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Press Release: IMF Reaches Staff-Level Agreement with the Latvian Authorities on First Review Under Stand-By Arrangement
July 27, 2009
An International Monetary Fund (IMF) mission, led by Anne-Marie Gulde and Mark Griffiths, held discussions with the Latvian authorities in Riga during July 13-27, 2009 as part of the first review of the country’s Stand-By Arrangement (SBA) with the Fund. The IMF mission met with senior government officials, including President Zatlers, Prime Minister Dombrovskis, Finance Minister Repse and Central Bank Governor Rimsevics, and worked in close cooperation with representatives of the European Commission who were also present in Riga.
At the conclusion of the mission, Ms.Gulde made the following statement:
“The mission has reached a staff-level agreement, endorsed by the IMF’s Management, with the authorities of Latvia on a policy package that can lead to the completion of the first review under the SBA. This policy package is intended to help Latvia overcome its difficult economic situation, while ensuring debt sustainability and protecting the most vulnerable groups in society, consistent with Latvia’s strategy to adopt the euro at the earliest possible date. The Letter of Intent that summarizes this agreement will be considered by the IMF Executive Board in the coming weeks. The completion of the first review by the Executive Board will enable Latvia to draw SDR 178 million under the arrangement (about €195 million or US$278.3 million).
“The IMF’s support is part of a coordinated effort with the European Union (EU), the World Bank, Nordic governments and other bilateral creditors. The Fund’s disbursement associated with completion of the first review, along with the €1.2 billion tranche made available today by the EU, will provide the financing necessary to ensure that essential public services, especially support to those most severely hit by the crisis, can be maintained in the face of a sharp drop in government revenues. It will also ensure that Latvia can continue to meet its international payment obligations and provide resources, as needed, to support the financial system.
“The economic contraction has been much deeper than anticipated; domestic demand collapsed and the global economic environment has been much worse than expected at the time the program was initiated. The large fall in output contributed to a rapid narrowing of the current account deficit, and the program’s end-March 2009 performance criteria for net international reserves and net domestic assets were met. The authorities also made good progress in reducing instability in the financial sector.
“But the economic downturn has revealed significant underlying weaknesses in government finances, causing the fiscal deficit to widen above initial targets. In response, the authorities have proposed a strengthened policy package intended to address the fiscal imbalance in 2009 and beyond in a sustainable way, while pursuing structural reforms. During the discussions, the mission underscored the importance of minimizing the social cost associated with the authorities’ economic program by avoiding measures that disproportionately affect the most vulnerable in the society or unnecessarily impair the quality of public services that are offered to them. This, along with the weaker growth outlook, may require a somewhat higher fiscal spending in 2009 than envisaged in the supplementary budget. Further structural reforms on both the revenue and expenditure side of the budget will be necessary to ensure that the deficit declines in 2010 and beyond, consistent with the government’s goal of qualifying for euro adoption as soon as possible.
“In view of unprecedented economic downturn, achieving the program goals requires very difficult decisions and trade-offs for the Latvian authorities. We will continue to work intensely, and in close cooperation with the European Union, to assist them in adapting to the challenges ahead.”
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