WASHINGTON, May 26, 2011 – The World Bank Board of Executive Directors today approved a US$ 142 million loan for the Second Safety Net and Social Sector Reform Program in Latvia. The program, designed to support the Government of Latvia’s efforts to mitigate the social impacts of the fiscal consolidation it undertook as a result of the emergency it faced in late 2008 at the height of global financial crisis, is the second of two programs focused on safety net support and social sector reform in Latvia.
"After a severe downturn, Latvia is now beginning to emerge from the crisis and see positive signs of growth," said Peter Harrold, World Bank Country Director for Latvia. "While Latvia has turned the corner, the lingering effects of the crisis remain. This operation ensures that society's most vulnerable groups are shielded from the worst effects of the downturn until the growth momentum can restore employment opportunities in the economy."
The combination of credit and housing bubbles, the global financial crisis, and acute banking pressures in Latvia contributed to a severe crisis in late 2008. The Latvian government responded with a reform program designed to arrest the immediate liquidity crisis and to ensure long-term external stability with the support of the European Union, the International Monetary Fund, and bilateral donors. The program has been based on a sizeable fiscal adjustment; spending was cut by 14 percent of GDP during 2009-2010.
However, the size of the fiscal adjustment required, together with the economic contraction and rise in unemployment, increased the risk of negative impacts for Latvian households – especially vulnerable and at-risk households. Further, the Government’s structural reform program involved fiscal cuts in the education and health sectors, and, unemployment, while falling, is doing so very slowly and remains high at 17.2 percent.
This round of funding will finance and coordinate the efforts of national and local government agencies to: maintain pre-primary education and child development programs; cover the cost of transporting students whose schools have closed to their new places of instruction; exempt needy households from health service co-payments and subsidize their pharmaceutical costs; while also improving general practitioner (GP) and primary health care (PHC) services and access. In addition, it will increase the coverage and pay-out period of unemployment insurance, as well as expand the coverage and amount of targeted social assistance benefits administered by local governments. Further, it helps finance a labor intensive public works program; providing a safety net to the long term unemployed not covered by the unemployment insurance and other social programs.
While protecting the vulnerable, this program is also aimed at supporting the reform program launched by the Government of Latvia, especially in health and education. The World Bank has supported the Government of Latvia’s efforts to improve outcomes in both sectors, while also finding ways to make them more efficient, including:
- A “funds following the student” financing reform aimed at increasing efficiency and education quality in light of the shrinking school-age population by targeting resources to students rather than infrastructure or other inputs in the education sector; and
- Structural reforms in the health sector aimed at increasing efficiency by improving administrative capacity and transparency, and substituting expensive inpatient services where possible by increased use of outpatient alternatives, but also at improving health outcomes through strengthening primary care.
As part of this program, the World Bank is supporting actions of the Government of Latvia to monitor, publicize and evaluate measures supported under the emergency social safety net. An evaluation of the labor-intensive emergency public works program, the income support program put in place to deal with the impact of the crisis, is due to be completed later in 2011.
“In putting the emergency social safety net measures in place, there has been a strong emphasis on monitoring the use of the resources set aside in the 2010 and 2011 budgets,” said Emily Sinnott, World Bank Senior Economist in the Europe and Central Asia Region. “The government reports each quarter on what the country gets in return for this spending and makes these results publicly available online. From this information, people can see that the money has been used to ensure continued access—particularly for citizens with low incomes—to government services ranging from preschool education to medical treatment that otherwise would have been under threat. Income support has also been provided to those hard hit by the rise in unemployment.”
For the structural reforms in education and health, typically it takes time to see results. But in Latvia we are already seeing some early indications of improvement. For example, visits to GPs started to increase in early 2011, an important outcome given that the health reforms aim to strengthen preventative care. This focus on monitoring and results should provide a good basis for the building of safety net programs and for the continuation of structural reforms in education and health as the country exits the crisis support program.
Latvia joined the World Bank in August 1992. Since then, the Bank has played an important role in supporting Latvia’s transition through lending, policy dialogue, and analytical and advisory assistance. Latvia graduated from Bank lending in 2007, but continued to benefit from the Bank’s analytical and advisory services.
As part of the international crisis response announced in December 2008 to stabilize Latvia’s economy, the Bank committed EUR 400 million in loans to the EUR7.5 billion package, which also includes contributions from the IMF, EC and the Nordic countries. The first EUR 200 million loan, approved by the Board in September 2009, is supporting the Government of Latvia’s efforts to strengthen the banking sector and maintain long-term financial stability.