## Public Information Notice: IMF Concludes 2001 Article IV Consultation with the Republic of Latvia _IMF News, January 25, 2002_ ## Source details **Canonical URL:** [Public Information Notice: IMF Concludes 2001 Article IV Consultation with the Republic of Latvia](https://www.imf.org/en/news/articles/2015/09/28/04/53/pn0205) ## Other formats - [Markdown version](/en/news/articles/2015/09/28/04/53/pn0205/index.md) - [Structured JSON version](/en/news/articles/2015/09/28/04/53/pn0205/index.json) - [Bundle manifest](/en/news/articles/2015/09/28/04/53/pn0205/bundle-manifest.json) ## Bibliographic details - Published: January 25, 2002 --- ### Background - Executive Board conclusion date: January 18, 2002. - Recent growth and inflation: - Real GDP growth: 6½ percent in 2000; 8¾ percent in the first half of 2001. - Inflation: 3 percent in 2000 and 2001. - External accounts and financing: - Current account deficit: fell to 7 percent of GDP in 2000, after reaching almost 10 percent of GDP in 1998-99. - Export growth: 9 percent in 2000; robust export growth appears to have been sustained in 2001. - Foreign direct investment: financed about three-fifths of the current account deficit. - Market evidence: relatively low yield spread on Latvia's first Eurobond; successful issue of a second Eurobond in November 2001. - Fiscal developments: - General government fiscal deficit: likely reduced by about 1½ percentage points in 2001, to 1.7 percent of GDP. - Expenditure ratio: reduced by about 6 percent of GDP from the high level reached in 1999. - Revenue ratio: fell by about 4 percentage points from 1999 to 2001. - Monetary and financial sector: - Exchange rate regime: peg of the lats to the SDR contributed to price stability. - Credit: relatively rapid expansion of credit to the private sector facilitating investment. - Financial supervision: introduction of unified financial sector supervision under the Financial and Capital Markets Commission in July 2001. - EU prospects: Latvia’s structural reforms and liberal market economy support the prospect of joining the EU in 2004. - Main macroeconomic concern: persistent current account deficit; deficits of the observed magnitude pose potential risk to external sustainability. - IMF program status: 20-month Stand-By Arrangement (SBA) approved in April 2001; first review under the SBA was not completed at this time due to concerns about the 2002 budget. ### Executive Board Assessment - Overall appraisal: - Latvia's 2001 performance among the best of the EU accession candidate countries. - Growth: strong and broad-based, driven by domestic demand and investment. - Inflation: remained low. - Concern: magnitude and persistence of the external current account deficit. - Regret: delay of the first review under the Stand-By Arrangement. - Exchange rate and monetary stance: - Directors agreed the peg to the SDR remained appropriate under present circumstances; must be underpinned by sound fiscal and monetary policies. - Recommendation: peg should remain an anchor in the period leading to EU accession. - Welcome: Bank of Latvia's discontinuation of long-term foreign exchange swaps ahead of schedule and limiting short-term swaps by relying more on open market operations. - Fiscal policy and medium-term outlook: - Strong medium-term growth prospects conditional on disciplined macroeconomic policies, improved public sector efficiency, and continued structural reforms. - 2002 outlook: domestic demand expected to underpin significant growth, albeit below 2001 pace; global slowdown likely to add stress to external current account. - Under fixed exchange rate, fiscal policy is the primary macroeconomic instrument. - Directors supported government's intention to move toward a balanced budget over the medium term but expressed reservations about the expansionary 2002 budget. - Spending needs associated with EU and NATO accession recognized; however, improved prioritization and containment of public expenditure—especially in election year 2002—were deemed crucial. - Encouraged: enhance tax administration and strengthen public sector reforms, including at municipal levels. - Noted: adoption of fiscal targets for first half of 2002 aligned with a modest annual deficit; concern that the budget adopted by Parliament would imply substantial fiscal loosening in the second half of 2002. - Financial sector and safeguards: - Welcome: participation in the joint IMF-World Bank Financial Sector Assessment Program; no major vulnerabilities identified. - Smooth transition to unified supervision under the Financial and Capital Markets Commission. - Money-laundering framework: adequate legal framework established; urged strengthening enforcement capacity and monitoring of large inflows of non-resident deposits. - Commended quick introduction of anti-terrorism financing legislation after September 11. - Some Directors expressed reservations about a possible Financial Services Center. - Credit growth and banking sector quality: - Concern with continued rapid expansion of private sector credit, particularly at very short terms. - Urged authorities to be ready to tighten monetary conditions if loan portfolio quality worsens. - Structural reforms and governance: - Welcomed advances in structural reforms to reduce unemployment and external vulnerability. - Noted improvements in the environment for investment and foreign investment. - EU accession process providing impetus to reforms; progress in accession negotiations welcomed. - Urged continued privatization of large-scale public enterprises, strengthened fight against corruption, and improved governance. - Commended maintenance of a very open international trade regime. ### Selected Economic Indicators (as reported) - Real Economy — Changes in percent - Real GDP: 1996: 3.3; 1997: 8.6; 1998: 3.9; 1999: 1.1; 2000: 6.6 - Unemployment rate (end of period): 1996: 7.2; 1997: 7.0; 1998: 9.2; 1999: 9.1; 2000: 7.8 - Consumer price index (period average): 1996: 17.6; 1997: 8.0; 1998: 4.7; 1999: 2.4; 2000: 2.6 - Public Finance — In percent of GDP - General government balance: 1996: -1.8; 1997: 0.3; 1998: -0.8; 1999: -3.9; 2000: -3.3 - Total government debt: 1996: 14.4; 1997: 12.0; 1998: 10.5; 1999: 13.1; 2000: 13.2 - External government debt: 1996: 8.4; 1997: 7.4; 1998: 7.7; 1999: 10.6; 2000: 9.9 - Money and credit — End-period; changes in percent - Reserve money: 1996: 25; 1997: 30; 1998: 7; 1999: 12; 2000: 8 - Broad money: 1996: 20; 1997: 39; 1998: 6; 1999: 28; 2000: (not reported in table) - Domestic credit (non-government): 1996: 1; 1997: 76; 1998: 59; 1999: 15; 2000: 37 - Balance of payments — In percent of GDP unless stated otherwise - Trade balance: 1996: -15.5; 1997: -15.0; 1998: -18.6; 1999: -15.4; 2000: -14.8 - Current account balance: 1996: -4.2; 1997: -5.1; 1998: -9.8; 1999: -6.9; 2000: (not reported in table) - International reserves (in months of imports): 1996: 2.8; 1997: 2.5; 1998: 2.9; 1999: (not reported in table); 2000: (not reported in table) - Exchange rate - Exchange rate regime: Peg to the SDR - Exchange rate (lats per US$; end-of period): 1996: 0.556; 1997: 0.590; 1998: 0.569; 1999: 0.583; 2000: 0.613 - Real effective exchange rate (1997 = 100) 1/: 1996: 100.0; 1997: 115.8; 1998: 125.4; 1999: 125.6; 2000: (not reported in table) - Sources: Data provided by the Latvian authorities; and IMF staff estimates. - Note: 1/ End-of-period. *Source: Public Information Notice: IMF Concludes 2001 Article IV Consultation with the Republic of Latvia, January 25, 2002.* --- ## Content in this bundle - [Cr0210pdf (PDF)](/-/media/websites/imf/imported/external/pubs/ft/scr/2002/_cr0210pdf.pdf){rel="external" type="application/pdf"} --- ## References - [Republic of Latvia and the IMF](http://www.imf.org/external/country/LVA/index.htm) - [Public Information Notices](https://www.imf.org/en/news/searchnews) - [Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm) - [Adobe Acrobat Reader](https://www.imf.org/adobe) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/pn0205_