10. Article

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.