Office of the Comptroller and Auditor General - Press Release VFM examination report of FEOGA Borrowing

Press Release issued on 15 April 1996

VFM examination report of FEOGA Borrowing

T he Comptroller and Auditor General, Mr. John Purcell, has carried out an examination of borrowing by the Department of Agriculture, Food and Forestry to finance FEOGA operations. Borrowing is undertaken on a bridging finance basis to meet the cost of purchasing commodities for intervention storage and to fund payments in respect of certain schemes under the Common Agricultural Policy pending reimbursement by the EU at agreed rates. A report of the examination was presented to Dáil ?reann today.

The examination focused on

  • how efficiently the Department engaged in borrowing activities
  • how well the associated risks were managed
  • the lessons which can be learned for the future.

Main Findings

Between 1983 and 1994, a significant proportion of the Department’s borrowing was denominated in foreign currencies. During this period, recoveries from the EU of ?436m more than covered the actual interest charges of ?363m. However, foreign borrowing exposed the Department to non-recoverable exchange losses of ?89m, resulting in a shortfall of ?16m. Overall, foreign borrowing was still more economic since the equivalent cost of domestic borrowing of ?509m in the period would have resulted in a shortfall of ?73m.

?66m of exchange losses arose mainly as a result of the currency crisis of 1992/1993. The net effect on the Department’s debt portfolio was largely similar to that on the foreign component of the National Debt.

The strategy of borrowing in low interest rate foreign currencies during the period from 1983 to 1994 was generally well managed, particularly through borrowing in currencies within or aligned to the Exchange Rate Mechanism. However, in December 1992, as a result of a shortage of other currencies, borrowing was undertaken in Japanese yen which resulted in a net additional cost of ?5.8m compared to borrowing in Deutschemarks.

While the policy of borrowing in low interest foreign currencies during the period 1983 to 1994 was reasonable, it could be argued that some portion should have been denominated in Irish pounds as all of the Department’s transactions are exclusively in that currency.

Conversion of the foreign borrowing to Irish pounds was carried out on a phased basis up to May 1994. Conversion in the early part of the year when the Irish pound was strong resulted in an estimated gain of ?7.4m compared to a conversion later in that year.

Based on our analysis of potential interest savings and currency risks, it appears that the Department is correct, in present circumstances, in funding its entire borrowing requirement in domestic currency.

Options Identified for the Management of Future Borrowing

The report identifies a number of options which could be considered in relation to the management of the borrowing.

Analysis of interest rates and yields should be carried out to determine the duration for which borrowing should be undertaken rather than adhering to the Department’s traditional procedure of borrowing for periods of one month. As an illustration of this, had the Department borrowed half of its funds on a weekly basis rather than a monthly basis over the first six months of 1995, an interest saving of over ?100,000 could have been made.

Since all of the borrowing is currently exposed to interest rate risk, a core borrowing requirement should be identified to be borrowed over a longer term at a fixed rate of interest.

Consideration should be given to the option of Forward Rate Agreements to fix future interest costs on domestic borrowing. Should there be a return to foreign borrowing, the use of forward foreign exchange contracts and currency swaps would be an efficient means of managing currency risks.

The Department does not, at present, have the expertise to engage in treasury management operations. Periodic advice in this regard from the National Treasury Management Agency (NTMA) could be beneficial.

While the Department has a facility of ?100m from the NTMA, any extension of this would directly impact on the National Debt which must be managed in conformity with EU convergence criteria. Borrowing during the first six months of 1995 at rates achieved by NTMA would have reduced interest costs by ?119,000 and, on this basis, assigning the borrowing and treasury management functions to the NTMA could be cost effective. However, such a move would need to be considered in the context of the wider debt management strategy of the State.

For further information about the report contents, please contact:

Derrick Rapple

Tel: +353 1 679 3122

Fax: +353 1 679 3288


Publication Details

VFM Report No. 7: FEOGA Borrowing

ISBN 0-7076-2336-7

Price ?5

Government Publication Sales Office

Sun Alliance House

Molesworth Street

Dublin 2

Tel: +353 1 661 3111

Fax: +353 1 475 2760

The contents of this page were last updated on 26/09/03

For further information, please contact:

Derrick Rapple

Telephone: (01) 6793122