Press Release No. 96/27

The International Monetary Fund (IMF) today approved a 15-month stand-by credit for the Republic of Latvia equivalent to SDR 30 million (about $43 million) to support the Government's economic program.

Background

Since regaining its independence five years ago, Latvia has made remarkable progress in attaining macroeconomic stability and in advancing its transition to a market economy. Inflation has been brought down swiftly from very high levels; economic recovery began in 1994; and gross official reserves have increased. Nearly all prices, including interest rates, are determined by the market; the exchange and trade system is very liberal; 35 of the 38 operating banks at end-1995 were privately owned; and privatization of small and medium enterprises is advanced. The economy faced major strains in 1995, however, because of the combined effects of a banking crisis and slippages in fiscal policy that led to a pronounced decline in international reserves and stagnation in economic output. Developments in the early part of 1996 have been encouraging, however, following a substantial tightening of both banking supervision and fiscal policy.

The 1996 Program

Latvia's program for 1996 targets an increase in real GDP of 2 percent, an inflation rate of 18 percent, an external current account deficit of 3 percent of GDP, and gross official reserves equivalent to three months of imports. To achieve these objectives, the program aims at tightening fiscal policy and ensuring that sufficient resources are available for private sector investment. To strengthen revenues, numerous measures will be undertaken to improve tax administration and address the problem of tax arrears. Monetary policy is designed to support the inflation and balance of payments objectives, and will rely increasingly on indirect, market-based instruments of monetary control. At the same time, the acceleration of privatization and other structural reforms will provide the necessary underpinnings to encourage resumed growth and increased private sector activity.

Structural Reforms

By the first quarter of 1996, the Government had authorized the privatization of most enterprises, including the large ones such as the shipping company and the energy utilities. Foreign investors are now allowed the same access to investment opportunities as domestic investors, including privatization vouchers. In addition, the Government has drafted insolvency and bankruptcy legislation that covers legal definitions, the liquidation procedure, delineation of responsibilities, and the rights of all involved parties. The Government will also continue to accelerate financial sector reform and encourage competition and efficient intermediation in the banking system.

Social issues

The numerous measures to improve tax administration and address the problem of tax arrears are expected to place the government finances on a more solid footing and allow increased expenditure on social services and infrastructure maintenance. Over the medium term, a more equitable and perhaps even a reduced tax burden is envisaged as a result of the reforms.

The Challenge Ahead

To hasten the transition process and the resumption of economic growth, Latvia has adopted a far-reaching structural reform program. Accelerated privatization measures, together with the recent steps undertaken to promote foreign direct investment, acceleration of land registry, and legal reform, will lend support to the development of financial markets and institutions to underpin future growth.

The Republic of Latvia became a member of the IMF on May 19, 1992; its quota¹ is SDR 91.5 million (about $132 million), and its outstanding use of IMF credit currently totals SDR 105 million (about $151 million).

Republic of Latvia: Selected Economic Indicators   1992 1993 1994 1995 1996*   (percent change) Real GDP -35 -16 2 -- 2 Consumer prices 958 35 26 23 18     (percent of GDP) External current account balance     (deficit –) 1.8 7.0 -2.4 -3.6 -3.0 Government financial balance      (deficit –) -- 1.0 -1.7 -2.7 -1.3 Sources: Latvian authorities; and IMF staff 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.