IMF disappointed with Latvia

  • 2003-01-23

The International Monetary Fund's representative in Latvia said the IMF was disappointed with Latvia's last year's budget indicators, citing large budget deficits as the reason.

IMF resident representative in Latvia Adalbert Knobl said the IMF had agreed with Latvia's previous government that consolidated budget deficit - the state budget together with the local budgets - should not exceed 1.8 percent of gross domestic product. However, by the year's end this deficit ballooned to 2.6 percent of GDP.

Worse, Knobl said the deficit expanded rapidly over the last month of the year, which was the first full month of the new government of Prime Minister Einars Repse. However, Knobl declined to comment whether December's deficit rise was the result of the new government or if additional spending had been provided by the previous government.

More thorough analysis is needed, the IMF official said.

"The IMF is highly disappointed with the budget indicators," said Knobl, adding that the last IMF mission to Riga urged the new government not to increase spending.

Finance Minister Valdis Dombrovskis was quick to shield the new government from the criticism, saying that the hefty increase in the December deficit was the fruit of the previous government's work.

He said the amendments to last year's budget were made as late as October and then announced in November. Thus, all additional expenditures provided for under the budget amendments were paid in December, including drought compensation to farmers and additional spending for the Eurovision Song Contest.

Latvia's national budget last year incurred a fiscal deficit of 98.2 million lats (158.7 million euros), the State Treasury reported, or 1.9 percent of GDP - much lower than the planned level at 2.7 percent of GDP.

However, when expenses from local budgets are taken into consideration the picture changes drastically. The consolidated budget deficit reached 131.1 million lats, or 2.6 percent of GDP.

During the first 11 months of the year the deficit amounted to 26.7 million lats, but then it expanded to 71.6 million lats over December. The aggregate deficit of the local budgets for the same month increased by 16.6 million lats to 45.4 million lats.

Dombrovskis also said that the previous government used "creative bookkeeping," to elude the public. For example, costs for holding the license for UMTS mobile communications were covered during the course of the whole year but were entered in accounting registers in December. The same pattern was used in other cases as well when expenditures were covered from privatization revenues.

"Now we see the result of the [previous] government irresponsibly adopting budget amendments so late," said Dombrovskis.

The previous government also declared that budget amendments must not be made before parliamentary elections so as to avoid accepting populist proposals in a pre-election atmosphere. So the annual budget amendments that normally are introduced in mid-year were only made in October.

The general elections in Latvia took place early in October.

Dombrovskis said he believed the fast expansion of the budget deficit will continue in February since the previous government adopted rules envisaging tighter control over repayment of value added tax to businesses.

Revenues into the main budget in 2002 were 817.3 million lats, which is 1.8 percent less than planned, while the spending was 846.4 million lats or 4.5 percent less than provided under the budget law.