IMF Concludes Fifth and Final Review Under Stand-By Arrangement with LatviaPress Release No. 11/481
December 21, 2011
The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of Latvia's performance under an economic program supported by a Stand-By Arrangement (SBA). The Board also completed the financing assurances review under the SBA. The Board decision makes available an amount equivalent to SDR 539.38 million (about € 637.6 million), but the authorities do not intend to draw this amount. The total amount disbursed under the SBA remains SDR 982.24 million (about € 1.161 billion). In completing this review, the Executive Board granted a waiver for nonobservances of the continuous performance criterion on imposing restrictions on the making of payments and transfers for current international transactions
This is the final review under the Fund-supported program, which was part of a coordinated effort with the European Union, Nordic governments, the World Bank, and other bilateral creditors to assist Latvia when it was hit by the global financial crisis in 2008 (see Press Release No. 08/345). With international financial support and strong ownership of the reform program, the Latvian authorities implemented difficult measures that have pulled the country out of the crisis.
The economy is now recovering and growing strongly, with economic growth of 4.5-5 percent expected in 2011, following an output decline of more than 20 percent between 2008 and 2010. Competitiveness has improved, and the very large pre-crisis current account deficits have been corrected. The authorities maintained their long-standing peg to the euro and continue to pursue their goal of adopting the single currency in 2014. A very large fiscal consolidation effort through the program period—around 15 percentage points of GDP, the bulk implemented in 2009—has corrected a large structural fiscal deficit, and given Latvia strong prospects of meeting the Maastricht fiscal deficit criterion in 2012. The authorities have also taken a series of measures to stabilize the financial sector, but further steps to improve financial sector supervision are still needed.
Despite the welcome return to economic growth, many challenges remain. Output remains well below its pre-crisis level and Latvia’s unemployment rate, while decreasing, is still high at 14.6 percent. Poverty rates remain among the highest in the European Union, making the social safety net critical.
The Latvian government's economic policy program for 2012 aims at sustaining the economic recovery in an increasingly difficult external environment, enhancing the country's ability to borrow on capital markets at affordable interest rates, and bringing Latvia closer to meeting the conditions for euro adoption, in line with its target date of January 2014.
The SBA, which was approved on December 23, 2008 for an amount equivalent to SDR 1.52 billion (about €1.71 billion), entailed exceptional access to IMF resources, amounting to 1,071 percent of Latvia's quota in the IMF (reflecting Latvia’s quota increase in March 2011).
Latvia and the IMF will continue to maintain a constructive policy dialogue and, in accordance with Fund policy, initiate Post-Program Monitoring (PPM). Under PPM, members undertake more frequent formal consultation with the Fund than is the case under surveillance, with a particular focus on macroeconomic and structural policies.
Following the Board discussion, Mr. David Lipton, First Deputy Managing Director and Acting Chair, said:
“Latvia’s strong performance under the Fund-supported program has helped overcome the crisis, facilitated a return to market financing, and contributed to economic recovery. With the program now ending, the focus should be on structural reforms to improve competitiveness, and preventing vulnerabilities from re-emerging.
“The 2012 budget, which aims for a deficit below 2.5 percent of GDP, demonstrates the authorities’ commitment to fiscal discipline and to meeting the Maastricht criteria. However, alternative measures such as higher real estate tax, progressive personal income tax, and improved targeting of social benefits, might have proved less distortionary and facilitated a more sustainable adjustment. Continued high unemployment and poverty rates make it important to maintain a strong social safety net.
“Greater harmonization of the Bank of Latvia’s decision making with the ECB would support the fixed exchange rate and mitigate pressures on international reserves.
“After completing the orderly sale of the commercial part of Mortgage and Land Bank, safeguards should be put in place to prevent the remaining institution from becoming a future source of fiscal and financial stability risk. Financial sector supervision should be strengthened to make sure the problems in Latvijas Krajbanka are contained.
“The problems in airBaltic demonstrate the importance of strengthening governance in state-owned enterprises. The authorities should consider all options if efforts to return the airline to profitability fail, to ensure public money is not wasted.”