Press Release No. 01/15

Press Release: IMF Approves Stand-By Loan for Latvia

April 20, 2001

The International Monetary Fund (IMF) today approved a twenty-month stand-by credit for Latvia for SDR 33 million (about US$42 million) to support the government's program for 2001-02. The government of Latvia does not intend to make drawings under the stand-by credit and will treat it as precautionary, as with the previous stand-by credit (see Press Release No. 99/58).

In commenting on the Executive Board's decision, Shigemitsu Sugisaki, Deputy Managing Director, made the following statement:

"Latvia's economy has emerged from the recession triggered by the Russia crisis. Economic growth is strong and broad-based, inflation is close to rates prevailing in the European Union, and vulnerability to external shocks has lessened. A surge in foreign direct investment has helped contain external debt indicators. However, unemployment remains relatively high.

"With a view to sustaining robust economic growth and further improving Latvia's external outlook, a prudent fiscal policy is key, and the budget is to be broadly balanced over the medium term. The budget deficit is to fall in 2001 to 1¾ percent of GDP—a near halving—and in 2002, a fiscal deficit of no more than 1 percent of GDP is envisaged. In the medium-term, the authorities will raise expenditure related to EU and NATO accession; they also wish to make selective reductions in tax rates. To help achieve these goals at the same time, public expenditure policy and management is being improved, the pension system further reformed, the tax and customs administration strengthened, and the budget process made more transparent and efficient.

"The exchange rate peg to the SDR has been a reliable anchor for the past seven years and remains appropriate, provided that macroeconomic policies remain sufficiently tight and external competitiveness is maintained.

"The Bank of Latvia is to be commended for its ongoing effort to bring financial regulations into full compliance with international standards. As a result, the financial sector has strengthened considerably. The entry of foreign strategic investors in several of the major banks, and possible mergers among key players in the market, are likely to further strengthen the banking system and make it more resilient to exogenous shocks.

"Structural reforms remain essential to achieve Latvia's medium-term goals and reduce further its vulnerability to external shocks. Key reforms include creation of an environment conducive to private sector development and increased foreign direct investment, privatization of remaining state-owned enterprises, and measures to enhance governance," Mr. Sugisaki said.

ANNEX

Program Summary

The Latvian economy has fully recovered from the recession triggered by the Russian crisis, with the resumption of strong growth in a low-inflation environment. Broad-based growth is driven by private investment and buoyant export performance, despite the appreciation of the lats relative to the euro.

The main focus of Latvia's new program will be on fiscal policy in 2001 and over the medium term, underpinned by a continuation of the successful exchange rate peg to the SDR. The key objective will be to provide a credible framework within which the authorities' medium-term fiscal goals - a broadly balanced fiscal stance, increased expenditure for EU and NATO accession, and selective tax rate cuts - can be achieved.

Under the program, GDP growth is projected at 6.0 percent in 2001, after 6.6 percent growth in 2000 and 1.1 percent in 1999. Inflation is targeted to remain low at, 3.0 percent 2001, compared with 1.8 percent in 2000. International reserves are targeted to remain in the range of three months of imports.

To achieve these goals, the budget for 2001 approved by Parliament late last year envisages a deficit of 1 ¾ percent of GDP. The budget is based on conservative revenue assumptions, with nominal tax receipts projected to grow by 8 ½ percent, somewhat slower than nominal GDP.

The structural component under the new program will focus on three areas that are key to medium-term macroeconomic stability and growth: public expenditure policy and management, including pension reform; improvements in tax and customs administration; and financial sector supervision. The program's prudent macroeconomic policy stance is complemented by key structural reforms that constitute a vital building block in supporting durable growth and Latvia's attractiveness to foreign investors. Measures include concerted efforts to expedite privatization and further improve the business climate.

Latvia joined the IMF on May 19, 1992 and its quota¹ is SDR 126.8 million (about US$161 million). Its outstanding use of IMF financing currently totals SDR 24.8 million (about US$31 million).