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Brussels, 16 May 2013
Third Post-Programme Surveillance mission to Latvia by the Commission services
Following the successful conclusion on 20 January 2012 of the three-year financial support programme by the EU, the third Post-Programme Surveillance (PPS) mission to Latvia was carried out by the Commission services from 13 to 15 May, together with the ECB. PPS missions are scheduled to take place twice a year until 75% of the EU loan provided to Latvia will be repaid (expected in 2015).
Since the last PPS visit in November 2012, economic and budgetary performance, including budget control, has been commendable. However, pressures to spend are likely to grow in the coming months. A new fiscal framework has been in place since earlier this year but has not been tested yet; the 2014 budget will show its actual clout. The Commission has on several occasions called for a substantial reduction of taxation for low income earners by shifting taxation to areas such as excise duties, property and/or use of natural resources, and by continuing actions to tackle envelope salaries, contraband and other types of tax avoidance.
The Commission will continue close monitoring of planned and implemented reforms through the European Semester framework and the Post Programme Surveillance. The agenda of necessary reforms includes better targeting of social benefits and a more effective social policy based on the results of a soon-to-be-published World Bank study, starting already from 2014 budget. The mission was encouraged by the proposed measures in higher and vocational education, as well as the planned assessment of scientific institutions in agreement with the Nordic Council of Ministers; however implementation of these actions has been slow and support by the governing coalition could be broader and stronger. Also, implementing first elements of the Third Energy Package related to third party access to gas infrastructure by April 2014 will be a true test for the government and show its resolve in implementing commitments vis-à-vis the EU.
Other challenges relate to implementing professional management of state-owned enterprises from January 2014, increasing funding and coverage of training and labour market policies to better help the unemployed, making public administration more professional and motivated, as well as modernising the judicial system and making it more accountable. While authorities are aware of the risks associated with non-resident deposits and recent measures to limit them are acknowledged, close monitoring of increasing non-resident bank deposits remains important; the available tools need to be applied more systematically. Capacities for tackling financial crimes and tax evasion need to be enhanced. Strengthening of capacities of the Competition Council also seems warranted.
The assessment of post-programme policies is somewhat ambiguous. Tackling of big-item reforms, where significant confrontation risks exist with coalition partners or strong vested interest groups, appears to have been put on hold, while less controversial reforms seem to be pushed forward. Decision-making procedures for key reforms appear to be long, in particular as regards review of important legal texts by the Parliament (e.g., Construction, Insolvency, Commercial, Civil and other laws).
A comprehensive Commission services’ assessment of Latvia’s reforms will be published on 29 May (the Staff Working Document assessing Latvia’s National Reform and Convergence Programmes).
From 2009 to 2011, Latvia benefited from a financial assistance programme (Balance of Payments Support) from the EU, provided in conjunction with an IMF stand-by agreement and financing commitments by the World Bank, the European Bank for Reconstruction and Development, several EU countries and Norway. Funds available amounted to € 7.5 billion, of which Latvia used € 4.5 billion (60%), with € 2.9 billion lent by the European Commission, on behalf of the EU. The lending was subject to an ambitious action plan, including fiscal consolidation and wide-ranging structural reforms, which have proven quite effective to help the country to recover from a deep financial and economic crisis.
For more information:
See also the recent ECFIN Occasional Paper "EU Balance-of-Payments assistance for Latvia: foundations of success":