Press Release No. 95/25

The International Monetary Fund (IMF) today approved a 13-month stand-by credit for Latvia for an amount equivalent to SDR 27.45 million (about $44 million) in support of the Government's 1995 economic program.

Background

Since Latvia regained independence in 1991, the authorities have embarked on an ambitious program aimed at establishing a market economy and attaining macroeconomic stability. Reforms in the structural area have included the adoption of a liberal exchange system, significant liberalization of prices and external trade, restructuring of the banking system, and a number of systemic changes designed to promote efficiency and to stimulate the privatization process. The steady implementation of stabilization policies has reduced inflation, increased output, and produced a comfortable accumulation of gross official international reserves. Recently, however, an accelerated rate of inflation has highlighted the continuing need for tight demand management policies and structural reforms.

The 1995 Program

The program for 1995 seeks to consolidate the gains Latvia has achieved under previous IMF-supported programs, by laying a firm foundation for sustained economic growth, restraining inflation, and maintaining external viability. The macroeconomic objectives for 1995 are an increase in real GDP of 5 percent, an inflation rate of 15 percent, and an external current account deficit equivalent to 3 percent of GDP.

To achieve these objectives, the program supported by the stand-by credit aims to reduce the overall fiscal deficit by nearly 2 percent of GDP through a sharp curtailment of government net lending to public enterprises. At the same time, monetary policy will be appropriately tight.

Structural Reform

Overall, it is expected that more than two hundred enterprises will be privatized in 1995, as the process gains momentum with the operation of the State Property Fund and the Privatization Agency, established in 1994. A draft law on bankruptcy for enterprises will be submitted to Parliament during 1995. The authorities are also committed to financial sector reform and to promoting an efficient and competitive banking system. The agenda for 1995 comprises the privatization of the Universal Bank of Latvia and the introduction of bankruptcy legislation for the banking sector, which should pave the way for an orderly restructuring of the banking system.

Addressing Social Costs

Important social reforms will begin in 1995 with the phasing out of the pay-as-you-go pension system in favor of a funded system, motivated by projections showing the number of pensioners growing significantly relative to the size of the labor force in coming years. The transition to the new system, which is being implemented with World Bank assistance, will require significant preparations, including the development of markets and institutions for the investment of individual contributions.

The Challenge Ahead

The Latvian Government, thus far, has been successful in coupling the transition process to a market economy with the implementation of stabilization policies. The continued success of this process, however, depends on a firm commitment to the overall aims of the economic program and on the continued steady application of macroeconomic policies, particularly in regard to the budget.

Latvia joined the IMF on May 19, 1992, and its quota¹ is SDR 91.5 million (about $146 million). Its outstanding use of IMF financing currently totals SDR 109.8 million (about $175 million).

Latvia: Selected Economic Indicators   1992 1993 1994 1995*   (percent change) Real GDP growth –35 –15 2 5 Consumer price index     (end of period) 958 35 26 15     (percent of GDP) Overall fiscal balance,     excluding grants (deficit –) –0.8 0.6 –4.1 –2.2     (months of imports of goods and non factor serviecs) Internal reserves 1.5 4.4 4.6 4.9 Sources: Latvian authorities; and IMF estimates. *Program. 1. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.