Latvia: One Year into the IMF Program
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Transcript 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
IMF one of several contributors:
€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
Stabilize financial sector
Restore depositor confidence
Structural reforms in anticipation of deteriorating credit quality
Fiscal adjustment
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
Much deeper downturn
Big swing in current account
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
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.
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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
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
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
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
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
End of special self-employed tax regime,
treat like other personal income taxpayers
Increases in excises, car tax, real estate tax
10
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
11
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
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