The Bank of Latvia » For Media » Publications » The Annual Report » 1998
Introduction
Strict monetary and fiscal policies, successful structural reforms and further adjustment of the country's economy to comply with market economy principles were the key factors that allowed Latvia to maintain its macroeconomic stability and helped to overcome difficulties provoked by the instability of the world financial system, and the Russian crisis in particular. Russia failed to meet its obligations, the Russian ruble was devalued, major world stock markets registered a sharp fall, the US dollar weakened, and financial markets experienced a liquidity squeeze. The Russian default, which followed the East Asian crisis, altered the global economic outlook for the long term. Latvia's macroeconomic indicators are evidence that the country has not only withstood the pressure, but also ranks among the most successful Central and East European transition economies. Both the low annual inflation rate (2.8%) and the growth in GDP (3.6%) were close to the level of developed countries.
The Government adhered to a tight fiscal policy thus ensuring a balanced general government consolidated budget and maintaining a low level of interest rates. In 1998, the revenue of the general government consolidated budget increased by 21.6% year-on-year, and the financial surplus totalled 8.1 million lats. As there was no demand for credit on the part of the Government, banks were stimulated to invest in the private sector of the Latvian economy (domestic lending showed a year-on-year growth of 52.0%). The increase in long-term loans was more rapid than in short-term loans, a difference of 8.3 times. (The weighted average interest rate was at 12.9% for long-term loans and at 14.2% for short-term loans.)
The rapid growth in industrial output in the first half of the reporting year was followed by a decline in September-December as a result of the Russian crisis. Nevertheless, the volume index of industrial output (at constant prices) rose by 2.0%.
In the reporting year, Latvia's exports and imports rose (by 10.0% and 18.9%, respectively). Trade turnover with the EU countries reached 55.7% of the total. In October, Latvia was the first of the three Baltic states to join the World Trade Organization. This step is expected to promote the expansion of Latvia's exports and growth in GDP.
In 1998, the average calculated (gross) monthly wage in the public sector (excluding social and religious organizations) showed a year-on-year increase of 12.7%. Though the number of unemployed persons rose and unemployment rate was 9.2%, domestic consumption continued to grow. Domestic trade turnover at constant prices rose by 21.9%.
The national currency in circulation was fully backed by gold and foreign convertible currency reserves. The stability of the lats was maintained through fixing the currency to the SDR [1] basket of currencies. Fluctuations in the exchange rates of foreign currencies against the lats were prompted by developments in the global foreign exchange market.
The Bank of Latvia's net foreign assets grew by 6.4%. Despite the current account deficit and increased demand for foreign currency during the second half of the year, the Bank's reserve assets increased, and the balance of payments was positive.
Several banks experienced difficulties as they had not adequately assessed country and credit risks when investing their assets in the Russian securities market; this, however, did not impair the stability of the Latvian banking sector.
Having assessed, upon the Bank of Latvia's request, the compliance of Latvian banking regulations and the Bank of Latvia's supervisory practice with the Basle Core Principles for Effective Banking Supervision, the Technical Assistance Mission of the International Monetary Fund expressed a positive evaluation. The Bank of Latvia amended and expanded the regulatory framework concerning the activity of credit institutions and calculation of credit institution performance indicators, as well as further improved other banking regulations. The Bank of Latvia upgraded the country's payment system by introducing an electronic clearing system.
The main priority of Latvian foreign and economic policies was the planned accession to the European Union. The amendments to the Law "On the Bank of Latvia", which were prepared by the Bank of Latvia and which came into effect on November 18, 1998, harmonized the Law with the respective EU requirements and provided the legal foundation for the Bank's policy to abstain from lending to the Government. The Law "On the Prevention of Laundering of Proceeds Derived from Criminal Activity" (in effect as of June 1, 1998) and the respective amendments to the Criminal Code of Latvia were important in creating a banking environment that would meet EU requirements. The Saeima, the parliament of the Republic of Latvia, also adopted the Law "On Natural Person Deposit Guarantees" (in effect as of October 1, 1998). This was done with the aim of strengthening confidence in Latvian banks and promoting an increase in deposits.
In February 1998, the Saeima expressed its support of the Bank of Latvia's policy by reelecting the Bank's Deputy Governor Ilmars Rimsevics for another six-year term.
In 1998, Latvia's economic policy was also recognized internationally: the rating agencies Moody's, Fitch IBCA and Standard & Poor's ranked Latvia as an investment-grade country. In view of the Russian and other regional crises, major rating agencies were cautious in assigning credit ratings; therefore, the favourable rating of Latvia reflected the country's good future prospects and acknowledged that Latvia was developing one of the soundest banking systems in the Central and East European transition economies.
[1] The code for Special Drawing Rights (SDR) in accordance with the International Standard ISO 4217 (Codes for the Representation of Currencies and Funds) is XDR.
