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European Commission

MEMO

Brussels, 10 April 2014

Commission staff carry out fifth Post-Programme Surveillance mission to Latvia

Following the successful conclusion on 20 January 2012 of the three-year financial support by the EU, the fifth Post-Programme Surveillance (PPS) mission to Latvia was carried out by staff of the European Commission from 7 to 10 April, together with the European Central Bank. PPS missions are scheduled to take place twice a year until 75% of the EU loan provided to Latvia will be repaid (expected in early 2015). Latvia made a EUR 1 billion repayment on 25 March 2014.

The assessment of post-programme developments is mixed. Macroeconomic, fiscal and political stability has allowed Latvia to enjoy fast GDP growth rates and the outlook for 2014 and 2015 is overall encouraging, despite the potential negative economic fall-out from the crisis over Crimea. Reflecting good macroeconomic conditions, nominal budget deficits are projected to remain around or slightly above 1% of GDP in 2014-2015 despite several income tax cuts planned for these years. This would depend on consequent implementation of the Fiscal Discipline Law. Positively, the tax policy package underpinning current projections implies a further 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 tax avoidance. Nevertheless, the tax wedge for low-income earners is still too high.

Some problems remain to be addressed with a greater sense of urgency. The authorities should implement credible higher education and science sector reforms and allocate EU funds in line with merit and quality considerations: e.g., the provision of higher education quality assurance services should only be open to accreditation agencies recognised by the European Quality Assurance Register and allocation of financing for scientific institutions should be based on the results of independent international assessments.

There has been no concrete progress with better targeting and broader means-testing of social benefits. Access to and financing of healthcare need to be improved significantly. Implementation of the management reform of state-owned enterprises, selling of minority and non-core-activity shares, and the appointment of professional board and council members have been significantly delayed. Reforms to make public administration more professional are slow, including as regards aligning the unified wage grid with efficiency and quality consideration and, introducing professional hiring for senior positions.

Full electricity market opening has been delayed to January 2015 as the political will to put an appropriate support mechanism for the most vulnerable in place on time seems not to have been strong enough. The government should foster the functioning of the electricity wholesale market.

Close monitoring of increasing non-resident bank deposits remains important. The capacity to tackle complex financial crimes and tax evasion has to be improved. Some of the institutions under the Prosecutor General and the Finance Ministry need more staff, training, and resources.

Positive initiatives by the Justice Ministry to streamline the judicial system need to be followed through. The appointment process of insolvency administrators needs to be more transparent and their accountability strengthened.

Overall, loan repayment risks are low at present due to the solid cash balance of the Treasury as well as sound fiscal and growth indicators.

Background

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. The European Commission will continue its close surveillance of planned and implemented reforms through the European Semester framework and the Post Programme process.

For more information:

http://ec.europa.eu/economy_finance/eu_borrower/balance_of_payments/latvia/latvia_en.htm

See also the ECFIN Occasional Paper "EU Balance-of-Payments assistance for Latvia: foundations of success":

http://ec.europa.eu/economy_finance/publications/occasional_paper/2012/op120_en.htm


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