Press Release: IMF Completes Second Review Under Stand-By Arrangement with Latvia and Approves €200.3 Million Disbursement
February 17, 2010Press Release No. 10/47
February 17, 2010
The Executive Board of the International Monetary Fund (IMF) today completed the second review of Latvia's performance under an economic program supported by a Stand-By Arrangement (SBA). The Board decision enables the immediate disbursement of an amount equivalent to SDR 178.4 million (about €200.3 million or US$274.9 million), bringing total disbursements under the SBA to SDR 892.2 million (about €1.00 billion or US$1.37 billion).
The SBA, which was approved on December 23, 2008 (see Press Release No. 08/345) for an amount equivalent to SDR 1.52 billion (about €1.71 billion, or US$2.34 billion), entails exceptional access to IMF resources, amounting to 1,200 percent of Latvia's quota in the IMF. The IMF’s support is part of a coordinated effort with the European Union, Nordic governments, the World Bank, and other bilateral creditors that are providing 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 the sharp drop in government revenues.
In response to the sharp downturn following the bursting of credit and real estate bubbles, the authorities have taken a number of steps to restore stability and confidence while cushioning the impact of the crisis on the poorest, including:
• keeping the 2009 fiscal deficit well below the level allowed under the program and passing a strong 2010 budget to make further progress toward fiscal sustainability,
• limiting the cost of adjustment for the most vulnerable in society by eliminating health copayments for the poorest, increasing the guaranteed minimum income, extending unemployment benefits, and launching a temporary jobs program, and
• addressing urgent financial sector strains, and strengthening supervision and monitoring.
While conditions remain quite difficult, there are signs that the Latvian economy is beginning to bottom out with hope for a recovery late this year and into 2011, and financial markets have calmed considerably. The current account has turned positive and previously high inflation is being reversed.
The authorities reaffirmed their commitment to putting the budget deficit on a rapidly declining path from 2010 onward in order to meet the Maastricht criteria for euro adoption as quickly as possible. Measures to achieve additional fiscal savings through the medium term will be considered during the year and will be discussed in subsequent reviews under the Fund arrangement.
Recognizing the need to sustain fiscal adjustment to achieve the program’s exit strategy of euro adoption, the authorities have requested, and the Board has approved, an extension of the SBA by nine months to December 22, 2011. This will spread the IMF’s financial support over a longer period and means that the program supported by the SBA would still be in place when the government prepares its 2012 budget, which will be critical for meeting the Maastricht criteria for euro adoption.
The Board also granted a waiver of non-observance of the continuous performance criterion on non-accumulation of external payment arrears.
Following the Executive Board's discussion on Latvia, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair stated:
“The Latvian authorities are to be commended for their strengthened program implementation, which yielded better-than-expected fiscal performance in 2009 and helped improve confidence. Adoption of a 2010 budget with substantial savings measures has enhanced the credibility of the authorities’ strategy. Nevertheless, Latvia continues to experience extremely challenging economic circumstances. Output has shrunk substantially, more than a fifth of the workforce is unemployed, and the downturn has eroded government revenue. There are, however, signs that the economy is starting to bottom out with exports increasing, and financial market conditions have improved considerably. The current account has moved fast from a very large deficit to a surplus and a correction of wage and price levels has set in.
“Looking ahead, substantial additional fiscal adjustment remains necessary to enable Latvia to meet the Maastricht criteria and realize the program’s exit strategy of euro adoption. Rigorous execution of the 2010 budget is the first step, and this entails refraining from tax cuts or spending increases, saving any windfall revenues, and using the spending flexibility allowed under the program to ensure a robust safety net for the most vulnerable. To ensure a rapid decline in the deficit in the 2011 budget and beyond, early action is needed this year to identify sustainable savings measures backed by structural reforms.
“Banks continue to face difficult conditions as non-performing loans and losses increase, and liquidity and funding risks remain. Capital increases as well as enhanced financial supervision and monitoring are helping to address risks. Faster progress in restructuring state-owned banks and addressing non-performing assets would strengthen the economy and lower potential costs for the government.
“The Latvian authorities remain committed to restoring macroeconomic stability and, ultimately, growth. They made good progress during 2009 and have outlined key measures to advance further in 2010. Decisive further efforts are needed, backed by strong international support from the European Union, Nordic countries, and other partners, in addition to the IMF.”