"We regard the establishment of the European Monetary Union and the introduction of the euro as a positive development, and hope that the new currency will prove successful," Bank of Latvia Governor Einars Repse said Tuesday, at a conference on the global financial market and the Euro.
"In keeping with our future accession to the European Union, we will analyze and consider the possible change of the peg in the medium term - but not before 2000."
Part of the reason for maintaining the SDR peg, Repse said, is the fact that nearly 50 percent of Latvia's foreign trade is conducted in U.S. dollars, which are a main component of the SDR basket. But he said he expects an increased use of the euro and a decline in the use of the dollar in foreign trade as the single currency gains market credibility.
Repse stressed that joining the EU is a strategic objective for Latvia, and that the country sees entering the EMU as part of that task. He said fulfilling Maastricht Treaty criteria for EMU is a medium-term goal, and expects the country will be able to meet them in four to five years.
"We have already fully met the criteria for budget deficit, public debt and, in principle, also that for currency stability," Repse said. "We must be able to bring inflation down to a stable 3 percent by 2001-2002, and expect the interest rates of long term government bonds to follow the same decline within the same time frame."
Repse said the SDR peg has "served us well," bringing less foreign exchange volatility than a peg to any single currency would have, thereby providing a cornerstone for tight monetary policy.
"The case for our changing the existing arrangement would have to be very convincing," Repse said, though he noted that in technical terms a change in the peg would be relatively easy to achieve.
Latvia's gross domestic product grew by 6.5 percent in 1997 and at the same rate in the first half of 1998, though a slowdown to 4.5 - 5 percent for the whole of 1998 is expected because of the Russian financial crisis.
"The implications of the Russian turmoil on our economy are frequently overestimated," Repse said. "Market reforms in Latvia have been faster and much more decisive than in Russia, and we have eliminated the main economic reasons underlying the crisis, including budget deficits, excessive domestic and foreign borrowing, and huge inter-enterprise arrears."
Latvia's budget was in surplus in 1997 and is expected to be balanced in 1998, while public debt is seen at 11.8 percent of GDP.
Repse said Latvia is also working to implement EU banking directives on consolidated supervision and capital adequacy, and said the regulatory framework for banking activities will be completely harmonized with EU requirements by the end of 1999.
Repse spoke at the first day's closing session of this two-day conference, which is sponsored by the Bank of Portugal and the London-based European Economics and Financial Center.