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International Monetary Fund

noninflationary economic growth. The litas has not deviated from its central rate vis-à-vis the euro, and the continued high confidence in the exchange rate policy is reflected in low and relatively stable interest rate differentials to the Euro Area. In fact, the short-term interest rate differential against the three month EURIBOR has been small and continued to decline since the ERM II entry (from almost 0.6 to around 0.4 percentage points at the end–2004). Long-term interest rates of relevance for the convergence assessment have been below 5 percent since ERM II entry

International Monetary Fund. European Dept.
This Article IV Consultation highlights that the economic expansion continues, driven primarily by private consumption and exports of goods and services. Discussions primarily focused on increasing the economy’s flexibility and resilience. Fiscal performance has been strong, however, the materialization of contingent liabilities from government guarantees is likely to reduce the overall surplus. Low public and private investment, and continued emigration appear to weigh on medium-term growth prospects. Downside risks in the near-term stem could be due to possible changes in regional or global economic and financial conditions, and the further realization of contingent liabilities. The IMF staff advocated for a moderately faster fiscal adjustment. The report recommends accelerating the pace of debt reduction that would build fiscal space and help reduce downside risks. The Central Bank may need to address potentially tighter external conditions while continuing with strong bank supervision and macroprudential policies. Additional measures to prevent excessive household borrowing could be considered if needed.
International Monetary Fund. European Dept.

to reduce the overall surplus. Low public and private investment, and continued emigration weigh on medium-term growth prospects. Downside risks in the near-term stem from possible changes in regional or global economic and financial conditions, and the further realization of contingent liabilities. Policies : As the country moves closer to ERM II entry, focus needs to be on increasing fiscal space, reviving the momentum of structural reforms, and boosting investment. Reduce debt and invest more : Accelerating the pace of debt reduction would build fiscal

International Monetary Fund

with EC officials to discuss ERM II entry issues. Estonia acceded to the European Union on May 1, 2004, and entered into the exchange rate mechanism (ERM II) on June 27, 2004, while unilaterally maintaining its currency board which fixes the Estonian kroon to the euro. The authorities published the Concluding Statement of the mission and intend to publish this staff report. The right of center coalition government (Res Publica, the Reform Party, and the People’s Union) has been in power since April 2003. The next parliamentary elections are scheduled for 2007

Ms. Susan M Schadler

gained independence, the policy mix has been based on a restrictive monetary policy and a relatively loose fiscal policy. Within the ERM II, monetary policy will be less restrictive—it will no longer be independent—and so a more restrictive fiscal policy will be required. Upon ERM II entry, Slovenia will gradually begin to lose monetary policy independence. The Bank of Slovenia will have to conduct an exchange rate policy in line with the fixed central parity and entry exchange rate, while interest rate policy will be subordinated to the exchange rate policy and

International Monetary Fund

. Monetary policy and the level of short-term interest rates will in fact continue to be oriented to supporting the exchange rate peg. Indeed, in April, prior to ERM II entry, the Central Bank of Malta raised its central intervention rate by 25 basis points to 3.25 percent, following a period in which the Bank’s external reserves had declined. The rise in interest rates was intended to curb excessive credit growth, dampen inflationary pressures and help address imbalances between saving and spending. The increase in official interest rates, and Malta’s subsequent

International Monetary Fund. European Dept.

the whole, remains well capitalized and liquid, and the NPL ratio continues to decline. The CNB continues to utilize the current conditions to build reserves. Croatia is currently targeting ERM II entry in mid-2020, and eventually the Euro Area. Executive Board Assessment The Croatian economy has performed well, but convergence with the EU needs to accelerate . The Croatian economy has become stronger over the last five years. This is significantly because of strong budget management and skillful policies by the Central Bank. As a result, public debt has

International Monetary Fund. European Dept.

ERM II entry (in 2020), joining the Banking Union, and eventually the Euro Area. Executive Board Assessment 2 Executive Directors welcomed Croatia’s continued economic recovery, which has helped further reduce indebtedness and build external buffers. Directors commended the attainment of the first fiscal surplus in 2017 since independence. They encouraged the authorities to seize the opportunity presented by favorable macroeconomic conditions to advance the reform agenda by stimulating more inclusive growth, persevering with fiscal consolidation and debt

International Monetary Fund

appreciation of the currency and advised that Lithuania’s competitiveness and external vulnerability be monitored closely. Directors endorsed the Lithuanian authorities’ strategy of seeking early entry into ERM II after accession and maintaining the unilateral commitment to the currency board arrangement until the adoption of the euro. They noted that all relevant decisions regarding ERM II entry and EMU participation should be made in mutual agreement with the EU authorities. Furthermore, they underscored that the success of the ERM II strategy hinges on the ability of the

International Monetary Fund

-term aim of the government’s medium term budgetary framework is a gradual reduction of the budget deficit towards a balanced budget. Monetary-Financial Policies and the Run-Up to the ERM II and the Euro The authorities are pleased to note the recognition by staff of the credibility of the ERM II entry and the euro adoption strategy. The authorities aim at repegging the lats from the SDR to the euro and a subsequent entry in the ERM II at the beginning of 2005, in accordance with multilateral procedures and within the adopted framework. The adoption of the euro is