Latvia may not take any further bilateral loans, including a large one originally planned from Sweden in 2010, from the 7.5 billion euro international support package. The Latvian authorities' assessment is apparently that the requirement for further support this year has decreased markedly thanks to further signs of economic stabilisation, restored confidence in the financial markets and a much stronger financial position, ending up in a current account surplus and close to record strong foreign currency reserves.
This can be concluded from a statement by the International Monetary Fund, published earlier this week. The statement was issued after a joint mission from the IMF and the European Commission visited Riga as part of the third review of Latvia's Stand By Arrangement. An agreement was reached that further money should be disbursed from the package agreed in December 2008 which was scheduled for the period December 2008-2011. The IMF's executive board meeting is expected to take the final decision in the second half of July.
"Completion of this review would make available around 1 billion euro in additional financing from the EC, the IMF, the Nordic countries, the Czech Republic, and Poland. In light of their much stronger financial position, the Latvian authorities intend to draw only the amount available from the EC and the IMF (about 300 million euro) as well as 100 million euro previously approved by the World Bank, and take future drawing decisions on a review-by-review basis," says Mark Griffiths, IMF Mission Chief for Latvia, in the statement.
The IMF statement praises the Latvian government for strong efforts so far: "Policy implementation over the past year has helped restore confidence and there are signs that the economy is starting to stabilize after last year's steep downturn. Real gross domestic product (GDP) appears to have levelled off in the first quarter of 2010... "
At the same time IMF highlights that there was need for further measures, reducing the fiscal deficit and strengthen the financial system. The government should continue to target a 2010 fiscal deficit of no more than 8.5 per cent of GDP (after -9 per cent last year), something which we view as well within reach. The stipulated target for next year is a budget deficit of max 6 per cent of GDP. "Preliminary estimates suggest that an additional 395-440 million Latvian lats (which corresponds to 3.0-3.4 per cent of GDP based on the Latvian GDP in 2009 according to SEB’s calculations) in net measures will be needed to reach this deficit target" says IMF.
Half of the bailout disbursed
According to SEB’s compilation, around 3.5 billion euro (mainly from the IMF and the EC) has been disbursed so far from the 7.5 billion euro bailout. Much of the money has been used to finance Latvia's large budget deficit. The loan package has ended the drain on international reserves. Latvia's foreign currency reserves stood at 6.4 billion dollars in May 2010, not far from record high level at 7.1 billion dollars registered in March. This can be compared to 4.2 billion dollars in November 2008 and only 3.7 billion dollars in June 2009 when turbulence in the financial markets peaked.
IMF's part of the total 7.5 billion euro original package amounts to 1.7 billion euro. The rest includes loans from the EU (3.1), the Nordic countries (1.8), the World Bank (0.4), the Czech Republic (0.2), the EBRD (0.1), Estonia (0.1) and Poland (0.1).
Large Swedish loan
The loans from the Nordic countries, and two other of the bilateral creditors (Czech Republic and Poland), were originally scheduled for 2010. The Swedish part of it is large; it consists of almost half of the Nordic loan sum.
In their latest forecast Central Government Borrowing Forecast and Analysis (published three times a year) the Swedish National Debt Office (NDO) earmarked the Latvian loan in their calculations on the Swedish net borrowing requirement: "Sweden will also lend money to Latvia. This on-lending corresponds to 8 billion Swedish kronor during 2010."
Next report from the NDO will be issued next week, on 16 June. Probably, it is too early for NDO to exclude the Latvian loan in the upcoming forecast. However, going forward, the Swedish net borrowing requirement for 2010 may be reduced by 8 billion kronor.