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The following item is a Letter of Intent of the government of Latvia, which describes the policies that Latvia intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Latvia, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
 

March 9, 1998

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Camdessus:

1.  We have completed discussions for the first review under the stand-by arrangement (SBA) in support of the government's economic program described in our letter and accompanying Memorandum of Economic Policies dated September 8, 1997. Continued prudent fiscal and monetary policies, combined with progress on a broad range of structural reforms, have led to stronger than expected growth, a more rapid than anticipated decline in inflation, and a rise in gross international reserves. All quantitative performance criteria for end-December were observed, although one of the two structural performance criteria was breached, for which we are requesting a waiver. We describe below the macroeconomic objectives for 1998 and over the medium term and outline the economic policies to be carried out over the next six months in support of these objectives. In addition, we specify performance criteria and indicative targets for end-June 1998, end-September 1998, and end-December 1998. The second review, expected to be completed by September 1998, will, in addition to a comprehensive evaluation of developments under the program, focus on progress in privatization of large enterprises, civil service reform and tariff policy. With international reserves currently equivalent to three months of imports, we maintain our intention not to make any purchases under the stand-by arrangement, but would do so should circumstances warrant.

Recent Economic Developments

2.  Macroeconomic developments during 1997 were favorable, and policies were implemented in line with the government's program. Real GDP in the third quarter of 1997 increased by 7.6 percent (relative to the third quarter of 1996), bringing annual growth through September to 5.6 percent. Growth has been broad-based, with particularly strong performance in the services sector and construction. The economy is expected to grow by 6 percent in real terms for the year as a whole. Reflecting the strong economic growth, unemployment has begun to decline, falling from 7 percent in midyear to 6.7 percent at present. Inflation fell more rapidly than expected in 1997, with consumer prices rising by 7 percent for the year; this reflects a number of factors, including cheaper food imports following the implementation of the Baltic Free Trade Agreement, and the significantly better-than-expected fiscal outcome. Excluding increases in administered prices, such as for public utilities and housing, consumer prices rose by just 4.5 percent over the same period.

3.  The external current account deficit for the first nine months of 1997 was 6.6 percent of GDP, and is estimated at 6.9 percent of GDP for the year as a whole. Exports grew strongly, by an estimated 13 percent (in volume terms), but import growth was just as rapid, reflecting an acceleration in the second half of the year in imports of intermediate and capital goods. The trade deficit in 1997 is estimated to have widened slightly from 1996 to 15.6 percent of GDP. Inflows of foreign direct investment continued to strengthen, encouraged by the stable macroeconomic situation, ongoing privatization, and new projects, and contributed to a balance of payments surplus through September of 5.8 percent of GDP.

4.  The fiscal stance was considerably tighter than programmed in 1997, contributing to lower inflation and higher private sector investment. The general government fiscal performance was better than anticipated by about 2 percent of GDP. Revenue exceeded programmed levels by 0.2 percent of GDP, owing to stronger economic growth as well as improvements in tax administration; strong gains were registered in the collection of corporate and personal income tax and social tax revenue. We were able to contain expenditure some 2 percent of GDP below program levels without reducing intended benefits, as a result of smaller-than-expected indexation increases in transfers resulting from the better inflation performance, lower interest payments, and shortfalls in public investment due to slower pace of disbursements of foreign loans.

5.  Monetary developments during 1997 reflect a continued increase in confidence in economic policies and the banking system, and an acceleration in the development of the financial sector. Reserve money grew by nearly 30 percent during the year. The increased demand for money was satisfied primarily through the Bank of Latvia's foreign exchange operations and strong growth in domestic credit to the private sector, equal to 76 percent for the year. Real interest rates in Latvia have remained quite low because of, inter alia, the tight fiscal stance and continued falling inflation. Despite interest rates on bank deposits slightly below current inflation, the level of deposits grew by 57 percent last year, reflecting increased confidence in the context of strengthened banking supervision and strong expectations of inflation decline. In addition, interest rate spreads have begun to narrow in recent months due, in part, to lower perceived credit risk.

6.  We recognize that prospects for sustained investment and export-driven economic growth are tied to a continuation of the process of structural reform. Good overall progress has been made in this area, although there have been some delays. The process of preparing some of the large infrastructure enterprises for privatization has taken somewhat longer than anticipated, but the goal of completing privatization of all but a few large enterprises by mid-1998 remains in reach. Apartment privatization is also moving ahead as scheduled, and measures are being taken to address obstacles for further progress over the medium term. Steps are being taken as well to strengthen property rights, including through enhancing the use of land and movable property as collateral, and to continue to improve the overall business climate.

Macroeconomic setting

7.  Our basic economic strategy remains unchanged. Latvia has succeeded in sustaining macroeconomic stability and is moving steadily toward implementing the structural reforms needed to provide the foundation for sustained economic growth. The policy of pegging the lats to the SDR has served Latvia well, and will remain a key feature of our economic policy. The main challenge now facing the economy is to move quickly and on a broad front to accelerate our program of structural reforms, including the completion of enterprise privatization, apartment privatization and promotion of the real estate market, the extension and refinement of financial sector regulation, the strengthening of property rights, and civil service reform, all of which will help create an efficient market-based economy supported by an effective public sector. At the same time, we will need to ensure that financial policies remain cautious and consistent with a sustainable external current account position.

8.  We anticipate that increased national savings and higher investment, including public investment in core infrastructure and enhanced efficiency arising from structural reforms and foreign direct investment, will generate real GDP growth in Latvia of about 6 percent in 1998 and over the medium term, allowing an increase in real per capita consumption and, at the same time, a gradual reduction in the external current account deficit. Inflation for 1998 is targeted at 6 percent and is expected to decline to 4 percent over the medium term, as fiscal and monetary restraint is maintained, and remaining administrative prices are raised to cover costs.

Fiscal policy and public sector reform

9.  The conservative fiscal policy of the last few years and, especially, 1997 has played a crucial role in Latvia's positive economic performance, helping to bring inflation and interest rates down and allowing increased bank credit to the private sector. We will continue this cautious policy in 1998, while addressing the need for enhancing the country's economic infrastructure. Our economic program for 1998 targets a general government fiscal deficit of LVL 16 million, or 0.4 percent of GDP, based on a conservative revenue estimate and a rise in public investment. This target is more prudent than the 1998 budget approved by parliament, in as much as improved growth prospects will affect revenue collection, and better inflation performance will reduce costs. The program target also reflects more conservative estimates of the pace of disbursements of foreign loans for investment as well as the utilization of budget expenditure authorizations; to the extent that foreign disbursements are higher than programmed, public investment and the fiscal deficit would be correspondingly higher. We believe this more cautious approach to fiscal policy is justified in view of the need to ensure a sustainable external position in an unsettled external economic environment. While pressures exist and will continue for expenditures to meet social and investment needs, the government is fully committed to the fiscal targets under the program and confident these objectives can be met without new tax increases or cuts in programmed expenditures. Nonetheless, we will monitor carefully economic developments during the year, and will take additional measures if necessary to achieve these targets.

10.  Over the medium term, a primary task facing Latvia in the fiscal area is rationalizing public expenditure and reforming the civil service. Given our goals of accession to the EU, which will require increased spending in a number of areas, limiting unproductive spending becomes all the more important. Our objectives in this area include eliminating the duplication of activities across ministries and agencies, devolving certain activities to the private sector, and providing competitive and transparent wages. In this context, we completed in December the first civil service census for Latvia. Based on the results of the census, we are currently drafting a "white paper," with recommendations regarding the direction of public sector reorganization and civil service reform, and expect that the paper will be submitted to the Cabinet of Ministers by March of this year. Also by end-March, we plan to complete a review of public sector wage policy, including recommendations for reform, and to present a draft regulation to the cabinet. It is anticipated that several recommendations of these two reviews will begin to be implemented during 1998 and will be fully reflected in the 1999 budget process. As a further step toward increasing the effectiveness of public administration, it is expected that, by end-1998, internal audits of ministries will be expanded to include managerial, rather than simply financial, aspects of their operations. Following this, over the next two years, external audits of each ministry will be undertaken as a means of generating specific recommendations for improving efficiency.

11.  We believe that pension reform will play an important role in providing adequate retirement income, mobilizing savings and contributing to the development of capital markets. We have completed the draft legislation required for implementing the planned second tier of the system, and anticipate the presentation of this legislation to parliament by September. It is anticipated that our experience in regulating private pensions beginning this year will prove valuable in implementing the public pension reform. We recognize as well the necessity of ensuring the long-term financial sustainability of the pension system, in particular given the need to finance the planned partial transition to a fully funded scheme, and to this end will continue to improve collections of social insurance contributions and limit benefits under the defined-benefit portion of the pension system to sustainable levels.

12.  The government has taken a number of other steps to improve the efficiency and equity of public spending. One of the two types of local government has been restructured and rationalized as of November 1997, and the consolidation of small local governments has begun on a voluntary basis, with four pilot projects underway. The primary aim of this reform is to improve the quality of public services, although savings should also materialize over time. We have also taken steps to rationalize further social spending, including the completion of the reform of the health insurance system in the context of the World Bank SAL.

13.  Tax revenues have increased faster than GDP in each of the last two years, indicating that the measures we have implemented over the last several years have succeeded in improving tax administration. Tax collection was enhanced in 1997 by an internal reorganization of the State Revenue Service (SRS) and the introduction of business plans, including revenue targets, for each regional office. Customs collections have increased, due in large part to improved border control, and several additional customs checkpoints will be reinforced during 1998. The takeover by the SRS of the collection of social insurance contributions took place, as planned, on January 1, 1998; it is likely that over the medium term, this transfer will improve social tax collection, as the SRS can utilize cross-checking with other tax information to improve audit. We are currently drafting the necessary legislation that will allow the SRS will move to joint collection of the income tax and social insurance contributions by early-1999. Tax arrears to the SRS declined during 1997 from 40 percent to 30 percent of annual tax revenue of the basic budget. A pilot project in three local offices, utilizing new debt collection procedures, proved successful last year, and will be expanded to all offices in 1998. In addition, in order to prevent the accumulation of new arrears, rules for allowing tax deferrals have recently been strengthened, with collateral now being required for such deferral. We view enhanced computerization as a key step for further improvement, and to this end have prepared a medium-term plan with the World Bank. The first priority for computerization during 1998 will be customs administration; a pilot project of the implementation of ASYCUDA is taking place in 1998, to be followed by full implementation next year. Other priority areas are improved audit through the cross-checking of taxpayer information, including with other agencies and property registers, as well as between regional tax offices; and the development of a system for tracking VAT payments and credits. The precise timing of these projects will depend on the available financing.

14.  We recognize the importance of maintaining a broad tax base in order to minimize tax-induced distortions in economic decision-making, simplify tax administration, enhance the transparency of the tax system, and allow adequate revenue to be raised at the lowest possible tax rates. In this context, we are committed to limiting applicability of tax-free economic zones, only two of which—in Riga Port and Ventspils—are currently in partial operation. It is anticipated that a third zone, in Liepaja, will come into operation during 1998, as we proceed with due caution in drafting implementing regulations, in order to maintain effective tax administration and minimize revenue loss. A fourth zone, in Rezekne, was only recently approved by Parliament, and the need to carefully draft implementing regulations will require considerable effort through 1998. We are following on an ongoing basis the experience of regional tax offices in administering the tax-free zones, and by September we will prepare a review of early experience with these zones for cabinet, in particular with regard to revenue impact. We envision preparing, in 1999, an overall assessment of these zones, focusing on their effectiveness in meeting the objectives of regional development.

Monetary and exchange rate policies

15.  We strongly believe that our pegged exchange rate to the SDR has served Latvia well, and remains consistent with near-term targets and policies. Latvia appears to have maintained its external competitiveness despite a real exchange rate appreciation relative to major western trading partners over the past several years, reflecting, in large part, a catch-up of the initial undervaluation and recent productivity gains resulting from economic reform and foreign direct investment. The overall trade-weighted real effective exchange rate has, moreover, remained virtually unchanged over the past two years. In addition, exports and foreign direct investment remain buoyant, the overall balance of payments position remains fairly strong, and profit margins in manufacturing increased during 1997. We believe that the impact of recent global developments, including the depreciation of a number of East Asian currencies and modest revisions of growth prospects for the EU, should have only a limited impact on Latvia, but we will continue to monitor developments closely. Should capital inflows endanger our inflation target, recourse would first be made to open market operations to sterilize purchases of foreign exchange and to fiscal tightening.

16.  In establishing monetary targets for end-June, end-September, and end-December 1998, we have taken into account the increasing demand for money and growth of confidence in the banking sector. In light of this, we have revised the original monetary program to reflect a higher money multiplier and lower velocity, implying a more rapid growth in broad money, as has been observed in recent months. The program allows for a real increase of about 24 percent in broad money during 1998. This would accommodate higher growth in credit to the non-government sector than originally envisaged, of 36 percent in real terms, which would nevertheless imply a dampening of the trends observed during the second half of 1997. We recognize that the stock of domestic credit, at about 10 percent of GDP, remains quite low by international standards, and that a sustained and efficient growth of credit depends crucially on continued progress in reforms to remove structural impediments to bank lending, including through steps to enhance the use of collateral and improve accounting standards, and completing privatization. At present, all indicators suggest that the acceleration of credit growth during last year increased the level of intermediation in the Latvian economy without affecting adversely the health of the financial system. We are confident that the same will be repeated in 1998. However, we are aware that rapid growth of credit also creates risks. For this reason, we will continue to monitor very closely credit developments during 1998, including its maturity, composition, and sources of financing. If at any time there are indications that the pace of credit growth might jeopardize the soundness of banks' loan portfolio, their liquidity or capital adequacy, or the sustainability of Latvia's balance of payments, we will take, in consultation with Fund staff, any measures that may be required to address this. Such measures could include a tightening of monetary conditions, higher prudential standards, or stricter supervisory practices. It should be noted as well that the BOL has recently started to implement a more active policy of open market operations.

External Sector Policies and Prospects

17.  We continue to be confident that the external current account deficit remains sustainable. First, the deficit is financed primarily by foreign direct investment, and the debt-to-GDP ratio is expected to remain low and approximately constant, at about 10 percent of GDP, over the medium term. Second, nontrade-related short-term capital appears to be limited, and steps to enhance financial sector oversight, in particular of nonbank financial institutions, will help to ensure that capital inflows are allocated efficiently. Third, net foreign assets of the banking system have risen from US$800 million at end-1996 to US$1050 million at end-1997, and the central bank's gross official reserves remain equivalent to about three months of imports of goods and nonfactor services. Finally, the growth of imports is strongest for capital goods, suggesting that significant new investments are taking place.

18.  Nevertheless, in the present international environment, the current account deficit clearly merits continued close attention, especially given the weakness in balance of payments data on the nature of capital inflows and on the composition of trade between investment and consumer goods. We stand ready to tighten monetary and fiscal policy as necessary in the event of adverse balance of payments developments. In addition, the Central Statistics Bureau and the BOL have stepped up their efforts to improve balance of payments statistics, including through a reexamination of the techniques employed in the estimation of specific capital flows and components of the trade and services accounts.

19.  Latvia has made significant progress in liberalizing trade. The Customs Law adopted in July 1997 modified the provisions on customs valuation of goods in accordance with WTO rules and lowered tariffs on most products, including a few agricultural goods, which still retain very high tariffs. Tariffs on several goods were lowered to zero or 1 percent, reducing the (unweighted) average tariff for all nonagricultural goods to 4.5 percent, with 1 percent the most common rate. In January 1998, tariffs on a number of products (including wine and cigarettes) were lowered further and the new system of customs valuation began to be implemented. During 1997, a free trade agreement among the Baltic states in agricultural products went into effect and several other bilateral free trade agreements were signed or went into effect. As a result, about three-fourths of our agricultural imports currently originate in FTA countries. Finally, substantial progress was made in 1997 toward WTO accession, and only one bilateral negotiation remains open. Our expectation to accede to the WTO by end-1997 was not met as these negotiations await resolution of different views among a number of major WTO members on trade in audio-visual services. We hope this disagreement can be resolved soon, allowing Latvia to join the WTO in the early part of this year.

20.  With respect to agriculture, the production-weighted basic tariff for all products was reduced to 34 percent in July 1997. We are committed to further agricultural tariff reduction, and intend to submit legislation to parliament by end-June 1998, lowering the average production-weighted tariff on a set of agricultural products as defined under the program (i.e., the highest tariff in each group of agricultural goods), currently at 47 percent, to no more than 30 percent.

21.  All quantitative restrictions on imports have been abolished and import licensing is now virtually automatic except for weapons, explosives and fuels. The processing period for license applications has been reduced to no more than ten business days and license fees have been set to reflect only processing costs. We intend to convert the remaining specific import tariffs (except on sugar) to ad valorem tariffs by June 1998 and, by end-1998, to remove remaining export duties except on books more than 50 years old and antiques.

Financial sector evolution

22.  Banking supervision has been strengthened dramatically since the banking crisis of 1995. Latvia now has some of the most stringent regulations of all transition economies, consistent with and in many cases exceeding the standards of both the Basle Committee recommendations and the EU. The banking system has strengthened considerably, with the number of banks meeting core bank requirements increasing, and the quality of loan portfolios improving. Our goals for 1998 are to strengthen further our monitoring procedures, support the development of financial markets, and expand the focus of financial oversight. We recognize the importance of appropriate regulations for non-bank financial institutions early in the process of financial widening in order to forestall potential future problems.

23.  By April 1998, banks will have to comply with the Bank of Latvia's new requirements for commercial bank internal control systems. The new requirements will allow the BOL to standardize data regarding governance practices, risk evaluation, management information systems, and general accounting practices. Second, the BOL will continue the policy of requiring full disclosure of shareholders of commercial banks, and reserves the right to take measures in the case of a noncompliance. Third, in an effort to reflect more accurately the risk of transactions with CIS countries, we have strengthened the capital adequacy requirement by changing the weighting of current claims on credit institutions from non-OECD countries from 80 percent to 100 percent. Fourth, in addition to categorizing any loan on which interest is overdue by more than 90 days as nonperforming, the loan-loss provisioning rules have been made more stringent by classifying as substandard any loan for which the bank cannot provide financial statements of the borrower.

24.  Further development of Latvia's financial markets will be aided by a series of legislative actions taken last year and planned for 1998. The Securities Market Commission, established in April 1997, is now fully operational. A series of regulations have been adopted for investment funds and insurance companies, which should also help to speed up the pace of nonbank financial market development. A draft deposit insurance scheme was presented to parliament in December 1997. Finally, an anti-money laundering law, which defines the responsibilities of financial institutions in identifying and reporting unusual or suspicious financial transactions and establish a Disclosures Office to monitor such transactions, has also been passed by parliament and will come into force in June 1998.

25.  As a major step toward our goal of extending coverage of prudential regulations and monitoring to the entire financial sector, we intend to begin monitoring banks on a consolidated basis. The necessary amendments to the Credit Institutions Act are in their second readings in parliament and are expected to be adopted by April 1998. We will complete the set of guidelines on new calculations of prudential ratios by this summer and, following training of banks on the implementation of the new system, formally require all banks to comply with consolidated supervision by January 1999. Regulation of nonbank financial institutions is now being completed through additional amendments to the laws on credit institutions introducing supervision on a consolidated basis, new laws on investment funds and private pension funds, and in the context of existing regulations. Finally, an Inter-agency Working Group on financial market supervision is working on a framework and timetable for creating an independent agency which would integrate all financial sector supervision.

Privatization and Property Rights

26.  The government has made a major effort to accelerate the privatization process, and we remain committed to the target of completing the privatization of almost all remaining enterprises by mid-1998. In this context, 312 purchase agreements were concluded in 1997 and we aim to conclude most of the remaining 195 agreements, which primarily refer to small and medium-sized companies, in the first half of this year. Significant progress has also been made in the privatization of the largest companies. With respect to the Ventspils Nafta oil terminal, the merger with the LaSam pipeline operator was concluded in September 1997, paving the way for public share offerings. By end-1997, 43 percent of the company's shares were owned by the private sector and the government is expected to become a minority shareholder by end-June. The privatization of the Latvian Shipping Company was initiated in 1996, and two potential strategic investors are currently undertaking an evaluation of the company, the results of which are expected by the end of February. The government intends, by end-June 1998, to sell 20 percent of its shares, including to a strategic investor, with the aim of achieving a restructuring and increasing profitability of the company. From mid-1998 onward, the government would consider further gradual divestiture. The restructuring of Latvenergo is continuing with the creation, as of January 1, 1998, of a holding company with three divisions, subsequently to be transformed into legally independent generating, transmission, and distribution subsidiaries. Consultations with the World Bank are ongoing regarding the precise modalities of privatization, and are expected to be completed by end-March 1998, with the aim of ensuring a competitive environment upon privatization. Last year, 32.5 percent of Latvijas Gaze was sold to strategic investors; the next step is to increase private ownership through public offerings, and the government is expected to become a minority shareholder by end-1998. In the case of Lattelekom, 49 percent of which was sold to a consortium of strategic investors in 1994, negotiations are currently underway with the private strategic shareholders to reduce the term of the company's monopoly position from 2013 to 2003, in line with EU requirements, and to turn Lattelekom into a joint stock company in line with the umbrella agreement, thus allowing further sales of the remaining government shares.

27.  We have taken specific steps to eliminate the structural problems in the energy sector which have tended to slow the privatization process, including resolving the issue of outstanding customer claims and ensuring that energy tariffs cover economic costs. The government's assumption of part of Latvijas Gaze's customer claims was an important step in that direction. The classification of gas and electricity claims into collectable, doubtful, and bad debts, and subsequent write-offs of the majority of the bad debts against provisions and profits, have further significantly reduced the arrears of Latvijas Gaze and Latvenergo. Furthermore, the newly established payment schedules for electricity and gas have been comfortably met; cutoff of supplies is being practiced in cases of non-payment; and several cases have been brought to court. A ministerial working group has been established to address the arrears in the heating sector, and the goal is to reduce these arrears as well as to shorten the heating payment schedules to 60 days over the next two years. To maintain full cost-recovery pricing, new pricing methodologies, prepared by an external consultant and reviewed and agreed with the World Bank, were recently issued for heat, gas, and electricity.

28.  The privatization of the Latvian Savings Bank (the larger of two remaining banks with government participation) has moved forward. Following last year's merger with a smaller bank, a public offering of 29 percent of the merged bank's shares was completed in June; 54 percent of the bank's are still government-owned and the Latvia Privatization Agency is preparing additional sales of shares, including a 5–10 percent share offer to employees. The government's plan to ensure the soundness of the new merged operation, through recapitalization and rationalization of bank operations was delayed, but is expected to be completed by mid-1998.

29.  Apartment privatization accelerated in 1997, with some 20 percent of all government-owned apartments sold by the end of the year. The government's target is to privatize 32 percent of all government-owned apartments by end-June and 50 percent by the end of 1998. The process has been aided by several amendments to the law on apartment privatization, allowing sales through an accelerated procedure which avoids the need of land registration ahead of divestiture; and reducing the ability of local governments to interfere with the privatization process. To expedite further the process, another amendment was submitted to parliament in 1997, which, inter alia, would enable tenants with outstanding utility arrears to initiate the privatization process, and provide incentives for tenants to decide more quickly whether or not to privatize. Sales for cash and fees collected through the accelerated procedure have continued to generate revenues for the local governments, enabling them to implement the privatization program more expeditiously. We also intend to move forward with privatization of land; to that end, 24 sales agreements for lots of land were signed in 1997, and the target is to sign another 150 such agreements in 1998.

30.  Draft legislation to establish a register for collateral based on movable property was submitted to the parliament last year. In addition, the process of settling restitution claims and the registration of land is continuing to advance, and almost all properties are now registered in the cadastre. Despite the relatively high cost of registering properties, as of end-1997, some 130,000 units were registered in the Land Book, thereby not observing the structural performance criterion of 140,000 properties registered. This shortfall can be primarily attributed to the belief on the part of many property owners that only those properties registered in the Land Book would be subject to the newly introduced property tax. Once this situation was clarified through an amendment to the property tax law, the land registration process accelerated, and we expect that some 160,000 properties will be registered by end-June, and at least 200,000 properties by the end of 1998. In light of the relatively small size of the shortfall, the unanticipated nature of the problem leading to it, and the subsequent steps taken to correct the problem, we ask that a waiver be granted for the failure to meet the performance criterion. In order to further enhance the development of the real estate market, the government also intends to create soon a system of mortgage credits for the construction and renovation of homes.

Governance and Market Environment

31.  The government gives a high priority to good governance in the country, including continued improvements in our legal framework and institutions. In order to develop further an effectively functioning judicial system, we intend to take measures to, inter alia, make the work of courts more public; develop more strict criteria for choosing judges and assessors; and prohibit judges from meeting with one party involved in a case without the participation of the other party. Furthermore, we intend to enforce rigorously the anti-corruption law passed in 1996 and complete the anti-corruption program initiated last year in collaboration with the World Bank. We believe as well that maintaining a broad tax base, increasing transparency in budgeting and expenditure management and eliminating unnecessary regulations will help to improve the transparency of public decision making and limit opportunities for unwanted discretion by government officials.

32.  The next stage of economic reform in Latvia will focus as well on creating a business climate conducive to attracting foreign and domestic investment. In that context, new regulations were introduced in October last year, reducing the number of entrepreneurial activities subject to licensing regulations from 118 to 67, primarily referring to issues of public health, safety and national security. We intend as well to begin negotiations with the OECD on joining the Multilateral Agreement on Investment as soon as this agreement is finalized, and negotiations open for nonmembers.

Sincerely,

/s/ /s/
Roberts Zile
Minister of Finance
Ministry of Finance
Ilmars Rimsevics
Deputy Governor
Bank of Latvia