Audit of public debt in the Republic of Moldova and the impact of audit findings and recommendations on public debt management Court of Accounts of the Republic of Moldova

Law № 419-XVI of „On public debt, state guarantees and state re-lending” Public debt includes state debt, debt of National Bank of Moldova, debt of administrative-territorial units, of public institutions financed, wholly or in part, from state or local budget, the debt resulting from internal and external loans of commercial companies where state and/or administrative-territorial unit has more than 50% of the social capital, and the debt of state and municipal enterprises.

In order to implement Law № 419-XVI of „On public debt, state guarantees and state re-lending”, the Government approved a series of normative acts that ensure its enforcement, such as: Regulation on public debt reporting; Regulation on State register of state debt, state guarantees and state re- lending; Regulation on the procedure of contracting and disbursement of internal and external state loans; Instruction on placement, circulation and redemption of state securities in the form of account recordings, etc.

State debt and state guarantees management The Government, in the person of the Ministry of Finance, is authorized:  a) to contract state loans, internal and external, in national currency or in any foreign currency;  b) to provide internal and external state guarantees, expressed in national currency or in any foreign currency;  c) to issue state securities for their placement on internal or external market. State debt and state guarantees are managed by the Ministry of Finance.

Main duties of the Ministry of Finance related to public debt, state guarantees and state re-lending  To examine the opportunities and conditions for contracting necessary funds for country’s development and for state debt refinancing and supervise that the net impact of the new loan does not exceed the limits of state debt established in the state budget law of the respective year ;  To prepare and submit to the Government draft laws and regulations necessary to meet the obligations and duties on public debt and state guarantees management ;  To perform primary issue of state securities on internal and external financial markets ;  To collect information and monitor the situation of public debt ;  To assess the situation regarding state debt and determine the necessity to seek new forms of debt relief, including restructuring, refinancing, repurchase operations, swap and exemption from debt payment and implement these forms under the rights provided by this law ;

In order to ensure state debt servicing, the Ministry of Finance supervises and organizes the repayment of state debt, calculates and pays interest and any other related payments, records all payments made. In order to keep records of all direct and contingent obligations of the Republic of Moldova, of loans granted from funds obtained from internal and external state loans, the Ministry of Finance is the sole authorized body to set and keep the following state registers: a) State register of state debt; b) State register of state guarantees; c) State register of state re-lending.

Law of the Court of Accounts № 261 of The Court of Accounts of the Republic of Moldova is the only state public authority that exercises control over formation, administration and use of public funds and over public property management by conducting external audit in the public sector as a supreme audit institution. Court of Accounts operates independently in accordance with the Constitution of the Republic of Moldova, the Law of the Court of Accounts and other laws and international treaties to which Republic of Moldova is a party.

In order to comply with International Standards on Auditing, and use the best practices, the Court of Accounts took the following actions: o On December 11, 2013 approved the implementation of Level 3 of International Standards of Supreme Audit Institutions (ISSAI 100, 200, 300 and 400) in the audits of the Court of Accounts. o On March 10, 2014 approved the implementation of General Audit Guidelines in the public audit conducted by the Court of Accounts in accordance with International Standards of Supreme Audit Institutions Levels 1, 2, 3 and 4.

In discharging its duties, the Court of Accounts, along with other areas, also audits the formation and management of public debt, and the compliance of government guarantees for internal and external loans.

Types of audits conducted In order to exercise its duties regarding formation and management of public debt auditing, the Court of Accounts performs the following types of audit: a) compliance audit; b) performance audit; c) audit of information technologies.

Reporting results of public debt audit Reporting on the results of public debt audit takes place in a plenary meeting of the Court of Accounts attended by the audit team and representatives of Ministry of Finance, Credit Line Directorate under the Ministry of Finance, and, as appropriate, the representatives of National Bank of Moldova, Government and Parliamentary committees. These meetings are open where the press representatives are invited, and are broadcast live on the website of the Court of Accounts.

After reporting the audit results, the Audit Decision and Report are submitted to: The Ministry of Finance, to implement the recommendations from audit report; The Government, for documentation; The Parliament of the Republic of Moldova, for documentation; The President of the Republic of Moldova, for documentation.

Follow up of recommendations and requirements of the Court of Accounts Court of Accounts has implemented an effective mechanism for follow up of recommendations and requirements made, which is used by the General Division on Methodology, Planning and Analysis. Thus, audited entities and other institutions referred to in the audit decision of the Court of Accounts are obliged to inform about the implementation of recommendations and/or enforcement of requirements of the Court of Accounts, and communicate about the actions taken by the deadline set by the Court of Accounts. As audited entities do not always meet the requirements in the established timeframes and in order to ensure the achievement of the expected impact from implementation of recommendations and requirements submitted, the Court of Accounts sent to Parliament suggestions to amend the Law of the Court of Accounts, and the provision related to contraventional prosecution for non-enforcement of Court of Accounts’ Decisions was included therein.

Audit methodology The audit of public debt, state guarantees and state re-lending is performed at the Ministry of Finance and is conducted in accordance with auditing standards applied by the Court of Accounts and by using the best practices in this area. Depending on the context, audit procedures (analysis, observation, confirmation, questionnaires, etc.) are applied to obtain audit evidence, and the regularity of data about the situation of public debt, state guarantees and state re-lending reported by the Ministry of Finance is checked.

Since 2008 till today the Court of Accounts performed: 5 compliance audits of public debt, state guarantees and state re-lending, 1 audit of public debt management and management information systems, 1 IT audit of IS DMFAS.

The main audit findings ( )  Need to develop regulatory framework related to the obligation and frequency of presenting information on debts contracted by public enterprises and administrative-territorial units;  Unclear definition of responsibilities of the parties involved in reporting the size of public debt;  The lack of a mechanism for cooperation and submission by financial institutions of the relevant information on the debt situation of public sector enterprises and administrative-territorial units;  Need to establish a mechanism and frequency of reporting by the National Bank of Moldova about the balance of contracted external debt;  Incompliance with the procedure for contracting long-term loans for capital expenditures by certain administrative-territorial units;  Need to approve a medium term state debt management strategy;  Some risks associated to state debt portfolio have not been identified and monitored;  There is poor use of external loans contracted for the implementation of investment projects;  Annulment of some disbursements of loans granted by foreign creditors due to failure to meet certain contract terms;  Increase of interest rates for some loans due to extension of their use period;  Considerable balance of overdue debts belonging to guaranteed debtors and re-lending beneficiaries;  Need to develop procedures for annulment and writing off of borrowers’ debt for loans guaranteed and re-lent by the state;  Insufficient use of all opportunities offered by the existing version of the IS DMFAS.

The impact of audit recommendations  Amendments and additions have been made to the Law „ On public debt, state guarantees and state re-lending ” –to ensure improvement of public debt monitoring, specifying the duties of the parties involved in the process and consistency of terminology used in this field. Also, by the amendments to this law there was set the mandatory condition for financial institutions to present information needed for public debt monitoring.  Actions have been taken and a mechanism was established to verify data on public debt components to ensure accurate reporting of public debt balance.  The “Blacklist" of state enterprises that have not reported the information on public debt was developed and published on the website of the Ministry of Finance.

The impact of audit recommendations  There was established the manner and frequency of presentation of information on external debt contracted by the National Bank of Moldova.  The Program „Medium term state debt management ( )” was approved that establishes the main goal of the state debt management – to fund the actions foreseen in the state budget with minimal medium and long term costs and at the optimal level of risks.  All risks associated to state debt portfolio have been identified and are being monitored.

The impact of audit recommendations  The Ministry of Finance periodically sends to the State Chancellery the information about implementation of projects financed from external sources, for taking appropriate measures.  Procedures have been developed for cancellation and writing off of borrowers’ debt for loans guaranteed and re-lent by the state.  The Ministry of Finance has initiated a process of seeking external assistance needed for IS DMFAS.

Thank you for attention!