Latvia: an Overview ofthe IMF Program
David Moore, IMF Resident Representative in Latvia
AmCham, October 20, 2009
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Background
Rapid international response to crisis €7.5 billion package; €3bn 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. SBA runs until March 2011
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Goal and structure of IMF programs
To rebuild international reserves, stabilize currencies, and pay for imports, while borrowing countries correct underlying balance of payment problems
Programs supported by IMF lending specify the policies and measures agreed by countries to resolve balance of payments problems
IMF loans are usually released in phased instalments as the program is implemented
The IMF Board approved the First Review of Latvia’s SBA on August 27, releasing €195m
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This time, with partners
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
Joint missions, though EC and IMF representation offices have different roles
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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
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Macroeconomic developments
Much deeper downturn Real GDP projected to contract 18 percent in 2009; initial
program envisaged only 5 percent contraction Weaker than expected international environment Credit crunch exacerbated domestic demand collapse
Unemployment approaching 20 percent
Big swing in current account 2007 deficit of 23 percent of GDP 2009 surplus projected around 5 percent of GDP
Deflation setting in Wages and prices falling Helps correct competitiveness, but erodes tax revenues
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Some of the output loss is permanent
Selected Countries: Output loss during Capital Account Crises(percentage change in real GDP)
-30
-25
-20
-15
-10
-5
0
5
10
Thailand Argentina Indonesia Latvia 1/
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.
Latvia: Real GDP(seasonally adjusted, 2006 = 100)
80
90
100
110
120
2006 2007 2008 2009 2010 2011 2012 2013 2014
Actual
Forecast
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Program implementation
Financial SectorDeposit outflows diminished, Parex
stabilized Improved supervision and monitoringStrengthened intervention capacity
Debt Restructuring Insolvency Law reformedProgress in out-of-court restructuring
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Program implementation (2)
Fiscal Large general government deficit overshoot in 2009
Downturn eroding tax revenues Some spending cuts not implemented
Program lenders have shown flexibility in adjusting fiscal targets
Budget institutions and processes need to be upgraded
Other SBA targets were met (quantitative targets for international reserves, monetary developments)
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SBA First Review: Letter of Intent
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
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First Review: fiscal deficit path
“ECOFIN” path 2009 – 10% 2010 – 8.5% 2011 – 6% 2012 – 3%
Meeting these targets could resolve fiscal and external vulnerabilities—but will be difficult to achieve
IMF program adds buffer to this path: flexibility for higher deficit levels, but deficit reduction from next year and path towards meeting Maastricht
Figure 13. Latvia: Program and Rapid Adjustment scenarios, July 2009
Source: Latvian authorties, Fund Staff Estimates.
General Government's basic f iscal balance(in percent of GDP), 2005-2015
-16
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
2005 2007 2009 2011 2013 2015
Program scenario
Rapid Adjustment scenario
Maastricht criteria (ESA)
General Government Gross Debt(in percent of GDP), 2005-2015
0
10
20
30
40
50
60
70
80
90
100
2005 2007 2009 2011 2013 2015
Program scenario
Rapid Adjustment scenario
General Government's primary structural basic f iscal balance (in percent of GDP), 2005-2015
-16
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
2005 2007 2009 2011 2013 2015
Program scenario
Rapid Adjustment scenario
General Government's structural basic f iscal balance (in percent of GDP),2005-2015
-16
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
2005 2007 2009 2011 2013 2015
Program scenario
Rapid Adjustment scenario
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First Review LoI: fiscal strategy
2009: improve implementation 1 percent of GDP for social safety net: GMI,
healthcare copayments for most vulnerable Ringfenced resources to implement EU-funded
projects: only feasible source of stimulus
2010: identify savings, but not preempt budget Adjustment of at least Ls 500 million (4 percent of
GDP), more if needed Revenue measures 1½ percent of GDP Expenditure measures 2½ percent of GDP
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LoI: 2010 revenue commitments
Revenue of 1½ percent of GDP from:Broaden base of personal income tax,
including capital income
Reduce or remove most exemptions, including for farmers
End of special self-employed tax regime, treat like other personal income taxpayers
Expand real estate tax to include all residential properties
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LoI: 2010 spending commitments
Savings of 2½ percent of GDP from:
Reform of public sector pay scale (½ percent of GDP)
Structural reforms based on functional audits, to generate sustainable savings of 2 percent of GDP
Consolidation of agencies Lower state support to agriculture Review of spending on culture, defense, foreign affairs Better targeting social benefits and public transport
subsidies
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LoI: other measures for 2010
LoI commitments targeted areas that would avoid unduly deep cuts to essential public services
Contingency measures if Ls 500 million not enough to achieve fiscal deficit goal
VAT, more progressive personal income tax (VAT increase also in supplementary MoU for the EC program), plus further spending cuts
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Next steps
EC and IMF staff in close contact with the authorities as they prepare 2010 budget
Program back to quarterly reviews
Joint mission—EC, IMF, other program partners—could take place in November
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Summary
Painful adjustment, but mitigated by large, coordinated international support
Progress in stabilizing the financial sector, as initial program intended
Program has responded to severe downturn: room for a wide fiscal deficit this year, but sustainable deficit-reducing measures needed from 2010
Thank you
AmCham, October 20, 2009
http://www.imf.org/external/country/LVA/index.htm