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Brussels, 8 November 2013
Fourth Post-Programme Surveillance mission to Latvia by the Commission services
Following the successful conclusion on 20 January 2012 of the three-year financial support by the EU, the fourth Post-Programme Surveillance (PPS) mission to Latvia was carried out by the European Commission services from 4 to 7 November, 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).
The assessment of post-programme developments is overall positive. Macroeconomic, fiscal and political stability has allowed Latvia to enjoy among the fastest GDP growth rates in the EU and the outlook for 2014 and 2015 is equally encouraging. Nominal budget deficits are projected to remain in the range between 1% and 1½% of GDP in 2013-2015 despite several income tax cuts planned for these years. The tax policy package underpinning the 2014 budget follows the respective Country Specific Recommendation (CSR) issued to Latvia, in particular through 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 strengthening actions to tackle different types of tax avoidance. Other measures, e.g. on child poverty, are expected to partly address social exclusion and demographic challenges.
However, some concerns remain to be addressed. The government has adopted far-reaching changes to, inter alia, the Construction and Civil Procedures Laws and there are promising steps as regards vocational training and youth unemployment; nonetheless, a greater sense of urgency still seems warranted. For several necessary reforms, progress is very slow and implementation foreseen only in up to three years' time. This applies for, inter alia, reforms of higher education and science where the opportunity to use independent international accreditation institutions has already been missed. Better targeting and broader means-testing of social benefits based on the results of a recently published World Bank study will take significantly more time than had been hoped. The same holds true for putting in place centralised and professional management of state-owned enterprises from early 2014 and for making public administration more professional. In the energy sector significant challenges with regard to the liberalisation of the gas and electricity markets are still to be overcome. The legal obligation to ensure third party access to gas infrastructure by April 2014 is a particular priority.
Close monitoring of increasing non-resident bank deposits and further improving the capacity to tackle financial crimes and tax evasion remain important. Positive initiatives to strengthen the judicial system and to reform the insolvency law need to be followed through.
It will be important for Latvia to keep the pace of reforms and maintain competitiveness and fiscal prudence once inside the eurozone. The European Commission will continue its close surveillance of planned and implemented reforms through the European Semester framework and the Post Programme process.
From 2009 to 2011, Latvia benefited from a financial assistance programme (Balance of Payment 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":