From the Executive Board

• Pages: 331-333

Page 331

Latvia: Stand-By

The IMF approved an 18-month stand-by credit for the Republic of Latvia, in an amount equivalent to SDR 33 million (about $45 million), to support the government's 1997-99 economic program. The authorities have indicated their intention not to draw on the credit as was the case under the recently expired arrangement.

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Latvia has completed the first phase of transition, as macroeconomic conditions have stabilized and economic growth has picked up. Following the banking crisis and fiscal slippage of 1995, the government made major strides in tightening fiscal policy, enhancing the soundness of the banking system, and moving forward with structural reforms. Considerable progress was made under the 1996/97 program supported by an IMF credit. Real GDP rose by 2.8 percent in 1996, led by strong performance in the transportation, communications, and construction sectors. While inflation declined to 13 percent, the current account deficitPage 332 nearly doubled to 6.6 percent of GDP in 1996, reflecting a onetime increase in fuel imports in advance of preannounced excise tax increases, strong growth in imports of capital goods and other raw materials, and adverse external conditions for wood exports. Capital inflows more than compensated for this deficit and resulted in an overall balance of payments surplus for the year.

The 1997-99 Program

Countries using ESAF resources must develop-with the help of both the IMF and the World Bank- a Policy Framework Paper for a three-year adjustment program.

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The macroeconomic objectives of Latvia's 1997-99 economic program are real GDP growth of 4 percent for 1997 and 5 percent for 1998, a reduction in the annual rate of inflation to 9 percent in 1997 and 7 percent in 1998, and a narrowing in the external current account deficit to 6.1 percent of GDP in 1997 and 4.9 percent in 1998. Gross international reserves will be tar-Page 333geted at the equivalent of approximately three months of imports for 1997 and 1998.

To these ends, Latvia is continuing the previous macroeconomic strategy, with the exchange rate peg to the SDR remaining its focus, underpinned by fiscal and credit restraint. In the fiscal area, the general government fiscal deficit will be reduced to 0.9 percent of GDP in 1997 and 0.5...