Latvia, Детальна інформація

Monetary Developments



Monetary policy has centered around the objectives of maintaining price stability and stabilizing the exchange rate. "The Bank of Latvia has continued to use the purchase and sale of foreign exchange to maintain a stable exchange rate.".(EIU, 1995). In the absence of developed financial markets (specifically interbank money markets), the Bank of Latvia has had little effect on refinancing policies. In an effort to improve management of band funds, the Bank of Latvia introduced minimum reserve requirement for all banks. Treasury bill auctions were also introduced to finance the budget. However, participants of the auction are still limited to only a few large banks and interest focuses on purchases of short-term bill.



In 1993, the lats were introduced to replace the interim currency, the ruble (which was valued at par with the Russian ruble). The conversion of Latvian rubles to lats proceeded very smoothly, and was completed in 1994. Rubles currently account for a very small portion of total currency issued. Posting of prices in foreign currencies was made illegal in Latvia, although the use of foreign currency is still allowed.



Latvia's move toward a convertible currency came in two stages. In May 1992, in response to a shortage of Russian ruble banknotes, the Latvian ruble was introduced as a parallel currency to the Soviet one in circulation. The two traded equally until Latvia became flooded with Soviet rubles. Latvia replaced the ruble with the rublis as the legal tender. In 1993, the rublis was strong enough to move on to the second stage, the introduction of the national currency , the lats. The rublis was gradually phased out and ceased to be legal tender on October 18, 1993. In June of 1994 the exchange rate was Lats0.57:$1.



Latvia did not use a 'currency board system', and lats have been allowed to float freely. As a result, the independent central bank has had a very important role. It strengthened the rublis prior to the introduction of the lats through market intervention, the placement of Russian rubles in a stabilization fund, and high interest rates.







Social Safety Net



"Latvia currently operates a pay-as-you-go system of public pensions and unemployment benefits, along with other allowances for general social assistance including allowances for families with children.".(World Bank, 1995). All social safety net benefits included in the central government budget are financed through the payroll tax. Employers pay a general rate of 37% and employees pay 1%. The social tax for agriculture is divided between enterprises and the worker at 18.5% and .5% respectively. (IMF, 1995).



Due to the aging population of Latvia and the expansive coverage of the system, pensions are the largest component of the social security expenditures. After consultation with a collection of advisers from the World Bank and the Swedish government, Latvia passed legislation reforming its existing pension system and created a new, funded mandatory savings program. In 1993, the pension system was switched over from a flat-rate average for nonworking pensioners ($25 per month regardless of work history or disability status) to a system of tiered benefits based on work history. A permanent pension law is currently under implementation. This law will separate social funds from the central government budget, and will introduce a multitier pension system which will separate publicly funded pensions from privately funded pensions based on need. The law will also increase the retirement age (IMF, 1995).



In addition to pensions, the social security system pays family allowances and unemployment benefits. Allowances are granted to families based on the number of children and the age of the parents. Unemployment benefit expenditures have remained at low levels. Enterprises continue to pay two-thirds of unemployment benefits directly. Total payments for allowances and benefits amount to approximately 2.5% of GDP. Efforts have been made to increase public works programs which relocate and train workers. Efforts have also been made to set the social benefits to a more realistic minimum subsistence level. "Local municipalities have also been given clearer guidance in prioritizing social assistance programs.".(EIU, 1995).



The main developmental issue facing Latvia is the acceleration of the pace of structural reform while maintaining a stable economy. "One of the key elements of the government's policy agendas is to support the develop the country's human resources to meet the needs of a market economy, and at the same time protect the most vulnerable residents during the transition.".(World Bank, 1995).







Structural Reform



By 1994, Latvia had made substantial progress toward stabilization and a market economy. Economic recovery was in progress, real wages had started to increase, and gross international reserves were at an all-time high. (EIU, 1995). The deterioration in the fiscal deficit at the end of 1994 and the banking crisis in 1995 halted the trend of economic recovery. The reserves went to a deficit and the bank crisis destroyed the confidence in the banking system. "The central bank maintained the stability of lats throughout the crisis by selling 18.5% of its foreign currency reserves.".(EIU, 1995). The Bank of Latvia eventually succeed in restoring stability.