The authority responsible for monetary policy is the Bank of Latvia (BoL). According to the 2002 International Monetary Fund (IMF) Financial System Stability Assessment (FSSA) of Latvia, the BoL displays a high degree of transparency in its monetary policy. The responsibilities of the BoL for formulating and implementing monetary policy, as well as the authority to use monetary instruments, are clearly defined in legislation and publicly disclosed. Frameworks, targets and instruments of monetary policy are conveyed to the public through various means of disclosure. The Law on the Bank of Latvia (LBL 1992) ensures accountability to the Parliament. Annual financial reports, as well as quarterly and monthly financial statements, are regularly and timely disclosed to the public. The 2006 Article IV consultations noted that sustained inflation well in excess of the Maastricht criterion has delayed the timetable for euro adoption, which was initially planned for the beginning of 2008). In the absence of an official announcement of a revised planned entry date, market participants generally expect euro adoption in 2010 or later.

General Overview

The authority responsible for monetary policy is the Bank of Latvia (BoL). The BoL displays a high degree of transparency in its monetary policy. It first subscribed to the International Monetary Fund Special Data Dissemination Standards in November of 1996 and began posting metadata on the SDDS bulletin board in December of 1997, meeting SDDS specifications in September of 1999 (IMF SDDS website). According to the IMF's 2002 Financial System Stability Assessment (FSSA) of Latvia, "the BoL's responsibilities for formulating and implementing monetary policy, as well as the authority to use monetary instruments, are clearly defined in legislation and publicly disclosed," that "frameworks, targets and instruments of monetary policy are conveyed to the public through various means of disclosure," and that "annual financial reports, as well as quarterly and monthly financial statements, are regularly and timely disclosed to the public" (p. 52). According to the Law on the Bank of Latvia (1992) the BoL is directly accountable to the parliament.

The BoL offers a public statement of its monetary policy objectives on its website, as follows: "The key objective of the central bank's monetary policy is to facilitate favourable macroeconomic environment for growth of the national economy in the long term. The course of the global economic development suggests that the monetary policy can best contribute to the economic growth, employment and financial stability by ensuring low inflation rate. By maintaining price stability, the central bank creates a stable and predictable business environment." According to the IMF's 2002 FSSA, the BoL achieves this through "facilitating free competition, effective allocation and circulation of assets, and the stability, coordination, and supervision of the financial system" (p. 51).

In 2002, the Commission of the European Communities (EC) reported that Latvia's currency has been pegged to the IMF's "special drawing rights" since 1994. This has had the dual benefits of anchoring BoL monetary policy and contributing to price stability. The EC added that "[Latvian] monetary policy also aims at avoiding excessive volatility in interest rates. Partly reflecting the decline in inflation, and the growing credibility of the fixed exchange rate, interest rates have slowly declined" (p. 40).

In May 2004, Latvia acceded to the European Union (EU). It began participation in the ERM2 in May of the following year. The IMF's 2006 Consultation reported that parliamentary elections were set to take place in October 2006. According to the Consultation "the four-party center-right coalition government that took office at end-2004 was reduced to a three-party minority coalition in April 2006--an interim arrangement that is widely seen as stable" (p. 1). Further, the Consultation reported that Latvia had met all Maastricht criteria, except in the area of inflation. The 2006 Consultation further noted that the Latvian government planned to reconsider whether or not its initial target date for euro adoption (early 2008) would be feasible, given Latvia's macroeconomic performance. In the absence of any official announcement, it is now expected that euro adoption will not occur before 2010.

The BoL's rights, responsibilities, and policy directives are publicly stipulated on the BoL website. Among these rights is the stipulation of independence in the design and implementation of monetary policy and the sole right to issue the national currency. Among the monetary policy tools available to the BoL is its control over the bank's reserves, which permits it to place limits on excessive lending. The BoL holds gold and foreign currency reserves to back its monetary base.

According to the 2006 IMF Article IV Consolation with Latvia, "monetary and exchange rate policy has been consistent with the narrow-band currency peg and supportive of eventual adoption of the Euro" (p. 5). As early as 2000, the BoL had begun to harmonize its reserve requirements, although Latvian requirements have recently diverged from those of the Euro area as a result of rapid growth in credit. In the area of liquidity management, the BoL has followed IMF advice to transition to open market operations from its earlier practice of foreign-exchange swaps.

The 2006 Consultation expressed approval of the BoL's approach to monetary policy which, it reported, "appropriately continues to lean against the wind of strong demand and credit growth" (p. 14). However, the Consultation went on to express concern that this policy's effectiveness "is is limited by fully open capital markets and the narrow-band exchange rate peg" (p. 14). Because it cannot appreciably influence the pace of economic activity, the BoL has, instead, imposed an increase, phased in over time, in reserve requirements. However, this can only offer temporary relief in the face of the rapid growth in credit, because there still remain "sizable spreads between interest rates on credits and banks' funding costs (p. 14).

The IMF's 2006 Consultation observed that "moderating credit growth is essential to relieve overheating pressures" (p. 3) It recommended that the BoL continue to track changes in the euro policy rate, but cautioned against "policies that divert bank lending offshore or to less-regulated non-banks, but without slowing overall credit' (p. 3). Instead, the IMF recommended adopting policies that effectively taxed real estate, because these "would restrain mortgage borrowing and ease pressures in the construction sector" (p. 3).

The Principles

Clarity of roles, responsibilities and objectives of central banks.

FC

According to the IMF''s 2002 FSSA, the BoL is responsible for the formulation and implementation of monetary policy. These responsibilities, as well as the BoL's "authority to use monetary instruments, are clearly defined in legislation and publicly disclosed" (p. 52). Legislation stipulates the nature of the relationship between the BoL and the government, and specifies the terms according to which the BoL is accountable to the Parliament for its policies and practices. The BoL employs a variety of means by which to disclose its policy frameworks, instruments, and goals, including printed materials and via the internet. Disclosure of the BoL's annual report and periodic (quarterly and monthly) financial statements is made to the public on a regular and timely basis.

The BoL's functions are set out in the Law on the Bank of Latvia. On its website, the BoL states that the establishment and implementation of monetary policy with the goal of ensuring price stability is one of its principal objectives. In addition to being responsible for the issuance of currency, the BoL must also "organize and ensure the functioning of the payment and settlement systems in Latvia [and] collect, record and aggregate the financial information and the data of the national payment balance." Further, it must "publish the processed statistical information; manage foreign assets [and] act as financial agent for the government to issue permits (licenses) to legal persons listed in the Republic of Latvia Register of Enterprises, except credit institutions, for the purchase and sale of foreign currency as a business activity." In carrying out its responsibilities, the BoL has a legal mandate of independence, and is not subject to instructions from the government or other agencies.

The Law of the Bank of Latvia (1992) sets forth the broad principles by which the BoL shall achieve its goal of maintaining price stability and implementing monetary policy by controlling the amount of money in circulation with in the state. However, the IMF's 2002 FSSA notes that "the exchange rate peg {to the IMF's special drawing rights) is not specified in any legislation or regulation but is widely known to the public" (p. 53).

On the BoL website, the specific rights conveyed to the bank by the Law of the Bank of Latvia (1992) are enumerated. These include: (1) the BoL's exclusive right to issue the national currency, banknotes and coins, which are the only legal tender in Latvia; and (2) the BoL's responsibility to set the official exchange rate of the national monetary unit against foreign currencies. The Law of the Bank of Latvia establishes the BoL as a legal person. The law also establishes the BoL's Board of Governors, which is chaired by the Parliament-appointed BoL Governor, who approves the structure of the BoL and has the power to hire and fire BoL employees. The BoL Governor nominates a deputy governor and 6 additional board members to assist in discharging Board responsibilities. These nominees must be approved by Parliament. The Board of Governors establishes a 6-member Executive Board, which is charged with managing the Bank's practical business.

The Law of the Bank of Latvia, the text of which is available on the BoL website, also stipulates that the BoL is accountable to the Latvian parliament. According to this law, the minister of finance is entitled to participate in meetings of the BoL's board of governors, but is accorded no voting rights. The IMF's 2002 FSSA observes that, "contrary to practices in some other countries, the BoL is not required by law to report regularly to [the Latvian Parliament] on the monetary policy stance" (p. 51). Instead, the law merely requires that the BoL produce an Annual Report which includes including audited financial statements. The 2002 FSSA further notes that Latvia's 1998 Constitution makes no reference to any such entity as a central bank, nor does it explicitly convey the right to conduct monetary policy to the BoL.

Open process for formulating and reporting monetary policy decisions.

FC

According to the IMF's 2002 FSSA, "the conduct of monetary policy and the principles on which it is based are very open and transparent," and "decisions of the board, as well as the underlying economic considerations of monetary policy decisions, are timely disclosed through various means." (p. 53)

The BoL sets exchange rates as a method by which to stabilize the market when it deems this to be necessary. The financial instruments used by the BoL to implement its monetary policy are consistent with the practice adopted by the European Central Bank (ECB). The refinancing rate is set by the BoL to serve as a reference rate for the financial system. When the BoL sees a need to intervene in the inter-bank market, it may set discount and yield rates for selling and buying government securities, enter into repurchase and reverse repurchase agreements on a tender basis, or organize currency swap tenders. According to the website, "the other important interest rate is the Lombard rate, which sets the upper limit to inter-bank market interest rates. The Bank also offers a time deposit facility to banks." (BoL website)

Public availability of information on monetary policy.

FC

According to the IMF's 2002 FSSA, "the predominant vehicle for warranting transparency and ensuring accountability is through the publication of the monthly 'Monetary Bulletin,' the quarterly 'Monetary Review,' the 'Annual Report,' and the BoL website" (p. 52). The BoL also makes available, with explanation when required, the decisions of board of governors and the executive board in both scheduled and extraordinary meetings. Such disclosure is offered on a timely basis, and is posted on the BoL's website. In addition, the website offers access to the text of laws and regulations relevant to monetary policy, as well as reports on policy objectives, BoL performance, and monthly reports on the state of the economy. The website also presents the text of speeches delivered by the governor and press conference proceedings. The 2002 FSSA also notes with approval that the website "allows for the exchange of views on the state of the economy and the financial system" (p. 54).

Latvia is a subscriber to the IMF SDDS and has met specifications since September 1999. The SDDS website shows that data are disseminated on the monetary base, net lending to the central government, credits to banks, and the net foreign position. The BoL balance sheet offers no central bank claims on non-financial public enterprises and no claims on the private non-bank sector. The accounting is on an accrual basis. Assets and liabilities in foreign currencies are valued at the end of period exchange rate set by the BoL.

The IMF's 2002 FSSA reported that, although the BoL publishes a great deal of important data, the coverage is not optimal. Particularly, "some key elements relating to the BoL's market operations, such as information on the aggregate market transactions, the amounts of the terms of refinance other than swaps or repos" are only available in the annual report, as are "details regarding the composition of credits to banks, i.e., the split between demand Lombard, overnight Lombard, repo, refinancing (which is the emergency facility), and other facilities" (p. 53).

The IMF's 2006 Article IV Consultation judged that the "monetary data are comprehensive, timely, and compliant with international standards" (p. 44). The Consultation specifically mentioned that "the balance sheets of the BoL, commercial banks, and other financial institutions, as well as the banking survey, are compiled with a very short time lag, i.e., within two weeks of the end of the reporting period" (p. 44). Foreign exchange transaction data is update to the IMF on a weekly basis, including data on foreign currency swaps and outright BoL interventions. The 2006 IMF report further noted that "the institutional coverage, classification, and sectorization of accounts comply with Fund standards. Interest rate data are compiled and published with equally short time lags" (p. 44). The BoL compiles and reports monetary statistics according to a framework that is consistent with that employed by the ECB, and provides a level of detail that is in harmony with that recommended in the IMF's recommended Standardized Report Forms.

Accountability and assurances of integrity by the central bank.

CP

According to the IMF's 2002 FSSA, "there is a high degree of transparency regarding the Bank of Latvia's (BoL) public accountability, including the procedures followed in preparing the annual report, audited financial statements, and regular appearances before the media" (p. 53). However, the BoL does not automatically make publicly available detailed documentation of the internal governance procedures it follows. Interested parties must submit a request for such information directly to the BoL.

The 2002 IMF FSSA notes that there are no laws or regulations that officially stipulate the legal protections available for officials and staff of the BoL. In fact, Article 33 of the Law on the Bank of Latvia stipulates that central bank employees are responsible for any violation of the laws established by the Republic of Latvia that may arise in the course of their official duties. Instead, staff is eligible for insurance to cover such situations. This situation has led to uncertainties as to the practical consequences of any such violations.

The Law of the Bank of Latvia gives parliament supervisory authority over the BoL. With regard to audit procedures, the BoL website sets forth the mandated procedure as follows: "An audit committee approved by the Republic of Latvia State Control carries out audits of the BoL's documents and activity. The Legislature of the Republic of Latvia supervises the BoL. The audit commission, whose members are approved by the State Auditors' Office of the Republic of Latvia, audit the economic activity and documents of the BoL. After the audit results have been reviewed, the Board of Governors of the BoL approve the Bank's annual report, and the report, together with the annual balance sheet, is published for the public knowledge."