PRINCIPLES OF ACCOUNTING

General Principles

The Financial Statements have been prepared in accordance with the Law of the Central Bank of the Republic of Estonia and the Statute of Eesti Pank. Estonian Accounting Law, from which Eesti Pank is exempted, and International Accounting Standards have been adopted only where Management consider them to be appropriate and applicable to the activities of a central bank.

The Financial Statements have been prepared in accordance with the historical cost basis of accounting, modified to include the revaluation of certain assets as referred to in the notes below.

The Financial Statements and notes have been prepared using accounting policies consistent with those used in recent years. The published balance sheet of Eesti Pank has been structured so that the domestic and foreign claims and liabilities can be separated. In addition, the balance sheet structure demonstrates the backing of the kroon by gold and convertible foreign currency assets.

In accordance with the Law of the Central Bank of the Republic of Estonia, Eesti Pank is not subject to taxes or any other payments connected with its economic activities to the State budget or to local budgets, except for taxes connected with natural persons.

The 1997 Financial Statements include, for the first time, a statement of changes in capital and reserves as a primary statement. This statement shows the Bank's total gains and losses, including those which are recognized directly in reserves.

The principal accounting policies adopted for the preparation of the Financial Statements are set out below.

Income and Expenses

Realized income and expenses are accounted for in the profit and loss account in the relevant reporting period on an accruals basis, notwithstanding the actual date the money is received or paid. Unrealized gains and losses are credited or charged to reserves.

Foreign Currency Translation

Transactions denominated in foreign currencies are translated into kroons, the legal tender of the Republic of Estonia, using the official exchange rates of Eesti Pank valid on the day of the transaction. Foreign currency assets and liabilities are translated into Estonian kroons at the Eesti Pank official exchange rate valid on the balance sheet date. Unrealized foreign exchange gains and losses are credited or charged to reserves.

Official exchange rates used at 31 December 1996 and 1997 were as follows:

 

1997

1996

DEM

8.00000

8.00000

USD

  14.33560

  12.43560

SDR

19.34665

17.85838

Gold

Gold reserves are valued at the market rate at the end of the year. Revaluation gains and losses are credited or charged to reserves.

Bonds and Other Securities

Foreign treasury bills and other quoted securities denominated in freely convertible currencies are recorded at their market value valid at the end of the year. Unrealized revaluation gains and losses are credited or charged to reserves. Securities purchased under reverse repurchase agreements are valued at their purchase price.

Investments in Shares

Investments in shares are included at their purchase price, less provisions for any permanent diminution in value. Profits and losses on the disposal of investments in shares are recognized when the sale becomes unconditional.

Fixed Assets

Fixed assets are recorded at original cost or values as determined by Management, less depreciation which is provided for on a straight line basis over the estimated useful lives of the assets at the following rates:

 

  1997

  1996

Buildings

3%

3%

Computers

33%

33%

Other

20%

20%

Building renovation costs are charged to the profit and loss account as expenses except where the expenditure results in an increase to the external floor area of the building or a change in its use, in which case such costs are added to fixed assets. Provisions are made where it is known or probable that the market value of the asset is less than the value recorded in the accounts. In 1996 and 1997, the properties transferred to the Bank by the Government of Estonia were revalued using the amounts at which they had been included in the Tallinn Building Register.

Loans and Provisions

Loans are reassessed periodically and specific provisions are established against those considered to be bad or doubtful due to the borrower's insolvency. Loan provisions are recorded as expenses of the reporting period and are included in the balance sheet as a deduction against the assets concerned. Loans are maintained in the balance sheet until they are repaid or written off. They are written off only after all legal measures to recover them have been taken.

Provisions for Guarantees

Provisions for guarantees are established as liabilities in the balance sheet, where it is considered probable that future events will result in payments being made by the Bank under the terms of guarantees. Such provisions are recorded as expenses of the reporting period.

ITEM 1 - GOLD

The Bank's gold reserves of 8,250.171 ounces remained the same as at the end of 1996. The market value at 31 December 1997 was EEK 4,147.28908 (USD 289.30) per ounce compared to EEK 4,572.57012 (USD 367.70) per ounce at 31 December 1996. The following Table shows the above described changes:

 

Amount
(troy ounce)

Market price
 (EEK per ounce)

Market value
 (EEK thousand)

Balance as of 31.12.1996

8,250.171

4,572.57012

37,724

Revaluation

 

 

-3,508

Balance as of 31.12.1997

8,250.171

4,147.28908

34,216

ITEM 2 - CONVERTIBLE FOREIGN CURRENCY ASSETS

These comprise current account balances, overnight loans, deposits, foreign government bonds, short-term investments in gilts and securities managed by a foreign investment bank and reverse repurchase agreements denominated in convertible foreign currency, together with accrued interest where applicable.

During 1997, Eesti Pank's convertible foreign currency assets have increased by more than one third due primarily to foreign currency purchases from Estonian commercial banks, income earned on foreign currency reserves, unrealized profit gained from the rise in the price of German government bonds and exchange rate movements due to the decline in the value of the German mark against most of the foreign currencies. At the end of 1997, the proportion of DEM denominated assets within the Bank's net foreign currency reserves was 88% (1996 - 75%, 1995 - 69%). This action is intended to reduce the currency risk exposure of the Bank arising from non-DEM foreign currency assets.

The Bank's investment policies allow transactions only with highly rated banks and financial institutions. Under the Bank's general investment principles the foreign currency reserves are intended to secure full convertibility of the kroon into other selected currencies and sufficient liquidity to meet the Bank's obligations whilst achieving reasonable returns within the given risk constraints. To fulfill these investment policies the Bank keeps its foreign reserves in low risk liquid instruments with an average maturity of approximately two years.

ITEM 3 (AND ITEM 12) - SPECIAL DRAWING RIGHTS (SDR'S)

These items comprise the unutilized assets and liabilities, denominated in SDR's, arising from loans granted by the International Monetary Fund (IMF) to Estonia.

Between 1992 and 1995, the International Monetary Fund granted a Standby Agreement (SBA) to Eesti Pank which at the end of 1994 was invested more efficiently in securities denominated in the SDR basket currencies than holding the money on the IMF account. Repayment of the SBA began in 1995 and its final maturity date is March 2000. Its major tranches are being repaid in 1997 and 1998.

Between 1993 and 1995, the Systemic Transformation Facility (STF) was granted by the IMF to the Government of the Republic of Estonia and mediated by Eesti Pank who acted as agent for the Government. The final maturity date of the STF is January 2005, with repayments beginning in 1998.

The following Table shows the above described changes:

EEK thousand

 

SBA

STF

Total

Balance as of 31.12.1996

2,118

2

2,120

Interest and other income

691

29

720

Purchases of SDR's

291,478

20,257

311,735

Loans repaid to the IMF

-270,523

 

-270,523

Interest and other expenses

-23,899

-20,430

-44,329

Exchange rate differences

301

144

445

Balance as of 31.12.1997

166

2

168

ITEM 4 (AND ITEM 12) - PARTICIPATION IN IMF

Participation in the IMF is recorded in the assets' side of the balance sheet and equals the country's quota in the IMF, which is recorded in the liabilities' side of the balance sheet ('IMF kroon accounts'). Estonia's quota in the IMF was SDR 46.5 million (EEK 899.6 million) at the end of 1997:

 

SDR thousand

EEK thousand

Balance as of 31.12.1996

46,500

830,415

Exchange rate differences

 

69,204

Balance as of 31.12.1997

46,500

899,619

ITEM 5 - OTHER CLAIMS ON IMF

In March 1997, a claim of EEK 10.0 million on the International Monetary Fund was established resulting from the Republic of Estonia's participation in the financing of the IMF Enhanced Structural Adjustment Facility (ESAF). EEK 6.7 million of this was credited to exceptional income (see item 27), the remaining EEK 3.3 million is payable to the Government (see item 17). The EEK 6.7 million was formerly expensed as a surcharge (now 0.4%) added to the SBA interest rates for strengthening the IMF's financial position.

The following Table shows the structure of other claims and movements in 1997.

EEK thousand

 

SBA

STF

Total

Balance as of 31.12.1996

 

 

 

Previous years' claim

6,753

3,293

10,046

Additions

618

922

1,540

Exchange rate differences

577

287

864

Balance as of 31.12.1997

 7,948

 4,502

 12,450

ITEM 6 (AND ITEM 18) - OTHER FOREIGN CURRENCY ASSETS

This item shows the accounts of Eesti Pank held with the central banks of CIS countries, Latvia and Lithuania and used for settlement of payment transactions with those countries on behalf of Estonian commercial banks and the Government of Estonia. The compensating balances with those organizations are shown as demand deposits of the Estonian banks and the Government in item 18 'Other foreign currency deposits'. At the beginning of 1998, Eesti Pank stopped providing clearing services in non-convertible foreign currencies to the Estonian credit institutions. Commercial banks now rely on their own network of correspondent bank relationships. The balances of credit institutions' accounts in non-convertible foreign currencies will be transferred to an account named by a credit institution or translated into kroons by the Eesti Pank official exchange rate and transferred to a settlement account of a credit institution according to the instructions of the latter.

ITEM 7 - LOANS

Total loans, net of provisions, decreased during 1997 by EEK 15.0 million, due mainly to repayments of loans. Set out below is an analysis of the loan movements followed by additional explanations:

EEK thousand

 

Balance as of
31.12.1996

 New loans
extended

Loans
repaid

Provisions

Balance as of
31.12.1997

Loans to Estonian financial institutions

47,898

10,825

-34,311

 

24,412

   Operating banks

7,718

10,825

-14,289

 

4,254

   Intermediary loans

40,180

 

-20,022

 

20,158

Other loans

18,523

13,550

-5,688

-189

26,196

   Enterprises

 

189

 

-189

 

   Staff loans

18,523

13,361

-5,688

 

26,196

Accrued interest

3,468

24,639

-23,859

 

4,248

Total

69,889

49,014

-63,858

-189

54,856

Loans to Operating Banks

Loans to operating banks include loans for crediting farmers that were issued to commercial banks by the order of the Eesti Vabariigi Ülemnõukogu (the Supreme Council of the Republic of Estonia) in 1991 and 1992. These loans were fully repaid in the first quarter of 1997.

Põhja-Eesti Pank (North Estonian Bank Ltd; now merged with Eesti Ühispank; Union Bank of Estonia; see item 8)

In 1995 and 1996, Arrow AS, a property holding company, received financial aid of EEK 0.3 million and 0.9 million, respectively, for the maintenance of a building under construction. Under an agreement signed at the end of 1996, Eesti Pank assigned its claim against Arrow AS worth EEK 1.2 million to Põhja-Eesti Pank, who will repay it on 1 May 1998 at the latest.

According to a guarantee agreement between Eesti Pank and Põhja-Eesti Pank (PEP), signed in January 1997, Eesti Pank transferred EEK 7.8 million (with 2% interest rate per annum) in March 1997 to a deposit account opened with Eesti Ühispank. In June 1997, Eesti Pank withdrew the deposit.

According to a guarantee agreement between Eesti Pank and Põhja-Eesti Pank (Eesti Ühispank) Eesti Pank obtained a legal claim over PEP loans with the principle value of EEK 123.9 million. These loans are administered by Eesti Ühispank. In 1997, Eesti Ühispank opened a deposit for Eesti Pank and transferred sums received from the recovery of these loans under the guarantee agreement. In 1997, these recovered loans amounted to EEK 3.0 million and were recorded in exceptional earnings (see item 27).

Intermediary Loans

The reduction in intermediary loans by half is due to the repayment of loans granted to Estonian commercial banks by a Finnish financial organization Vientiluotto OY, for which Eesti Pank acts as agent. The final maturity date for these intermediary loans falls in November 2001.

Loans to Enterprises

According to an agreement between Eesti Pank, Põhja-Eesti Pank and Arrow AS signed in January 1997, Eesti Pank and Põhja-Eesti Pank will equally pay for the maintenance of a building of Arrow AS at 1 Maleva Street, Tallinn, for the period from December 1996 to 31 March 1997. In 1997 (January-March) Eesti Pank has paid for the maintenance EEK 189,236. Arrow AS is liable to repay the maintenance costs to Eesti Pank and Põhja-Eesti Pank at their first request. Provisions have been made against the whole of 1997 maintenance costs in December 1997, since the recovery from Arrow AS of these amounts is considered to be remote (see item 26).

Loans to the Employees of Eesti Pank

Home purchasing loans guaranteed by property and consumer loans to the employees of Eesti Pank are provided for a maximum of 25 and 2 years, respectively. In addition, professional education loans are granted for 15 years.

ITEM 8 - SHARES

Shares held by Eesti Pank comprise the following:

 

1997

1996

Percentage
holding

EEK
thousand

Percentage
holding

EEK thousand

Eesti Investeerimispank
(Estonian Investment Bank)

44,121 shares nominal value 1,000 EEK

33.3

47,524

33.3

47,524

Eesti Hoiupank (Estonian Savings Bank)
1,028,933 shares nominal value 10 EEK

5.3

10,289

13.6

22,504

Bank for International Settlements (BIS)
700 shares including 200 voting shares

N/A

8

N/A

8

SWIFT
1 share nominal value 5,000 BEF

N/A

12

N/A

12

Väärtpaberite Keskdepositoorium
(Central Depository for Securities)

2 shares nominal value 100,000 EEK

7.1

200

7.1

200

Joint-stock company Arrow AS
516 A-shares nominal value 5,000 EEK

 

 

97.2

 

Põhja-Eesti Pank (North Estonian Bank)
200,000 shares nominal value 100 EEK

 

 

33.3

 

Tallinna Väärtpaberibörs
(Tallinn Stock Exchange)

10 shares nominal value 10,000 EEK

3.8

100

4.2

100

Total

 

58,133

 

70,348

Eesti Pank's general policy continues to be to reduce its holdings in Estonian commercial banks.

Eesti Investeerimispank (Estonian Investment Bank)

An agreement for the sale of shares in Eesti Investeerimispank to Immerman OÜ was signed on 18 December 1997. The sale was completed on 7 January 1998 when payment was received and all conditions of the sale were met. According to the agreement Eesti Pank sold 44,121 shares to Immerman OÜ with nominal value EEK 1,000 for EEK 103.3 million. The profit of EEK 55.8 million will be recorded in 1998 profit and loss account.

Eesti Hoiupank (Estonian Savings Bank)

According to an agreement signed on 30 June 1997, Eesti Pank sold to Sparbanken Sverige AB (Swedbank) 1,221,500 Hoiupank shares for EEK 147.5 million. The price of shares between Eesti Pank and Swedbank was related to the average closing price of Hoiupank shares on the Tallinn Stock Exchange in the period of 10 consecutive stock exchange days in 1997. According to the sale agreement Swedbank has the pre-emption right to the remaining shares held by Eesti Pank should Eesti Pank wish to sell the shares before 31 December 1998. At the end of 1997, the Eesti Pank shareholding in Hoiupank was 5.3%.

Bank for International Settlements (BIS)

BIS shares (25% paid in) with a total book value of EEK 7,837.50 are included at their historical cost established in 1930 when Eesti Pank joined the BIS. The historical cost includes the conversion from Estonian kroons to rubles in 1940 and from rubles to Estonian kroons in 1992. The BIS has not made calls for share capital against Eesti Pank although such calls might possibly arise in the future. According to the Statute of the Bank for International Settlements, the BIS can make a call by a management decision.

Arrow AS

On 2 September 1997, an agreement on purchase and sale of shares between Eesti Pank and Rime Kinnisvara AS was signed. Under the agreement Eesti Pank sold to the above joint stock company 600 shares in Arrow AS of which 516 were A-shares with nominal value of EEK 5,000 each and 84 were B-shares with nominal value of EEK 5,000 each, totalling EEK 6,000.

Põhja-Eesti Pank

In accordance with the shareholders meeting in January 1997 the shares of Põhja-Eesti Pank were annulled. A 100% provision was made against the whole of the Bank's interest in Põhja-Eesti Pank.

In January 1997, Eesti Ühispank and Põhja-Eesti Pank merged. The merger was approved by the major shareholders of Põhja-Eesti Pank, the Government of the Republic of Estonia, Eesti Pank and Eesti Ühispank. On 12 April, a shareholders meeting of Eesti Ühispank approved the merger agreement of Ühispank and Põhja-Eesti Pank. Eesti Pank gave permission to Eesti Ühispank to merge with Põhja-Eesti Pank on 18 April 1997.

Based on a decision of the Republic of Estonia and Eesti Pank the total losses of previous periods of Põhja-Eesti Pank were written off in the merger. As a result of the merger agreement the Government and Eesti Pank ceased to have an interest in Põhja-Eesti Pank.

Tallinna Väärtpaberibörs (Tallinn Stock Exchange)

In 1997, the share of Eesti Pank in the share capital of the Tallinn Stock Exchange was reduced to 3.8%, as a result of a share issue in which Eesti Pank did not participate.

ITEM 9 - OTHER ASSETS

This item includes the difference between the nominal value and selling price of the Eesti Pank certificates of deposit (CDS) sold to banks, prepayments for services and goods, to be provided in 1998 and the cost of Eesti Pank sundry assets. It also includes an amount recoverable of EEK 800,000, based on an agreement between Eesti Pank and Eesti Maapank (Land Bank of Estonia) under which Eesti Pank paid the latter's moving expenses from the Bank's building at 11 Estonia pst in 1996.

In addition, this item includes EEK 13.0 million as a prepayment to recover the losses of Hoiupank's non-performing loans according to a guarantee agreement with Eesti Hoiupank. Full provision was made for the prepayment at the end of 1996. Hoiupank is obliged to transfer any sums received from the recovery of these loans to Eesti Pank until 15 March 2001, after deducting any direct costs of Hoiupank. During 1997 Eesti Hoiupank has paid to Eesti Pank EEK 4.7 million which is recorded in exceptional earnings (see item 27).

ITEM 10 - FIXED ASSETS

Details of movements in fixed assets during 1997 are as follows:

EEK thousand

 

Buildings

Computers

Furniture
and fixtures

Software

Vehicles

Total

Cost or valuation of fixed assets

 

 

 

 

 

 

Balance as of 31.12.1996

50,235

30,435

43,644

9,030

6,858

140,202

Additions

26,131

10,371

18,521

2,842

902

58,767

Disposals

-7,666

-8,765

-797

-270

-445

-17,943

Balance as of 31.12.1997

68,700

32,041

61,368

11,602

7,315

181,026

Depreciation

 

 

 

 

 

 

Balance as of 31.12.1996

1,745

17,911

21,473

2,899

4,661

48,689

Charge for the year

1,659

8,428

9,593

2,030

1,309

23,019

Disposals

-103

-8,644

-717

-175

-349

-9,988

Balance as of 31.12.1997

3,301

17,695

30,349

4,754

5,621

61,720

Net book value as of:

 

 

 

 

 

 

31.12.1996

48,490

12,524

22,171

6,131

2,197

91,513

31.12.1997

65,399

14,346

31,019

6,848

1,694

119,306

The increase in the net book value of fixed assets in 1997 compared to 1996 arises primarily due to the acquisition and renovation of buildings as well as purchase of computer equipment, furniture and fittings.

The balance sheet value of fixed assets increased by EEK 27.8 million which is due mainly to the building renovation costs. The cost of bank buildings at 11 Estonia pst was increased by renovation works by EEK 16.8 million, 4 Sakala tn by EEK 0.3 million and the training centre at Maardu by EEK 2.0 million.

In 1997, the Ministry of Transport and Communications assigned to Eesti Pank, free of charge, a property at 13 Tartu mnt. This was originally included in the Bank's balance sheet at EEK 6.9 million, representing the amount at which this was registered in the Tallinn Building Register. This amount has been credited to revaluation reserves. In May 1997, the buildings and the ground at 13 Tartu mnt were transferred at a value of EEK 34.0 million in connection with the settlement of the Põhja-Eesti Pank guarantee agreement. In addition a building at 7 Suur-Karja tn was transferred at a value of EEK 40.0 million in connection of the same agreement.

ITEM 11 - FOREIGN DEBTS

Foreign debts, which also include accrued but not yet received interest at the end of 1997 and 1996, comprise the following:

EEK thousand

 

1997

1996

Vientiluotto OY, Finland  

20 252

40 336

Total

20,252

40,336

The related assets connected to the above item are included in 'Loans to financial institutions' (see item 7). The maturity dates of remaining loans received from the Vientiluotto OY fall mainly in 1998.

ITEM 12 - IMF KROON ACCOUNTS

This item shows the Estonian kroon deposits of the IMF held with Eesti Pank, which include loans granted by the IMF to Eesti Pank and the quota of the Republic of Estonia in the IMF.

The following Table shows the movements of the loans obtained from the IMF and participation in the IMF.

EEK thousand

 

SBA

Participation

Total

Balance as of 31.12.1996

559,354

830,328

1,389,682

Accrued interest

41,894

 

41,894

Exchange rate differences

43,524

69,198

112,722

Loans repaid to the IMF

-270,523

 

-270,523

Interest paid

-43,458

 

-43,458

Balance as of 31.12.1997

 330,791

 899,526

 1,230,317

ITEM 13 - ACCOUNTS OF NON-RESIDENTS

This item includes non-interest bearing accounts held with Eesti Pank by the central banks of the CIS countries, Latvia and Lithuania, which are used for settling transactions between Estonia and those countries through Eesti Pank.

ITEM 14 - NOTES AND COINS IN CIRCULATION

This item shows banknotes and coins issued for circulation by Eesti Pank. An analysis of the notes and coins in circulation is shown on pages 71-74 of the Annual Report.

ITEM 15 - ACCOUNTS OF BANKS AND OTHER CURRENT LIABILITIES

This includes the clearing accounts of Estonian credit institutions with Eesti Pank. With effect from 1 July 1996 Eesti Pank has commenced paying interest at a rate calculated by reference to the Deutsche Bundesbank discount rate on the amount by which average balance on a credit institution's clearing account with Eesti Pank exceeds its minimum reserve requirement for a reporting month. At the same time charges on commercial banks became payable if the minimum reserve level was not maintained and transactions charges were introduced.

In accordance with a Memorandum of Economic Policies signed between the International Monetary Fund, the Government of the Republic of Estonia and Eesti Pank, the Government formed a stabilization fund where the budget surplus of the central government will be transferred. The aim of the stabilization fund is to form a pecuniary reserve which would help to secure the Estonian economy against unexpected events and provide general stability to the economy. The stabilization fund is long-term and it will grow with budget income surplus. Eesti Pank, as Government agent, in close co-operation with the State Treasury invests the sums of the stabilization fund into foreign currency assets.

In November, the Ministry of Finance placed a deposit of EEK 150.0 million through Eesti Pank into the stabilization fund. At the end of December, the Ministry of Finance made additional deposit of EEK 200.0 million.

ITEM 16 - SECURITIES (CERTIFICATES OF DEPOSIT ISSUED)

The short-term certificates of deposit (CDS) raised during the year are 28 day discountable paper issued to Estonian commercial banks in amounts of EEK 100,000 nominal value each. In 1997, 4 auctions have taken place but no CDS were outstanding at 31 December 1997.

ITEM 17 - CONVERTIBLE FOREIGN CURRENCY DEPOSITS

The convertible foreign currency account shows demand deposits of the Republic of Estonia held with Eesti Pank. It includes the undistributed element of the Systemic Transformation Facility (STF) in SDR provided to the Republic of Estonia by the IMF, together with accrued interest payable. In addition the convertible foreign currency account includes the claim on the International Monetary Fund, arising from the participation in financing the IMF Enhanced Structural Adjustment Facility (ESAF). Eesti Pank acts as agent in the name of the borrower - the Republic of Estonia.

EEK thousand

Balance as of 31.12.1996

317

Adjustments of balance (see item 5)

3,293

Additions

21,842

Interest income

14

Exchange rate differences

288

Interest and other expenses

-21,076

Balance as of 31.12.1997

4,678

The above Table shows the recorded claim on the IMF and the movements on the STF account, including amounts received from the Government to pay STF interest and other expenses.

ITEM 18 - OTHER FOREIGN CURRENCY DEPOSITS

This item includes non-interest bearing foreign currency demand deposits of the Government of the Republic of Estonia and of Estonian commercial banks with Eesti Pank. The deposits are related to transactions with the CIS countries, Latvia and Lithuania carried out through Eesti Pank (see item 6).

ITEM 19 - PROVISIONS FOR GUARANTEES

In 1997, no provisions have been made for the guarantees. In 1997, provisions for the guarantees made have been adjusted to reflect amounts recovered and no longer required because of changed circumstances during the year as follows:

EEK thousand

 

Eesti
Hoiupank

Põhja-Eesti
Pank

Other
guarantees

Total

Balance as of 31.12.1996

36,377

17,800

500

54,677

Utilisation of provision (see note 28)

-21,000

 

 

-21,000

Release of provisions (see note 27)

-15,377

-17,800

 

-33,177

Balance as of 31.12.1997

0

0

500

500

ITEM 20 - OTHER LIABILITIES

This item includes sundry other accounts payable in 1998 for 1997 costs.

ITEM 21 - CAPITAL AND RESERVES

Capital and reserves can be analysed as follows:

EEK thousand

 

Balance as of
31.12.1996

Transfers

Appropriation
of 1996 profit

Revaluation
adjustments

Balance as of
31.12.1997

Statutory capital

100,000

 

 

 

100,000

Reserve capital

100,000

 

74,000

 

174,000

Special reserve

924,367

224

82,000

 

1,006,591

Revaluation reserve

19,154

 

 

9,303

28,457

Gold revaluation reserve

4,896

 

 

-3,509

1,387

Fixed assets reserve

4,711

-224

 

-627

3,860

Translation reserve

-13,882

 

 

128,324

114,442

Total

1,139,246

0

156,000

133,491

1,428,737

In accordance with the Law on the Central Bank of the Republic of Estonia at least 25% of annual profit must be allocated for increasing each of the statutory and reserve capital. After these allocations, part of the profit can be allocated for forming and supplementing special reserves, based on a decision of the Board of Eesti Pank. The remaining profit is transferred to the State budget.

In 1992, Eesti Pank covered from the special reserve the losses arising from revaluation of ruble assets and liabilities at the time of monetary reform, amounting in aggregate to more than half a billion kroons. In accordance with the 1993 decision of the Board of Eesti Pank, the Eesti Pank reserves have to be restored from the profits of the Bank of the following ten years.

The planned appropriations of the 1997 profit are shown below the Profit and Loss Account on page 99. In accordance with the Bank's budget for the year, approved by the Board of the Bank, an amount of EEK 252.4 million is to be transferred to the special reserve in order to continue to restore the losses from monetary reform in 1992.

The revaluation reserve includes the unrealized difference between the cost and market value of foreign securities. At the end of 1997, the market value of the foreign securities was higher than their cost.

The fixed assets reserve reflects the revaluation of fixed assets, including the valuation by Tallinn Building Register attributed to a building, auxiliary building and a ground at 13 Tartu mnt. The transfer from this reserve to the special reserve reflects the realization of the revalued amount in line with depreciation on the related assets. As a result of the sale of a certain revalued property in 1997 the reserve was decreased (see item 10).

The translation reserve reflect the results of translating the assets and liabilities denominated in foreign currencies into kroons at the balance sheet date. The rise in value of certain foreign currencies, particularly the US dollar against the German mark, in 1997 has caused this item to increase.

ITEM 22 - FOREIGN NET INTEREST INCOME AND SIMILAR ITEMS

This includes principally realized exchange gains, income from the sale of securities, interest income from time deposits and short-term investments managed by foreign investment bank as well as dividends less interest expense of Standby Agreement and intermediary loans from Vientiluotto OY as well as realized expenses on foreign exchange and swap transactions.

The increase in net income by EEK 16.4 million compared to 1996 was achieved through the purchase of foreign currencies from the Estonian commercial banks. There were no transactions with gold in 1997.

ITEM 23 - DOMESTIC NET INTEREST INCOME AND SIMILAR ITEMS

This includes interest earned and bank charges on loans granted by Vientiluotto OY and intermediated by the Bank to Estonian commercial banks, interest earned from loans to Eesti Pank employees, interest payable and other bank charges connected with the management of the clearing accounts from domestic credit institutions, agent fees of Systemic Transformation Facility, interest received on investments of the stabilization fund and payable to the Government and interest payable on CD's issued by the Bank. Interest earned by the Bank in 1997 has decreased by EEK 7.2 million compared to 1996. The reason for this has been the reduction in intermediary loans by more than half, increase in interest expenses related to the management of credit institutions' clearing accounts because Eesti Pank has paid interest on the excess deposited over minimum reserve requirement as well as reduction in interest payable on CD's issued by Eesti Pank in connection with the decrease in the number of auctions in 1997.

ITEM 24 - OTHER OPERATING INCOME

This includes income connected with adjustments in respect of prior year items and with various charges for sundry non-banking related services including services which are not connected with the Bank's main objectives. In 1997, the present item includes rent of buildings and equipment as well as other charges, such as income from the usage of telephones and the sale of Eesti Pank Bulletins.

ITEM 25 - OTHER OPERATING EXPENSES

Other operating expenses have been analysed by principal category, consistent with the way in which the Bank's Management budgets for and monitors costs.

Staff related expenses comprise not only salaries and salary related expenses, including health insurance and social security taxes, but also training, business travel and sports expenses. The increase in staff related expenses is due to salary rises and the related taxes as well as business travels.

The costs of making notes and coins have increased considerably in 1997. 10-sent coins and 500-kroon banknotes were made to replenish the existing stocks and to meet the demand for new notes and coins. At the end of 1997, Bank's contractual liabilities for making banknotes and mints in 1998 reached EEK 5.6 million. The costs of making money are expensed to the profit and loss account as they are incurred.

Depreciation costs have increased in line with additions to Bank buildings as well as acquisition of computers and fittings.

Renovation costs have been reduced somewhat in 1997 compared to 1996 but are budgeted to increase in 1998 due to new Bank buildings and the associated renovation costs.

Maintenance and administrative costs in 1997 compared to 1996 have increased by more than one fifth. The reasons for this were legal expenses, the cost of obtaining an Estonian credit rating from credit rating agencies, increase in maintenance costs of information technology and expenses on real time business information.

Other costs include money spent to mark the fifth anniversary of the reintroduction of the Estonian kroon.

ITEM 26 - PROVISIONS FOR BAD AND DOUBTFUL LOANS AND GUARANTEES

In accordance with an agreement signed between Eesti Pank, Põhja-Eesti Pank and Arrow AS in January 1997, Eesti Pank and Põhja-Eesti Pank will equally pay maintenance costs of a building at 1 Maleva tn for the period between December 1996 and 31 March 1997. In 1997 (January-March) Eesti Pank paid its share of these costs amounting to EEK 189,236. Under the agreement Arrow AS is liable to pay the maintenance costs back to Eesti Pank and Põhja-Eesti Pank at their first request. Provisions have been made against the whole of 1997 maintenance costs in December 1997, since the recovery from Arrow AS of these amounts is considered to be remote.

ITEM 27 - EXCEPTIONAL ITEMS

These include items of income and expense arising on transactions of an unusual or infrequent nature. In 1997, this included the following items:

EEK thousand

Profit from sale of Eesti Hoiupank shares (see item 8)

135,299

Release of provision of Põhja-Eesti Pank (see item 28)

17,800

Release of provision of Eesti Hoiupank (see item 28)

20,109

Previous years' claim (see item 5)

6,753

Deposit with Eesti Ühispank (see item 7 and 28)

3,025

Recovery of loans previously provided for

2,581

Total

185,567

This item includes the profit of EEK 135.3 million received from the sale of Eesti Hoiupank shares. Of the guarantee provisions made in 1996 EEK 17.8 million, made for Põhja-Eesti Pank, and guarantees of EEK 15.4 million, made in favour of Hoiupank, were recovered. In addition, EEK 4.7 million was received in respect of the prepayment made to Hoiupank in 1996. The credit of EEK 6.7 million in relation to the IMF ESAF agreement (see item 5) is also included. The sums EEK 3.0 million transferred to a deposit account opened with Eesti Ühispank in accordance with an agreement signed between Eesti Pank and Eesti Ühispank on 5 May 1997 (related to an agreement signed in January 1997) is also included. EEK 1.9 million was recovered of the provisions made for Painküla Starch Factory in previous years. During 1997 certain amounts were recovered in respect of loans to LEA Pank against which provisions had been made in previous years.

ITEM 28 - OFF-BALANCE SHEET ITEMS

Contingencies and Commitments

Legal Action

In September 1996, a petition was issued against the Bank and Mr V. Kraft in a court in Texas, USA by Eastern Credit Limited, Inc a stockholder of Eesti Innovatsioonipank, claiming damages, including exemplary damages, of at least USD 18.8 million plus costs. The Management of Eesti Pank are of the opinion that this claim is without sound foundation and that the Bank has a strong defence against the claim, which will be defended vigorously. Accordingly, no provision has been made in respect of this claim.

Forward Contracts

As of 31 December 1997, Eesti Pank had remaining forward contracts amounting to EEK 1,269.5 million, maturing on various dates up to 2002. Under these contracts, which are with Estonian commercial banks, Eesti Pank is committed to sell DEM at future specified dates for between 8.0010 and 8.0020. Such contracts were offered until March 1995.

Guarantee to the European Investment Bank

On 27 November 1995, Eesti Pank entered into an agreement with the European Investment Bank and Eesti Investeerimispank whereby it guaranteed loans amounting to ECU 10 million which mature in 2006. This agreement annulled the previous loan agreement signed between Eesti Pank and the European Investment Bank in October 1993.

Guarantee to Põhja-Eesti Pank (Eesti Ühispank)

Under an agreement signed between Eesti Pank and Põhja-Eesti Pank in January 1997, Eesti Pank guaranteed together with the Government contribution to Põhja-Eesti Pank (PEP) to recover the losses from non-performing loans and other assets.

Full provisions were made during 1996 and were settled by the transfer of properties and other assets in 1997. As a result of these transactions Eesti Pank's obligations were settled in full.

At the same time, Eesti Pank obtained a legal claim over PEP (Eesti Ühispank) loans with a principle value of EEK 123.9 million, against which PEP had established provisions in 1996. In 1997, Eesti Pank opened a deposit account with Eesti Ühispank into which EEK 3.0 million of recovered loans and credits have been deposited (see item 7).

Guarantee Agreement between Eesti Pank and Eesti Hoiupank

In August 1996, Eesti Pank and Eesti Hoiupank signed a guarantee agreement covering the period to 22 December 1997. In accordance with this agreement, Eesti Pank guaranteed to protect the interests of the creditors and depositors of Eesti Tööstuse ja Ehituse Kommertspank (Estonian Bank for Industry and Reconstruction; ETEK) and Eesti Hoiupank up to a maximum amount of EEK 74.4 million in respect of losses arising from assets and loan agreements taken over from ETEK by Eesti Hoiupank on the merger of those two banks. These guarantee costs were fully provided in 1996.

In accordance with the guarantee agreement Eesti Pank paid EEK 21.0 million to Hoiupank in December 1997. The remaining conditional obligation was written back in 1997 (see item 19).

Other Guarantees

In August 1996, Eesti Pank issued a letter of warranty for compensating the injured party for medical treatment costs up to an amount of EEK 500,000 relating to a traffic accident involving one of the Bank's cars which took place on Merivälja tee in Tallinn at the beginning of 1996. This amount is expected to be recovered from the employee of the Bank involved.

Bank for International Settlements (BIS)

There exists a contingent liability in respect of the BIS since 1930. This liability represents an amount unpaid for the BIS shares and denominated in Swiss gold francs the kroon equivalent of which was EEK 36.5 million as of 31 December 1997 (see item 8).

Off-balance sheet Assets (Property Rights)

By a decision of Eesti Vabariigi Ülemnõukogu (the Supreme Council of the Republic of Estonia) on 23 January 1992 Eesti Pank was allocated forestry rights with a value estimated in 1992 of USD 150.0 million.

In accordance with a Decision of Riigikogu (Parliament) of 2 June 1997, the Decision of 23 January 1992 of Eesti Vabariigi Ülemnõukogu was revoked and consequently Eesti Pank no longer has title to these forestry rights.