Press Release No. 97/46

The International Monetary Fund (IMF) today approved an 18-month stand-by credit for the Republic of Latvia, in an amount equivalent to SDR 33 million (about US$45 million), to support the government’s 1997-99 economic program. The authorities have indicated their intention not to draw on the credit as was the case under the recently expired arrangement.

Background

Latvia has completed the first phase of transition, as macroeconomic conditions have stabilized and economic growth has picked up. Following the banking crisis and fiscal slippage of 1995, the government made major strides in tightening fiscal policy, enhancing soundness of the banking system, and moving forward with structural reforms. Considerable progress was made under the 1996/97 program supported by an IMF credit. Real GDP rose by 2.8 percent in 1996, led by strong performance in the transportation, communications, and construction sectors. While inflation declined to 13 percent, the current account deficit nearly doubled to 6.6 percent of GDP in 1996, reflecting a onetime increase in fuel imports in advance of pre-announced excise tax increases, strong growth in imports of capital goods and other raw materials, and adverse external conditions for wood exports. Capital inflows more than compensated for this deficit and resulted in an overall balance of payments surplus for the year.

The 1997-99 Program

The macroeconomic objectives of Latvia’s 1997-99 economic program are real GDP growth of 4 percent for 1997 and 5 percent for 1998, a reduction in the annual rate of inflation to 9 percent in 1997 and 7 percent in 1998, and a narrowing in the external current account deficit to 6.1 percent of GDP in 1997 and 4.9 percent in 1998. Gross international reserves will be targeted at the equivalent of approximately three months of imports for 1997 and 1998.

To these ends, Latvia is continuing the previous macroeconomic strategy, with the exchange rate peg to the SDR remaining its focus, underpinned by fiscal and credit restraint. In the fiscal area, the general government fiscal deficit will be reduced to 0.9 percent of GDP in 1997 and 0.5 percent in 1998 from 3.3 in 1995 and 1.3 percent in 1996. This improved fiscal position reflects both improved revenue performance and overall expenditure restraint, despite increased spending on investment largely for infrastructure.

Structural Reforms

The program will emphasize the acceleration of structural reforms, including the completion of enterprise privatization and the strengthening and extension of private property rights, which will firmly establish Latvia as a market economy, encourage restructuring, and stimulate savings and domestic and foreign investment. Virtually all remaining state-owned enterprises, including large companies, will be privatized by mid-1998. In this context, steps are being taken to resolve the issue of consumer arrears and to ensure that energy tariffs are set on a cost-recovery basis. Other structural reforms, including land registration and a reduction in the number of business regulations, will also advance under the program. Trade liberalization is to continue, and legislation will be submitted to parliament by mid-1998 for further substantial reduction in agricultural tariffs.

Addressing Social Costs

Measures to improve tax administration and expenditure productivity, including through civil service reform, will make possible increased expenditures on social services and infrastructure. The government is also taking steps to improve the efficiency of social spending, including through a reform of the national health insurance system. The authorities recognize the importance of increasing productivity and protecting the needy as reductions in agricultural tariffs are implemented in connection with trade liberalization efforts.

The Challenge Ahead

Further progress and consistent implementation of structural reforms, together with continued fiscal discipline, are crucial for sustained economic growth to take hold. These steps will facilitate Latvia’s objective of accession to the European Union.

The Republic of Latvia joined the IMF on May 19, 1992, and its quota¹ is SDR 91.5 million (about US$126 million). Its outstanding use of IMF credit currently totals SDR 69 million (about US$94 million).

Latvia: Selected Economic Indicators 1994 1995 1996 1997* 1998* (Percent change) Real GDP Consumer prices (end-of-period) 2 26 0 23 2.8 13 4 9 5 7 (Percent of GDP) Fiscal balance -4 -3.3 -1.3 -0.9 -0.5 External current account balance, including official transfers (deficit-) -2.4 -3.4 -6.6 -6.1 -4.9 (Months of imports) Gross international reserves 4.5 3.0 2.9 2.7 2.7 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.