mr repse describes general economic developments and banking in latvia notes delivered by mr einars repse, governor bank of latvia, at the 5th annual international conference and exhibition “ banking and finance in the baltics 99 ”, held in riga on 13 - 15 october 1999. * * * general economic developments since 1996 and until the third quarter of 1998 latvia experienced a period of accelerated economic development. it was characterised by : • high gdp growth - 8. 6 % in 1997 and the same level of growth in the first half of 1998. • continuously declining inflation - 2. 8 % at year end 1998. • growth in exports and orientation of trade increasingly towards the european union ( eu ). • this has been a continuous and sustainable trend backed by sound and responsible economic policies of the government. no budget deficit - even a surplus was recorded in 1997 and 1998. public borrowing in mid - 1998 was just around 10 % of gdp. • these policies were and continue to be strongly supported by the tight monetary policy pursued by the bank of latvia. for more than 5 years, the cornerstone of this policy has been and continues to be exchange rate stability. the national currency has been pegged to the sdr ( the imf basket of currencies ) since february 1994, and its value against the sdr has remained unchanged. • macroeconomic stability, improving investment climate and continuing structural reforms have all contributed to increasing investor confidence. foreign direct investment ( fdi ) attracted in 1996 - 1997 more than doubled and in 1997 constituted 9. 3 % of gdp, covering the current account deficit. • however, unfavourable external developments, first and foremost the russian crisis, caused a considerable slow - down in latvia ’ s economic growth in the second half of 1998 and at the beginning of this year. • the budget for 1999 originally adopted by the central government was balanced. under current circumstances, however, a fiscal deficit of 3 - 3. 5 % of gdp is planned for this year. it is important to stress that this was an extraordinary measure. the government has every intention to reduce the deficit to a minimum next year, and a balanced budget remains its objective for the near future. • despite the unfavourable external conditions, the latvian economy already shows signs of recovery. after the first six months of 1999, there has been a visible upward trend of economic activity, particularly due to a much stronger performance in the service sector. substantial number of latvia ’ s export - oriented businesses have made concert

fully enforce their compliance. bank of latvia ’ s policies and the introduction of the euro our policy responses to the euro are based on the general objectives set by our country. accession to the eu is a strategic aim for latvia, and we see entry in the european monetary union as a part of this task. we have adopted the fulfilment of maastricht convergence criteria as a medium - term target, and will be able to meet all of them in 4 to 5 years. latvia already complies or is close to complying with most of them : • the public debt is much lower than maastricht requirements, i. e. 13 % of gdp ; • there has been no budget deficit in 1997 and 1998 ; the fiscal situation in 1999 was strongly influenced by external factors, and the government intends to reduce the deficit in 2000 below maastricht requirements ; • the lats has been pegged to the sdr at a constant exchange rate since 1994, and, in principle, we are meeting the currency stability criteria ; • inflation has declined to a stable level below 3 %, close to the maastricht targets ; • government bond yield rates, while still high, are on the downward trend, and we expect to be able to meet the requirements in the medium - term. the bank of latvia will be prepared to join the european system of central banks at the time of latvia ’ s accession to the eu. the structure and objectives of the bank of latvia, the degree of its independence and the set of monetary policy instruments are fully in line with those defined for the european system of central banks. during the pre - accession period, the exchange rate peg of the lats to the sdr will be maintained. this peg has served us well and has ensured less exchange rate fluctuation than a peg to any single currency. in addition, the composition of latvia ’ s foreign trade by settlement currencies closely resembles the composition of the sdr basket, with usd being the major component in both. however, we are closely monitoring the new european currency. we hope that the euro will become a stable currency and anticipate its wider use in world trade. if this happens, we will have all the necessary economic grounds for joining the european monetary union after latvia ’ s accession to the eu.