The Latvian parliament sapped the final drop to the IMF's patience by passing budget amendments Nov. 2. that increased the budget deficit to nearly 3.2 percent of GDP. The biggest additional spending - two million lats ($3.2 million) - was allocated for the purchase of a new Latvian embassy building in Washington. Another 819,000 lats was approved for the purchase of mobile telephone tapping equipment for national security authorities.
"The fiscal target was missed by a very sizable amount, and once the supplementary budget was adopted by the parliament, it was not realistic that the next quarterly target would be met," Schiff said.
"The supplementary budget should not have been passed. If there were increases, decreases also had to be made elsewhere," Schiff said.
Despite the IMF's criticism, the markets were calm.
"The IMF's decision will not effect Latvia's credit rating, because the rating agencies mainly look for the basic ratios which are OK," said Ervins Jonass, the chief of treasury for Latvijas Krajbanka.
He said that it will have only a slightly negative impact on the markets. "There is no problem in borrowing on the foreign markets. Everything depends on how Latvia will manage to control the budget deficit," he stressed.
Latvia's economic performance was praised by the IMF representatives, who said the economy has performed quite well this year despite some negative external factors, such as a weak euro and the lingering effects of the 1998 Russian financial crisis. He said GDP growth this year should hit 5 percent while inflation will be 3 percent or lower. The current account deficit, according to the IMF's estimates, could reach 8 percent this year, which is lower than was forecast initially.
Still, there are few risks to the economy. "We believe the only way to address these risks is to have a very cautious fiscal policy," Schiff said.
"Latvia is facing a lot of extraordinary spending needs, including those for EU and NATO accession. It's crucial that these expenses are incorporated in the budget step by step instead of an uncontrolled expansion of the budget deficit," Schiff noted.
"The Latvian government announced intentions to have 1 percent budget deficit. We think that they should make all possible efforts to reach that figure," he said.
Latvia's southern Baltic neighbor, Lithuania, faces similar problems. The new government is set to negotiate the fiscal deficit increase for the coming year with the IMF. The former government led by Andrius Kubilius agreed with the IMF on a fiscal deficit of 1.4 percent of GDP while the new government predicts the deficit to be 2-3 percent of GDP. "We want to increase the state investments, and first of all, to direct funds for the renovation of schools," said Lithuanian new finance minister Jonas Lionginas. In March 2000 the Lithuanian government signed a 15-month economic policy memorandum approved by the IMF.
Now the IMF intends to sign an additional memorandum to set Lithuania's macroeconomic targets for the first quarter of 2001. "I want to underline that the most acceptable figure (for the fiscal deficit) should be very close to that agreed with Kubilius' government," Mark Horton, the IMF representative in Lithuania and Belarus, told BNS.
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