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Latvia: One Year into the IMF Program

Latvia: One Year into the IMF Program. David Moore IMF Resident Representative in Latvia Latvijas Ekonomistu asociācija, March 5, 2010. Background. Rapid international response to crisis €7.5 billion package; €3.3 billion already disbursed IMF one of several contributors: EC: €3.1 billion

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Latvia: One Year into the IMF Program

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  1. Latvia: One Year intothe IMF Program David Moore IMF Resident Representative in Latvia Latvijas Ekonomistu asociācija, March 5, 2010

  2. Background • Rapid international response to crisis • €7.5 billion package; €3.3 billion already disbursed • IMF one of several contributors: • EC: €3.1 billion • IMF: €1.7 billion (Stand-By Arrangement: at 1,200 percent of quota, one of largest ever IMF programs) • Nordic governments: €1.8bn • World Bank: €0.4 billion • Others: €0.5 billion • IMF Board approved SBA in December 2008; recently extended SBA to December 2011

  3. Joint program with EU • EU Balance of Payments facility, for non-euro area member states, has similar goals to the IMF Stand-By Arrangement • Besides financial and fiscal issues, EC covers structural policies, including use of EU funds • Joint programs active in Hungary and Romania, as well as Latvia

  4. Latvia program: goals at launch • Counter balance-of-payments strains • Correct current account deficit • Address liquidity crisis • Stabilize financial sector • Restore depositor confidence • Structural reforms in anticipation of deteriorating credit quality • Fiscal adjustment • Reduce external financing needs • Wage cuts to help correct a competitiveness problem, while maintaining the long-standing peg to the euro • Program exit strategy: euro adoption

  5. Macroeconomic developments • Much deeper downturn • Real GDP contracted 18 percent in 2009; initial program envisaged only 5 percent contraction • Weaker than expected international environment • Credit crunch exacerbated domestic demand collapse • Unemployment around 20 percent • Big swing in current account • 2007 deficit of 22 percent of GDP • 2009 surplus of 9 percent of GDP (but inflated by bank losses) • Deflation setting in • Wages and prices falling • Helps competitiveness, but pressure on tax revenue

  6. Some of the output loss is permanent

  7. Program implementation • Financial Sector • Deposit outflows diminished, Parex stabilized • Improved supervision and monitoring • Strengthened intervention capacity • Debt Restructuring • First round of insolvency law reform last year; further measures pending (2nd reading stage) • Progress in out-of-court restructuring

  8. Program implementation (2) • Fiscal: 2009-10 measures of 10 percent of GDP • 2009 fiscal deficit target widened at First Review, but 2009 outcome better than expected at mid-year • Downturn eroding tax revenues • Mixed-quality spending cuts from mid-2009 Program lenders showed flexibility in adjusting fiscal targets • 2010 budget includes Ls 500 million adjustment • Other SBA targets were met (quantitative targets for international reserves, monetary developments)

  9. First Review: Fiscal Strategy • Balancing act • Wider fiscal deficit target needed for 2009, given revenue slump and basic social assistance needs • Medium-term fiscal adjustment also needed: policies consistent with peg, euro adoption • Not just how much to tighten, but how • Across-the-board cuts risky • Structural reforms needed to underpin permanent deficit reduction

  10. 2010 budget: revenue measures • Revenue of 2.3 percent of GDP from: • Increase in rate of personal income tax (PIT) from 23 to 26 percent • Broadened PIT base, including capital income and reducing or removing most exemptions • End of special self-employed tax regime, treat like other personal income taxpayers • Increases in excises, car tax, real estate tax

  11. 2010 budget: spending measures • Savings of 1.9 percent of GDP from: • Substantial cuts in administrative budgets (closure and merger of agencies) • Wage cuts, steps to harmonize wages across ministries and institutions • Mix of further across-the-board cuts, and structural reforms • Program review discussions emphasized need for reforms to make 2010 spending cuts permanent

  12. Second Review: Fiscal • SMoU/LoI benchmarks on fiscal/structural measures, including on technical-level work on deficit-reduction options for 2011 • Further measures of Ls 800-900 million needed in 2011-12, to reduce fiscal deficit below 3 percent of GDP in 2012 • EC-IMF mission now in Riga for update; Third Review mission expected in May

  13. Summary • Painful adjustment, but mitigated by large, coordinated international support • Progress in stabilizing the financial sector, as initial program intended • Very large fiscal adjustment effort in 2009-10 helping confidence now • Another major effort needed in 2011-12 to qualify for euro adoption

  14. Thank you Latvijas Ekonomistu asociācija, March 5, 2010 http://www.imf.org/external/country/lva/rr/index.htm

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