The Executive Board of the International Monetary Fund (IMF) today completed the first review of Latvia's performance under an economic program supported by a 27-month Stand-By Arrangement (SBA). The completion of the review enables the immediate disbursement of an amount equivalent to SDR 178.4 million (about €195.2 million or US$278.5 million), bringing total disbursements under the SBA to SDR 713.8 million (about € 780.7 or US$1.14 billion).
The SBA, which was approved on December 23, 2008 (see Press Release No. 08/345) for an amount equivalent to SDR 1.52 billion (about €1.66 billion, or US$2.37 billion), entails exceptional access to IMF resources, amounting to 1,200 percent of Latvia's quota in the IMF.
Latvia’s economy is suffering a much deeper contraction than envisaged at the launch of the program in 2008. The authorities nevertheless remain committed to an adjustment strategy centered on strong fiscal consolidation. The program has been adjusted to reflect:
• a significant increase in the program’s fiscal deficit ceiling in 2009 (up to 13 percent of GDP, compared with 5 percent in the original program) to avoid measures that would harm the most vulnerable, and
• allow for 1 percent of GDP in additional resources for social safety nets.
The IMF’s support is part of a coordinated effort with the European Union, the World Bank, Nordic governments and other bilateral creditors that are providing the financing necessary to ensure that essential public services, especially support to those most severely hit by the crisis, can be maintained in the face of a sharp drop in government revenues.
The authorities are firmly committed to putting the budget deficit on a rapidly declining path from 2010 onward, and have outlined measures to this effect, the details of which will be a key topic for discussion in the next review under the Fund arrangement.
The Board also approved the request for waivers of nonobservance of the end-March 2009 performance criterion on the adjusted cash fiscal balance; the end-March 2009 structural performance criterion on submission of a second supplementary budget law for 2009 to Parliament; and the continuous performance criterion on non-accumulation of domestic arrears by the general government.
Following the Executive Board's discussion on Latvia, Mr. Dominique Strauss-Kahn, Managing Director and Chair stated:
“Latvia’s economy is suffering a much deeper contraction than envisaged at the launch of the program. This reflects both the more-pronounced unwinding of the credit and real estate bubble, as well as the much worse international environment than originally anticipated. Although the current account has moved into surplus, the contraction has significantly eroded government revenues, increasing the fiscal deficit.
”The significant revision of the 2009 fiscal deficit target minimizes further pressure on economic activity and increases the scope for spending on social safety nets. Latvia’s large fiscal deficit will need to be reduced through strong corrective policies over several years. The 2009 supplementary budget includes initial steps in this direction but greater reliance on structural reforms would make the adjustment more permanent and credible. For the 2010 budget, efforts should focus on preparing sustainable and structurally sound fiscal reforms, on seeking the support of social partners, and on protecting the most vulnerable.
“The authorities have made good progress in stabilizing the financial sector. Important measures include strengthened intervention capacity, an enhanced financial supervision and monitoring framework, and steps to contain risks in Parex Bank. Looking ahead, in light of binding fiscal constraints, the authorities should minimize contingent liabilities from domestic banks, particularly those in state ownership, and restrict issuance of new guarantees.
”The Latvian authorities are committed to putting their economy back onto a sustainable path, through substantial corrective measures, including additional fiscal consolidation. Latvia continues to receive strong international support as it seeks to overcome its present economic difficulties. The European Union, Nordic countries, and other partners are providing considerable financial support and, together with the authorities, remain committed to Latvia’s macroeconomic strategy.“