Following the successful conclusion on 20 January 2012 of the three-year financial support programme by the EU, the sixth and most likely last Post-Programme Surveillance (PPS) mission to Latvia was carried out by staff of the European Commission from 11 to 14 November, together with the European Central Bank.
Overall, the assessment of the post-programme developments is positive, though the developments between Ukraine and Russia present downside risks to growth of Latvia’s economy. The euro changeover has been completed, the fiscal position is under control with projected deficits around 1% of GDP in 2014-2015, and the financial sector has been strengthened, including as regards surveillance of non-resident bank services. Also, actions have been taken to improve the judiciary (procedural changes, mediation and arbitration laws, accountability of insolvency administrators) and to intensify the fight against tax avoidance. Further, the financing for science will be allocated based on the results of an independent international assessment. The electricity market is planned to be fully liberalised from January 2015. In addition, promising laws on construction, public procurement, insolvency, state-owned enterprise (SOE) management and the Single Development Institution have been adopted. It will be important to monitor how these laws are implemented in practice, including by finalising the needed secondary acts and appointing professional SOE board and council members.
On the other hand, big-item, “quality-of-life-improving” reforms to tackle high social inequality and inadequate healthcare access for the poorest, improve general and higher education outcomes, deal decisively with corruption cases, and modernise public administration have barely advanced. This is either due to strong vested interests, to a general reform fatigue, or to difficult budgetary choices in view of tight fiscal space. Similarly, decisions on de-politicising the management of state-owned enterprises and ports have come slowly and still need follow-up. Measures to boost energy independence, in particular on gas market opening and the future management of Incukalna gas storage, need to be implemented. Overall, a greater sense of urgency seems warranted: it is important to keep the pace of reforms to improve general living standards sustainably.
The authorities are committed to a prudent level of government borrowing. Fiscal space to address the manifold public service needs is limited; thus, either new revenue sources need to be found or existing spending has to be re-focused and improved. Shifting the tax burden from labour to consumption, property and pollution would strengthen the growth potential of the economy and help improving social equality. Positively, the 2015 budget proposals include measures supporting low income earners through an increase in the minimum wage in addition to the already scheduled personal income tax rate reduction. While the authorities foresee measures to tackle tax avoidance, more could be done in this area given the severity of the problem relative to other Member States. Importantly, resourcing and training of the professionals in tax administration and judiciary need to be further strengthened to solve complex financial crimes.
The end of post-programme surveillance will be decided in the coming weeks by the Commission, after consulting the Member States, taking into account a EUR 1.2 billion repayment planned by Latvia for January 2015 which would bring total repayments to 75% of the EU loan provided to Latvia. After the post-programme surveillance process, it will be essential to keep the structural reform momentum and fiscal and financial prudence, which will be monitored through the European Semester framework.
From 2009 to 2011, Latvia benefited from a financial assistance programme (Balance of Payment Support) from the EU, provided in conjunction with an IMF (International Monetary Fund) stand-by agreement and financing commitments by the World Bank, the European Bank for Reconstruction and Development, several EU countries and Norway. Funds available amounted to EUR 7.5 billion, of which Latvia used EUR 4.5 billion (60%), with EUR 2.9 billion lent by the European Commission on behalf of the EU. The lending was subject to an ambitious action plan, including fiscal consolidation and wide-ranging structural reforms, which have proven quite effective to help the country to recover from a deep financial and economic crisis. The European Commission will continue its close surveillance of planned and implemented reforms after the Post Programme process is closed through the European Semester framework.
For more information
Post-programme surveillance for Latvia
ECFIN Occasional Paper “EU Balance-of-Payments assistance for Latvia: foundations of success”