In three coming years a loan amounting to EUR 7.5 billion (LVL 5.27 billion) will be available to Latvia from international financial donors. Here you can find answers to frequently asked questions about the support provided by financial organizations.
1. Why does Latvia need to take loan?
2. What would happen, if Latvia did not receive the loan?
3. Who and when will provide financial support to Latvia?
4. What will be conditions for loan repayment?
5. What has served as a basis for receipt of the financial assistance – has Latvia pledged something to receive the loan?
6. How it is planned to pay back the financing received from the international organizations?
7. What purposes will be the resources used for?
8. Who will monitor and control the spending of the financial support?
9. What will happen in case of a failure to achieve any of the monthly, quarterly or other milestone deliverables agreed by the Latvian Government and international partners?
10. Could the financial donor request devaluation of the lats?
11. What is the target year of the euro changeover in Latvia?
Why does Latvia need to take loan?
Rapid growth of Latvia’s national economy in five recent years facilitated increase in living standards; however this growth was mainly driven by private consumption, as well as investments in real estate and other non-tradable sectors. Growing public expenditure stimulated demand, however wage growth exceeded productivity growth, as the result inflation increased and national competitiveness reduced. Significant import demand caused increase in current account deficit, but credits issued by commercial banks caused rapid increase in government gross external deficit. Recent financial market turmoil intensified these risks. To ensure financing of the state budget, until now the Treasury annually attracted financial resources both issuing domestic debt securities and taking loans in foreign markets. However, global financial crisis and lowered Latvia’s credit ratings very rapidly decreased availability of financial resources in the second half of 2008. At the same time significant liquidity support was provided to facilitate activities in the banking sector. So the Government took a decision to launch debates with international financial donors.
Basically these state loans are similar to previous loans taken every year; the key difference is comparatively bigger amount, as well as special conditions which Latvia should comply with to receive and use the loans.
What would happen, if Latvia did not receive the loan?
Taking into account that in the context of global financial crisis availability of credit resources have decreased significantly and in circumstances of slowdown in national economy state budget revenue has substantially reduced, it would be necessary to cut budget expenditure considerably. Besides, the need to borrow in financial markets would turn out to be incomparably more expensive causing additional burden on the state budget in the form of considerable interest payments.
Who and when will provide financial support to Latvia?
In the end of December 2008, the European Commission, IMF, World Bank, European Reconstruction and Development Bank (ERDB) and several Member States of the European Union (EU) agreed on provision of financial support to Latvia in amount of EUR 7.5 billion. The financing within international financial borrowing programme will be available in parts till the end of 2011 to stabilise and revive Latvian financial system, avoid further worsening of the economic situation, re-structure Latvian economy increasing its competitiveness, as well as to reduce the impact of risks slowing down the economic growth.
Loan resources available for Latvian in 2009-2011
EUR million | 2009 | 2010 | 2011 | Total: |
European Commission | 2 200 | 700 | 200 | 3 100 |
IMF | 8000* | 500 | 400 | 1 700 |
Nordic Countries (Finland, Sweden, Estonia, Denmark, Norway) |
| 1 000 | 900 | 1 900 |
The World Bank | 200 | 200 |
| 400 |
Others (ERDB, Czech Republic and Poland) | 100 | 200 | 100 | 400 |
Total by years: | 3 300 | 2 600 | 1 600 | 7 500 |
* including EUR 600 received on December 29, 2008
| Million, Euro | Receiving date |
| IMF | 600 | 29.12.2008. |
| European Commission | 1 000 | 25.02.2009. |
| European Commission | 1 200 | 27.07.2009. |
| IMF | 200 | 31.08.2009. |
| EBRD* | 100 | 03.09.2009. un 11.09.2009. |
| World Bank | 200 | 04.11.2009. |
| IMF | 200 | 19.02.2010. |
| European Commission | 500 | 12.03.2010. |
| Total | 4 000 | |
| Including IMF | 1 000 | |
| European Commission | 2 700 |
It is worth noting that loans granted to Latvia are used only in cases of necessity. In case of positive scenario, Latvia will not use all resources granted.
What will be conditions for loan repayment?
Separate agreement on financial conditions of the loan is signed with each lender. The rate for each instalment is set separately; repayment schedule also is fixed for each instalment.
IMF
The principal sum of the first instalment from the IMF (~ 600 mln EUR) will be repaid quarterly in eight equal payments 75 mln EUR each from March 2012 till the end of 2013.
The principal sum of the second instalment from the IMF (~200 mln EUR) will be repaid quarterly in eight equal payments 25 mln. EUR each from November 2012 till August 2014.
The principal sum of the second instalment from the IMF (~200 mln EUR) will be repaid quarterly in eight equal payments 25 mln. EUR each from May 13, 2013 till February 2015.
Interest payment for the IMF loan will be paid quarterly. The IMF loan rate is flat and is set on the basis of IMF standard regulations depending on the ratio between the size of Latvian quota and the loan.
European Commission
Principal sums of the loans from the European Commission should be repaid in full amount at the end of the loan term: 1 billion EUR (first instalment) in 2014, 1.2 billion EUR (second instalment) in 2015, 0.5 billion EUR (third instalment) in 2019.
Interest payments for the European Commission loans should be paid annually. The loan rate is flat: for the first two instalments it is 3.125%, for the third instalment 3.375%.
World Bank
The principal sum of the first instalment (200 mln EUR) will be repaid in 10 equal payments (20 mln EUR semi-annually) from 2015 till 2019.
Interest payments for the loan should be paid semi-annually according to the rate 6m EUR LIBOR + 2.00% which is fixed semi-annually.
On March 12, 2010, the Minister of Finance signed an agreement with the World Bank on the second part of the loan amounting to 100 mln EUR for the social sector support.
What has served as a basis for receipt of the financial assistance – has Latvia pledged something to receive the loan?
The basis for the loan is the determination of the government formulated both in the Letter of Intent to the IMF and Memorandum of Understanding with the European Community, as well as updated Latvia’s Economic Stabilisation and Growth Revival Programme adopted by the Parliament in June 2009. These documents do not envisage pledge of any state property.
How it is planned to pay back the financing received from the international organizations?
The key precondition for Latvia to cover the loan after three years is revival of economic activity and following increase in budget income, the fiscal policy oriented towards optimised public expenditure. Loan interest payments are done from the budget resources. Therefore it is essential to carry out significant reforms optimizing public expenditure in several public service sectors, as well as to improve tax policy and optimise tax administration, improve business environment and use actively the financial mechanisms available to the state.
Continuation of international financial borrowing programme according to the agreement signed and the presence of international lenders in Latvia is a significant factor to guarantee trust of investors and revive economic growth, which, in turn, is a precondition to renew ability of the state to borrow in financial markets to ensure repayment and re-financing of the loans received within international financial borrowing programme according to the set terms.
What purposes will be the resources used for?
According to the agreements signed the financing from international financial borrowing programme is envisaged to finance state budget financial liabilities (including, financing of the state budget deficit and loans, re-financing of the state debt) and to ensure stability of the financial sector.
The financing received from international financial borrowing programme is available for the government ensuring the so called liquidity buffer or pillow excluding any doubts about the ability of the state to perform its liabilities. Ensuring liquidity of the Treasury means that the state has guaranteed resources to pay planned pensions and allowances, to pay wages to teachers, medical practitioners and other employees of public administration institutions thus ensuring provision of public services which are used by all Latvian inhabitants.
Resources planned to guarantee stability of the finance sector form a kind of “safety reserve” which will be available if measures will be performed to re-structure the finance sector. For the Latvian finance sector it is important to regain the confidence, therefore the goal of “safety reserve” made of international loan resources is to help the finance system to regain this confidence both in domestic and external market.
Loans granted to Latvia within international financial borrowing programme are cheaper comparing to current possibilities of the state to borrow in financial markets. In case the liquidity buffer available to the government will be used and solvency of the state will be in doubt, the need to borrow in financial markets will turn out to be more expensive.
Taking into account that granted loan resources may be used by Latvia only if it is necessary, marked loan resources are currently kept in Treasury’s accounts in the Bank of Latvia put in term deposits in the Bank of Latvia so that these resources could be available for the above mentioned purposed in necessary amount.
Although the liquidity of the Treasury currently is sufficient to cover financial liabilities of the state in the next periods, it does not mean that the state has to stop borrowings in financial markets.
It is necessary to continue borrowings in financial markets because of the following reasons:
- to put an emphasis on positive information about the perspective of Latvian economic revival as soon as possible, because the ability of the government to borrow regularly in financial markets is a very significant signal for rating agencies and investors. It, in turn, will facilitate notably possibilities of Latvian entrepreneurs to cooperate with foreign partners thus promoting attraction of potential investments and amounts of exports;
- facilitate faster renewal of general macroeconomic stability and ensure regaining of the trust in Latvia as a borrower because many investors associate Latvia with a state facing crisis and functioning only on the basis of financial support from international donors. Therefore it is important to stimulate cooperation of foreign investors and Latvian entrepreneurs and facilitate faster recovery of the economic growth;
- promote activity of transactions in interbank money market and strengthen possibilities of the private sector (companies, commercial banks) to borrow taking into account the fact that investors will be ready to lend money to the government.
Taking into account these factors further borrowing measures in domestic and external financial markets will be based in regular emissions of domestic borrowing securities, continued gradual increase in their maturity and reducing the re-financing domestic borrowings according to the situation in domestic market. It was started already on February 24, 2010 when T-bonds with 2 years maturity (for the first time since May 9, 2007) were emitted. Further borrowing measures will be based also on continued cooperation with international investors ensuring possibility to return to international capital markets in medium-term
Use of the international financial assistance, thousand LVL (till 28.02.2010)
Used: 1.44 billion lats
Who will monitor and control the spending of the financial support?
Already the current Law on Budget and Financial Management provides that the manager of each budget institution shall be responsible for effective spending of the funds granted to that particular institution. Spending is extensively audited by the State Audit Office. The IMF and the European Commission experts also monitor the spending of the loan and implementation of the commitments outlined in the Letter of Intent of the Government. Several additional working groups have been established for the purpose of checking on the spending of the loan. These groups monitor the budget implementation from various aspects, e.g. the Fiscal Discipline Monitoring Committee monitors that the budgetary spending matches the actual revenue, a separate working group analyses the public and private sector wage developments as well as monitor the optimisation measures carried out in the public sector (reports on the working group are available here. The loan granted by foreign donors will also be monitored by the Public Expenditure and Audit Committee of the Parliament. A significant advantage when receiving long-term financing of this kind is the opportunity to consult the IMF, World Bank and EC experts within the framework of technical assistance as well as involve them in the development of reform implementation plans and in carrying out those reforms.
What will happen in case of a failure to achieve any of the monthly, quarterly or other milestone deliverables agreed by the Latvian Government and international partners?
With a view to ensuring the implementation of the fiscal objectives, the Cabinet has taken a decision on reforming the budget implementation monitoring. Any future allocations from the centralised contingency funds will be disbursed gradually in the course of the year, in order to meet the performance criteria and standards defined by the government. All ministries and spending institutions will submit cash flow forecasts and proposals for new commitments once every week. The local governments will have to submit similar reports once a month. Weekly meetings of the Ministry of Finance and the Treasury officials will be held to review the consolidated report and prepare recommendations to the Prime Minister, who will take decisions concerning the level of new commitments for the following week. Should the revenue receipts be insufficient, the commitments will be immediately reduced to cover only the mandatory expenses. An Action Plan to implement the Latvian Economic Stabilisation and Growth Renewal Programme is being prepared in order to supervise the implementation of the structural reforms and coordinate all the measures to be implemented. After approved by the Cabinet, the Plan is being regularly updated and reporting on its implementation to the Cabinet and international cooperation partners is ensured. The fulfilment of liabilities is also monitored by international lenders. They prepare regularly review reports, and the EC (please see http://ec.europa.eu/economy_finance/articles/financial_operations/2010-02-26-mou-latvia_en.htm), as well as the IMF SVF (please see http://www.imf.org/external/pubs/cat/longres.cfm?sk=23703.0) have approved measures performed by the Latvian government and Parliament to ensure financial and economic stability in the state.
Could the financial donors request devaluation of the lats?
The Latvian government and international financial donors unanimously support the preservation of the existing peg rate of the lats, considering it an important prerequisite to achieve the pre-defined objectives of Latvia. The Letter of Intent of the Latvian government addressed to the IMF, Latvian Economic Stabilisation and Growth Renewal Programme as well as the Memorandum of Understanding with the EC mentions the fixed exchange rate of the lats as the foundation of a stable monetary policy. The Latvian government has also defined the euro changeover as one of the strategic objectives to be implemented as soon as possible but no later than by 2014.
What is the target year of the euro changeover in Latvia?
The Letter of Intent of the government of Latvia addressed to the IMF defines the euro changeover as one of the strategic objectives to be implemented as soon as possible. On March 16, 2010, the Cabinet of Ministers made a decision that the euro changeover date in Latvia is January 1, 2014. The Latvia’s National Euro Changeover Plan was also updated including particular euro changeover measures to ensure cash and non-cash euro changeover, public information, adjustment of legal acts, statistics, accounting, financial mechanisms and information systems to the euro, as well as protection of consumer rights. The activities included in the Plan refer both to the private, as well as public sector.
