After the disbursement of €1.0 billion in February 2009, the second instalment of €1.2 billion is expected to be released end-July 2009
20 July 2009
In view of the sharply worsened economic environment a revision of the
Memorandum of Understanding (MoU) of January 2009 has become necessary to
revise the original budget deficit targets. Consequently, a Supplemental
Memorandum of Understanding (SMoU) was signed by the Latvian authorities and
Commissioner Almunia on 13 July.
>> Supplemental Memorandum of Understanding
The SMoU reiterates the commitment of the Latvian authorities to continue with vigour the macro-financial stabilisation programme. Compared to the original MoU, it adds a number of economic policy conditions linked to budgetary savings and structural measures as well as further reforms in the financial sector.
Signature of the SMoU was the last condition to be fulfilled for the Commission to proceed with disbursement of the second instalment of EU BoP assistance. The borrowing of the necessary funds was launched on 15 July and final transfer to the Bank of Latvia is expected within two weeks from that operation.
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.
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.
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 2011.
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 instalment of 600 million EUR on 26 December 2008.
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 €1.2 billion will be disbursed before the end July 2009. The remaining instalments are planned for the fourth quarter of 2009 (up to EUR 500 million), first quarter of 2010 and the beginning of 2011.
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. It sets out the policy conditions attached to this assistance, including fiscal consolidation targets, measures to strengthen fiscal governance, financial sector regulation and supervision reforms, and structural reform measures supported in the context of the Lisbon strategy.