The Latvian government does not intend to make drawings under the standby credit and will treat it as precautionary, as with the previous standby credit.
IMF Deputy Managing Director Shigemitsu Sugisaki said that Latvia's "economic growth is strong and broad-based, inflation is close to rates prevailing in the European Union, and vulnerability to external shocks has lessened."
The exchange rate peg to the Standard Drawing Rate – a mixture of the yen, U.S. dollar , euro and the British pound – was described as appropriate while Sugisaki voiced certain concern over unemployment, which remained relatively high in Latvia at about 8 percent.
He pointed out that the financial sector has strengthened considerably and the entry of foreign strategic investors in several of the major banks as well as possible mergers among key players in the market are likely to further strengthen the banking system.
"Structural reforms remain essential to achieve Latvia's medium-term goals and reduce further its vulnerability to external shocks. Key reforms include creation of an environment conducive to private sector development and increased foreign direct investment, privatization of remaining state-owned enterprises and measures to enhance governance," Sugisaki said.
Under the cooperation memorandum, this year's Latvia's gross domestic product is expected to grow by 6 percent, the inflation rate should remain at 3 percent and current account deficit go down to 6.3 percent.
The economic policy memorandum between the IMF and Latvia comprises Latvia's undertakings for 2001 and 2002.
Key objectives are to sustain robust economic growth, reduce vulnerability to the Latvian economy and to ensure as early as possible admission to the European Union.
The budget deficit should not exceed 1.75 percent of GDP this year and is to fall to 1 percent in 2002, and a fiscal deficit of no more than 1 percent of GDP is envisaged. Latvia will seek to achieve a zero deficit budget in the coming years.
Latvia wants to complete the privatization of large companies this year, by selling state holdings in the Latvian Shipping Company, oil terminal Ventspils Nafta and gas company Latvijas Gaze.
There are also plans to build a competitive system in the energy and telecommunications sectors.