1. Latvia: One Year into the IMF Program David Moore IMF Resident Representative in Latvia Latvijas Ekonomistu asociācija, March 5, 2010

2. 2 Background Rapid international response to crisis €7.5 billion package; €3.3 billion 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; recently extended SBA to December 2011

3. 3 Joint program with EU 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

4. 4 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

5. 5 Macroeconomic developments Much deeper downturn 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 Big swing in current account 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

6. 6 Some of the output loss is permanent

7. 7 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 (2 nd reading stage) Progress in out-of-court restructuring

8. 8 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)

9. 9 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

10. 10 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

11. 11 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 2010 budget: spending measures

12. 12 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

13. 13 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

14. Thank you Latvijas Ekonomistu asociācija, March 5, 2010 http://www.imf.org/external/country/lva/rr/index.htm