IMF evaluation interpreted

  • 1999-08-19
  • Diana Kudayarova
The results of the International Monetary Fund assessment of the state of the Latvian economy have been published. We have been looking forward to this event, with anxious expectations, for quite a while, and especially since we started fiddling with our budget and, linked to it, pensions. The exam is over and we have been given our grade.

And it's a good grade too. The IMF executive board concluded that we've done pretty well. They praised our efforts to cut budget deficit, approved of the pension reform, even though it was controversial enough to be put on hold for two months, and maybe, depending on the results of a referendum if it takes place, forever.

They told us that cutting expenditure is a good way to deal with budget deficits, that we should think about repegging our currency to the euro, and that increasing agricultural tariffs was an undesirable return to protectionism. We listened, we blushed with pleasure and bowed our heads in shame in appropriate places, and promised to comply with the IMF recommendations.

After all, the IMF wants to see Latvia as a stable, economically prosperous country, integrated into a thriving international community of other stable and prosperous states. Don't we all want the same?

But of course we do. One only has to remember that the IMF is first and foremost a monetary fund, giving loans to countries and expecting them back with interest and a thank-you note attached.

Latvia currently owes the IMF $52.77 million, and would like an opportunity to borrow more. Some $15 million are unlikely to be ever paid back. Of the sum that will be repaid, a large proportion is due back by the close of 1999.

In these circumstances it is clear that the IMF is very much interested in a low budget deficit, because high deficit, as well as being burdensome to the economy, might also mean a lack of funds to pay back the loans. Moreover, it is interested in improving the budget situation immediately. Hence the IMF statement that "the primary emphasis in fiscal consolidation should be on containing expenditure pressures" - cutting expenditure brings positive results faster than broadening the tax base and improving tax collection.

As for the farmers, the international element of the IMF means that Latvia is not the only country on its mind, and while trade protectionism may be good for one country's economy, it is usually damaging for others. The IMF's displeasure with Latvia's increase in import tariffs on pork means that the measure caused concern among our pork exporting neighbors, as well as going against the theoretical principle according to which free trade is the ultimate good for all parties involved.

It doesn't mean that it was a wrong measure. If the Latvian government wants to have the support of the Latvian farmers, in fact, if it wants to have any farmers at all, some of the theoretical principles and concern about the neighbors' welfare may have to be foregone.

The IMF recommendations are a very useful guide for Latvian economic development, and the IMF evaluations must be looked into with utmost care. But all evaluations are based on the standards of the evaluating party, the standards that must be known and taken into account when interpreting the "grade." What is best for the IMF may not be best for Latvia.