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Press Release No. 01/15
April 20, 2001
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves Stand-By Loan for Latvia

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 1 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 percent of GDP. The budget is based on conservative revenue assumptions, with nominal tax receipts projected to grow by 8 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).


Table 1. Latvia: Selected Economic and Financial Indicators



 

1996

1997

1998

1999

2000

2001

     

 

 

Est.

Proj.


             

(Annual percent changes unless otherwise specified)

National income

           

Nominal GDP (millions of lats, estimates for 2000)

2,829

3,276

3,590

3,897

4,333

4,717

GDP (millions of $US)

5,137

5,639

6,086

6,662

7,144

7,709

Real GDP

3.3

8.6

3.9

1.1

6.6

6.0

Registered unemployed (in '000, end of period)

90.8

84.9

111.4

109.5

92.3

...

Unemployment rate (end of period)

7.2

7

9.2

9.1

7.8

...

             

Prices and wages (annual change)

           

Consumer price index (period average)

17.6

8.4

4.7

2.4

2.7

2.3

Consumer price index (end-period)

13.1

7.0

2.8

3.2

1.8

3.0

Producer price index (end-period)

13.7

4.1

1.9

-1.1

1.1

...

Real wage (growth rate)

-5.3

11.2

6.2

3.5

...

...

Average monthly wage (in lats)

99

120

133

141

...

...

             

General government (in percent of GDP)

           

Revenue 1/

37.4

41.3

42.6

40.0

37.5

37.5

Expenditure

39.0

40.7

43.3

43.8

40.9

38.9

Net lending

0.2

0.3

0.1

0.2

0.0

0.3

Fiscal balance 1/

-1.8

0.3

-0.8

-3.9

-3.3

-1.7

Gross government debt (millions of lats)

408

392

377

505

570

...

Gross debt as percentage of GDP (in percent)

14.4

12.0

10.5

13.0

13.2

...

Foreign debt (millions of lats)

227

218

232

358

347

...

             

External sector

           

Current acct. balance (incl. official transfers, percent of GDP)

-4.2

-5.1

-9.8

-9.7

-6.8

-6.3

External trade balance (percent of GDP) 2/

-15.5

-15.0

-18.6

-15.4

-14.8

-14.6

Exports

           

Value

8.8

23.6

9.4

-6.1

9.0

11.7

Imports

           

Value

17.4

17.5

17.0

-7.2

6.9

9.8

CPI-based real exchange rate indices (1994=100)

           

INS weights

101.4

105.9

134.2

141.6

...

...

International reserves (in months of imports

           

of goods and nonfactor services, end-of-period)

3.1

3.0

2.7

3.1

2.8

2.9

Exchange rate (lats per $US; end-of-period)

0.56

0.59

0.57

0.58

0.61

...

Exchange rate (lats per $US; period average)

0.55

0.58

0.59

0.59

0.61

...

             

Money and credit (end-period, change in percent)

           

Reserve money

25

30

7

12

8

13

Domestic credit (non-government)

1

76

59

15

37

29

Broad money

20

39

6

8

28

27

Ratio of broad money to NFA of the BoL

1.8

2.0

1.7

1.9

2.4

2.6

Riga Stock Exchange Price Index, RICI, (end-of-period)

417

741

186

171

176

...

             

Interest rates (in percent, a year end-period)

           

Deposit 3/

11.0

6.0

7.0

6.0

4.9

...

Credit 3/

20.0

13.0

15.0

15.0

11.3

...

Three-month treasury bill auction rate

10.8

4.0

7.9

5.1

4.5

...


Data: Latvian authorities and IMF staff estimates and projections.
1/ Privatization receipts are classified as a deficit financing component, i.e., they are excluded from revenues.
2/ Goods only.
3/ Average volume-weighted commercial bank interest rates on 3-6 month domestic currency transactions.


1 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share of the allocation of SDRs.


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