Introduction

The economic situation in Latvia during 1993 was complicated. The volume of production continued to decline in nearly all the branches of the national economy, and the level of unemployment rose.

Nevertheless, a considerable reduction in inflation should be noted as a positive development alongside with the successful completion of currency reform. This may reasonably be considered the main achievement of the monetary policy implemented by the Bank of Latvia during the reporting year.

On March 5, 1993, the national currency was renewed by placing in circulation the first Republic of Latvia national currency note, the 5 lats note. A gradual replacement of Latvian rubles by lats started simultaneously, and proceeded until June 28, 1993, when the regulation came into effect stating that all prices, tariffs and balances of accounts shall be calculated in lats. This marked the completion of the currency reform initiated in 1992.

During the fiscal year, the Bank of Latvia looked for new monetary instruments and improved its existing ones. The Bank also activated its participation in the foreign exchange market.

If people do not trust the existing currency, they avoid it by either buying goods or obtaining foreign currency, thus often causing inflation and devaluation of the national currency. But inflation in 1993 was not the result of avoiding the local currency. It was mainly caused by the rapid growth in prices for imported goods, an increase in tax payments as well as seasonal factors at the end of the year. People trusted in lats from the very beginning, and their trust became even stronger over the course of time. The amount of foreign exchange purchased by the Bank of Latvia exceeded the amount sold; the exchange value of lats grew considerably in the currency market.

In 1993, the Bank Privatization Fund of Latvia performed both the separation and privatization of the former Bank of Latvia commercial branches. The number of newly licensed commercial banks was lower than in previous years. This may be explained by the increased competition among the commercial banks, higher regulatory requirements on banks, as well as the intensified supervision by the Bank of Latvia.

One of the main objectives was to make the supervision of credit institutions more efficient by auditing not only the accuracy of the financial statements, but also the compliance with the prudential requirements set by the Bank of Latvia.

The Bank of Latvia continued its cooperation with the IMF, the World Bank, other international financial institutions, and foreign central banks.

The above is only a short survey of the activity of the Bank of Latvia in 1993. The following chapters give more detailed information. The monetary policy results discussed in this Annual Report are based on monetary and banking statistics compiled by the Bank of Latvia. The economic conditions in Latvia are analyzed using information supplied by the Republic of Latvia State Committee of Statistics.