IMF says to stay the course

  • 2010-06-02
  • From wire reports

WE DIDN’T WRITE THAT: Whatever the source, an alleged forged letter has brought back discussion of currency devaluation. Prime Minister Valdis Dombrovskis maintains that a stable lat is government policy.

RIGA - The International Monetary Fund (IMF) and the European Commission (EC) have not changed their position, and continue to support Latvia’s chosen economic program based on preserving the current valuation of the national currency and working on gaining entry to the eurozone, reports news agency LETA. IMF experts have not recently discussed whether Latvia should return to the question of devaluation of the lat, or the possible positive or negative effects this would have on the national economy, says the organization.

The IMF representative office emphasizes that the international lenders’ mission is working with the Latvian government in order to protect the most vulnerable parts of society during the recession; however, the IMF can see clear signs that the economy is stabilizing and the chosen strategy is working.
Clarification on the question of devaluation was requested after a political contact provided LETA with a copy of a letter seemingly signed by IMF Managing Director Dominique Strauss-Kahn, appearing to call for Latvia to decide on a possible “mini-devaluation” of the lat and indicating that a timely decision would correspond to the interests of all parties in the long term.

The contents of the letter suggest that it may have been written as a reply to a Latvian politician. In the copy, the name of the addressee has been crossed out. However, the IMF representative office in Latvia claims that the letter is a forgery and does not express the organization’s views.
The document or forgery in question also notes that the IMF is pleased with Latvia’s action in implementing the terms of the agreement; however, it also stresses that no progress has been seen in the area of social spending. More precisely, in light of the approaching Saeima election, doubts are expressed over the government’s ability to carry out the previously-agreed reforms in the social sphere, and therefore the necessity presents itself of examining the option of a “mini-devaluation” - a widening of the lat’s allowed fluctuation band against the euro in order to hasten Latvia’s exit from the crisis.

Already at the beginning of last year, Prime Minister Valdis Dombrovskis (New Era) revealed that the IMF was not pressing for a devaluation of the lat, but would not object to this either. A stable exchange rate for the lat was the path chosen by the Latvian government in dealing with the collapse in the economy, and it defended this course of action in the initial talks with the international lenders at the end of 2008.
Bank of Latvia President Ilmars Rimsevics, in addressing the NATO Parliamentary Assembly’s Economic and Security Committee in Riga on May 29, declared that devaluation of the national currency would be poison, not an antidote, for the Latvian economy, and would bring no positive results.

Rimsevics mentioned that at the end of 2008, in the middle of the economic crisis, an “important and interesting” discussion ensued on how to get out of the recession. Usually in such cases, Rimsevics went on, there is a “simple and primitive” approach that calls for the same medicine for all ailments - devaluation. “But the Bank of Latvia carefully analyzed what would happen if the lat were devalued. It would be poison, taking into account that Latvia is a small and open economy with a large import trade balance and most of its loans are taken out in euros,” he declared.

The central bank president also expressed his opinion that the economic stabilization plan chosen by Latvia is showing the first positive signals, clearly confirming that it is working. Asked what lessons have been learned from the crisis, Rimsevics replied that Latvia now knows that there cannot be one and the same approach for all countries.