IMF allows Latvia to retain its budget deficit at 1.75 percent

RIGA - The Latvian government and the International Monetary Fund reached an agreement during talks this week that the maximum deficit level in the consolidated state budget would be 1.75 percent of GDP and revenue from the auction of the third mobile operatorÕs license would be used for investment.

Finance Ministry spokeswoman Baiba Melnace said following the meeting of Finance Minister Gundars Berzins and the IMF mission on Feb. 7 that the budget deficit level could be revised if unforeseen circumstances occured during the year affecting the budget - such as the depreciation of the euro or growing fuel prices in the world which had a negative effect on the Latvian budget last year. If this were the case the deficit volume would be specified next autumn.

The IMF mission head said the IMF and the Latvian government had reached understanding on all issues and there were no more problems left. One of the most complicated issues concerned fiscal policy but the Latvian government confirmed the budget deficit would not be increased.

The proposals discussed during the missionÕs work in Latvia will still be discussed by the government and the IMF while drawing the final version of the memorandum.

The IMF officials said LatviaÕs fiscal policy and budget situation could be regarded as healthy.

The IMF didn't demand the countryÕs pension system be changed but various development stages of the system were under discussion and an agreement was reached on the sequence of their implementation.

On pension reform the Latvian government still will have to reach an agreement with the World Bank, which is managing this project.

ÒThe targets should be set sufficiently high and stay within the set budget frames. We should not eat up our future,Ó said Prime Minister Andris Berzins.

The finance minister meanwhile said the pension law should not be amended any further because the public has already lost confidence in pension reforms.

During the talks, officials agreed to use the funds raised from the sale of the third mobile communications operatorÕs license for investment projects. The IMF initially wanted these funds be used for covering the national debt and reducing the budget deficit.

The IMF said Latvia should use the funds raised from the sale of the third mobile operatorÕs license only for investment projects which have clear and transparent plans.

The finance minister said the cooperation memorandum between Latvia and the IMF developed for the coming 18 months included realistic targets and the talks with the IMF were open and direct.

The IMF mission closed its work in Latvia on Feb. 7 and now the final version of the memorandum will be developed and approved by the Latvian government and the IMF.

The cooperation memorandum with the IMF includes LatviaÕs commitments it undertakes to implement during the 18 months of the memorandumÕs term. The memorandum implementation is observed by IMF officials on a regular basis.

The memorandum indicates the IMF supports the governmentÕs policy. Last year the IMF declined to sign the memorandum with Latvia due to its excessive budget deficit.