Front Matter Page
© 2010 International Monetary Fund
March 2010
IMF Country Report No. 10/65
Republic of Latvia: Second Review and Financing Assurances Review Under the Stand By Arrangement, Request for Extension of the Arrangement and Rephasing of Purchases Under the Arrangement and Request for Waiver of Nonobservance and Applicability of Performance Criteria
The following documents have been released and are included in this package:
The staff report, prepared by a staff team of the IMF, following discussions that ended on December 14, 2009 with the officials of the Republic of Latvia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on January 25, 2009. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
Supplements to the staff report.
A Press Release.
A statement by the Executive Director for the Republic of Latvia.
The document(s) listed below will be separately released.
Letter of Intent sent to the IMF by the authorities of the Republic of Latvia*
Technical Memorandum of Understanding*
*Also included in Staff Report
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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International Monetary Fund
Washington, D.C.
Front Matter Page
INTERNATIONAL MONETARY FUND
REPUBLIC OF LATVIA
Second Review and Financing Assurances Review Under the Stand-By Arrangement, Request for Extension of the Arrangement and Rephasing of Purchases Under the Arrangement and Request for Waiver of Nonobservance and Applicability of Performance Criteria
Prepared by the European Department
(In Consultation with Other Departments)
Approved by Anne-Marie Gulde-Wolf and Tessa van der Willigen
January 25, 2010
Stand-By Arrangement: A 27-month SDR 1.52 billion SBA involving exceptional access (1,200 percent of quota) was approved by the Executive Board on December 23, 2008 (Country Report No. 09/3). A first purchase of SDR 535 million was made following the Board meeting. A Staff Report for the Interim Review under the Emergency Financing Mechanism was issued on February 23, 2009. A second purchase of SDR 178 million was made following the First Review on August 27, 2009 (Country Report No. 09/297) and a third purchase, also of SDR 178 million, becomes available on completion of this Second Review.
Program status: The sharp economic downturn is starting to bottom out, although recovery has not yet begun. The authorities have implemented the June 2009 supplementary budget, and met with a wide margin the end-September performance criterion on the adjusted primary balance (the end-December performance criteria also seem likely to be met, although final data are not yet available). The continuous performance criterion on external payments arrears was missed, but by a small amount which the authorities expect to resolve soon. The authorities adopted a strong budget for 2010 that would likely have lowered the deficit to 7 percent of GDP, well below First Review projections; however, a recent Constitutional Court ruling overturning last June’s pension reductions will add around 1½ percent of GDP to the 2010 deficit, increasing the necessary medium-term fiscal adjustment. The Court also held that all significant and essential loan agreements needed Parliamentary approval. As the current account surplus has widened, and capital outflows have been less than expected, the end-December 2009 performance criteria for net international reserves and net domestic assets were met. Further steps are needed to accelerate the restructuring of domestically owned banks.
Discussions were held in Riga during December 2–14, 2009, building on the work of earlier staff visits focused on the budget. The mission met with Prime Minister Dombrovskis; Finance Minister Repše and coalition leaders; Bank of Latvia Governor Rimšēvičs; Head of the Financial and Capital Market Commission Krūmane; senior officials in these institutions; social partners; and representatives of financial institutions.
Staff: The staff team comprised Mark Griffiths (head), Lone Christiansen, James John (all EUR), Alex Klemm (FAD), Michaela Erbenova (MCM), Gavin Gray and Chris Marsh (SPR). David Moore (Resident Representative) assisted the mission. The team worked closely with staff of the European Commission, ECB, World Bank, and the Swedish authorities. Gundars Davidsons (OED) attended some meetings.
Contents
I. Introduction and Summary
II. Background
III. Policy Discussions
A. Macroeconomic Framework
B. Fiscal Policy
C. Financial Sector Policies
D. Monetary Policy and Debt Management
E. Private Debt Restructuring
IV. Program Issues
V. Staff Appraisal
Figures
1. Real Sector, 2006–09
2. Labor Markets and Inflation, 2006–09
3. Competitiveness and the Global Outlook, 2006–09
4. Fiscal Sector, 2005–09
5. Balance of Payments, 2008–09
6. Net International Reserves and FX Market Developments, 2006–10
7. Banking Sector Developments, 2006–09
8. Bank Credit, 2006–09
9. Interest Rates and Euroization, 2006–09
10. Monetary Developments, 2008–09
11. Public Debt Sustainability: Bound Tests
12. External Debt Sustainability: Bound Tests
Tables
1. Selected Economic Indicators, 2007–10
2. Macroeconomic Framework, 2007–14
3. General Government Operations, 2008–12
4. Fiscal Balances and Debt, 2008–14
5. Estimated Impact of the 2010 Budget
6. Public Sector Debt Sustainability Framework, 2004–14
7. Medium Term Balance of Payments, 2007–14
8. External Debt Dynamics, 2006–14
9. External Debt Sustainability Framework, 2004–14
10. Financial Soundness Indicators, 2007–09
11. Bank of Latvia Balance Sheet, 2005–10
12. Monetary Survey, 2005–10
13. Selected Vulnerability Indicators, 2005–10
14. Schedule of Reviews and Purchases
15. Program Financing, 2009–11
16. Indicators of Fund Credit, 2009–16
Appendix
I. Letter of Intent
II. Technical Memorandum of Understanding
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INTERNATIONAL MONETARY FUND
REPUBLIC OF LATVIA
Second Review and Financing Assurances Review Under the Stand-By Arrangement, Request for Extension of the Arrangement and Rephasing of Purchases Under the Arrangement and Request for Waiver of Nonobservance and Applicability of Performance Criteria—Informational Annex
Prepared by the European Department (In Consultation with Other Departments)
Approved by Anne-Marie Gulde-Wolf and Tessa van der Willigen
January 25, 2010
Contents
Appendix
I. Fund Relations
II. World Bank Relations
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INTERNATIONAL MONETARY FUND
REPUBLIC OF LATVIA
Second Review and Financing Assurances Review Under the Stand-By Arrangement, Request for Extension of the Arrangement and Rephasing of Purchases Under the Arrangement, Request for Waiver of Nonobservance and Applicability of Performance Criteria—Supplementary Information
Prepared by the European Department (In Consultation with Other Departments)
Approved by Anne-Marie Gulde-Wolf and Tessa van der Willigen
February 9, 2010
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Press Release No. 10/47
FOR IMMEDIATE RELEASE
February 17, 2010
International Monetary Fund
Washington, D.C. 20431 USA
Washington, D.C. 20431 • Telephone 202-623-7100 • Fax 202-623-6772 • www.imf.org
