World Bank Supports Financial Sector Reform Program in Latvia

The World Bank’s Board of Executive Directors today approved a Financial Sector Development Policy Loan for Latvia in the amount of Euro 200 million (US$ 282.65 million). The objective of this loan is to support the Government of Latvia in strengthening its banking sector and maintaining long term financial stability.

This new loan is part of a joint International Financial Institution initiative to support banking sectors in Central and Eastern Europe. It supports a comprehensive financial sector reform program, including measures that have helped contain the financial sector crisis Latvia faced at the end of 2008, and structural reforms aimed at enhancing the resilience of the system to future potential shocks.

“The Republic of Latvia is committed to make rapid progress in the implementation of the reform program to facilitate sustainable recovery of the national economy,” said Sophie Sirtaine, World Bank financial sector expert in the Europe and Central Asia Region. “Strengthening the Latvian banking sector will encourage resumption in lending to Latvia’s creative entrepreneurs, small business owners and other businesses. It will also mean that depositors’ savings are protected.”

Latvian Minister of Finances Einars Repse emphasizes: “The WB loan is a positive signal indicating that the decisions the government has taken so far have been targeted at overcoming the economic crisis in this country and it has been noticed by our foreign partners. Our goal is a stable and balanced national economy based on healthy competitiveness. Therefore now the most important task for the government is to approve the national budget for the coming year. In achieving that we would assure the Latvian public and foreign investors of the stabilization of the economic conditions in this country.”

Latvia is among the Eastern European emerging economies most affected by the global financial turmoil. A large current account deficit, high external debt, and a very high loan to deposit ratio resulted in loss of access to foreign exchange funding in the second half of 2008. To ease the situation, the Government of Latvia sought external financial support and agreed to an international stabilization program supported by the European Commission, the International Monetary Fund (IMF), European Bank for Reconstruction and Development (EBRD), Nordic and Central European Countries, and the World Bank.

The Financial Sector Development Policy Loan will help strengthen the banking system’s solvency and liquidity, facilitate renegotiation of corporate and mortgage debts to avoid foreclosures and corporate insolvencies where possible, strengthen banking sector regulations and prudential supervision, and improve consumer protection in the financial sector. Another Development Policy Loan for Latvia to support Social Safety Net and Public Administration Reform is under preparation and is planned for approval in early 2010, with the objective to mitigate the social impact of the crisis and protect the most vulnerable groups.

“The World Bank is pleased to participate in the international support effort for Latvia, and to be able to help the government of Latvia to strengthen its financial and social sectors,” saidThomas Laursen, World Bank Country Manager for Poland and the Baltic countries.

Latvia joined the World Bank in 1992. Since then, the Bank has played an important role in supporting Latvia’s transition through lending, policy dialogue, and analytical and advisory assistance.(EOM)