Press Release No. 10/229

Press Release No. 10/229
June 7, 2010

A joint mission from the International Monetary Fund (IMF) and the European Commission (EC) visited Riga from May 19 to June 7 as part of the third review of the country’s Stand By Arrangement (SBA). Mark Griffiths, IMF Mission Chief for Latvia, issued the following statement today:

“We have reached agreement at staff level on the third review of the Stand-By Arrangement. Subject to approval by IMF Management, and, subsequently, by the Executive Board, the fourth disbursement (SDR 90 million or about €108 million) would become available. The Executive Board meeting is expected to take place in the second half of July.

“Policy implementation over the past year has helped restore confidence and there are signs that the economy is starting to stabilize after last year’s steep downturn. Real GDP appears to have leveled off in the first quarter of 2010, industrial production especially but also retail sales have picked up, and exports have risen strongly. The end-March program targets on the government’s fiscal balance, net international reserves, net domestic assets, and other targets related to fiscal policies were all met, as were two of three targets related to strengthening the financial system, with progress made on the third.

“Looking ahead, much remains to be done, however, and the authorities have reaffirmed their commitment to reducing the fiscal deficit and taking further steps to strengthen the financial system, in order to support the fixed exchange rate to the euro and, in the medium term, qualify for euro entry. In particular, the Latvian authorities will:

• Continue to target a 2010 fiscal deficit of no more than 8.5 percent of GDP (ESA 95 basis), while protecting social safety net spending and increasing appropriations for EU-co-financed projects.

• Build on preparatory work that is well under way to identify a menu of options for the next government to reduce the 2011 fiscal deficit to no more than 6 percent of GDP. Preliminary estimates suggest that an additional LVL 395–440 million in net measures will be needed to reach this deficit target.

• Implement the restructuring plan for Parex Bank once it is approved by the EC while upholding fair and equitable treatment of banking system depositors and creditors.

• Work closely with the EC to pursue reforms as specified in their Supplemental Memorandum of Understanding.

“Completion of this review would make available around €1 billion in additional financing from the EC, the IMF, the Nordic countries, the Czech Republic, and Poland. In light of their much stronger financial position, the Latvian authorities intend to draw only the amount available from the EC and the IMF (about €300 million) as well as €100 million previously approved by the World Bank, and take future drawing decisions on a review-by-review basis.

“The IMF and other program partners will continue to work with the Latvian authorities to help them reach their goals, and to implement the measures needed to meet the Maastricht criteria in a way that can support the incipient recovery and help Latvia emerge stronger from the crisis.’

For information on the Stand-By Arrangement, please see the following link:

Latvia and the IMF: http://www.imf.org/external/country/LVA/index.htm

IMF Resident Representative Office in Latvia: http://www.imf.org/external/country/LVA/rr/index.htm