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IP/10/698

Brussels, 7 June 2010

Statement after Commission financial assistance review mission to Latvia

The European Commission, jointly with the IMF, World Bank and Swedish representatives, has concluded discussions with the Latvian authorities on the implementation of the policy programme under the €7.5 billion multilateral assistance package. The Latvian authorities and the joint mission agreed that the 2010 budget deficit target of 8.5% of GDP is within reach, even allowing for accelerated spending financed by EU funds this year. There was also agreement that a further LVL 395 to 440 million net consolidation will be needed to reach the 2011 budget deficit target of no more than 6% of GDP (in ESA95 terms). Continuing with the consolidation effort is necessary to put Latvia's public finances on a sound footing, meet the Maastricht criteria for euro adoption and create the stability necessary for economic recovery.

A mission of the European Commission was in Riga from 25 May until 7 June, jointly with IMF, World Bank and Swedish representatives, to assess Latvia's compliance with the policy conditions attached to the ongoing international financial support programme. The Commission mission, led by Matthias Mors, Acting Director at the European Commission and Gabriele Giudice, Head of the Unit in charge of EU financial assistance to Latvia, reached agreement at staff level on the third review of the conditions attached to the EU financial assistance.

Latvia's economic environment is beginning to improve. The economy is showing signs of stabilisation and is expected to start expanding already this year. External competitiveness is improving through continuing adjustment of wages and prices. Exports are rising rapidly and export market shares are increasing. Latvia's financial market conditions have improved significantly as policy credibility has strengthened. However, both the internal situation and the external economic environment remain challenging. Under these circumstances, Latvia needs to consolidate the gains made so far and to continue to deliver the policy measures necessary to reach its goal of fulfilling the conditions for euro adoption.

The Latvian authorities and the mission concurred that the budget has so far remained under control, that the 2010 deficit target of no more than 8.5% of GDP in ESA95 terms is within target and that this allows for increased appropriations for expenditure in 2010 co-financed by EU funds. In case additional fiscal room for manoeuvre emerges in the remaining course of the year, the Latvian authorities intend to seek approval for further raising such appropriations, which could bring total absorption of expenditure financed by EU Funds in 2010 to above LVL 1 billion (more than 8% of GDP). Looking beyond 2010, significant additional measures will nevertheless be needed to meet the Maastricht criteria by 2012 in order to keep open the prospect of adopting the euro in January 2014.

The Latvian authorities and the mission concurred, based on preliminary estimates, that an additional LVL 395 to 440 million (around 3.1 to 3.5% of GDP) in net measures will be needed to reach the 2011 budget deficit target of no more than 6% of GDP in ESA95 terms. The government is preparing a menu of revenue and expenditure options that in total amount to a significantly larger amount than the consolidation needed, to give the incoming government a meaningful choice of measures to reduce the deficit when the 2011 budget is submitted after the Parliamentary elections in October. For 2012, further significant adjustment may be needed to bring the deficit below the 3 percent of GDP target. Progress is envisaged to continue in the financial sector and in many areas of structural reform aimed at making the economy more efficient and competitive, while supporting those most at risk from the ongoing adjustment.

The EU's mission staff will now report to Brussels their positive assessment of the programme implementation. Subject to this being endorsed by the Commission and following consultation of the EU Member States, a Supplemental Memorandum of Understanding (SMoU) including the new measures agreed should be signed and released by July 2010.

For more information on the EU's Balance-of-Payment assistance for Latvia see the following link:

http://ec.europa.eu/economy_finance/articles/financial_operations/2010-03-11-bop-latvia_en.htm


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