6 % growth in 1998 remained positive in 1999 as well. given the beneficial impact of sound economic policies on latvia ’ s integration into european markets, there is little doubt that these policies will be implemented in the future as well. in fact, the provisions of the european stability and growth pact and requirements for the members of the monetary union laid down in the eu treaty specify the direction of economic policy, a direction to which latvia is committed. although these criteria are not legally binding for the country prior to eu membership, in the opinion of latvian authorities and the bank of latvia the maastricht criteria are the proper principles of sound economic policies. consequently, economic policy in latvia will be implemented in a way that facilitates thoroughgoing compliance with these requirements in due course. we strongly believe that these policies will establish our country as a small but reliable player in world markets and hence ensure rapid and sustainable growth in latvia.

). the law singles out price stability as the main monetary policy objective of the latvian central bank and in its operational practice, the bank of latvia enjoys full independence from the government. direct government borrowing from the central bank is also explicitly banned by the law. in pursuing its monetary policy, the bank of latvia uses the same market - based instruments employed by the ecb. latvian experience confirms that an independent central bank and firm anti - inflationary policies produce the good results expected. annual inflation in latvia declined to 2. 4 % in 1999. the lats has proved its stability for over six years, providing a solid foundation for restructuring and growth in the latvian economy. even without participation in the eu exchange rate mechanism, the lats has stayed within the + / - 15 % band against the ecu and later the euro during this entire period. fiscal policy in latvia has always been implemented with eu accession in mind, thereby, in accordance with the european stability and growth pact provisions, avoiding unsustainable government expenditure. despite the dynamic political environment in latvia since independence, every government has declared eu membership its top priority. therefore, the pursuit of strict fiscal policies has never been threatened. over the past few years, as prudent monetary and fiscal policies led to productive economic transformation, latvia has become one of the most successful transition economies in central and eastern europe. these policies were tested in 1997 - 1998 during the southeast asian and russian crises, but the latvian economy has recovered from these shocks at a relatively fast speed and is now on a growth path again. at a time of external pressures, the credibility of national economic policies becomes crucial to economic performance, as was evident in latvia over the previous year and a half. in 1998, the current account deficit in latvia was financed mainly by long - term capital, as foreign direct investment and other long - term capital inflows amounted to 72 % of all capital flows. as a result, latvia did not suffer from a sharp reversal of short - term capital flows that could have damaged the economy. as time went by and the country ’ s economic situation remained stable, the confidence of foreign investors rebounded quickly. in the second half of 1999, inflows of foreign direct investments increased by 27 %, as compared with the first half of the year. the confidence in the latvian banking industry was also restored rather quickly among both foreign investors and the general public. presence of foreign capital as a percentage of total bank capital strengthened and main banking indicators improved considerably