RIGA - Latvia has received the first segment of a 7.5 billion euro loan from a group of international lenders aimed at easing the country's economic hard landing.
The Latvian Finance Ministry said on Dec. 29 that it received 589.57 million euros from the International Monetary Fund in the first of a series of payments that will last until February 2011. In total, the IMF has pledged 1.7 billion euros to the ailing Baltic state.
The European Union has pledged a 3.1 billion euro loan as a part of the package, the Nordic countries contributed a combined 1.8 billion euros, the World Bank 400 million euros, the European Bank for Reconstruction and Development 200 million euros, and Poland, the Czech Republic and Estonia are each to give 100 million euros.
Diana Berzina, a spokeswoman for the Finance Ministry, said the first portion of the IMF loan will be used to ensure liquidity of the Latvian State Treasury.
"Latvia faces severe economic challenges. Pressures on liquidity and on international reserves are intense, in part caused by the global financial crisis… Very high wage growth in recent years, far outstripping productivity gains, have severely undermined Latvia's competitiveness and contributed to large external imbalances," Dominique Strauss-Kahn, IMF Managing Director and Chairman, was quoted by the Baltic News Service as saying.
"The Latvian authorities have developed a program with the exceptionally strong policies needed to address these challenges. Their program is centered on their determination to maintain the current exchange rate peg in order to lay the groundwork for Latvia's entry into the eurozone as soon as possible," he said.
The loan interest rate is set in accordance with the IMF standard terms at the maximum of 3.87 percent based on the ratio of Latvia's quota and the loan amount. The loan will total some 1,200 percent of Latvia's quota.
The first part of the IMF loan will be used to secure liquidity of the State Treasury 's ensuring implementation of the 2009 budget plan in the first quarter of the next year, because budget revenue at the beginning of the budget year is significantly smaller than the expenditures.
The IMF will issue funds to Latvia on a quarterly basis, with the bulk of the sum to be paid out in 2009. Altogether, Latvia will receive 10 tranches.
SPENDING PLAN
"The Latvian authorities' program is an appropriately ambitious response in the current circumstances. Determined implementation of this program 's supported by the 27-month Stand-By Arrangement under the IMF's exceptional access policy and the very substantial financial assistance expected from Latvia's European Union, Nordic and other international partners 's will help address Latvia's immediate balance of payments needs," Strauss-Kahn said.
For the future, the program should contain and reverse the increase of external debt, improve competitiveness and return Latvia to a sustainable growth path," he said.
The government program aims to stem the current liquidity crisis and then ensure long-term external stability, while maintaining the exchange rate peg.
The immediate three objectives of the program are to stabilize the financial sector, restore investor confidence, and to avoid the disorderly adjustment that would follow if the exchange rate peg were abandoned.
The program includes measures to resolve the immediate problems in Latvia's ailing Parex Bank 's which was recently nationalized for the token sum of 2 lats 's to prevent contamination to the rest of the system. It also draws on substantial outside international financial assistance to meet the demand for foreign exchange.
For the medium-term, the program includes measures to promote economic adjustment and strengthen the peg. The program further aims to restore confidence in the broader financial system and halt the drain of external liquidity.
Substantial fiscal policy tightening will reduce financing needs, foster real depreciation, and make room for potentially large contingent financial sector liabilities. Such policies are targeted at meeting the Maastricht deficit criteria in order to adopt the euro. This exit strategy, meanwhile, is aimed at helping prevent a recurrence of the current economic difficulties.
The program includes strong income policies to reduce inflation and improve competitiveness, and structural policies that should boost productivity growth and help generate the much-needed shift from non-tradable to tradable production. Private sector debt restructuring will also likely be needed.
The loan is also planned to be used for refinancing short-term debt obligations. The nearest deadline for state debt refinancing is February 6, 2009, when a payment of 194.92 million lats has to be made
Latvia will have to start repaying the loan in February 2012 's a year later than the IMF standard regulations would require. Currently it is planned that the loan would be paid back in eight installments by the end of 2013.
