IMF deputy managing director Shigemitsu Sugisaki said the Latvian
authorities' pursuit of appropriate financial policies and
implementation of difficult structural reforms has laid the
foundation for the current economic recovery from the Russian crisis.
It was noted that Latvia now appears poised for a resumption of
durable growth in a low-inflation environment, supported by its
stable exchange rate regime. However, the persistently large current
account deficit, coupled with the increased reliance on debt
financing, should be monitored carefully.
The fiscal deficit targets for 2000 and 2001 and the planned
achievement of near fiscal balance over the medium term are
appropriate. However, further fiscal consolidation may be needed
should the external current account deficit fail to decline as
expected, or if foreign direct investment falls short of
expectations. To this end, the authorities have already prepared a
set of contingency spending measures that they are ready to implement
if necessary, the IMF said in its statement.
The IMF also praised Latvia's national currency but suggested that
the authorities monitor closely Latvia's external competitiveness,
particularly in light of possible further appreciation of the lat
against the euro.
"There has been welcome progress in strengthening the financial
health of the banking system and in enhancing banking supervision,"
the statement read.
Sugasiki said the Latvian government should strive to implement its
plans to largely complete the privatization of the remaining large
public enterprises by early 2001, establish an adequate framework for
the regulation of utilities, and address the remaining impediments to
an enabling business climate in order to enhance the role of the
private sector, attract foreign direct investment, and strengthen and
diversify Latvia's export base.
The cooperation memorandum between Latvia and IMF was approved late
last year and outlines the main objectives to be achieved by Latvia
over next 16 months.
The Latvian government May 16 approved the additional cooperation
memorandum between Latvia and the IMF outlining additional
requirements of IMF to Latvia.
The additional memorandum states, among other things, that Latvia
should reduce current account deficit by increasing inflow of foreign
investment. The IMF hopes that by 2001 over two- thirds of the
deficit would be covered by direct foreign investment.
In 1999 the current account deficit in Latvia was 10.2 percent of GDP.
The additional memorandum also said the revenues into this year's
budget should be retained at the planned level while attempts should
be made to cut the spending.
In the additional memorandum, the government pledges to contain this
year's budget deficit at 2 percent and next year's at 1 percent of
The Latvian government also voices commitments to refrain from
raising tax rates this year, to promote improvement of tax
administration and eliminate evading of fuel excise tax payment by
imposing excise tax on all fuel products.
The government, among other things, also undertakes to complete
privatization of the remaining state-owned companies by the end of
Upon approval of the cooperation memorandum the IMF also granted
Latvia a stand-by credit. According to the IMF officials, Latvia will
treat the credit as precautionary and does not intend to draw the SDR
5.5 million (about $7.3 million) that is available. The total amount
of the credit is $45 million.