OREANDA-NEWS. April 18, 2011. A joint team from the International Monetary Fund (IMF) and the European Commission (EC) visited Riga during April 5–15 for discussions for the Fourth Review of the ongoing international financial support program.

Following discussions with the Latvian government, they reached agreement at staff level on main elements of the Latvian government’s policy program.

The Latvian economy is now showing clear signs of recovery, with economic growth of 3.3 percent expected this year, reflecting the Latvian authorities’ continued implementation of their economic program. Their policy agenda for 2011 sets the stage for meeting the conditions for euro adoption in January 2014, and for sustaining the economic recovery.

The 2011 budget, adopted by the Saeima in December 2010 together with the supplementary budget adopted on 14 April 2011 include deficit-reducing measures totaling around LVL 350 million, with much of the savings permanent. If fully implemented, these measures should ensure a general government deficit of around 4.5 percent of GDP in 2011 (ESA terms), so that Latvia will be within reach of a general government deficit below 3 percent of GDP in 2012.

The authorities will aim at a 2012 budget deficit of 2.5 percent of GDP. This will demonstrate their commitment to fiscal discipline and debt sustainability, and to meeting the general government deficit criterion for euro adoption on a sustainable basis. Preliminary estimates suggest that achieving this target in 2012 will require a further LVL 150¬–180 million in net additional measures, a smaller remaining adjustment need than the large adjustment measures implemented in 2011 and in previous years.

There has been good progress also in other areas of the program. Significant financial system stabilization measures have been taken. The restructuring of Parex Bank and Citadele is well advanced and the transformation plan for Mortgage and Land Bank is being submitted to the EC, following its adoption by the Cabinet of Ministers on 12 April. These measures have reduced potential banking sector funding needs. In this context, an agreement was reached with the Latvian authorities for phased release of the funds earmarked for banking sector support (€650 million in total) for the purpose of financing general government operations, subject to continued progress on financial sector reforms.

Completion of this review by the IMF and EC will unlock around EUR 970 million in resources from the EU, the IMF, the Nordic countries, and other EU countries, with another EUR 100 million expected to be approved by the World Bank. The Latvian authorities intend to draw only from the World Bank.”

Next steps: Subject to endorsement by the European Commission and following consultation of EU Member States, a Supplemental Memorandum of Understanding (SMoU) including the new policy measures agreed for the EC’s next review could be signed and released by June 2011. Subject to approval by IMF management, the IMF Executive Board meeting to discuss the Fourth Review under the Stand-By Arrangement could take place in late May or early June 2011.

EC-IMF staff teams should come back to Riga in late summer, and discussions on the fifth and final review would take place later in the year.