The Executive Board of the International Monetary Fund (IMF) today completed the third review of Latvia's performance under an economic program supported by a Stand-By Arrangement (SBA).
The Executive Board of the International Monetary Fund (IMF) today completed the third review of Latvia's performance under an economic program supported by a Stand-By Arrangement (SBA). The Board also completed the financing assurances review under the SBA. The Board decision makes available an amount equivalent to SDR 90 million (about €105.8 million or US$135.6 million), bringing total disbursements under the SBA to SDR 982.24 million (about €1.15 billion or US$1.48 billion). The Executive Board also completed the financing assurances review under the SBA and approved a request to waive the applicability of the end-June 2010 performance criterion on the fiscal balance, as data on this criterion were not yet available.
The Board today concluded the 2010 annual Article IV consultation as well, and a Public Information Notice will be released on this in due course.
Strong policy actions under the SBA have helped stabilize the economy, restore confidence, and limit spillovers from financial market turbulence elsewhere in Europe. While achieving substantial fiscal savings, the government has also sought to protect the poorest, by increasing social safety net spending beyond amounts in the 2010 budget, to finance active labor market policies and temporary jobs programs. Looking ahead, the government has committed to steps to support a recovery in growth and continue progress toward euro adoption, which include:
• adhering to the 2010 budget, identifying a menu of options for the 2011 budget that will put the deficit on a declining path consistent with meeting the Maastricht criteria and adopting the euro in 2014, and developing a new Fiscal Responsibility Law to help maintain budget discipline,
• strengthening the financial sector, including by developing a transformation plan for Mortgage and Land Bank, and
• removing tax and legal impediments to private debt restructuring, so that credit can help support a return to growth.
The SBA, which was approved on December 23, 2008 (see Press Release No. 08/345) for an amount equivalent to SDR 1.52 billion (about €1.79 billion, or US$2.29 billion), entails exceptional access to IMF resources, amounting to 1,200 percent of Latvia's quota in the IMF. The IMF’s support is part of a coordinated effort with the European Union, Nordic governments, the World Bank, and other bilateral creditors that are providing the financing necessary to ensure that essential public services, especially support to those most severely hit by the crisis, can be maintained in the face of the sharp drop in government revenues.
Following the Executive Board's discussion on Latvia, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, stated:
“The Latvian authorities’ fiscal and financial sector reforms have helped stabilize the economy and insulate it from recent international financial market turmoil. Exports and industrial production are rebounding strongly. To support more rapid growth and to put euro adoption within reach, it will be important to ensure sustained fiscal adjustment, reduce unemployment, improve competitiveness through structural reforms, and restore the financial sector to health.
”Considerable fiscal adjustment is still needed to preserve debt sustainability and lower the deficit in line with the Maastricht criteria. The authorities’ program focuses on identifying high-quality fiscal measures and spending cuts that will last, including by re-examining areas where spending increased significantly in the past, and on improving control over state-owned enterprises. Given remaining adjustment needs, the authorities’ medium-term tax strategy, which identifies possible revenue measures, is welcome.
“Competitiveness has improved significantly. Additional wage and price adjustment, together with structural reforms, would help close any remaining competitiveness gap, further enhance confidence in the quasi-currency board exchange rate regime, and boost growth by reorienting the economy toward the export sector.
”The authorities have taken steps to strengthen financial sector regulation and supervision, bank resolution procedures, credit and liquidity risk management rules, and emergency liquidity support. Plans to restructure two state-owned banks are also advancing. Given high levels of private sector indebtedness, measures are being taken to streamline insolvency and foreclosure procedures and review tax disincentives. These steps should encourage debt restructuring, stimulate new lending, and restore economic growth.“