January 28, 2013 / 2:16 PM / 5 years ago

IMF says Latvia on euro course but bank deposits worrying

RIGA, Jan 28 (Reuters) - Latvia is on course to adopt the euro in 2014 but has to keep an eye on banks with volatile deposits from elsewhere in the former Soviet Union, the International Monetary Fund said on Monday.

The IMF nudged up its growth forecast for the Baltic state to 3.7 percent this year and expressed concern about a cut in benefits for the poor in one of Europe’s most unequal countries.

“Latvia appears on track to meet all the Maastricht criteria, subject to uncertainties on two criteria -- inflation and interest rates -- whose reference values are not yet determined,” the Fund said in a report on Latvia.

The Washington-based lender co-financed a 7.5 billion euro lifeline with the European Union for Latvia in 2008. Latvia repaid all its debt to the IMF last December.

To adopt the euro, a European Union country has to meet five economic criteria on deficits, debt, long-term interest rates, a stable currency peg to the euro and low inflation.

The IMF said the interest rate and inflation goals were yet to be set but the EU and European Central Bank officials had said in talks ahead of the report that the two criteria would be applied “fairly”.

The IMF raised the growth forecast from an earlier 3.5 percent but that is slower than the 5 percent notched up in 2012 and the lender said risks were on the downside due to an uncertain external environment.

It noted 80 to 90 percent of non-resident deposits (NDRs) in the banking sector came from former Soviet states, such as Russia, either directly or through countries like Britain, Cyprus, Belize and the British Virgin Islands.

“Given the size of the sector, a sudden reversal of NDR flows, and the potential of contagion to resident deposits, represents a source of vulnerability to international reserves and a significant contingent fiscal liability,” the Fund said.

The Fund urged Latvia to reassess cutting a key benefit for the poor to 35 lats ($67.50) a month from 40 lats.

“We are concerned about these developments, especially in the context of Latvia’s already high levels of inequality,” IMF mission chief, Shekhar Aiyar, told the IMF Survey Online publication. ($1 = 0.5186 Latvian lats) (Reporting By Aleks Tapinsh; editing by Anna Willard)

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