News Brief: IMF Completes Latvia Review
June 30, 2000
The Executive Board of the International Monetary Fund (IMF) today completed the first review under the stand-by credit for Latvia. Latvia will treat the credit as precautionary and does not intend to draw the SDR 5.5 million (about US$ 7.3 million) that is available as a result of today's decision.
In commenting on the IMF Executive Board discussion, Shigemitsu Sugisaki, Deputy Managing Director, said:
"The Latvian authorities' pursuit of appropriate financial policies and implementation of difficult structural reforms has laid the foundation for the current economic recovery from the Russian crisis. Latvia now appears poised for a resumption of durable growth in a low-inflation environment, supported by its stable exchange rate regime. However, the persistently large current account deficit, coupled with the increased reliance on debt financing, should be monitored carefully.
"The fiscal deficit targets for 2000 and 2001 and the planned achievement of near fiscal balance over the medium term are appropriate. However, further fiscal consolidation may be needed should the external current account deficit fail to decline as expected, or if foreign direct investment falls short of expectations. To this end, the authorities have already prepared a set of contingency spending measures that they are ready to implement if necessary. Fiscal consolidation over the medium term will also benefit from continued reform of the public pension system, as well as from the implementation of measures to improve tax administration and enhance the efficiency, effectiveness, and transparency of public expenditure.
"The current exchange rate regime remains appropriate, provided that sufficiently tight financial policies continue to be pursued. The authorities should monitor closely Latvia's external competitiveness, particularly in light of possible further appreciation of the lats against the euro. The authorities' monetary program is consistent with maintaining the exchange rate peg. However, the Bank of Latvia should watch carefully the liquidity impact of its recently-introduced long-term foreign exchange swaps.
"There has been welcome progress in strengthening the financial health of the banking system and in enhancing banking supervision, which has brought the prudential framework closer to full compliance with the Basel Core Principles of Effective Banking Supervision. Efforts should be intensified to enhance the regulatory framework for, and the supervision of, nonbank financial institutions, so as to make the forthcoming Unified Financial Sector Supervision Agency a success.
"The government intends to largely complete the privatization of the remaining large public enterprises by early 2001, establish an adequate framework for the regulation of utilities, and address the remaining impediments to an enabling business climate. These steps are preconditions for enhancing the role of the private sector, attracting foreign direct investment, and strengthening and diversifying Latvia's export base, which will strengthen Latvia's external sustainability," Mr. Sugisaki said.