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Latvia: Economy Gets IMF Board Commendation

Washington, 15 April 1998 (RFE/RL) -- Latvia has received a commendation from the Executive Directors of the International Monetary Fund (IMF) for its great economic and financial successes.

But while being praised for it's "prudent financial policies," Latvian authorities were cautioned that they must reenergize the process of privatization, especially for large enterprises.

The annual review of Latvia's economy was conducted by the 24-member Executive Board of the fund in late March. The board, which oversees the daily operations of the IMF, is composed of representatives of all the fund's 181 member nations. The large countries have individual representatives on the board while the smaller nations are represented in groups or constituencies.

The directors noted that Latvia had met all the performance criteria set up for its 1997 IMF program, except in the area of structural reforms.

However, they said, Latvia's economy still faces "important challenges and risks" over the next year or two stemming from rising pressures for higher government spending and from the effect of the slowdown in the privatization of large enterprises.

A tight fiscal policy has been a "major contributor" to Latvia's economic performance, said the directors, who then added their concern that the new budget approved for 1998 shows a "significantly larger deficit" than contained in the IMF program.

Mostly, said the directors, Latvian authorities must not let growing election-year pressures succeed in increasing spending.

They also told Latvian leaders that the country's expanded use of tax-free economic zones is not a good idea because it complicates tax administration, reduces transparency and distorts economic decision making. The IMF directors urged Latvia to develop other more appropriate policies to promote regional development.

The IMF directors also urged Latvian authorities to continue improving tax collections and administration, in addition to increasing the transparency of the budget process, and pushing ahead with pension system reforms.

The directors said that Latvia's currency exchange rate peg has served the country well and remains appropriate, and that its external position remains broadly satisfactory.

They said they were encouraged by the increased confidence in the Latvian financial system and the steps taken by authorities to achieve strong bank supervision and implement a prudent regulatory framework for the entire financial sector.

The IMF directors urged Latvia to accelerate its program of structural reforms to foster sustained economic growth and move the country further toward its goal of EU (European Union) accession.

While recognizing that Latvia's structural reforms have reached an advanced stage, they said the recent delays in privatization were hurting the overall effectiveness of what has been achieved.