26/02/2010 - A second Supplemental Memorandum of Understanding (SMoU) in the context of the Balance of Payment (BoP) assistance to Latvia was signed by the Commissioner Olli Rehn and the Latvian authorities on 22 February 2010.
The new SMoU complements the previous Memoranda of Understanding signed in February and July 2009, it paves the way for the third disurbsement of 500 million EUR within the next weeks and spells out the conditions for subsequent BoP disbursements. The SMoU includes continuous requirements, e.g. on the required fiscal adjustment for 2011-2012 in line with what specified in the Council recommendation under the excessive deficit procedure in July 2009, and specific economic conditions as regards fiscal consolidation, fiscal governance reform, financial sector and structural reforms. The latter include steps to improve the business environment, EU Structural Funds fund absorption, access to financing for SMEs and public sector reforms. With the aim of making the SMoU more operational, specific deadlines have been attached to meeting its conditions. The EC and IMF have worked closely to ensure that the new SMoU and the IMF's Letter of Intent are fully consistent. The Commission, in close cooperation with the IMF, will be monitoring the implementation of both the SMoU and the LoI.
Community assistance over the period to 2011
The Community assistance is part of a coordinated package of international financial assistance totaling up to €7.5 billions over the period to 2011. It underpins the implementation of the "Economic Stabilisation and Growth Revival Programme" adopted by the Latvian authorities on 12 December 2008.
On 20 January 2009 the ECOFIN Council approved Community medium-term financial assistance for Latvia totaling up to €3.1 billion under the Balance of Payments (BoP) facility for non-euro area Member States.
The Community assistance is provided in conjunction with a loan from the
International Monetary Fund of SDR 1.5 billion (1200% of Latvia's IMF quota,
around €1.7 billion) under an IMF Stand-by arrangement approved on 23 December
2008. The Nordic countries (Sweden, Denmark, Finland, Norway and Estonia) are
to contribute €1.9 billion together. Further contributions are from the World
Bank with €0.4 billion, the European Bank of Reconstruction and Development,
the Czech Republic and Poland with a total of €0.4 billion, bringing the
combined total to €7.5 billion over the period to the first quarter of
Overall the EU, through the Community and its Member States individually, contributes around €5.3 billion out of the €7.5 billion. The IMF disbursed its first installment of 600 million EUR on 26 December 2008. On 27 August 2009 the Executive Board of the IMF completed the first review of performance under economic program supported by Stand-By Arrangement (SBA). The completion of the review enabled disbursement of EUR 195 million. The second review of Latvia's performance under an economic program supported by a SBA was completed on 17 February 2010, enabling the immediate disbursement of around EUR 200 million.
Assistance is being provided to meet liquidity constraints in the short term and support an orderly external adjustment in the medium term. Assistance requires addressing the worsened budgetary situation, restoring confidence in the banking sector, and bolstering the foreign reserves of the Bank of Latvia.
Payment in instalments
The EU assistance comprises six instalments. The first instalment of Community assistance of €1 billion was released on 25 February following the entry into force of a Loan Agreement and Memorandum of Understanding (MoU), after consultation with the Economic and Financial Committee. The second instalment of EUR 1.2 billion was disbursed on 27 July 2009, while the third disbursement of EUR 0.5 billion is expected around mid-March 2010. The remaining instalments are planned for the third quarter of 2010 (up to EUR 200 million), the first quarter of 2011 and the end of 2011 (both up to EUR 100 million).
On 20 January 2009 the ECOFIN Council approved Community medium-term financial assistance for Latvia totaling up to €3.1 billion under the Balance of Payments (BoP) facility for non-euro area Member States. The MoU associated with the Community assistance was signed in Riga on 26 January 2009 by the Prime Minister, the Minister of Finance, the Governor of the Bank of Latvia and the Chairwoman of the Financial and Capital Market Commission. Commissioner Almunia signed the MoU in Brussels on 28 January. The MoU details the precise conditionality that will be applied to successive loan disbursements.
A first review mission was carried out by the Commission services in cooperation with IMF staff from 27 May to 17 June 2009. Based on the findings of the Commission mission, a Compliance Note sent by the authorities on 26 June 2009 and in consultation with the EFC, the economic policy criteria for the second instalment, as laid down in the MoU, were considered to be broadly fulfilled or not applicable in view of the larger-than-expected deterioration in the economic situation. The first SMoU was signed on 13 July 2009, including new conditions, in particular new budget deficit targets for 2009-2012, of no more than 10%, 8.5%, 6% and 3% of GDP, respectively (ESA 95 terms). As a result, the second disbursement of EUR 1 billion was completed on 27 July 2009.