During the years of rapid development, budget revenues were not channeled for establishing adequate budget reserves and, as a result, Latvia did not have funds for the stabilization of the economy when the global financial crisis hit the country. Consequently, due to a chain of events at the end of 2008 (rapid deceleration of economic activity due to the global financial crisis, deteriorating liquidity in financial markets, lowering sovereign rating in the second half of 2008 and the necessity to channel funds for the stabilization of the financial sector) the Latvian government negotiated a support program with international institutions to address balance of payments problems.
In December 2008, an agreement was reached about a loan of 7.5 billion euro (of which 3.1 billion euro was from the EU and 1.7 billion euro was provided by the IMF). Other international institutions (the World Bank, the European Bank for Reconstruction and Development) and several countries of the region also agreed to provide financial assistance.
The funding was provided on the basis of the program for stabilizing the Latvian economy and reviving its growth that was accepted by the Parliament in 2008, the Letter of Intent to the IMF, and the Memorandum of Understanding with the EU. A determined and timely implementation of the program is the most relevant precondition for receiving the funds of the international loan. The program contains a number of measures in the areas of monetary, fiscal and financial policies and for the promotion of competitiveness of the economy.
Both the IMF and the EU scrutinize the progress achieved under the program. The necessary economic stabilization measures are included in letters of intent and supplementary memoranda of understanding.
Program financing of the international loan is available in tranches by the end of 2011. In view of the progress made so far to stabilize the economy it may be expected that Latvia will not use all available funding.
Documents:
Letters of Intent (LOI) to the Managing Director of the IMF
Memoranda of Understanding with the EU