The Executive Board of the International Monetary Fund (IMF) yesterday completed the fourth 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 107.877 million (about €121.3 million or US$170.7 million), but the authorities do not intend to draw this amount. The availability of Fund resources will help to provide insurance against the impact of any unforeseen deterioration in external financing conditions. The total amount disbursed under the SBA remains SDR 982.24 million (about €1.10 billion or US$1.55 billion). The Executive Board also approved a request for a waiver of nonobservance of a continuous performance criterion resulting from an unapproved exchange restriction.
Strong policy actions under the SBA have helped restore confidence, contributed to economic recovery, and enabled significant progress toward Latvia’s goal of euro adoption. The government has continued to achieve substantial fiscal savings while also protecting the poorest through social safety net spending and a temporary public works jobs program, and is strengthening its active labor market policy efforts. Looking ahead, the government has committed to meet the Maastricht criteria for euro adoption and strengthen the financial sector, which should further enhance confidence and support a rebound in growth. Steps include:
- Implementing a strong 2011 budget, reducing the 2012 deficit safely below the Maastricht reference value, and completing work on a fiscal responsibility law that will ensure future fiscal sustainability; and
- Completing the restructuring of Mortgage and Land Bank, and implementing the sales strategies for Parex and Citadele Banks.
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 €1.71 billion, or US$2.41 billion), entails exceptional access to IMF resources, amounting to 1,071 percent of Latvia’s quota in the IMF (reflecting Latvia’s quota increase in March 2011). 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:
“Strong policy implementation of the economic program has contributed to Latvia’s economic recovery and put attainment of the Maastricht criteria for euro adoption within reach. Unemployment is still high, however, arguing for greater use of active labor market policies and a robust permanent safety net.
“Euro adoption would mark a successful exit from Latvia’s difficult and ambitious program, but will require a focus on fulfilling the criteria in a convincing and sustainable way. The substantial fiscal adjustment to date and the decision to aim at a 2012 deficit of 2.5 percent of GDP demonstrates the authorities’ commitment. It will be important to maintain strong budget implementation in 2011 while working to identify high-quality and sustainable fiscal measures early in the budget cycle.
“Inflation is rising due to higher world food and energy prices, as well as tax increases. The authorities’ should focus on spending cuts rather than tax increases in the 2012 budget and on enhancing efficiency in product markets and state-owned enterprises to help keep inflation under control.
“Development of a restructuring plan for Mortgage and Land Bank after delays marks an important step to strengthen the financial system in the wake of the crisis, and should be followed up by timely implementation. Similarly, progress on the restructuring and sales strategies for Parex and Citadele Banks should help maximize recovery of state aid and reduce state involvement in the banking sector. To promote future lending, it will be important to protect the rights of secured creditors and continue facilitating market-based debt restructuring.”