European Central Bank annexed to the Treaty Establishing the European

Community. In the event of a conflict between the legal actc and the international treaties of

the Republic of Lithuania,the international treaties shall take precendence.

� The primary objective of the Bank of Lithuania shall be to maintain stability prices stability.

� Only the Bank of Lithuania shall have the right to issue currency. The Bank of Lithuania is

hereby designated as the National Analysis Centre and the Coin National Analysis Centre in

the Republic of Lithuania, perform the expert examination of the currency of the Republic of

Lithuania and the banknotes and coins the European Union’s single currency.

� The Law came into effect on 1 May 2004.

26 February 2004


on Approving the Rules for Concluding and Executing the Litas and Anchor Currency Euro

Exchange Transactions between the Bank of Lithuania and Banks

� The Rules for Concluding and Executing the Litas and Anchor Currency Euro Exchange

Transactions between the Bank of Lithuania and Banks were approved.

� These Rules regulate the procedure for concluding the litas and the anchor currency exchange

transactions between the Bank of Lithuania, commercial banks and foreign bank branches

possessing a license or permit of the Bank of Lithuania, and for non-cash settlement of these

transactions, also other related rights and obligations of counterparties.

� The Bank of Lithuania shall enter into transactions with banks bound by reserve requirements,

provided they hold valid permits to engage in foreign currency operations and are parties to

the agreement concluded with the Bank of Lithuania for the litas and the anchor currency

exchange transactions.

4 March 2004


on Accession to the Exchange Rate Mechanism II

� In observance of item 3, Par. 1, Article 8 and Par. 2, Article 3 of the Law on the Bank of

Lithuania, and having regard to the obligations of the Republic of Lithuania, and with a view

to joining the European System of Central Banks on 1 May 2004 and properly implementing

the targets set forth in the Treaty establishing the European Community, the Board of the

Bank of Lithuania decided to enter the Exchange Rate Mechanism II.

� By virtue of this Resolution the Chairman of the Board of the Bank of Lithuania, in concert

with the Minister of Finance, were instructed to file with the President of the European Economic

and Financial Affairs Council (Ecofin) an application on entry of the Republic of Lithuania into

the Exchange Rate Mechanism II.

� The Chairman of the Board of the Bank of Lithuania was instructed to sign agreements related

with the participation in the Exchange Rate Mechanism II.

30 March 2004

Republic of Lithuania Law on Banks (No. IX-2085)

� The purpose of this Law shall be to regulate the procedure for setting up, licensing, pursuing

of business, terminating and restructuring as well as supervising Lithuanian commercial banks


153

and specialised banks as well as foreign banks operating in the Republic of Lithuania, including

establishments thereof, in order to ensure a stable, sound, efficient and safe banking system.

� Where this Law sets stricter or additional requirements for banks in operation or for

establishments of foreign banks compared with the legal acts in force prior to the entering into

force of this Law and were, on the basis of these requirements, activities of a bank or an

establishment of a foreign bank must restructured, these requirements must be complied with

within one year of the entering into force of this Law. Until activities of the bank are restructured

in accordance with all requirements of this Law, the bank shall not have the right, according to

the procedure set forth by this Law, to establish a branch or to provide financial services without

establishing a branch in another Member State of the European Union.

� The provisions of this Law regulating the reorganisation, restructuring, winding-up and

bankruptcy of banks shall by applied to the proceedings opened after the entering into force

of this Law. The Law on Commercial Banks in force prior to the entering into force of this Law

shall be applied to bank reorganisation, winding-up and bankruptcy procedures where decisions

on the reorganisation, winding-up or bankruptcy of a bank were taken prior to the entering

into force of this Law.

8 April 2004


on Declaring the Commemorative 50 Litas Coin and the Circulating Commemorative 1 Litas Coin

Issued to Mark the 425th Anniversary of Vilnius University as Legal Tender and on Putting them

into Circulation

� The coins were put into circulation on 20 April 2004.

15 April 2004


on the Rules for Payment of Compensation under Par. 2, Article 46¹ of the Republic of Lithuania

Law on the Bank of Lithuania

� The Rules for Payment of Compensation under Par. 2, Article 46¹ of the Republic of Lithuania

Law on the Bank of Lithuania were approved.

� The Rules establish the procedure for payment of compensation to the Bank of Lithuania current

or former staff equal to their expenses incurred due to criminal or administrative actions brought

against them or due to other actions taken by law enforcement institutions in relation to such

actions or emissions, or due to civil actions brought against them in relation to their acts or

omissions done in the performance of the professional duties related to the supervisory function.

22 April 2004


on Approving the Rules for Handing Over to the Territorial City (District) Police Department the

Republic of Lithuania the Currency of the Republic of Lithuania and the Single Currency of the

European Union Suspected Counterfeit and for Examining Such Currency in the Bank of Lithuania

� The Rules for Handing Over to the Territorial City (District) Police Department the Republic of

Lithuania the Currency of the Republic of Lithuania and the Single Currency of the European

Union Suspected Counterfeit and for Examining Such Currency in the Bank of Lithuania were

approved.

2004


154

� These Rules regulate the procedure for handing over to the territorial city (district) police

department the litas banknotes and coins of the Republic of Lithuania and the euro banknotes

and coins of the European Union suspected counterfeit which are received by the Bank of

Lithuania or credit institutions from natural or legal persons, the procedure for submitting

said currency for examination and the procedure of carrying out such examination in the

Bank of Lithuania.

� The Bank of Lithuania, or a credit institution, that receives the currency suspected counterfeit,

shall be obliged to accept it and hand over to the territorial city (district) police department.

29 April 2004

Republic of Lithuania Law on European Companies (No. IX-2199)

� This Law shall regulate the transfer of the registered office, the formation, management and

conversion of the legal persons, which adopt the form of a European company.

� This Law shall ensure the application of the Council Regulation on the Statute for a European

company, referred to in the Annex to this Law.

� The legal provisions of the Republic of Lithuania regulating public limited-liability companies

to the extent permitted by the Regulation and unless otherwise provided for by the Regulation,

this Law and other legal acts regulating European companies shall apply mutatis mutandis to

European companies whose registered office is located in the Republic of Lithuania.

6 May 2004


on Approving the Rules Governing the Filing and Deliberating of General Applications of Credit

Institutions for Obtaining Authorisations and Their Granting

� The Rules for Governing the Filing and Deliberating of General Applications of Credit Institutions

for Obtaining Authorisations and Their Granting were approved.

� These Rules establish general requirements for granting licenses, authorisations and approvals

or performing other actions provided for in the Republic of Lithuania Law on Banks, the

Republic of Lithuania Law on the Central Credit Union and the Republic of Lithuania Law on

Credit Unions and other requirements contained in the documents submitted to the Bank of

Lithuania alongside the application, as well as the general procedure for filing and deliberating

the applications and for granting authorisations.

� Decisions on granting authorisations shall be passed by the Board of the Bank of Lithuania.


on the Form of the Banking License

� A new form of the banking license was approved.

� Within 6 months of the day of enactment of this Resolution, the Bank of Lithuania shall

prepare a banking license of the new form for each bank possessing a license issued by the

Bank of Lithuania and communicate a written notification to the effect.

� No later than within 15 days of the day of receipt of the notification, banks must take from

the Bank of Lithuania the banking license of the new form and surrender the old one alongside

the accompanying letter.


155


on the Form of the License of the Central Credit Union

� A new form of the Central Credit Union License was approved.

� Within 6 months of the day of enactment of this Resolution, the Bank of Lithuania shall

prepare a license of the new form for the Central Credit Union holding the license issued by

the Bank of Lithuania and notify the Central Credit Union to the effect.

� No later than within 15 days of the day of the receipt of the notification, the Central Credit

Union must take from the Bank of Lithuania the license of the new form and surrender the

old license alongside the accompanying letter.


on Approval of the Structure and Periodicity of Interim Financial Statements

� It was established that interim financial statements of the bank and financial group shall

comprise:

- Balance Sheet Forms (6001 and 6001K) and Profit (Loss) Statement Forms (6002 and 6002K)

approved by the Bank of Lithuania Board Resolution No. 103 of 21 May 1998;

- Form 3 of the Cash Flow Statement and Form 4 of the Statement on Changes in Equity

approved by the Bank of Lithuania Board Resolution No. 294 of 24 October 1996.


on the Statement on Loans Granted to Connected Persons of the Bank

� The Statement on Loans Granted to Connected Persons of the Bank (Form 6207) was approved.

� It was established that for the purpose of applying the 20 per cent lending restriction imposed

in Par. 2, Article 53 of the Republic of Lithuania Law on Banks, the sum of lending transactions

which give rise to monetary claims or irrevocable monetary liabilities of the bank, shall be

calculated in observance of Part IV of the Rules for Calculating Maximum and Large Exposure

Requirements approved by the Bank of Lithuania Board Resolution No. 91 of 4 July 2002.


on Participation of the Staff of the Bank of Lithuania’s Credit Institutions Supervision Department

in the Work of Managerial Bodies and Committees of Credit Institutions with Observers’ Rights

� It was established that:

- employees of the Credit Institutions Supervision Department of the Bank of Lithuania and

the staff of the Bank of Lithuania who carry out the inspection of the credit institution on

order of the Chairman of the Board of the Bank of Lithuania shall have the right to attend

with observers’ rights the meetings and sittings of managerial bodies of a bank, a branch

of a foreign bank holding a license issued by the Bank of Lithuania, the Central Credit

Union and also of the committees of credit institutions;

- credit institution managers must create conditions for the Credit Institutions Supervision

Department staff enjoying such right to participate in the work of managerial bodies and

committees of credit institutions.

2004


156


on Approval of the Rules for Imposing Enforcement Measures for Violations of Submission of

Statistical Information

� The Rules for Imposing Enforcement Measures for Violations of Submission of Statistical

Information were approved.

� These Rules establish the amount of fines and penalties imposed by the Bank of Lithuania on

financial institutions for violations of submission of the required statistical information, the

procedure of investigation of violations and time limits for safekeeping the related material.

� Enforcement measures shall be applied by the Board of the Bank of Lithuania on proposal of

the Department of the Bank of Lithuania collecting statistical information. For the purpose of

applying an enforcement measure, the Bank of Lithuania Board shall guarantee that such

measure is objectively justified, undiscriminating and commensurate to the pursued objective

and to the nature of violation.

� With a view to increasing the transparency and efficiency of the application of enforcement

measures, the Bank of Lithuania, in consultation with a respective supervisory authority, may

decide to announce publicly its decision on the imposition of the enforcement measure and

any other related information.

� When the Bank of Lithuania joins the Eurosystem, provisions of these Rules shall apply to the

extent they are in conformity with the provisions of legal acts of the European Union and

European Central Bank establishing enforcement measures for the violation of statistical

reporting requirements.

20 May 2004


on Approval of the Rules for Supervision of Foreign Bank Branches Operating in the Republic of

Lithuania

� The Rules for Supervision of Foreign Bank Branches Operating in the Republic of Lithuania

were approved.

� These Rules establish the procedure of supervision of foreign bank branches, except licensing,

and submission of reports to the public and to the Bank of Lithuania.

� Supervision of branches of foreign banks licensed in the countries, other than the European

Union Member States, operating in the Republic of Lithuania shall be carried out in observance

of the provisions of the Republic of Lithuania Law on Banks, Law on Financial Institutions,

Law on the Bank of Lithuania and legal acts of the Bank of Lithuania which apply when

supervising banks which hold a license issued in the manner established by the Law on Banks

and having regard to the agreements concluded with a supervisory authority of a respective

foreign state.

� Branches of foreign banks licensed in the countries, other than the European Union Member

States, must fulfil prudential requirements for bank activities established in the Law on Banks.

� A branch of a foreign bank licensed in the countries, other than the European Union Member

States, shall furnish the Bank of Lithuania with the same financial statements and reports

meant for supervision, following the same procedure likewise banks holding a license issued

in the manner established in the Law on Banks.


157


on Approval of the Rules for Concluding and Executing Intraday and Overnight Repos of the

Bank of Lithuania and LITAS Payment System Participants

� The Rules for Concluding and Executing Intraday and Overnight Repos of the Bank of Lithuania

and LITAS Payment System Participants were approved.

� These Rules define LITAS System participants with whom the Bank of Lithuania may conclude

intraday and overnight repos, securities, which may be used in such transactions, the procedure

for concluding and executing repos, termination of repos and limitations of entry into such

transactions.

� The Bank of Lithuania shall conclude repos with those participants of LITAS System who are

subject to the credit institutions reserve requirements applied by the Bank of Lithuania, who

are participants of the Securities Settlement System and who have signed with the Bank of

Lithuania the agreement on intraday and overnight repos.

� For the monetary policy purposes, the Bank of Lithuania shall have the right to discontinue

concluding repos with LITAS participants for unlimited term or to limit the entry into these

transactions.

10 June 2004


on Approval of the Rules for Outsourcing Bank Ancillary Services

� The Rules for Outsourcing Bank Ancillary Services were approved.

� This document is aimed at implementing the provisions of Par. 4, Article 4 of the Republic of

Lithuania Law on Banks and Par. 5, Article 4 of the Republic of Lithuania Law on the Central

Credit Union, in observance of recommendations of Basel Committee on Banking Supervision

and practices of the European Union Member States.

� Provisions of these Rules shall apply to the Central Credit Union of Lithuania and banks

possessing licenses issued by the Bank of Lithuania, who decide to refrain from engaging in

certain activity on their own, when such activity is indispensable for the provision of financial

services, helps to provide financial services or is otherwise directly related with their provision,

and to procure from other entities such services supplementary to bank activities.

� A decision of the bank to refrain from providing certain services supplementary to bank activities

and to procure them from other entities shall not reduce the bank’s liability for proper

organisation of the process of internal control and for comprehensive management of assumed

risk.

� When taking a decision to procure services supplementary to bank activities, the bank shall

guarantee stable, reliable and safe operation of the bank, respecting the right of the Bank of

Lithuania to exercise supervisory functions to the same extent likewise in case when such

activity is carried out by the bank itself.


on Approval of the Procedure of Organising the Design of Plaster Models for the National Side

(Obverse) of Circulating Euro Cents and Coins

� The Procedure of Organising the Design of Plaster Models for the National Side (Obverse) of

Circulating Euro Cents and Coins was approved.

2004


158

� This legal act defines the procedure of organisation of public tenders for the design of plaster

models for the national side (obverse) of circulating euro cents and coins, summarising tender

results and paying for work of authors who are recognised as the best.

� In exceptional cases, the Board of the Bank of Lithuania may establish the different procedure

for designing plaster models for the national side (obverse) of circulating euro cents and coins.

17 June 2004


on the Election or Appointment of Bank Managers

� The Rules on the Election or Appointment of Bank Managers were approved.

� The Rules establish the procedure of election or appointment of individuals to the posts of bank

managers, other than managers of banks licensed in Member States of the European Union.

� Procedure of the present Rules shall be observed in electing or appointing the following bank

managers:

- members of the supervisory board of the bank;

- members of the bank board;

- heads of bank administration;

- head of internal audit unit of the bank;

- bank branch manager;

- manager of the representative office of the bank;

- managers of the branch of a foreign bank licensed in non-Member States of the European

Union;

- managers of the representative office of a foreign bank licensed in non-Member States of

the European Union;

- staff of the bank and foreign banks licensed in non-Member States of the European Union

and other persons who by virtue of the bank statute, board resolutions, work regulations

of the administration, or by decision of the heads of administration, are authorised to

independently take decisions on the provision of financial services and concluding risk-

related transactions on bank’s behalf.


on the Form of the Questionnaire of the Credit Institution Manager

� The Form of the Questionnaire of the Credit Institution Manager was approved.

1 July 2004


on Approval of the Republic of Lithuania Government Securities Auction Regulations and the

Requirements for the Republic of Lithuania Government Securities Auction Participants

� The Regulations for the Republic of Lithuania Government Securities Auction and the

Requirements for the Republic of Lithuania Government Securities Auction Participants were

approved.


159

� The purpose of the Republic of Lithuania Government Securities Auction is to sell Republic of

Lithuania Government securities of the new issue, to redeem Republic of Lithuania Government

securities in circulation or part of their emission.

� The auction shall be organised by the Bank of Lithuania according to the agreement entered

into by the Bank of Lithuania and the Ministry of Finance of the Republic of Lithuania.

� Credit and financial institutions which satisfy the requirements and criteria set forth in the

Requirements for the Republic of Lithuania Government Securities Auction Participants

approved by the Board of the Bank of Lithuania, and which have entered into the Auction

Participant’s Agreement with the Bank of Lithuania shall qualify as auction participants.

8 July 2004


on Election or Appointment of the Central Credit Union Managers

� It was established that the Board of the Bank of Lithuania Resolution No. 105 of 17 June

2004 on Election or Appointment of Bank Managers should apply mutatis mutandis to the

election or appointment of the Central Credit Union managers.

22 July 2004


on Approval of the Rules on Enforcement of the Right to Provide Legal Services in the Republic

of Lithuania and within the Territory of Other Member States of the European Union

� The Rules on Enforcement of the Right to Provide Legal Services in the Republic of Lithuania

and within the Territory of Other Member States of the European Union were approved.

� These Rules establish the procedure of implementation of Articles 14, 15, 20 and 21 of the

Republic of Lithuania Law on Banks regulating the right of the Republic of Lithuania banks

and financial enterprises controlled by them and also of foreign banks licensed in other Member

States of the European Union and in the European Economic Area and financial enterprises

controlled by such foreign banks to render financial services in the Republic of Lithuania and

other Member States in observance of the provisions of the Directive 2000/12/EC of the

European Parliament and of the Council of 20 March 2000 relating to the taking up and the

pursuit of business of credit institutions regarding the freedom of establishment and the

freedom to provide services.

� The Rules define the documents and information to be furnished to the Bank of Lithuania by

virtue of Articles 14, 15, 20 and 21 of the Republic of Lithuania Law on Banks and the actions

taken by the Bank of Lithuania in implementing Articles 14, 15, 20 and 21 of the Republic of

Lithuania Law on Banks.


on Approval of the Rules on Consolidation of Financial Group Accounts and Joint (Consolidated)

Supervision

� The Rules on Consolidation of Financial Group Accounts and Joint (Consolidated) Supervision

and Statement Form No. 6003 “Information about Investment” were approved.

2004


160

� This document is aimed at implementing Directive 2000/12/EC of the European Parliament

and of the Council on the taking up and the pursuit of the business of credit institutions,

Seventh Council Directive 83/349/EEC on consolidated accounts, Council Directive 86/635/

EEC on the annual accounts and consolidated accounts of banks and other financial institutions

and has been developed in observance of the Republic of Lithuania Law on Financial Institutions,

the Republic of Lithuania Law on Banks, the International Financial Accountability Standards

and Core Principles for Effective Banking Supervision approved by the Basel Committee on

Banking Supervision.

� These Rules establish the conditions for preparation of consolidated financial accounts and

procedures of consolidation of accounts.

� Joint (consolidated) supervision shall be carried out in accordance with the procedure

established in section eight of the Law on Banks.

2 September 2004


on Approval of General Provisions Pertaining to the Organisation of the Internal Audit of the

Bank

� General Provisions Pertaining to the Organisation of the Internal Audit of the Bank were

approved.

� Provisions of this document shall apply to banks of the Republic of Lithuania and to the

Central Credit Union. Foreign bank branches in Lithuania shall apply requirements of this

document mutatis mutandis. In foreign bank branches the functions of supervisory board

and internal audit committee established in this document shall be carried out by the internal

audit unit of the bank which has established a branch, whereas the functions of the council –

by branch managers.

� The present document defines the principles of internal audit organisation in the bank: the

role of bank’s managerial bodies in the field of internal audit, internal audit objectives, functions,

principles of organisation of activities internal audit and of its performance.


on Approval of the Regulations for Determining the Value of Bank Shares Taken for Public Needs

� The Regulations for Determining the Value of Bank Shares Taken for Public Needs were

approved.

� The present document establishes the methods (criteria) for determining the value of shares

of banks registered in the Republic of Lithuania taken for public needs.

� This document is aimed at implementing the provisions of Par. 1, Article 29 of the Republic of

Lithuania Law on Banks. Bank shares shall be valued according to the condition of the day on

which the decision to take bank shares referred to in Par. 2, Article 28 of the Law on Banks is

adopted.

� Methods (criteria) for valuing bank shares shall be established by the Bank of Lithuania.

� For bank shares valuation purposes, the Bank of Lithuania may involve property or business

values (or enterprises valuing property or business) and audit companies to determine the

value of different types of assets.


161

23 September 2004


on Approval of Bank Inspection Regulations

� The Regulations for Inspection of Bank were approved.

� Bank Inspection Regulations govern the procedure of inspection of banks and the Central

Credit Union possessing a license issued by the Bank of Lithuania, foreign bank branches

established in the Republic of Lithuania, and of the documentation and assessment of inspection

results. Requirements of these Regulations shall also apply to inspections of entities mentioned

in Par. 2, Article 58 of the Republic of Lithuania Law on Banks and Par. 6, Article 55 of the

Republic of Lithuania Law on the Central Credit Union.

� The purpose of inspection shall be to examine the spheres of bank activities related with the

highest risk in order to establish whether the risk management system of the bank facilitates

proper and timely identification, assessment, monitoring and management of risk, whether

the bank guarantees observance of requirements set forth in legal acts regulating activities of

banks, their founding documents and rules of internal procedure.

� The inspection commission comprising the staff of the Bank Inspection Division of the

Department shall carry out inspection, and its composition shall be approved by order of the

Chairman of the Board of the Bank of Lithuania.


on Approval of the Regulations for Inspection of Credit Unions

� The Regulations for Inspection of Credit Unions were approved.

� Regulations for Inspection of Credit Unions establish the procedure of inspection of credit

unions holding licenses of the Bank of Lithuania and of documentation and assessment of

inspection results.

� Inspection shall be aimed at verifying whether the credit union’s performance conforms to

requirements of laws of the Republic of Lithuania regulating activities of credit unions, other

legal acts, credit union bylaws and internal documents of the credit union; evaluating the

credit union’s governance in terms of operational risk management and financial condition of

the credit union in view of prudential requirements established in legal acts for activities of

credit unions, and other requirements; examining whether financial statements and reports

for supervisory purposes submitted to the Credit Institutions Supervision Department of the

Bank of Lithuania have been prepared correctly.

� The Inspection Commission comprising the staff of Non-banking Credit Institutions Division

of the Department shall carry out inspection. The Bank of Lithuania Board Chairman shall

approve its composition.


on Approval of Systemically Important Payment Systems Assessment Methodology

� The Methodology for Assessment of Systemically Important Payment Systems was approved.

� The purpose of the Systemically Important Payment Systems Assessment Methodology is to

define the object of assessment of such systems, the process of assessment and the criteria of

assessment of the system’s compliance with Core Principles for Systemically Important Payment

Systems established by the Bank for International Settlements.

2004


162

� The Bank of Lithuania shall carry out assessment of payment systems according to this

Methodology.

11 November 2004


on the Code of Ethics of the Board of the Bank of Lithuania

� The Code of Ethics of the Board of the Bank of Lithuania was approved.

� The purpose of the Code of Ethics of the Board of the Bank of Lithuania is to define the

principles and rules of activities and behaviour of the Chairman of the Board of the Bank of

Lithuania, Deputy Chairpersons and Board Members with a view to guaranteeing their

independence, creative, beneficent working environment, developing respect towards

colleagues and other persons, increasing public confidence in the Bank of Lithuania and

strengthening the authority of employees of the Bank of Lithuania.

� The Code also regulates behaviour of board members after business hours, establishes the

principles and norms to be observed by board members in order to avoid situations that are

likely to give rise to the conflict of public and private interests, refrain from engaging in

activities incompatible with interests of the Bank of Lithuania, and from seeking benefits or

creating conditions for others to receive benefits; and seek that functions of the Bank of

Lithuania are carried out in observance of high standards of professional activity.

� The Code has been developed having regard to the Constitution of the Republic of Lithuania,

the Law on Public Administration, the Labour Code of Republic of Lithuania, the Law on

Reconciling Public and Private Interests in Public Service, the Code of Conduct of the European

Central Bank, other legal acts, and practices of foreign central banks.

25 November 2004


on Money Laundering Prevention Guidelines for Credit Institutions

� The Money Laundering Prevention Guidelines for Credit Institutions was approved.

� These Guidelines apply to banks and other credit institutions holding the licence issued by the

Bank of Lithuania, and to foreign credit institution branches operating in the Republic of

Lithuania.

� The purpose of these Guidelines for Credit Institutions is to establish the procedure for

implementing the requirements of legal acts regulating the prevention of money laundering.

� Credit institutions, in their activities, must be guided by the provisions of the Law of the

Republic of Lithuania on the Prevention of Money Laundering and resolutions of the

Government of the Republic of Lithuania and the Board of the Bank of Lithuania, and fulfil

the requirements established therein. The whole financial group of a credit institution shall be

bound by the same principles of implementation of the money laundering prevention measures.


on the Announcement of Data about the Liquidity Condition of the Banking System

� It was resolved to publish on the Bank of Lithuania website the following data about the

banking system:


163

- required reserves;

- average amount of litas reserves on settlement accounts with the Bank of Lithuania for the

past calendar days of the required reserves’ holding period;

- reserves in litas of the last day;

- factors of daily change of litas reserves;

- forecast average surplus (deficit) of litas reserves of 7 calendar days compared with required

reserves and forecast average of the entire period of holding the required reserves.

� The above data must be announced no later than by 10.00 a.m. on each business day. If due

to technical reasons the announcement of the data at the fixed time is impracticable, such

announcement shall take place as soon as possible.


on Declaring the 50 Litas Coin Dedicated to the Curonian Spit (UNESCO World Heritage) as Legal

Tender and on Putting it into Circulation

� The coin was put into circulation on 15 December 2004.

9 December 2004


on Credit and Other Institutions’ Statistical Reporting Forms of the Balance Sheet and Loan and

Deposit Interest Rates

� A short Balance Sheet Statistical Reporting Form (PFI-03) of credit and other institutions was

approved.

� Data for the Balance Sheet Statistical Reporting Form (PFI-03) and Statistical Reporting Form

(PFI-02) on Interest Rates approved by the Bank of Lithuania Board Resolution No. 139 of 24

December 2003 on the Monetary Financial Institutions’ Statistical Reporting Forms on Loan

and Deposit Interest Rates must be provided to the Bank of Lithuania by the Central Credit

Union, credit unions and other institutions selected by the Bank of Lithuania from the List of

Monetary Financial Institutions of Lithuania in line with the principles of the general provisions

of the Requirements for Monetary Financial Institutions’ Statistical Reports on Loan and Deposit

Interest Rates.

� Data for the Statistical Reporting Forms (PFI-02) and (PFI-03) shall be provided from 1 April

2005 beginning with data for March 2005.

� Data for the Statistical Reporting Form (PFI-03) shall be submitted within five business days of

the end of the reporting month. Data for the Statistical Reporting Form (PFI-03) shall be

prepared in line with general provisions of the requirements and classification principles

established in the Bank of Lithuania Board Resolution No. 46 of 8 May 2003 on the Balance

Sheet Statistical Reporting of the Monetary Financial Institutions.

Bank of LithuaniaGedimino pr. 6, LT-01103 Vilnius, LithuaniaTel. +370 ~ 5 268 02 35Fax +370 ~ 5 212 60 05E-mail: [email protected]

http://www.lb.lt

Annual Report of the Bank of Lithuania 2004

Order No. 125Published by the Bank of LithuaniaPrinted by UAB “Baltijos kopija”Kareiviø g. 13B, LT-09109 Vilnius, Lithuania

annual report of the bank of lithuania 2004 · lithuania of ltl 137 thousand was 3.3 times higher...

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