The Republic's national debt has fallen for the first time since 2001, according to the National Treasury Management Agency.

In its end-of-year report published yesterday, the agency estimates that the national debt dropped from €38.2 billion at the end of last year to finish 2006 at €36.3 billion.

The decrease is almost entirely due to an Exchequer surplus which currently stands at €1.854 billion, based on estimates provided by the Department of Finance. However, figures made available by close of business last night indicate that this surplus may be revised upwards to €2.8 billion, which would further reduce the debt level.

Agency chief executive Dr Michael Somers said the national debt was now equivalent to less than four months of tax revenue.

"There's been a huge turnaround," Dr Somers said. "In 1990, over three months of tax revenue was required just to service the interest burden. This year just 3 per cent of the State's tax take was needed to pay interest on the national debt.

"This reduction in the interest burden has freed up substantial resources which the Government can use for other purposes," the treasury agency said in its report.

The ratio of national debt to gross national product has fallen from 28.1 per cent at the end of 2005 to 24.4 per cent at the end of this year. The agency indicates that roughly a third of this drop is due to the Exchequer surplus, while the balance is due to a rise in nominal gross domestic product this year.

Dr Somers also highlighted that international credit rating agencies have reaffirmed Ireland's AAA top long-term credit rating.

However he said that while public sector borrowing had undergone a welcome decrease, the private sector was becoming increasingly indebted.

In addition to managing the national debt, the agency also manages the National Pensions Reserve Fund which will be used to meet social welfare and public service pension costs from 2025 onwards.

During 2006 the fund grew by almost €3.5 billion to reach €18.87 billion by the end of 2006. The fund's value is now equivalent to 12.7 per cent of GNP.

In addition to a contribution from the Exchequer of €1.446 billion, this growth was due to a return of 12.3 per cent earned on the fund during the year. "One per cent of our GNP goes into the fund every year," Dr Somers said. "The rest is pure net gain."

In particular, this gain was driven by strong returns on the fund's European equity investments. In addition, the treasury agency's policy of hedging 50 per cent of its foreign currency exposure contributed to the fund's global equity performance.

"The fund, since its inception, has made a commercial return," Dr Somers said.

Its annualised return since it was established in April 2001 now stands at 6.5 per cent. This was the the "fourth successive year of strong returns on the fund's investments".