At the end of 2024, the value of the official international reserves (OTA) of the Bank of Lithuania amounted to EUR 7153 million. After Lithuania became a member of the euro area on 2015 January 1, OTA consists of claims on non-euro area residents in convertible currencies (except the euro), monetary gold, special drawing rights and the reserve position in the International Monetary Fund (IMF). We note that OTA is not state funds transferred to the Bank of Lithuania for management – it is an asset financed by the Bank of Lithuania’s liabilities and capital.
Historically, the OTA was formed before the introduction of the euro. According to the Law on the Reliability of the Litas, litas issued by the Bank of Lithuania had to be fully covered by official international reserves, therefore the Bank of Lithuania put litas into circulation by purchasing the base currency (which has been the euro since 2002). In 2015, when the euro was introduced in Lithuania, a significant part of the litas issued by the Bank of Lithuania was exchanged for euros and became the Bank of Lithuania's liabilities in euros, which were matched on the asset side by OTA and financial assets in euros (a small part of the cash litas was not exchanged by residents into euros, but they also remain liabilities of the Bank of Lithuania, which are covered by OTA).
Why does the Bank of Lithuania need OTAs after the introduction of the euro??
After the introduction of the euro in Lithuania in 2015, the OTA of the Bank of Lithuania decreased to 1-2 billion euros, because after the introduction of the euro, investments in euro-denominated assets could no longer be classified as foreign reserves. In carrying out its activities and seeking to manage emerging risks (financial and geopolitical), the Bank of Lithuania began to consistently form an OTA portfolio, which, both before the introduction of the euro and now, is invested primarily based on the principles of liquidity, security, profitability and sustainability. Foreign reserves are invested in transparent, regulated, large and liquid financial markets, where foreign reserve management operations can be carried out smoothly and efficiently.
A sufficient level of OTA is also necessary to ensure the independence of the central bank. This is a common requirement in a modern economy, enshrined in the Treaty on European Union (Article 130), which Lithuania has also signed. Maintaining the independence of the central bank is also required by the Statute of the ESCB (Article 7 of Chapter III of the Statute of the European System of Central Banks and of the European Central Bank). The activities of the Bank of Lithuania must be financed from sources that would not reduce the independence of the bank - for this, central banks usually use income from the investment of foreign reserves.
Why cannot the Bank of Lithuania finance the Government of the Republic of Lithuania directly?
Article 123 of the Treaty on European Union establishes a monetary financing prohibition, i.e. prohibits the Bank of Lithuania from lending money or overdrafting funds on accounts held with the Bank of Lithuania to the Government of the Republic of Lithuania, other state institutions or enterprises of the Republic of Lithuania. The Bank of Lithuania is also prohibited from directly purchasing debt instruments from them. However, these provisions of the Treaty on European Union do not prohibit the Bank of Lithuania from acquiring the aforementioned debt instruments on the secondary market under certain conditions, which stipulate that such purchases of debt instruments are not used as a means of circumventing the aforementioned prohibitions.
Article 1 of the Law on the Bank of Lithuania establishes that the Bank of Lithuania shall carry out its activities to the extent that this does not conflict with the legal acts of the European Union and the European Central Bank. The assets of the Bank of Lithuania belong to it by right of ownership. The Bank of Lithuania shall manage, use and dispose of its assets in accordance with the legal acts of the European Union and the Law on the Bank of Lithuania.
Any provision of assets, including foreign reserves, or direct lending of funds by the Bank of Lithuania to the Government of the Republic of Lithuania, other state institutions of the Republic of Lithuania or state-owned enterprises without complying with the requirements established by legal acts of the European Union and the European Central Bank would be considered a violation of Article 123 of the Treaty on European Union.
What benefits does the Republic of Lithuania receive from the Bank of Lithuania?
The main objective of the Bank of Lithuania (together with the Eurosystem) is to ensure price stability. The money put into circulation by the Bank of Lithuania is a means of efficient exchange for the entire economy, and price stability is a necessary condition for healthy and sustainable economic development.
The Bank of Lithuania contributes to the financial well-being of the state. In total, during its modern history, the Bank of Lithuania has already transferred EUR 591 million to the state budget, and over the past 5 years – EUR 65 million (the amount of the transfer for 2024 will be determined after the Bank of Lithuania's financial reporting is completed).
Approximately EUR 2 million has been paid over the past 260 years for funds held by the Ministry of Finance of the Republic of Lithuania at the Bank of Lithuania. The Bank of Lithuania has set the maximum possible interest rate in accordance with Eurosystem rules for the funds of the Ministry of Finance at the Bank of Lithuania.
The Bank of Lithuania, together with the ECB, has purchased more than EUR 8 billion worth of Government of the Republic of Lithuania securities (including debt securities of other public sector entities) in the course of implementing monetary policy.
