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USAID Mission to Lithuania
Europe & Eurasia
>> E&E Home >> Lithuania >> Fiscal Sector Impact Report
USAID/Lithuania Fiscal Sector Impact ReportBy Aldas Kriauciunas, with inputs from Rasa Ciceniene, Diane Dogan Hilliard, Diane Juzaitis and Irving Rosenthal; USAID/Lithuania
May 31, 2000
Acknowledgements
This report was prepared by Aldas Kriauciunas, with inputs from Rasa Ciceniene, Diane Dogan Hilliard, Diane Juzaitis, and Irving Rosenthal.
The Fiscal Sector Program implemented by the USAID Mission to Lithuania provided expert assistance and training to the key participants of the Lithuanian fiscal sector. Through targeted activities, USAID helped to improve fiscal management at the Ministry of Finance, Seimas (Parliament), and the Government of Lithuania. This area of assistance was chosen since fiscal systems not only provide the financial foundation for the government to operate, but also effect all citizens and enterprises through the investment climate developed and ease of complying with fiscal laws and regulations.
The USAID fiscal sector programs started in 1992 and during the past eight years, assistance was provided in seven areas: tax policy, tax administration, treasury systems, debt management, budgeting, macro-forecasting and training. Five organizations participated in implementing these programs, representing private companies, universities, and parts of the U.S. Government. In total, approximately $7 million were spent on programs to assist in strengthening fiscal management.
It is hard to measure success in the fiscal sector, since the progress depends on broader developments in the economy and because progress in one area of fiscal management impacts progress in other areas. Nevertheless, progress in the fiscal sector has been clear and positive over the past eight years. Since 1992, Lithuania has implemented a much improved tax system, with hundreds of different excise taxes and a de facto confiscatory profits tax replaced by a process that resembles a western tax system. The State Tax Inspectorate has been reorganized into ten districts with a more efficient separation of functions, such as audit and control. The budget process has been reformed to follow principles of performance and program based budgeting, which should make expenditures more accountable to the public and more efficient. The Ministry of Finance has introduced a computerized treasury system, with most Ministry payments centralized through this system, leading to improved cash management and debt management operations. The Ministry of Finance also introduced domestic treasury securities (T-bills) and savings bonds, thus improving the ability to utilize debt effectively. Various forecasting and policy analysis models have been implemented and a comprehensive Government accounting system was established, providing more accurate data and allowing opportunities for better decision making. Underlying these successes, training has ensured effective "know-how" transfer of skills, so that the momentum for reform can continue.
The reasons for the success of the above programs varies, but they share some common characteristics that helped improve the potential for success. Some of the points that USAID found important when implementing the programs were advisor quality, skill development, adaptation of programs to local needs, activity coordination, ensuring smooth transition, and integrating training into every assistance program. These characteristics have allowed for important progress since 1992 and have contributed to reforms that will serve Lithuania well in the year 2000 and beyond.
USAID LITHUANIA PROGRAM OVERVIEW
The United States Agency for International Development (USAID) has played a major role in the economic, political and social development of Lithuania since 1992. The primary goals have been to stimulate the growth of a free market economy, promote strong democratic institutions and a dynamic civil society, improve environmental protection, and strengthen the social safety net. USAID assistance has enhanced Lithuania’s capacity to integrate into Western political and security structures, develop a healthy economy, and achieve democratic reforms which rival many Central and Eastern European countries. Expertise has been provided by various U.S. Governmental agencies, the private sector, and Non-Governmental Organizations (NGOs). By the year 2000, the United States will have provided almost $90 million in technical assistance, training, equipment, and investments.
Initially, USAID’s program of activities was broad-based and designed to affect many segments of the transforming society. More than 55 projects were undertaken in ten strategic areas. In the first years of activity, USAID experts worked with local partners to initiate legal reforms, improve the protection of human rights, and strengthen the media. USAID provided assistance in drafting the Lithuanian Constitution, and worked with the government, political parties and the media to increase professionalism in the political arena and public activism in local and national elections. USAID strengthened the energy sector by improving environmental regulation and reducing environmental hazards. USAID’s environmental projects provided examples of economically sound investments, and at the same time reduced industrial pollution. Other priorities included regional energy planning, national energy pricing, and safety at the Ignalina Nuclear Power Plant.
In the economic sector, USAID supported privatization, helped set up the national budget process, improved fiscal and financial policies, and strengthened capital markets. After the banking crisis in 1995, USAID helped the Government and central bank to improve bank supervision. This raised the standards for bank operations, and rebuilt public confidence in banks, enabling the financial sector to recover rapidly. More than 300 Lithuanian businesses obtained technical assistance, and more than 100 entrepreneurs received business training in the United States. Independent evaluators have estimated the direct economic impact of USAID programs to exceed $400 million, and approximately 8,000 jobs have been created.
After a broad-based program review in 1995, including extensive consultations with Lithuanian counterparts in the public and private sectors, USAID narrowed its activities to focus on four areas. They are: improving fiscal policy and national budgeting, developing a more stable financial environment with better capital markets, strengthening national energy policy and nuclear safety, and increasing democratization via enhanced citizen participation.
The Fiscal Sector programs have been a major part of the USAID program in Lithuania from the very beginning. By working primarily with partners in the Ministry of Finance and other government institutions, USAID has helped to strengthen fiscal management in Lithuania to provide for better policies, well-managed state finances and stable revenue in the years to come.
Since the start of the USAID Mission in 1992, the U.S. assistance program has focussed on improving the fiscal systems in Lithuania. This has been accomplished by providing technical expertise and training in a variety of policy and technical areas. Strengthening fiscal management became a priority area in 1996, with the goals of identifying and overcoming major obstacles to economic stability and business growth.
The USAID fiscal program activities were organized into the seven following areas/tasks:
- Improve tax policy through tax simplification, restructuring taxes, and establishing capacity to analyze and assess alternative tax policies;
- Improve tax administration, through reorganization of the tax compliance system and taxpayer education;
- Improve financial management, through an extended treasury subsystem;
- Improve public debt system, through Ministry of Finance and Bank of Lithuania oversight of the secondary market;
- Improve the budget process, through consolidated budgets and implementation of performance and program based budgeting;
- Strengthen macro-economic forecasting through improved skills and development of models;
- Ensure skill-transfer through training.
Overall, the USAID used five primary implementing organizations over eight years to implement these programs: U.S. Treasury (for tax administration, public debt systems, treasury systems, and budgeting) the Harvard Institute for International Development (HIID) (for tax policy), KPMG (tax policy), EMSI (forecasting and training) and World Learning (training). The strong and broad technical bases of these organizations allowed USAID to tap into a pool of experts from many fields. Also, the intensity of the work provided for opportunities of exchange and using the results from one area (such as forecasting) to improve the results in another (such as budgeting). This integration of work, supported by a strong training program, allowed for significant improvements in fiscal management.
The main objective of the fiscal management work was to enhance the Government's capacity to systematically identify and understand the fiscal and economic implications of alternative policies and to implement systems to ensure the effective operation of those policies. This can include analyzing the resulting impact from various tax policies, subjecting proposed regulations to public scrutiny, improving compliance by tax payers, and effectively collecting and using the money paid by taxpayers. This work is made especially difficult by the fact that the Government's fiscal systems must be improved at the same time that they are in operation - from policies, to revenue collection, to budget allocation. This provides for a dynamic environment where improvements are hard to achieve, but each improvement touches the life of every citizen of Lithuania.
When Lithuania reestablished independence in 1990, it had to form many government systems completely anew. Creating these systems was made especially difficult by the fact that Lithuania’s fiscal system managers had been implementers of a broader soviet policy, rather than operators of a national policy. As a result, they needed assistance on how to create and how to run the systems required to support the country’s fiscal structure. This included revenue programs (through different taxes), cash management (collecting and disbursing tax revenue), spending allocations (budgeting), and knowing future needs (forecasting) as well as the optimal way to obtain the revenues (tax policy and public debt). The primary institution in this area is the Ministry of Finance, which provides input and makes decisions on many of the issues. The Seimas (Parliament) is also an important decision-maker, given its authority in legislative issues and budget adoption.
The changes and progress in fiscal systems are linked to overall macro-economic progress in the country. The Lithuanian economy has been making slow but steady progress since 1994 and has grown in real terms in each year but one since then. Inflation has been tamed, falling from an annual rate of 39 percent in 1995 to almost zero in 1999; real wages have grown steadily for five straight years; the ratio of public debt to GDP has remained moderate; and private investment has been steadily growing. Sound overall economic polices are in place, including the currency board and free-trade agreements which Lithuania is pursuing as preconditions for joining the European Union.
Although macro-results are generally positive, there have been difficulties along the way. The banking crisis of 1995 resulted in a change in the Government and put a new burden on the budget to cover some of the losses of the banks. The Lithuanian fiscal reform process was further hampered by the Russian financial crisis of 1998. Payments to Lithuanian enterprises were either delayed or customers in general cancelled orders. This put a double burden on the Lithuanian budget: the drop in orders and production at Lithuanian firms reduced the tax revenue flowing into the budget and the increase in unemployment put a greater strain on the social support system.
Even with these difficulties, there have been positive developments tied to USAID's assistance in the field of fiscal management. Lithuania has a much improved tax system, with hundreds of different excise taxes and a de facto confiscatory profits tax replaced by a more modernized, western style tax system. The major taxes are now a value-added tax (at 18 percent), a personal income tax (flat rate of 33 percent), excise taxes on a few categories of commodities (the major items are alcohol, tobacco, and petroleum products), and a profits tax (at 29 percent). These taxes still need improvements, as they contain many exemptions, special tax rates, and other distortions. However, progress has been in the right direction. The budgeting system has the central government as the primary revenue collector, with municipal budgets met through central government allocations.
The USAID fiscal management assistance began with a broad mandate, which was focused in 1996 on key fiscal systems. This evolution of the USAID Lithuanian Mission policy allowed for programs to better address bottle-necks in fiscal management and build the basis for momentum in the reform process. The past four years have provided a good example of the results of the USAID-Lithuania partnership as well as the basis for continued change.
This section reviews USAID’s seven programs in fiscal management: tax policy, tax administration, treasury systems, public debt, budgeting, macro-forecasting, and training. The discussion in each case follows a similar format: description of the initial situation, description of the USAID assistance provided, and a review of the results.
Initial Situation: As Lithuania's tax system developed in the 1990s, there was insufficient time to coordinate different policies and ensure harmonization. As a result, the piece-meal approach left a complex tax system plagued by evasion and avoidance, a large number of tax exemptions, and relatively high nominal personal and social tax rates. In the mid-1990s, steps were taken to simplify the tax system, to remove or limit certain exemptions, and enhance enforcement and improve collections. Fines were reduced on tax evaders and tax inspectors began to discern between honest mistakes and tax evasion. Tax enforcement agencies began routine inspections and took 250 cases to court. In early 1996, the tax system still kept a large part of the economy underground, with economic activity in the "gray market" estimated at up to 40 percent of GDP. Towards the end of the 1990s, the primary area of concern remained the low level of tax revenue as a percentage of official GDP.
USAID Assistance: USAID assistance was directed at simplifying the tax laws, making them more coherent, broadening the tax base, lowering and simplifying tax rates, encouraging fairness and neutrality in taxation, and educating tax policy makers on tax measures adopted in Western countries. In addition, the tax analysis work aimed to strengthen the Ministry of Finance's (MoF) capacity to analyze and assess alternative policies, using economic modeling techniques. USAID provided intermittent assistance in this area starting in 1993 through the U.S. Treasury and KPMG Peat Marwick, but a strong focus began in 1997, with the placement of a full-time advisor from the Harvard Institute for International Development (HIID). The two general areas of work were assistance in tax policy legislation and tax policy modeling, which was further broken down into four major areas: 1) improving specific taxes; 2) reviewing international tax treaties and formulating strategies; 3) commenting on indirect tax laws; and 4) developing a broad strategy.
USAID advisors worked to broaden the tax base through drafting of a new personal income tax law and business income tax law. These changes included defining income clearly, reducing the number of exemptions and unifying rates for corporate and household income tax, as well as providing for clear application of the personal income tax. The corporate income tax law was reviewed to reduce special exemptions, provide for new transfer pricing provisions, and allow greater flexibility for taxpayers to deduct reasonable expenses. Other areas of activity were taxation of capital gains and dividends, calculating expenses for permanent establishments, taxation of securities, carryover treatment of net operating losses, the amortization of depreciation, and issues related to double deductibility of reinvested profits.
A later area of assistance added was tax modeling and micro-simulation. This was done to provide the MoF with relatively advanced capabilities in modeling tax policy in order to estimate the effects on government revenue from changes in tax policy. The HIID approach developed a behavioral model for predicting the implications of changes in tax policy. Later the model was adopted by the MoF to use for revenue forecasting purposes. This is important because changes in taxes can change how people and firms choose to spend and invest their money.
Final assistance addressed the MoF’s capacity to analyze and assess alternative policies, using economic modeling techniques. Workshops were organized during which information was shared among various government agencies overseeing different aspects of the regulation and taxation of corporations and unincorporated businesses, and during which agency representatives worked together to create databases for the modeling as well as monitoring income taxation of such entities.
Results: USAID’s program in tax policy and tax legislation has been beneficial. Its efforts have helped to bring national tax policy to a point where the broad outline of the national tax system resembles other western countries. The VAT and excise taxes have moved the closest to the EU model, with the personal and corporate income taxes closely resembling such taxes in the West. MoF staff and others concerned with public finance matters are now well acquainted with the variety of outcomes of varying tax policies. They understand the basic principles of sound tax policy (broad bases, low rates), and are utilizing these skills in their daily work. The advisors' work also strengthened the MoF’s capacity to analyze and assess alternative tax policies and tax laws, develop viable tax policy options that will increase the effectiveness of the tax system, enhance transparency and reduce compliance costs to both the Government of Lithuania (GOL) and tax payers. The advisors introduced tax reform initiatives including developing economic and analytical models and data bases for empirical analysis of alternative tax laws, bringing draft laws in line with international principles, developing capacity at the MoF to draft and oversee implementation of tax legislation, and harmonizing tax legislation based on international tax treaties and strategy formulation.
Later assistance resulted in the GOL publicly announcing its commitment to principles such as fairness, neutrality, and clarity in taxation matters and stated its intention to: 1) stimulate savings and reinvestment of earnings, 2) reduce tax exemptions and tax administration costs, 3) harmonize Lithuanian taxes with European Union principles, 4) resolve contradictions in the existing tax laws and regulations, and 5) prepare a unified, coherent Tax Code.
Concerning some of the specific taxes, technical assistance resulted in simplifying requirements, lowering rates and broadening the base of the personal income tax. It also ensured that adopted revisions to the VAT laws were in line with EU standards and covered assistance in the preparation of new tax legislation on real property and the framework for a unified Tax Code. The assistance and training in policy analysis resulted in the decision to keep the corporate income tax for the near future. This was done given consideration to budgetary needs, the risk of creating a large exemption for all companies as well as the risks of putting an even greater burden of income taxation on individuals.
The results of the assistance indicate that USAID has achieved many of its initial goals, including improved capacity to understand the impact of alternative tax policies, the need to simplify the tax system, and develop databases to improve decision making.
Initial Situation: Throughout the early 1990's, Lithuania's tax system was administratively complex and hard to understand by taxpayers, and full of exemptions and preferential rates for priority branches of the economy. These problems were made worse by frequent changes in tax laws, large number of taxes (there were almost 20 taxes at one time) as well as decrees issued by the Ministry of Finance which appeared to contradict the laws themselves. Tax evasion and avoidance were widespread with an estimated 40 percent of economic activity taking place in the gray or black markets. Tax administration efforts were directed largely to squeezing more out of firms that were already complying, rather than towards individuals and firms that were not compliant. Most importantly, little concern was given to reforming the system to give such potential taxpayers more incentive to comply voluntarily and making it easier for them to comply. The result was to undertake publicized actions against tax offenders that raised revenues temporarily, but did not address systemic problems.
USAID Assistance: The programs in this area were directed at improving tax administration through reorganization of the tax compliance system and introduction of taxpayer education. The tax administration assistance began through intermittent regional U.S. Treasury advisors in 1993. The first resident advisor began working in 1994. Much of the initial effort was on preparation and implementation of a tax administration law and training of tax administration [State Tax Inspectorate (STI)] employees. Later assistance focused on training in taxpayer service and indirect audit methods. The final tax administration advisor departed in May 1999. Her work focused on the tax compliance system and the taxpayer education system. She also assisted on consolidation by working to create 10 district STI offices to undertake some of the functions of the 56 local districts, such as audit and control. This reorganization will allow for better focus on tasks and provide a split between audit and tax reviews. She has also initiated training (with the help of a short-term consultant) in indirect audit methods, and in developing outreach programs to the business community.
Results: The MoF has made a concerted effort to improve tax compliance and improve the underlying system of tax administration. The U.S. Treasury’s assistance improved tax collectors’ skills, such as collection techniques, indirect methods of audit, criminal investigation, taxpayer service, and other topics. Business planning was successfully introduced and is quickly becoming a standard practice throughout the STI. Regular communication has been established between the business community and the STI to improve the sharing of ideas. Work on a manual for the Tax Collection Division was initiated to ensure a standardized approach to tax collecting. Restructuring of the STI began by replacing the system of 56 local offices with 10 district-level offices, effective January 1, 1999. Operations are being computerized and there is increased focus on taxpayer education. Through these results, the MoF has succeeded in reducing the level of the gray market economy to half their 1994 levels, indicating a greater acceptance and compliance of the tax administration system by individuals and companies.
Initial Situation: In 1992, Lithuania had no treasury system. Such a system is fundamental to operating the government, as it can manage and account for public monies and can reduce the cost of financing government. This system monitors expenditures, forecasts cash inflows and outflows, and optimizes the use of cash balances. As recently as 1997, there was no cash forecasting at all, with upcoming payment needs not clearly matched to expenses incurred and other obligations of and by the Government.
USAID Assistance: The advisor in this area worked to put financial controls in place and ensure sound financial management, by helping to create a treasury system, such that the government's budget would closely match revenue flows. This involved developing a system to collect the taxes paid into the government account quickly and efficiently, so that the government would have access to its own funds. Access to its own funds reduces the government's need to borrow. A second key part of this work was introduction and implementation of the treasury system, so that all the Ministries would be linked to a central disbursement system. This treasury system would ensure that funds would be paid out only when needed, again providing for better control of the country's funds and better information on the exact financial situation of the country.
Results: The assistance provided by USAID, along with the EU Phare project, has greatly improved the control of the country's finances. The U.S. Treasury, together with International Monetary Fund and Danish advisors, collaborated successfully and helped the MoF establish the core of a treasury operation, which helped consolidate funding control. In addition, a treasury law was passed in 1997, which had been five years in the making, providing a legal base to the changes still needed at that time. The MoF introduced a computerized treasury system, so that most Ministry payments would be centralized through this system, which led to improved cash management and debt management operations.
A cash-management system was set-up and linked short-term cash availability with public sector treasury bill operations. This system, providing weekly cash balance information, has helped the Government avoid the buildup of wage, pension and other public expenditure arrears and has given a much better understanding and control of funding needs. About 70 percent of Ministry cash flows are now run through this system, providing only partial monitoring. When SODRA (the Lithuanian social insurance fund), health fund and capital budgets become part of the current system, this monitoring will be complete. With the assistance of a U.S. Treasury advisor, Lithuania received an investment grade credit rating from Standard & Poor's. This increased foreign investor confidence and helped the country improve access to international capital markets. Also, one important barrier recently resolved for safeguarding government money was the securitization of government funds, ensuring that government deposits kept in commercial banks are never lost if the bank experiences any financial problems.
Initial Situation: With the break-up of the Soviet Union, Lithuania began the 1990s with practically no sovereign debt. This slowly changed as funds were borrowed to help the country through the difficult early years of the transition. As the country began to undertake capital investments, debt increased. Some of this debt was also through the form of government guarantees on loans provided to enterprises. In 1997, the Government adopted a policy of improving management of public expenditures and being cautious in expanding the public debt. This policy was particularly targeted at debt from foreign markets and the issuance of domestic securities (T-bills, savings bonds, etc.). In managing debt, a balance is needed to ensure the government has sufficient funds for operations and investments, while not crowding out domestic borrowing by enterprises and individuals.
USAID Assistance: The U.S. Treasury advisors in this area worked to improve the public debt system and address risk management, through two areas of focus: developing oversight of a secondary market in sovereign debt by the MoF and the Bank of Lithuania, and increasing confidence and marketability of domestic securities. An intermittent advisor has provided assistance to the MoF since 1992, while a resident advisor provided assistance to the Bank of Lithuania from 1997 to 1999. Although much of the work by USAID at the Central Bank supports monetary policy, there have been important elements supporting public debt management. These include the law on the backing of the currency, monetary management issues, changing government deposits from the state-owned Savings Bank to the Central Bank, and developing financial instruments (such as repurchase agreements and deposit auctions). The Central Bank is one of two players in the evolving system of cash and debt management, with the MoF being the other. The advisors have emphasized the importance of coordination between the U.S. Treasury advisors in these fields and their respective clients.
Results: The advisor at the Bank of Lithuania was instrumental in helping develop strong internal institutions, and now the Central Bank is capable of moving ahead on its own in key policy functions. The MoF advisor was involved in the initial effort to establish a market in government securities (1992-94) which grew successfully. During 1996-97, the MoF focused more on international borrowing in the Eurobond market, a move that was tempered due to increasing rates. The MoF has since worked to successfully reestablish the domestic securities market utilizing assistance from the advisor. The advisor also assisted the MoF to develop a new savings instrument, along the lines of U.S. Savings Bonds, which were launched in 1999. Another important accomplishment was making policy makers aware of the risks in setting below-market rates and thus trying to make borrowing immune to market evaluation and scrutiny. The work in debt management has allowed Lithuania to improve its debt rating and keep the debt to GDP ratio at manageable levels.
Initial Situation: In 1997, a high share of annual public spending was for civil service wages and transfer payments. There was little public investment and spending on the social sectors remained both inadequate and poorly linked to priorities. Public pensions were substantially increased, but remained below poverty levels while covering a high number of beneficiaries. Municipalities were assigned spending priorities without an adequate funding base, while government budget control and oversight was weak. USAID's assistance in budgeting was aimed at improving the link between public spending and performance of Government agencies and state-funded projects. This work may not yield immediate economic benefits because of the lag between improved public expenditure performance and the complementary impacts in private investment and productivity. However, it is expected to enhance fiscal credibility and help address the problems associated with poor budgeting, such as frequent budget revisions, large gaps between budget and actual expenditures and the imbalances between capital and current spending.
USAID Assistance: The work in this area was to help put in place budget management capacity at the MoF, through an improved budget process, through consolidated budgets and through implementation of performance and program based budgeting. The implementer for this work has been the U.S. Treasury, and it incorporated two sub-components: assisting the Government of Lithuania (GOL) develop a consolidated budget, and incorporating performance and program based budgeting into the budget process. Prior to 1997, GOL and donor assistance efforts had focused on the input side of financial management, including the development of cash management systems, debt management systems, and centralized accounting and treasury functions. However, little had been done on the output side of budgeting, and there was a need to evaluate the outcomes (performance) of budget expenditure programs. As a result, the USAID assistance began in mid-1997 with three objectives: a management review concerning the current status of national and municipal budgeting; an analysis of specific budgetary issues under review by the Lithuanian Budget Department; and responding to other budgetary issues that might come up. By the end of 1997, the new U.S. Treasury advisor had initiated a budget system development project to a) improve the legal framework for public expenditures, b) design the consolidation and regularization of budgets and budgeting procedures for the national budget, and the largest public enterprises, c) phase out use of off-budget expenditures; and d) improve systems for budget monitoring.
The advisor successfully explained the new budget concepts and trained MoF staff to assume new responsibilities within the new budget approach. Through active participation in the Government Budget Commission, the advisor reviewed the current budget law and proposed a strategy for budget reform and introduced concepts of program budgeting, budget formation, budget transparency, and public hearings on budget formation. A primary accomplishment was the decision by the MoF to adopt program budgeting as the country’s official policy and to initiate the approach with the 1999 budget. With this start, the advisor worked with the European Union assistance program on automation and computerization of the GOL’s accounting and budgeting system, which would help ensure full implementation of performance based budgeting. In addition, USAID also provided training opportunities for MoF officials in the United States and Europe to better understand the operations and benefits of the new budgeting system. This was coupled with an intensive training program in Lithuania on performance based budgeting, which ensured its correct introduction throughout the GOL.
Final assistance addressed improvements in the budget monitoring system, a program budget evaluation, and increasing budget transparency. This included developing budget planning and development procedures, phasing out use of off-budget funding and expenditures, and improving the systems of budget monitoring and evaluation. Also, as a way to form links to local experts and provide more information on budget effectiveness, USAID funded a fiscal policy study that assessed opportunities for public expenditure reform in Lithuania’s education sub-sector.
Results: In just a few years, much has changed in the Government's budgeting process. In addition to the adoption of performance and program based budgeting, budget forecasts are now required for three-year periods, previously off-budget funds are included in the budget (although not SODRA, health insurance funds, or privatization funds), and the budget process has been opened to greater public scrutiny. These reforms should make expenditures more accountable to the public and more efficient.
Progress has been fairly continuous since the start of the assistance. During 1998, the Ministry of Finance improved the budget process, which was enhanced due to the GOL’s decision to adopt a policy of program and performance based budgeting. The Government has also formed a Budget Commission that developed a strategy for budget reform that included: introduction of program and performance budgeting, increasing transparency, reduction of off-budget expenditures, and improvement of the expenditure control system. This allowed the government to stay within its planned budget and all 14 Ministries began to use performance based budgeting targets as compared to 1996 when none of the Ministries used this system. In addition, the advisor drafted a new program and performance based budget manual called, "Preparation, Submission, Analysis, and Evaluation of the National Budget," which will help ensure standardization of the process throughout all the Ministries. In under three years, substantial progress has been made in meeting the goals of introducing performance based budgeting, creating a more open budget process that involves long-term planning, and centralizing government budgets.
Initial Situation: As the fundamental fiscal systems were being implemented at the Ministry of Finance (MoF), there was a growing need to be able to gather information about developments in the economy. This information on macro-economic events was needed to ensure that the fiscal systems could meet needs coming up in the future. This need became even greater when crises in Southeast Asia showed how quickly economic reforms could disappear.
USAID Assistance: During 1998-99, USAID helped the MoF's Fiscal Policy Department develop their capacity for macroeconomic analysis and forecasting and improved fiscal -policy analysis. A senior macroeconomist advisor worked on building capacity within this department. He assisted and trained MoF staff to analyse the linkages between fiscal policy, structural policy and macroeconomic vulnerability, enabling the Ministry to better predict and respond effectively to fiscal sector developments. The advisor also helped to develop short term forecasting models, a policy simulation model and a medium-term (3 year) macroeconomic model. He also provided assistance on macroeconomic reporting and analysis. Jointly building and utilizing the models has ensured that the models can be operated appropriately and will be maintained and improved over time. Also, with the USAID advisor’s assistance, a work program was developed to "link" the medium term macroeconomic model with the "time-series" models that are used for revenue forecasting.
Also, USAID undertook a special fiscal policy study with two goals in mind. The first was to help build strong links between the MoF and local Lithuanian research institutions. The second was to help the MoF analyze issues that are fundamental to fiscal policy decision making. The topic of study was the 'determinants of economic growth in Lithuania' to better understand what parts of the economy were the engines of growth and how that impacts fiscal policy.
Results: The training and technical assistance led to a series of improvements in the MoF’s ability to forecast changes in the economy and use that information for internal planning. A set of macroeconomic forecasting techniques was developed and staff trained in their use. The MoF staff is now better able to exercise fiscal control and make short term expenditure and revenue forecasts. This was especially useful in recognizing the risks associated with macroeconomic over-heating. As a result, the GOL took steps to reduce over-heating of the economy in the early part of 1998.
The Fiscal Policy Department now produces monthly macroeconomic briefings, monthly macroeconomic forecasts, and operates simulation models for forecasting and policy simulation. It also releases budgetary information on the internet, helped to establish the MoF-Bank of Lithuania macroeconomic coordinating committee, and has advised on policy matters, including grants to local governments, pension reform, program budgeting, and excise tax reform.
When the macro-economic and revenue models are fully linked, the GOL will be able to more accurately forecast the effects of macroeconomic and revenue policy changes on fiscal and economic performance. The advisor's assistance and training will allow the MoF staff to analyze linkages between fiscal policy, structural policy and macroeconomic vulnerability, thus enabling the MoF to better predict and respond effectively to fiscal sector developments.
Initial Situation: Lithuania has a good university system and the experts in fiscal systems are well educated. They have worked closely with technical advisors, but it was crucial that not only do the Lithuanian experts have the knowledge for the work, but that they also be able to teach others on fundamental fiscal principles. To support this, the Ministry of Finance (MoF) has had its own training center for continuing education, but there was no concerted strategy on creating sustainable MoF education programs using Lithuanian instructors.
USAID Assistance: USAID began providing training in the fiscal area in 1992, with training primarily in the U.S. This allowed for an intense program for individuals abroad to gain new skills and share them with fellow employees upon return. After several years of organizing overseas training for the MoF staff, USAID started to deepen MoF staff skills through effective and regular in-country training to ensure these programs could continue after USAID completed its assistance. Fiscal education programs were not limited to the MoF. USAID implemented an initiative to increase Parliament members' knowledge on economic reform by organizing a series of seminars on diverse economic topics, including fiscal seminars on tax policy and budget reform.
Results: The training programs have significantly increased the knowledge and ability of participants to engage in fiscal policy and implementation issues. The Seimas (Parliament) seminars provided an overview of the issues in each sector as well as the implications, which were well received by the participants. At the MoF, direct training was provided to 286 employees on treasury and debt management, fiscal policy, budget management, and orientation to the Ministry of Finance. More importantly, USAID assistance efforts improved the Ministry’s own capacity to manage its own training. This objective was mainly satisfied through a variety of on and off-the job training efforts. Last year, USAID training resources were focused on the creation of routine in-service training capacity in public finance, fiscal policy, debt and treasury management, and budget policy. Over 30 trainers have been trained to provide courses in the future to MoF employees.
TRANSITION TO CONVERGENCE CONFERENCE
In September 1999, USAID hosted a conference titled, "Lithuania: From Transition to Convergence." The purposes of the conference was to acknowledge the accomplishments of Lithuania in different aspects of economic policy reform; to foster strategic thinking about Lithuania's integration into Western economic and political structures; and to identify areas for future reform focus.
The conference inspired an improved and better-informed policy making process, as the Government contends with the challenges posed by economic transition and convergence (i.e., membership in the EU). This was accomplished by generating high-quality analysis and debate on Lithuania’s achievements during the economic and democratic transition, future challenges to convergence, and policy reform options.
Also, the conference helped to open-up the process of economic policy reform and development strategy debate by inviting researchers and other specialists from a range of government and non-governmental institutions to share their analysis and conclusions with Lithuania’s national leaders. Finally, the conference helped to enrich the domestic policy debate by providing opportunities for a mix of international experts to share the results of their research on matters likely to affect Lithuania.
Over the past eight years, the USAID program in Lithuania has had a number of successes. Although the foundation for this success varies from project to project, there are some common factors that resulted in very positive results for Lithuania.
Advisor Quality: Through all the activities, the high quality of long-term and short-term advisors employed by the Mission was important for success. The advisors possessed a depth of experience and knowledge that allowed them to transfer the knowledge needed to create and manage key fiscal systems.
Skill Development: In various parts of fiscal management, the Lithuanian clients have developed substantial skills and experience. In tax legislation, tax policy analysis, budgeting, and tax administration, Lithuanian experts have developed the capacity to proceed on their own, without USAID assistance.
Adaptation to Local Needs: Some aspects of assistance are best when starting with simpler models. This allows for a broader group of experts to understand the fundamentals and increases the likelihood of use. Advanced techniques or models may be useful in the U.S. and other large economies, but not initially to a country making the transition to a market economy.
Coordinated Activities: USAID’s targeted approach to a few assistance activities allowed the program to make a difference in several key areas. This focus provided the counterparts with a good combination of resident and intermittent assistance as well as training. By providing this assistance for several years, skill transfer was completed effectively.
Smooth Transition: It was important to let the counterparts and other donor programs know of plans to complete assistance. This not only motivated all participants to complete what had been planned, but also allowed for others to take over the assistance where needed and help move reforms forward.
Training: Practically every project emphasized that training is vital to success. In some cases, the training was done by the advisors working with counterparts, and in other cases, by having counterparts participate in special programs. Where practical, training efforts should be provided through and in coordination with local institutions. This allows for a strengthening of that institution and often results in better adapted courses.
Lithuania’s fiscal systems were just a few years old or non-existent when USAID began its fiscal management assistance program in 1992. Since then, USAID has spent approximately $7 million for programs to assist the Lithuanians in building sound fiscal systems and providing training and assistance in using those systems. USAID has accomplished that objective and the programs will be able to continue without active U.S. Government assistance.
USAID assistance has contributed to many improvements in Lithuania's management of fiscal systems. Within the legal foundation, laws are more transparent and internally consistent. Tax compliance is easier with improved administration of the tax system. The taxes paid by the citizens and companies of Lithuania are managed more effectively with the spending of these taxes linked to the goals that the Government of Lithuania and its people have set out. Finally, training will ensure that the common efforts of Americans and Lithuanians can continue without the need for direct USAID assistance.
The most crucial factors affecting future program performance in Lithuania are the continued positive economic performance, GDP levels starting to rise above 1990 levels, Lithuania's improved credit ratings by international lenders, and the political will to complete the difficult and complex economic policy reforms still facing the country. Generally, economic prospects are good, the institutional capacity to formulate and introduce policy reforms is improving, and Lithuanian policy makers are increasingly sensitive to the subtleties of economic weaknesses.
USAID is proud of having had the opportunity of working with the Government of Lithuania and other bilateral and multi-lateral programs. The joint-efforts of the advisors working with Lithuanian specialists have formed the foundation for strengthened fiscal systems that will serve Lithuania in the years ahead.
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Last Updated on: June 25, 2009 |
