News Brief No. 02/65

News Brief: IMF Completes First and Second Review of Latvia Under Stand-By Arrangement

July 12, 2002

The Executive Board of the International Monetary Fund (IMF) today completed its first and second review of Latvia's economic performance under the 20-month stand-by arrangement. Completion of the review entitles Latvia to purchase a total amount equivalent to SDR 23.6 million (about US$31 million). Latvia has not so far drawn any of those resources, and the authorities have indicated their intention not to make any purchase under the arrangement.

The IMF's Executive Board approved the stand-by arrangement on April 20, 2001 for a total of SDR 33 million (about US$44 million—see Press Release No. 01/15).

Following the discussion of the Executive Board, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman, said:

"The Latvian authorities' implementation of sound economic and structural policies has been the cornerstone of Latvia's strong macroeconomic performance over the past two years. Latvia continues to be well placed to sustain high growth in a low-inflation environment over the medium term, supported by its stable exchange regime and the prospect of EU accession. Growth is expected to reach 5 percent in 2002, among the highest of EU accession countries. Nonetheless, the persistently large current account deficit, projected at 8½ percent of GDP for 2002, poses a potential risk to Latvia's external sustainability.

"Prudent fiscal policy is critical to containing vulnerabilities associated with the large external current account deficit. Following the overall strong fiscal adjustment in 2001, the authorities' tight budget implementation during the first half of 2002 bodes well for achieving the 2002 fiscal deficit target of 1.8 percent of GDP, about 1 percentage point less than under the budget law. Further fiscal consolidation is called for in 2003, with a view to achieving broad budget balance over the medium term. To this end, and in view of the key spending priorities related to EU and NATO accession, the authorities need to improve expenditure prioritization and medium-term budget planning while moving cautiously in reducing the tax burden. In addition, the authorities need to bring local government borrowing under control in light of the nonobservance of the end-December 2001 deficit target, for which a waiver had to be granted. In this context, it is hoped that the amendments to the Law on Local Government Budgets would become effective expeditiously as soon as the definitional clarifications requested by the President of Latvia have been incorporated into the law.

"The currency peg to the SDR has served Latvia well and remains appropriate in the current external environment. To this end, the authorities' monetary program supports the peg and is based on further monetization of the economy and strong confidence in the financial system. The transition toward unified financial sector supervision has been managed very successfully, and Latvia is on track in implementing a high-caliber supervisory framework in line with international standards. The authorities have also taken significant steps to enhance the legal framework for combating money laundering and the financing of terrorism.

"Progress in the area of structural reforms has been good, driven by EU accession prospects. In particular, the recent strengthening of the anti-corruption framework is noteworthy, and this effort should be accompanied with strong and effective implementation. In addition, the divestiture of the remaining large state enterprises nears completion," Mr. Sugisaki said.