10. pants

Our 2002 budget sets a general

government fiscal deficit of LVL 128 million, or 21/2 percent of

GDP. This higher deficit as compared to 2001 mainly reflects

substantially higher expenditures in the areas of defense and

security (related to NATO accession), pensions (as a result of

pension amendments agreed with the World Bank), European Union

accession, teacher salaries, and health, as well as an

acceleration of our public investment program. We recognize that

under our present economic circumstances, and in light of the

current uncertainty in the external environment, a more

appropriate fiscal stance would suggest a deficit on the order of

11/2 percent of GDP, broadly in line with our original intention

under the stand-by arrangement. The quarterly pattern of revenues

and expenditures next year will, in practice, allow us to keep

the deficit in the first two quarters down to a level consistent

with an annual deficit of 11/2 percent of GDP. We therefore

intend to limit our cumulative fiscal deficit to LVL 20 million

at end-March and LVL 46 million at end-June. We intend to

continue to strengthen revenue collection efforts, and we will

strive for central government tax revenues of LVL 316 million by

end-March and LVL 648 million by end-June.1 We hope

that this, together with expenditure restraint, will produce a

strong fiscal performance through the first quarter of 2002 that

could serve as the basis for a resumption of discussions and the

possible completion of the first program review.