latvia & the ec -imf program: emerging from the...
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Latvia & the EC-IMF Program: Latvia & the EC-IMF Program: Emerging from the Crisis
David MooreIMF Resident Representative in Latvia
Bruegel, December 9, 2011
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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
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� 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� Post-program assessment by EU institutions and members
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Macroeconomic developments
� Much deeper downturn than originally expected� Real GDP contracted 18 percent in 2009; 2011 growth 4½-5%
� Unemployment peaked near 20 percent; eased but emigration
� Big swing in current account balance� 2007 deficit of 22 percent of GDP
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� 2009 surplus of 9 percent of GDP (though inflated by bank losses); roughly zero balance in 2011
� Deflation� Wages fell 10 percent in 2009, led by public sector
� Consumer prices fell 1.4 percent in 2009 (e.o.p.); excluding indirect tax effect, fall was 6.5 percent
� Substantial improvements in competitiveness
� Strong export growth in 2010 and 2011
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Implementing the program (1)
� Financial Sector
� Some improvements in supervision and monitoring
� Strengthened intervention capacity
� Stabilization and restructuring of systemically large
Parex Bank
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Parex Bank
� Debt Restructuring
� First round of insolvency reform in 2009, followed by
new insolvency law effective in November 2010
� Progress in out-of-court restructuring
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Implementing the program (2)
� Fiscal policy: emerged as major challenge as depth of downturn became clearer
� 2009 fiscal deficit target widened at “First Review” of the SBA (summer 2009),
Downturn eroding tax revenues
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� Downturn eroding tax revenues
� Mixed-quality spending cuts from mid-2009
�Program lenders showed flexibility in adjusting fiscal target� Cushion when downturn most severe
� But further deficit-reducing measures were still needed
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Summer 2009: new 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 for
policy consistency with ER peg, euro adoption
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policy consistency with ER 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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Fixing the fiscal imbalance (1)
� 2010 budget (Second Review of SBA) included new net fiscal adjustment measures of 4.2 percent of GDP
� Modest actual reduction in deficit from 2009, but much worse deficit avoided (“swimming upstream”)
2009 fiscal deficit target: 10 percent of GDP
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� 2009 fiscal deficit target: 10 percent of GDP
� 2009 fiscal deficit outcome: 9.7 percent of GDP
� 2010 target: 8.5 percent of GDP
� 2010 outcome: 8.3 percent of GDP
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Fixing the fiscal imbalance (2)
� 2011 budget, and supplementary budget (Fourth Review of SBA) included new net fiscal adjustment measures of about 2 percent of GDP, though some measures temporary
� Latvia on track to hit fiscal target in 2011: original
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� Latvia on track to hit fiscal target in 2011: original deficit ceiling of 6 percent of GDP; authorities now aiming at 4½ percent of GDP (4th Review commitment)
� For 2012, aiming at fiscal deficit of 2½ percent of GDP (4th Review commitment)
� Maastricht ceiling is 3 percent, but this is an electric fence!
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Program benchmarks, 4th Review
� Fiscal policy
� menu of options to hit 2012 target
� tax compliance strategy
� strategy for state-owned enterprises
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� strategy for state-owned enterprises
� fiscal responsibility law (draft)
� Financial sector
� restructuring of state-owned banks
� protect rights of secured creditors
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The 5th Review discussions
� Fiscal policy
� Mixed-quality measures in the 2012 draft budget, but should keep the deficit to 2½ percent target
� Financial sector
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� Implementing the restructuring for the state-owned banks
� Krajbanka highlighted need for extra steps to improve supervision
� And cutting across sectors …
� airBaltic
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Completing Latvia’s SBA
� IMF Board could complete 5th and final program
review just before SBA expires on December 22
� Next year: post-program monitoring
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� Article IV consultation, as with all IMF members
� IMF not just a lender, but provider of policy
advice and technical assistance
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Summary
� Painful adjustment, though mitigated by large, coordinated international support
� Stabilization of the financial sector, as intended when program launched, though further steps still needed to improve supervision
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improve supervision
� Much done to address underlying fiscal imbalance; huge adjustment effort since 2009 saved the peg, and helped insulate Latvia against turbulence elsewhere
� Latvia on track to complete the program successfully, but needs to be prudent as external situation worsens
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Thank youThank you
Bruegel, December 9, 2011
http://www.imf.org/external/country/lva/rr/index.htm