Republic of Latvia: First Review and Financing Assurances Review Under the Stand-By Arrangement, Requests for Waivers of Nonobservance of Performance Criteria, and Rephasing of Purchases Under the Arrangement—Informational Annex
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The Latvian authorities have strengthened their intervention capacity, financial supervision, and monitoring framework, and have taken steps to contain risks in Parex Bank. The staff report reviews the Republic of Latvia’s economic developments and policies. Substantial progress has been achieved in stabilizing the financial sector. The collapse in output has revealed significant underlying fiscal weaknesses that risk leading to unsustainable deficits in the absence of strong corrective measures. The deeper downturn is also in part explained by the much worse-than-projected international environment.

Abstract

The Latvian authorities have strengthened their intervention capacity, financial supervision, and monitoring framework, and have taken steps to contain risks in Parex Bank. The staff report reviews the Republic of Latvia’s economic developments and policies. Substantial progress has been achieved in stabilizing the financial sector. The collapse in output has revealed significant underlying fiscal weaknesses that risk leading to unsustainable deficits in the absence of strong corrective measures. The deeper downturn is also in part explained by the much worse-than-projected international environment.

Appendix I. Latvia: Fund Relations

(As of July 29, 2009)

I. Membership Status: Joined May 19, 1992; Article VIII.

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Latest Financial Arrangements:

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VI. Projected Obligations to the Fund:

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Exchange Arrangements:

The currency of Latvia is the lats, which was introduced in March 1993 to replace the Latvian ruble. The exchange rate was pegged to the SDR from February 1994 to December 2004, within a ±1 percent band. On January 1, 2005, the lats was repegged to the euro at the rate € 1 = 0.702804 lats, and on April 29, 2005, Latvia entered ERM2, maintaining the previous band width. On July 29, 2009 the lats was equal to US$ 2.03. Latvia’s exchange system is free of restrictions on the making of payments and transfers for current international transactions. Latvia maintains security-related exchange restrictions pursuant to UN Security Council resolutions and EC Council regulations, which have been notified to the Fund under Decision No. 144-(52/51), adopted August 14, 1952. Latvia also maintains a partial deposit freeze on Parex Bank, which gives rise to an exchange restriction. However, as it has been imposed for balance of payments reasons, is temporary and is nondiscriminatory, the board has approved its retention until end-November 2009 or the conclusion of the next Article IV, whichever comes earlier.

Article IV Consultation:

Latvia is on the 24-month consultation cycle.

The 2006 Article IV staff report was issued on September 13, 2006 (Country Report No. 06/353). The last Article IV Board discussion took place on October 4, 2006. The Public Information Notice No. 06/113 was released on October 12, 2006.

Safeguards Assessment

A safeguards assessment of the Bank of Latvia was conducted in October 2001 and an update assessment was concluded on July 8, 2009. The update assessment confirmed that the BoL has a relatively strong safeguards framework in place. Recommendations for further improvements were made in the legal structure and independence, financial reporting, and internal control areas.

FSAP Participation and ROSCs:

A joint World Bank-International Monetary Fund mission conducted an assessment of Latvia’s financial sector as part of the Financial Sector Assessment Program (FSAP) during February 14–28, 2001. The Financial Sector Stability Assessment (FSSA) report was discussed at the Board on January 18, 2002, together with the 2001 Article IV staff report (Country Report No. 02/10). An AML/CFT assessment mission took place during March 8–24, 2006, and the report was sent to the Board on May 23, 2007. A joint IMF-World Bank mission conducted an FSAP Update during February 27-March 9, 2007.

ROSC Modules

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Technical Assistance (2004–09):

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Resident Representative:

Mr. David Moore has been appointed Resident Representative effective from June 11, 2009.

Fourth Amendment:

Latvia accepted the Fourth Amendment of the Articles of Agreement on February 16, 2001.

Appendix II. Latvia: World Bank Relations

(As of July 29, 2009)

Table 1.

Latvia: Bank and Fund planned activities in macro-critical structural reform areas, July 2009–June 2010

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