Analytics, EU – Baltic States, Financial Services, Latvia

Ilmars Rimsevics.

According to the bank's president, the decision to turn to the IMF was adopted jointly by a number of Latvia's financial system agencies, after evaluation of the possible economic development trends for the next few years, when the volume of available money resources is expected to further contract, writes LETA.

Currently it is difficult to name the exact amount that Latvia will borrow as it will be defined by the IMF, representatives of which will visit Latvia and assess the amount of money that needs to be borrowed. The exact sum that will be borrowed will become known in three to four weeks.

Rimsevics explains that, judging from the past experience, after the talks with IMF are completed the financial situation in the country tends to stabilize, as doubts about its financial situation are dispelled. As Rimsevics said, it is difficult to say what the money will be used for by the state, but its main purpose will be to serve as "safety airbag", which could be used if necessary.

Rimsevics underlined, if the government had listened to the warnings of the Bank of Latvia and developed a budget with a surplus, now there would be no need to seek help from the IMF.

As reported, on November 20, the government authorized Finance Minister Atis Slakteris (People's Party) to launch talks with the International Monetary Fund regarding support for stabilization of the macroeconomic situation in Latvia. The government of Latvia has already started negotiations also with the European Commission and does exclude the option to start similar talks also with the World Bank.

Godmanis, did not reveal the amount of the aid that Latvia wishes to receive, he said that it would depend on the results of the talks.

Slakteris also did not specify the exact sum of money that the state hopes to obtain from the IMF, but he underlined that the talks have been launched timely, in order to avoid possible risks. The finance minister emphasized that, due to the global financial crisis, the government has to think in advance and attract the necessary additional financial means.

The newspaper Diena informed yesterday that this should not be regarded as Latvia officially turning for financial help to the IMF and the European Commission, as a number of countries have done already, including Hungary, Ukraine and Serbia. The government will not seek help because the situation is not that critical in Latvia, it will rather be a decision on launching necessary preparatory work for evaluating the options for borrowing money from the IMF and the Commission if the economic situation declines in Latvia and the world, as government sources told the newspaper.

According to the Finance Ministry's spokeswoman Diana Berzina, there have already been informal consultations with international institutions, including the European Commission, regarding loans for Latvia.

The interest on loans provided by the Commission and the IMF is lower, and the repayment term longer than with other loans. There are certain preconditions for the IMF and the Commission's loans, the money that a government borrows from the IMF or Commission must not be used to cover public administration or national budget expenditures. The Commission, the IMF and the World Bank, upon issuing a loan to a government usually also set a number of requirements, for instance, limiting government expenditures, carrying out structural reforms, strengthening the competitiveness of the national economy, and others.

The IMF offices in Latvia were closed a few years ago. The IMF experts issue reports on the Latvian economy on an annual basis, but the Latvian government has been rather critical of these reports over the past few years. In 2006 the government of Aigars Kalvitis (People's Party) was very skeptical about IMF experts' opinion that the government should take measures to prevent the Latvian economy from overheating, as well as limit the increasing budget expenditures, the lending rate, and pay more attention to control over the banking sector.