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Press release of November 4, 2004

In October, the regular IMF mission visited Latvia to assess Latvia's macroeconomic situation, namely, fiscal, monetary policy and financial sector developments. The IMF's   aide-memoire on the outcome of the visit will be available to the public and the original document will be also placed on the Bank of Latvia's homepage in the Internet.

In the aide-memoire, the IMF expresses its support to the euro adoption strategy developed by the Latvian authorities and an opinion that repegging the lats to the euro at the beginning of 2005 will help over the long term bring inflation in Latvia in line with the average inflation in the euro area. On the basis of Latvia's external competitive ability and expanding export volume, it is concluded that the exchange rate at which the lats will be pegged to the euro will serve well to the needs of the Latvian economy.

In the summary, the rapid economic expansion is noted along with the necessity to limit macroeconomic risks to maintain the growth rate and adopt the euro according to the schedule. In view of an increase in inflation and current account deficit, there is a need to reduce the growing demand. According to the IMF staff, strict fiscal or budgetary policy is decisive to ensure macroeconomic stability under a fixed exchange rate regime. Fiscal policy gains importance taking account of the notable inflow of the EU funds planned in 2005 and the extremely rapid pace of bank lending.

The aide-memoire points out positive factors along with the challenges of the financial sector: exceptionally rapid credit growth, exposure of banks to real estate market and indirect exchange risk due to the large share of bank credits in foreign currencies. The IMF suggests that Latvia continue carrying out the measures to reduce demand in relation to the banking sector.

Latvia joined the IMF on May 19, 1992 and on March 20, 2003 the Bank of Latvia became  the leading institution in Latvia's cooperation with the Fund.

The International Monetary Fund (http://www.imf.org) is an international organization that was established in July, 1944 in Bretton Woods and whose aim is to promote international monetary cooperation, exchange rate stability, economic development of countries and increase in employment and to ensure short-term financial assistance to its members in case of balance-of-payments problems. Currently, 184 countries are members of the IMF.

According to a plan approved by the Latvian government, the Bank of Latvia will repeg the lats from the SDR basket of currencies to the euro on January 1, 2005 at the market rate. It will be fixed by the European Central Bank (ECB) as at the previous business day (December 30, 2004). The relation of the lats to the euro will be calculated according to the SDR exchange rate formula, similar to the daily procedure.