Download Latvia`s Economic Stabilisation and Growth Revival Programme

Latvia’s Economic Stabilisation and Growth Revival Programme
Considering that:
- economic growth has stopped and even decreased in Latvia, as well as Baltic
States and euro area in general thus restricting possibilities of profitable
transactions carried out by Latvian economic basic units – enterprises in both
domestic and export markets;
- rapid economic growth in recent years in Latvia was mostly based on private
consumption increase and large credit resource injections mainly in activities
related to real estate market development which together with rapid import
increase caused government debt increase to 135% of GDP;
- during last three months the wage increase in Latvia was inconsistent with
national economy productivity growth which put additional stress on the
inflation;
- insufficient improvement in performance and efficiency of national economy,
public administration and public services structure reduced the overall
economic competitiveness, which was particularly influenced by recession in
the export market;
- financial markets are unstable and stiff, and it is not planned that they will
revive soon, which together with growing mutual mistrust limits financing of
development and restructuring projects, but in current conditions difficulties
with loan refinancing could shake the whole national financial market;
- in the current economic conditions budget revenue has decreased significantly
and therefore it is not possible to finance previously developed policies and
mechanisms for their implementation in previous amount from the budget
revenue;
- halt of economic growth causes risk of lowering living standards of Latvian
citizens – especially socially most vulnerable groups – and increased social
tension in Latvia,
immediate, decisive and coordinated reaction of public administration
institutions, private entrepreneurs and general public is needed to:
- avoid further decline in economic activity;
- stabilise and revive financial system;
- balance national wishes and possibilities for their fulfilment;
- restructure Latvia’s economy increasing competitiveness in economy, public
administration and public service provision, thus creating basis for significant
improvements in further national payment balance,
the government of the Republic of Latvia in cooperation with the Bank of Latvia on
the basis of thorough situation analysis have developed the Latvia’s Economic
Stabilisation and Growth Revival Programme.
Goal of the programme
- Stabilise Latvia’s economy,
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-
Solve potential liquidity problems,
Restore long-term stability strengthening banking sector, eliminating fiscal
imbalances, and keeping fixed currency policy,
Improve competitiveness of national economy at international level to achieve
sustainable GDP growth and balanced budget as soon as possible.
Basic elements of the programme:
- Stringent and stable monetary policy based on fixed pegging of national
currency to single European currency;
- Stringent fiscal policy – balancing of state and local government expenditure
with resources provided by the revenue;
- Reduction in salaries for individuals employed in Latvia’s national economy
(in both – public administration and services, as well as private sector) –
balancing with resources provided by the productivity national economy;
- Reduction in public administration apparatus within 2 years by at least
15 %, covering ministries and their subordinated policy implementation and
administration institutions. In addition – reforms of education, health and other
public service sectors, partly reducing, partly restructuring HR in these
sectors;
- Increase in elasticity of labour market by means of motivation and
involvement of temporary unemployed in other work and preparation for
carrying such work;
- Facilitation of investments, including maintenance of investments in state
financed and supported programmes;
- Ensuring financing of activities related to restructuring of national
economy, especially of programmes co-financed from the EU structural funds
in conditions of “frozen” credit resources;
- Stabilisation of financial sector – provision of state aid for strengthening
reliability and performance of credit institutions, and therefore intensified
supervision of credit institutions;
- Maintenance of social security measures to strengthen piece among socially
most vulnerable groups.
This programme, which shall be implemented under the supervision of the Cabinet
of Ministers including all coalition partners and responsible institutions, defines the
following action fields:
I Monetary Policy:
1. The Bank of Latvia will continue to ensure fixed exchange rate of the lats against
the euro 1 EUR = Ls 0.702804 maintaining fluctuation band ±1% of central or peg
rate.
2. The Bank of Latvia will continue to follow economic growth processes and be
ready to apply mandatory reserve requirements, as an instrument for
implementation of monetary policy, if it will be necessary.
3. The Cabinet of Ministers and responsible public administration institutions will
take steps necessary to comply with Maastricht convergence criteria to ensure
euro changeover as soon as possible, in 2012.
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II Fiscal Policy
1. On the basis of revised forecasts the Cabinet of Ministers will prepare budget
amendments to the state budget 2009 to ensure that budget deficit in 2009 will
not exceed 5% of GDP.
2. The Cabinet of Ministers will closely supervise actual budget implementation in
2009, and, if necessary, perform additional expenditure cut to ensure that budget
deficit will not exceed 5%. The only reason for exceeding the set budget deficit
limit is acquisition of EU funds above the planned amount. At the same time the
Cabinet of Ministers is determined to reach balanced budget as soon as possible.
3. Performance of structural reforms will be continued and expedited in the public
sector reducing number of employees in 2009 and two following years at least by
15% comparing to 2008.
4. Considering the need to improve efficiency of public service sectors on the basis
of state territory administrative structure developed in 2009 education and health
care system reforms will be carried out improving overall quality of services and
reducing public costs.
5. The Cabinet of Ministers will implement stringent fiscal policy achieving that
basic budget, excluding revenue and expenditure related to acquisition of EU
funds and other foreign financial mechanisms, shall be balanced or with surplus as
of 2012; in the transitional period according to the adopted macroeconomic
scenario the state budget deficit shall not exceed:
a. 5.0% of GDP in 2009;
b. 4.8% of GDP in 2010;
c. 2.8% of GDP in 2011.
However, the government will continue to monitor economic situation and in
2009 it will revise the adopted set of fiscal measures with the aim to comply with
Maastricht criteria in 2010 to receive invitation to join the euro area in 2011.
6. Key measures aimed at optimisation and reductions activities which will be
included in the budget amendments for 2009:
a. Reduce staff and nominal wages by 15% in state budget institutions and
public service structures to support and facilitate commensurability of
salaries in all employment fields, and taking into account real reduction in
salaries in production companies;
b. Reduce expenditure on goods and services procured for needs of the state
by 25%;
c. Reduce budget expenditure for programme subsidies by 25%, except
health care programmes for which larger resources shall be maintained;
d. Hold previously planned state funded wage and social allowance increase
until revival of economic growth;
e. Evaluate all functions of state policies and public administration
institutions and follow recommendations prepared during the evaluation
process about cutting and optimisation of public administration
expenditure, review policy programmes and their administration
mechanisms;
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f. Do not uptake any new liabilities in 2009 and 2010 in terms of guarantees
or direct financing in investment projects which are not directly related to
increase in competitiveness of Latvia.
7. To ensure increase in economic competitiveness and facilitate investments in
production continue shifting of tax emphasis from direct taxes on production to
indirect taxes on consumption:
a. Maintenance of personal income tax relief in 209 and following years;
b. Reduce personal income tax rate by 2 percentage points in 2009; increase
in non-taxable minimum by LVL 10 comparing to 2008; widen personal
income tax base in 2010 including income from capital income and capital
growth;
c. Increase in VAT basic rate by 3 percentage points, increase in reduced
VAT tax rate from 5% to 10%, and abolish reduced VAT rate for separate
groups of goods and services, except baby food, medicine, heating,
electricity, public transport services;
d. Additional increase in excise duty for fuel, coffee, alcohol and nonalcoholic beverages till the predominant tax rate in the Baltic States;
e. Widen real estate tax base in 2010 including apartments, at the same time
setting significant tax relief for registered dwelling apartments.
8. To ensure sustainable fiscal accountability and create basis for long-term
economic stabilisation reserve the Cabinet of Ministers will set clear and
responsible fiscal policy goals for introduction in the national legislation aiming at
balanced budget and channelling of at least half of annual revenue increase to the
stabilisation reserve if projected GDP growth will exceed 2%.
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III Financial Sector Stabilisation
1. The government will maintain guarantees for all deposits in Latvian banks in
amount to 50 000 EUR
2. The government will give guarantees for syndicated loans of banks to be paid
back in 2009, taking decision on every separate case.
3. The Cabinet of Ministers will set possible framework and necessary internal
procedures to ensure rapid access to financial resources for financial institutions
facing problems in the global financial crisis.
4. Although valid legal acts regarding financial services and monitoring practice
comply with acquis communautaire and international standards, recent events
showed that it is necessary to improve application of regulatory requirements in
practice and revise existing legislative acts strengthening supervision of
institutions acting in the financial markets, which will done by means of special
programme on strengthening financial sector monitoring (Annex 1).
IV Increasing Economic Competitiveness
Developing macroeconomic stabilisation plan prepared by the government in 2008
and cutting salaries and staff in public sector, as well as to reduce tax burden for
enterprises:
1. The Cabinet of Ministers will promote understanding and agreement with private
sector to facilitate commensurability of salaries in all employment fields reaching
balance between remuneration and productivity
2. The Cabinet of Ministers will develop and implement corresponding measures to
strengthen elasticity of labour market and improve competitiveness.
3. The government will concentrate EU funding, allocated to the state for
programming period 2007-2013, to provide support for export fields and
infrastructure projects which could allow optimisation of national economy costs.
At the same time the government will perform necessary activities to simplify EU
funds administration procedures facilitating more efficient use of resources and
rapid circulation of financial resources.
4. The government will provide state aid for export enterprises creating competitive
export credit insuring model.
5. By means of special financial mechanisms the government will support
enterprises in their restructuring and for improvement of their competitiveness,
especially for acquisition of EU funds.
6. The government will continue reduction of administrative burden for economic
units, especially for SMEs, simplifying tax administration, registration of
immovable property, receipt of construction licences, as well as it will facilitate
wider use of national integrated information system in communication between
institutions and enterprises. At the same time the government will carry out
activities to promote development of entrepreneurship and unburden registration
and licence receipt procedures.
7. The government will prepare amendments to the Law on Insolvency to improve
insolvency and liquidation process thus facilitating possible reorganisation of
enterprises, specifying rights of different creditor groups and therefore also
facilitating decrease in crediting risks.
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8. In 2009, administrative territorial reform will be finished in Latvia.
9. Significant progress in health care and education system reform will be reached on
the basis of administrative territorial reform.
10. After finishing territorial reform the Cabinet of Ministers will merge public
service regulators in one institution to coordinate policy of regulated tariffs and
facilitate their deflation which could ensure competitiveness of prices and costs.
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Annex
Measures for strengthening financial sector monitoring.
1. Apart from global regulatory response the following monitoring measures have
been implemented in the result of recent financial instabilities:
a. Quarterly reports on “problematic” loans (loans in repayment process,
restructured loans, loans with changed terms) as of third quarter of 2008.
b. Additional checks in largest banks paying special attention to quality of credit
portfolio.
c. As of October 2008, banks provide daily report on liquidity.
d. Regular meetings are held with management of banks.
e. Closer cooperation with foreign monitoring institutions. The cooperation will
be strengthened in future by means of memorandum on financial group
monitoring.
f. Financial and Capital Market Commission (hereinafter – FCMC) seeks for
possibility to get guarantees from mother banks that they will ensure
sustainable support for their subsidiary companies in Latvia.
g. A project has been drafted on monitoring guidelines for banks for Internal
Capital Requirement Evaluation Process (ICREP) (will be approved till the end
of March 2009).
h. With repeated agreement to comply with International Accounting Standards
and International Financial Reporting Standards (IAS/IFRS), including
conditions for recognition of impairment loss, it was planned to introduce
changes in own capital calculations envisaging deduction of positive difference
between savings corresponding to the requirements and savings created
according to IAS/IFRS.
2. During the programme FCMC will continue to work in the following directions:
a. Develop monitoring levers applicable within the framework of pillar II to
facilitate safe risk management and sufficient capitalization of banks. Till the
end of March 2009, a policy document of FCMC will be developed and
approved about monitoring revisions and evaluation process, inter alia
including criteria according to which additional capital will be required for an
individual bank.
b. FCMC will evaluate and propose to the Cabinet of Ministers and Parliament
amendments to its rights and mandate to ensure that FCMC can take corrective
steps timely.
c. In the credit risk management field FCMC will improve credit risk
management standards (underlining responsibility of bank superior
management) and strengthen monitoring of compliance with these standards.
d. Requirements of supervisors regarding savings will be specified (till the end of
March 2009).
e. FCMC will continue work to strengthen the framework for liquidity risk
management to adopt corresponding guidelines of the Committee of European
Banking Supervisors (CEBS) and to strengthen stress testing and action
planning in emergency situations, including periodical stress testing according
to FCMC scenario.
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f.
g.
h.
i.
FCMC will change frequency of bank reports from quarterly to monthly.
FCMC will evaluate potential measures for restricting risks related to
investing non-resident money for financing domestic economy.
To facilitate more rapid payments in case of deposit inaccessibility
amendments will be made to the Deposit Guarantee Law specifying definition
of inaccessibility and improving procedure for serving depositors, as well as
setting principles for attraction of necessary resources to the state budget
therefore shortening term of guaranteed compensation. In addition,
amendments would be harmonised with planned amendments to the Directive
94/19/EC on Deposit Guarantee Schemes regarding level of cover and
requirements for delayed payments.
It is planned to improve Deposit Guarantee Law specifying procedure for
participation of banks in deposit guarantee fund and to strengthen cooperation
between home state and host state to promote information exchange and
harmonisation of payment processes therefore expediting payment procedure
in case of cross-border crisis.
Minister of
Finance
State
Secretary
A.Slakteris
M.Bičevskis
Official
Head of Legal
responsible for
Service
control
M.Brencis
Responsible
official
M.Radeiko
08.12.2008 20:00
2113
Euro Project Manager S. Bajāre
67095403
[email protected]
565340137; Latvijas ekonomikas stabilizācijas un izaugsmes atjaunošanas programmas projekts
S.Bajāre