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

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IMF one of several contributors:


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€7.5 billion package; €3.3 billion already disbursed
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
2
Joint program with EU

EU Balance of Payments facility, for noneuro 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
3
Latvia program: goals at launch

Counter balance-of-payments strains

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Stabilize financial sector

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Restore depositor confidence
Structural reforms in anticipation of deteriorating credit quality
Fiscal adjustment
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Correct current account deficit
Address liquidity crisis
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
4
Macroeconomic developments
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Much deeper downturn
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Big swing in current account
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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
2007 deficit of 22 percent of GDP
2009 surplus of 9 percent of GDP (but inflated by bank losses)
Deflation setting in

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Wages and prices falling
Helps competitiveness, but pressure on tax revenue
5
Some of the output loss is permanent
10
5
120
Selected Countries: Output loss during
Capital Account Crises
(percentage change in real GDP)
Latvia: Real GDP
(seasonally adjusted, 2006 = 100)
0
110
-5
Actual
-10
100
-15
-20
90
Forecast
-25
-30
80
Thailand
Argentina
Indonesia
Latvia 1/
2006 2007 2008 2009 2010 2011 2012 2013 2014
1/ Based on IMF Staff forecasts for seasonally adjusted quarterly GDP from 2007 Q4 to 2010 Q3.
Sources: Central Statistial Bureau, Haver, IMF Staff Forecasts.
6
Program implementation

Financial Sector
Deposit outflows diminished, Parex stabilized
 Improved supervision and monitoring
 Strengthened intervention capacity

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Debt Restructuring
First round of insolvency law reform last year;
further measures pending (2nd reading stage)
 Progress in out-of-court restructuring

7
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
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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)
8
First Review: Fiscal Strategy

Balancing act
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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

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Across-the-board cuts risky
Structural reforms needed to underpin permanent
deficit reduction
9
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
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End of special self-employed tax regime,
treat like other personal income taxpayers
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Increases in excises, car tax, real estate tax
10
2010 budget: spending measures
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Savings of 1.9 percent of GDP from:
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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
11
Second Review: Fiscal

SMoU/LoI benchmarks on fiscal/structural
measures, including on technical-level work
on deficit-reduction options for 2011
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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
12
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
13
Thank you
http://www.imf.org/external/country/lva/rr/index.htm
Latvijas Ekonomistu asociācija, March 5, 2010