Transcript of a Conference Call on the Fifth and Final Review Under a Stand-By Arrangement with LatviaIMF Mission Chief Mark Griffith
Washington, December 22, 2011
MS. NARDIN: Good morning, my name is Simonetta Nardin and I am with the IMF External Relations Department. The IMF Mission Chief to Latvia, Mark Griffiths, will conduct this conference call on the Fifth and Final review of the IMF-supported program with Latvia. Mark will now say a few words and then we will give the line to Riga for questions.
MR. GRIFFITHS: The IMF Executive Board yesterday completed the fifth and final review of Latvia's program, which has had a number of achievements over the last three years. The program, which ends today, has been successful in maintaining the exchange rate peg, in returning Latvia to international capital markets, and in keeping the budget deficit under control. Right now, we are seeing growth picking up, and in the third quarter, growth of 6.6 percent, year on year. This year we project that growth could be five percent or perhaps slightly higher. In addition, Latvia has done enormous efforts on the path to euro adoption with considerable achievements over the last three years. Latvia has come a long way. We have had strong cooperation over the last few years in this strong program.QUESTION: Some government officials have said the 100 lats program of the Guaranteed minimum income (GMI)distorts the labor market and is creating a culture of dependency. How do you see that?
MR. GRIFFITHS: I think it's very important not to create a culture of dependency and that it is very important to have incentives for people to go back to work. But the 100 lats program has been oversubscribed and this shows that the Latvian people are really willing to work, willing to take jobs. They need the money. They want to stay part of the labor force. I think that's been an excellent part of the program, designed with the World Bank, and the people who joined that program, it's all credit to them. As you know, the program has been very strong on the social safety net protecting the poorest people. The recession was quite severe at the start of the program. And I fear that unemployment, although it's come down, may stay high particularly because of developments in Europe, things outside Latvia's control. So from the Fund's perspective we are very, very keen on keeping the safety net in place, strengthening it, having it paid as much as possible by the central government and not letting local governments have to pay because some of the poorer local governments won't be able to afford this. Those poorer local governments often have lots of unemployed so they need to have some more assistance. At the same time though you make a fair point, that if you're receiving benefits and a job comes up you should be able to take that job and if you go back to work you should not be penalized for that so that the benefits should not be withdrawn. They should be withdrawn gradually so that people have a good incentive to go back to work. But I think the program shows that people want to work If the jobs are there, people will work. So we need to have a safety net, which protects people and encourages them to go back to work.
QUESTION: How likely do you think the government will need additional budget cuts in 2012 to meet its budget deficit targets?
MR. GRIFFITHS: I think that's a good question, and it's a little bit too early to say right now. We've just done the budget. I think there are two types of risks. One comes from outside developments in Europe and if growth slows there how much will that affect Latvia. Governor Rimsevics has been on the pessimistic side and pointed to growth falling to 0 to 1 percent, or something like that, in which case the budget deficit would increase so that more measures would be needed. He has also pointed out that there's very little scope for slippages this year, there's very little contingency reserve as in the past so the risks are there.
There are also a few home-grown risks. We've seen problems in Air Baltic this year, which will cost the government an extra 0.5 to 0.7 percent of GDP and Latvian taxpayers will have to pay for that. I did a back-of-the-envelope calculation a few minutes ago. It's something like 40 or 50 lats per person in Latvia for what went wrong there, so that I think it's very important that the government keeps an eye on fiscal discipline within the government but also generally for state enterprises and that kind of thing. Let's not waste money, let's not waste resources. We can keep taxes low and have spending efficiently. It's a bit too early to say yet whether a new budget is needed. I really hope not. Remember that the Maastricht Criteria is 3 percent and this budget targets the deficit well below that so that there is a little bit of room as well. To summarize, the possible shocks come from outside in Europe and let's make sure that spending is under control in Latvia so that money is not wasted.
QUESTION: Could you share some data about the -- program monitoring? How often will the IMF visit Latvia?
MR. GRIFFITHS: We're quite happy to visit Latvia. We have very strong relations there with good cooperation. We think that it will be two to three times a year. We'll have the regular annual Article IV consultation, which every country has, plus we will follow on the implementation of the program looking at the last letter of intent to see that the reforms there are kept to. I don't like the word monitoring. That sounds a bit adversarial or like a teacher, or something like that. I think it's going to be more cooperation and will continue over the next few years, and let's hope we can make a difference and make things better in Latvia.
QUESTION: we all know this information about the bad situation of the euro. My question is about people in Latvia who have savings. What is your advice for them? To keep their money in euros, in lats or in other currencies? Can they trust lats and euros that they will stay stable in the next years?
QUESTION: I think one of the key things you've seen under this program, one of the clear successes, is the stability of the lat. That's what this program has really achieved and the central bank governor and the government have really delivered on that so that I think the Latvian people can be quite confident in the stability of their currency and the value of their currency.
QUESTION: About the euro, also you can say that the Latvian people can trust the euro that it will be stable in next years and keep their savings in this currency?
MR. GRIFFITHS: I didn't quite catch that, but this conference call is about Latvia and what the Latvian authorities can do. I think the euro is part of a broader set of questions, which are important, but I think it's important that the Latvian authorities do the right thing, keep the value of the currency stable and maintain confidence. That's all your government can do and that's what it's doing. It's doing very well and the Central Bank Governor is doing that as well.
QUESTION: Do you think that the Latvian authorities should have a contingency plan if something were to go wrong in the Euro Zone?
MR. GRIFFITHS: That's an interesting question. . I think it's important to look at all possibilities. You should have contingency plans for many things in case of natural disasters or much slower growth or if the recession in Europe were to deepen. I think the government should be ready. If the recession were worse in Europe than is projected, how would you respond? What would you do with the budget deficit? How would you respond to that? What kind of measures would you introduce? So I think that policymakers need to be thinking about the risks and be ready to respond flexibly. They should also be ready for good news as well. That sometimes happens.
QUESTION: At the bottom of the press release it says, " 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. ." Do you think that the mortgage and lend banks should have a banking license at the moment?
MR. GRIFFITHS: That's a good question. At the moment I think, yes, it does because it has the commercial part. I think the idea is that once the commercial part has been sold or moved or whatever, resolved satisfactorily, then you've got a development institution in place which is just doing development work, then I think the arguments for a banking license are much weaker. But of course the commercial part needs a license and it needs to be doing its commercial activities, but once the reforms are in place and this bank is stabilized and moves to purely development work, then I think there's less need for a banking license.
QUESTION: During the crisis the government has passed a number of regressive measures reducing the nontaxable minimum income and raising VAT without any sort of mechanism to protect the country's poorest. Has the burden been shared equally in this country in your view and what are the risks if any to long-term high levels of inequality?
MR. GRIFFITHS: This is a political question as well so it's for the Latvian people and the Latvian government to make that choice. What I can say from our side is that the program has throughout stressed the importance of the safety net, of protecting the poorest people, of raising GMI, or making sure that's financed by the center as much as possible, introducing housing benefits for poorest people, health payments, abolishing those and education for 5- and 6-year-olds. We worked really hard on protecting the safety net. On the points you mentioned, I think, yes, for an adjustment to be sustainable, the lesson we've learned is that the burden needs to be shared fairly and evenly. And, yes, I think it's right that in the past we have said that cutting the tax threshold wasn't maybe the fairest way to do this and that the government could have considered introducing a progressive personal income tax or by improving the so that you could introduce those taxes on residential real estate. These are all ideas we've suggested, we've advocated, and we are working with the government to adopt. It's ultimately a choice for the Latvian government and Latvian society. We're trying our best at the technical level, but it's for your country's people to work out.
QUESTION: I have a question about Latvijas Krajbanka. You said that financial sector supervision should be strengthened to make sure that problems in Latvijas Krajbanka are contained. Today the head of the Parliamentary Committee on the Krajbanka investigation said that the parliamentary investigation of the bank's collapse will only concern the effect of the bank's failure. You've served in an advisory capacity to the government. How effective do you think that is to strengthening the financial supervision?
MR. GRIFFITHS: I'm not quite sure I got all of the question. What I would say is that it's not for me to say what parliament should investigate or not, but I think it's important that somebody looks into the causes of what went wrong here, what happened, how much money was lost and why, so that we can learn from what happened here and the mistakes are not repeated again because otherwise we're wasting taxpayer money in Latvia. I think similarly in the previous case of Parex there was a case for doing that, having an independent investigation to look into what went wrong and are there lessons that can be learned? Was it an accident or are there ways we can improve supervision to make sure it doesn't happen again? So I'm in favor of independent investigations with high-caliber people, independent people, professionals and independent of highest repute looking into these issues and making sure that it doesn't happen again.
QUESTION: At the IMF conference in Iceland, economist Willem Buiter raised concerns about that with small countries it can be difficult to warn of some of the risks to the economy. Given Latvia's precrisis experience where even IMF and World Bank reports about Latvia's economy went unpublished and other people were either intimidated or one case even briefly jailed, are you concerned that this situation has improved, that the public now that the program is over won't get the information they need to accurately access possible future risks?
MR. GRIFFITHS: That's an excellent question, and that's why we're having press conferences like this. We're releasing press releases, I give interviews and we have released lots of staff reports. Throughout the program all the letters of intent, all the staff reports have been released and we are looking forward to releasing the one for the fifth review early in the new year. I think our reports have been frank. They give a fair assessment of what's going on. They give plenty of warnings, they give plenty of debate, and I think we're keenly part of that process. I think also as journalists and society, you have to be part of that process and to encourage openness and to encourage debate. But certainly from the Fund's point of view, yes, we've published everything and we are looking forward to being open and to working to improve policies in Latvia.