Abstract
This paper focuses on the Republic of Latvia’s First and Second Reviews Under the Stand-By Arrangement and a Request for a Waiver of a Performance Criterion. Latvia has continued to follow prudent macroeconomic policies. All performance criteria under the IMF-supported program have been observed—except that the end-December 2001 fiscal deficit ceiling was exceeded by 0.2 percent of GDP because of local government budget overruns. Key financial sector indicators suggest no major vulnerabilities at this time. The current account deficit remains the main risk to Latvia’s economy.
Since issuance of the staff report (EBS/02/118), the following information has become available on macroeconomic developments, fiscal performance, legislative developments, and privatization. This information does not alter the thrust of the staff appraisal.
1. Twelve-month inflation dropped to 0.9 percent in June, reflecting lower prices for food products and telecom services.
2. The current account deficit for the first quarter of 2002 was 3.9 percent of GDP, about one percentage point below the preliminary estimate in EBS/02/118. This improvement was mainly due to unexpectedly strong private transfers, while the trade and services account balances developed as projected. Preliminary data for April show a strong recovery in exports of both goods and services, which grew year-on-year by 9 percent and 17 percent, respectively, with exports to Russia expanding particularly strongly. However, as import growth continues to outpace export growth, staff does not propose a revision of the projected annual current account deficit.
3. The end-June indicative target on the general government fiscal deficit is likely to have been met comfortably. The central government recorded a surplus of LVL 8 million in June, leading to a cumulative deficit of LVL 2 million since the beginning of the year. The excellent June outcome was helped, among other things, by a dividend payment of Lattelekom (as expected; see Box 2 of EBS/02/118) and strong inflows of EU grants. Local government data for June are not yet available, but are expected to show a deficit, given the normal seasonality in executing investment projects during the warmer summer months.
4. As expected, Parliament adopted two key legislative amendments at end-June:
To the Law on the Prevention of Laundering of Proceeds from Criminal Activity, which will enhance customer identification requirements and extend the law to also cover terrorism, including regarding the freezing of terrorism-related funds.
To the Law on Local Government Budgets, which are intended to strengthen control of local government borrowing. However, while explicitly recognizing the merits of the law, the President did not promulgate the amendments but returned them to Parliament so that certain definitions could be clarified. The authorities are working on new wording in the affected paragraphs and will put the law back on the agenda of Parliament in due course.
5. The auction of 51 percent of shares in the Latvian Shipping Company (LASCO) at the Riga Stock Exchange yielded LVL 36 million of privatization receipts. However, the auction result is being disputed in court by a foreign shipping company that was excluded from the auction because it had missed a deadline for submitting paperwork.