Last week, the IMF Executive Board announced, pursuant to authority under the IMF’s Emergency Financing Mechanism, its approval of Latvia’s $1.68 billion aid request under the terms of a 27-month Stand-By Arrangement. Under the Executive Board’s approval, approximately $535.3 million will be made available immediately to Latvia, while the remaining amount will be disbursed in “nine installments subject to quarterly reviews.” The IMF aid package will be provided in conjunction with financial assistance from the European Union, the World Bank, the European Central Bank, Sweden and other Nordic countries. In addition, as part of the arrangement, “foreign parent banks operating in Latvia have affirmed their commitment to provide their subsidiaries with adequate financing.”

Mr. Dominique Strauss-Kahn, Managing Director and Chairman of the IMF, stated that “[t]he Latvian authorities have developed a program with the exceptionally strong policies needed to address these challenges. Their program is centered on their determination to maintain the current exchange rate peg in order to lay the groundwork for Latvia’s entry into the euro area as soon as possible.”

The Arrangement, “which is centered on maintaining Latvia’s exchange rate,” provides for the implementation of the following key policies and measures by the government:

  • initiatives to restore investor confidence “in the banking system in the medium-term and to support private debt restructuring”;
  • measures to curtail “the loss of bank deposits and international reserves,” and fiscal measures to limit the budget deficit and prepare Latvia to meet the “Maastricht deficit criteria to facilitate adoption of the euro”; and
  • adoption of “incomes policies and structural reforms that will rebuild competitiveness under the fixed exchange rate regime.”  

Mr. Strauss-Kahn also noted that “[f]inancial sector reform to strengthen the banking system will also key. The government’s actions to take control and install new management in a major domestic bank are an essential step to stabilization.” Last month the European Commission announced its approval under EC Treaty state aid rules of the Latvian government’s bailout of JSC Parex Banka, the country’s second largest commercial bank.