Interest rates higher by more than CZK 200 million every year due to 2009 amendment to an agreement concerning interbank swap transactions

PRESS RELEASE on Audit No. 15/13 – March 14, 2016

The Supreme Audit Office (SAO) performed and audit of the national debt management. Auditors scrutinized funds used in 2014 by the Ministry of Finance to manage the national debt as well as the creation and utilisation of financial reserves in order to balance the risks related to the debt. Auditors also scrutinized funds used for the national debt interest payments in the total amount of CZK 17,500 million and focused on issuances and principal payments of debt certificates and loans in the total amount of CZK 220,000 million.

In 2014, the national debt exceeded CZK 1.6bn and the Ministry of Finance paid CZK 48,500 million for its administration. Financial reserves are made by issuances of debt certificates to address risks associated with the national debt management. Reserves reached maximum at CZK 140,000 million in 2012, and then the Ministry of Finance reversed its approach and used CZK 128,000 million, which resulted in decreasing the national debt. By the end of 2014, financial reserves amounted to CZK 11,500 million. By decreasing the financial reserves, the national budget did no longer suffer from a high financial burden, which previously emerged from interest rates on government bonds that the Ministry had issued to create the financial reserves.

In case of the amount exceeding CZK 5,000 million, which remained as the balance of the amount budgeted for the national debt interest payments in 2014, the Ministry of Finance opted for a different approach. The amount was transferred to other state budget chapters instead of declaring it unused balance in the state budget chapter. The transfer of CZK 1,700 million was approved by the Government, the rest was transferred by the approval of the minister. Over 90 % out of the amount approved for the transfer by the minister were channelled to various sub-headings of the Ministry’s budget. In the past, the SAO criticized such a creation of hidden financial reserves, which were transferred from the original budget headings only by the minister’s decision and without the consent of the Government.

Since February 2015, the new budgetary regulations allow the Ministry of Finance to issue bonds that are supposed to create financial reserves without any restrictions and without the Parliament’s approval. The size of bonds issued only by the decision of the minister is not even regulated by internal regulations of the Ministry.

Auditors also scrutinized swap transactions related to the national debt. In 2009, the Ministry of Finance concluded an amendment to an interest rate agreement, which enabled the other contractual party to choose the type of interest rate. As a result, the swap transaction no longer served as hedging of risk exposures. On the basis of this amendment, the Czech Republic pays interests at 3.2 % on the amount of EUR 243.2 million every year. If the amendment had not been concluded, the rate would have been zero. In 2014, the Czech Republic would have saved CZK 216 million in interests only.

The SAO concluded that the national debt management improved in spite of the above mentioned errors.

Communication Department
Supreme Audit Office

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