BANK OF LATVIA ANNUAL REPORT 2 0 0 3 ISSN 1407–1800

BANK OF LATVIA ANNUAL REPORT 2003 Details may not add because of rounding-off.

© Latvijas Banka, 2004 The source is to be indicated when reproduced. CONTENTS

Introduction 4 3 The National Economy and the Bank of Latvia's Monetary Policy 8 Global Economic Environment 8 Inflation and Prices 10 Gross Domestic Product 11 Foreign Trade and the Balance of Payments 12 Fiscal Policy 15 Banking Sector 16 Money Supply 17 Lending and Deposit Rates 20 Interbank Market 21 Monetary Base 22 Foreign Exchange Market and Latvia's External Debt 24 Securities Market 26 International Cooperation 29 Integration in the European Union 29 International Financial Institutions 29 Cooperation with Foreign Central Banks and Technical Assistance 29 BANK OF LATVIA: ANNUAL REPORT 2003 REPORT BANK OF LATVIA: ANNUAL 2003 Highlights of Normative Acts Adopted in Pursuit of the Bank of Latvia's Main Tasks 31 Report of the Bank of Latvia's Executive Board 33 The Bank of Latvia's Foreign Exchange Rate Policy and Foreign Reserves 34 The Bank of Latvia's Monetary Policy Instruments 35 Cash Management 37 Balance of Payments and Financial Statistics 37 Payment Systems 39 Information Systems 41 Information to the Public 42 Quality Management at the Bank of Latvia 43 Management of the Bank of Latvia's Budget 43 Financial Results of the Bank of Latvia 44 The Bank of Latvia's Organisational Structure 44 Human Resources Development 45 The Bank of Latvia's Financial Statements for the Year Ended December 31, 2003 47 The Bank of Latvia's Balance Sheet 48 The Bank of Latvia's Profit and Loss Statement 50 The Bank of Latvia's Statement of Total Recognised Gains and Losses 52 The Bank of Latvia's Cash Flow Statement 53 Notes to the Bank of Latvia's Financial Statements 54 Report of the Audit Commission to the Board of Governors of the Bank of Latvia 79 Resolution of the Bank of Latvia's Board of Governors 80 Appendices 81 1 Monetary Indicators in 2003 82 2 The Bank of Latvia's Month-End Balance Sheets for 2003 83 3 The Bank of Latvia's Year-End Balance Sheets for the Years 1999–2003 84 4 The Bank of Latvia's Profit and Loss Statements for the Years 1999–2003 85 5 The Bank of Latvia's Exchange Rates for the Euro, the British Pound, the Japanese Yen and the US Dollar 85 6 The Bank of Latvia's Organisational Units at the End of 2003 86 The Bank of Latvia's Structure at the End of 2003 89 BANK OF LATVIA: ANNUAL REPORT 2003 4 INTRODUCTION observed. Theannouncementsofinternationalratingagencies In 2003,gradualfavourablechangesintheexternaleconomic environmentwere maturities inEUcountriesnarrowed. eurobondsandcentralgovernments'debtsecuritiesofcorresponding Latvia's curities tradedinprimarytendersdeclined.Thespreadbetweeninterestrateson ongovernmentse- ment consolidatedbudgetwassmallerthanprojected.Yields Tax revenuegrewinthereportingyear.Thefiscaldeficitofgeneralgovern- credit andindustrialcredit. toresidentsweredominatedbymortgageloans,commercial the economy.Loans enterprises andprivatepersons,long-termlendingexpandedinallsectorsof creation oftheRegister ofDebtors,fosteredgrowth inloansgrantedtodomestic tion, lowinterestrates,andthereductionofcreditrisk,supportedinpartby The sustainabilityoftheeconomicsituation,growingincomepopula- pansion oftheirapplication. ratio indicatedafurtherdevelopmentofnon-cashpaymentinstrumentsandex- transactions ineurosandadeclineUSdollars.Contractingcash ening oftheeuroinforeigntradesettlementsdeterminedariseshare eign currencies,thedepreciationofUSdollar,appreciationandstrength- foreign currencies.Inrespectofloansanddepositsdomesticnon-banksinfor- determined aconsiderablyfastergrowthofdepositsinlatsthan sons. Ahigherlevelofreturnandstrongerconfidenceinthenationalcurrency edly theamountofdepositsreceivedfromdomesticenterprisesandprivateper- strengthening oftherealsectoreconomy,banksmanagedtoincreasemark- with stabilityofthenationalcurrency,growingprosperitypopulationand Banks stillaccountedforthemostessentialpartoffinancialsector.Inline tially affecttheaverageweightedinterestratesonloansgrantedtonon-banks. still low,andtheirmoderategrowthinthesecondhalfofyeardidnotsubstan- etary policyandleftinterestratesunchanged.Moneymarketwere to thedynamicgrowthand,havingassessedoutlook,didnotaltermon- carefullymonitoredeventualrisksrelated mained balanced.TheBankofLatvia tional economynotwithstanding,theeconomicdevelopmentsincountryre- that ofcurrenttransfersgrewconsiderably.Theongoingrapidgrowththena- deficit ofthebalancepayments.Servicessurplusdidnotchangenotably,while modernisation oftheeconomydeterminedanincreaseincurrentaccount up. Therapidlygrowingdomesticdemandandthelargefinancingrequiredfor supply side.Unemploymentremainedbroadlyunchanged,andrealwageswent average annualinflationwas2.9%,mainlydeterminedbytheconditionson Real grossdomesticproduct(GDP)increasedby7.5%inthereportingyear.The tries oftheEuropeanUnion(EU)grewatanevenhigherpacethantotalexports. businessesinmajorexportmarkets;addition,exportstocoun- of theLatvian by thestrongdomesticandexternaldemandaswellsuccessfulperformance economycontinuedtogrowrapidlyin2003.Thegrowthwasensured The Latvian dence. regainedindepen- lished itselfasoneofthemost significantsymbolsofLatvia's cant eventandanimpetustoeconomicdevelopment.Thelats hasfirmlyestab- was putintocirculationmarkedonMarch5.Itboth a historicallysignifi- anniversary sincethefirstbanknoteofrestorednational currency–5lats forseveralreasons.Thetenth The year2003wasparticularlysignificantforLatvia evaluationabroadhad becomemorepositive. indicated thatLatvia's liabilitiesinforeigncurrenciesandonimprovingthecountry's outlook Latvia's Standard &Poor's onassigningahigherlong-termcreditworthinessratingfor Fitch Ratings and exchange ofinformationrelatedtocentralbanking. groups oftheEuropeanSystemCentralBanksasobservers,contributingto wereinvolvedinthecommitteesandworking resentatives oftheBankLatvia Cooperation withtheEuropeanCentralBankwasexpandinganddeepening.Rep- becominganEUmemberstate. Latvia public informationcampaignsonpotentialgainsandrisksfortheeconomyupon activelyconducted TheBankofLatvia the introductionofeuroinLatvia. onDecember9isanimportantsteptowards passed bytheGovernmentofLatvia preparationforfull-scaleparticipationintheEMU Protocol DecisiononLatvia's live inaunitedEuropeandtoexploittheadvantagesofsinglecurrency.The rable eventforthecountryanditscitizens,confirmingdesireofnationto EU andhencealsototheEconomicMonetaryUnion(EMU)wasamemo- accessiontothe The positivevoteonSeptember20atthereferendumLatvia's 5

BANK OF LATVIA: ANNUAL REPORT 2003

BANK OF LATVIA: ANNUAL REPORT 2003 8 POLICY THE NATIONAL ECONOMYANDTHEBANKOFLATVIA'S MONETARY indicators hadbeenimplying certain progressoftheeconomicactivity.Inline vived inthethirdquarter.Sincebeginningofsummer, business confidence Following athree-quarter longstagnationintheeuroarea,realGDPgrowthre- though deflationpersisted,itdiminishedattheendofyear. only insomesectorsofindustryandwithoutmucheffectonunemployment trends; East Asia).However,therecoverywasnotsmooth,withimprovements observed investment growthandrapidaccelerationofexports(particularly tocountriesin In Japan,therecoverythathadstartedin2002continued.It was largelydrivenby mained sluggish. business confidencestrengtheningnotably.Thelabourmarket, bycontrast,re- tive signs,withcapitalexpendituregrowing,industrialproduction expandingand balance deterioratedsubstantiallyin2003.Themanufacturingsectorshowedposi- Due totaxcutsandthegrowingmilitaryexpenditure,governmentbudget reduced by25basispointsandremainedanchoredat1%untiltheendofyear. low federalfundtargetratesetbytheFederal Reserve System,whichinJunewas sumption strengthenednotably.Domesticdemandwasalsofosteredbyarecord ter. Tax cutssupportedthegrowthofrealdisposableincome;henceprivatecon- in thelast10yearsthirdquarter,butsomewhatslowedfourthquar- spring of2003.GDPgrowthrateincreasedinthesecondquarter,rosetoitshigh The growthrateofeconomicactivityintheUShadbeenacceleratingsince ated alsoagainsttheJapaneseyen. sive interventionsconductedbytheGovernmentofJapan,USdollardepreci- in capitalyieldrates).TheUSdollardepreciatedagainsttheeuro.Despitemas- cies oftheworld(due,inpart,togrowingUStwindeficitandalsodifferences rate changes:in2003,theUSdollarsharplydepreciatedagainstallmajorcurren- To acertainextent,imbalancesoftheglobaleconomywerecorrectedbyexchange 5 basispointsinJapan. increased by26basispointsintheUS,64UnitedKingdom,and the samematuritywentupfrom0.5%to1.4%.Bycontrast,yieldson2-yearbonds year bondsrosefrom3.1%to4.3%,whilethoseonJapan'sgovernmentof ontheUSgovernment10- declining; hencetheyieldonthemincreased.Yields Since themiddleof2003,demandforfixed-incomedebtsecuritieshadbeen mid-April. indices felltothelowestlevelin2003,commencearapidrecoveryagain Shortly beforetheoutbreakofwarinIraq,i.e.onMarch11,stockmarket changes ofAsiaalsoincreaseddespitethestill-feltdiscouragingeffectsSARS. technology corporations–by50%.Indicesforsecuritiesquotedatthestockex- 26%, DJIAby25%,andNASDAQ –anindexpredominantlyforthestockof subsequent yearsoflosses.TheUSstockmarketindexS&P500increasedby US investmentfundsrecordedanotablegrowth–forthefirsttimeafterthree forecasts andbetterkeyperformanceindicatorsoftheeconomy.In2003,major ket participants'investinginmorerisk-exposedsecurities,andoptimistic Likewise, thefinancialmarketuncertaintiesdiminished,indicatedbybothmar- persisting insomeeconomies. recovery wasonitswaydespitearatherweakdomesticdemandandimbalances cated thattheglobaleconomyhadbecomesustainable.InEuropeancountries, globe. AccelerationofthegrowthrateinUSandmanyAsiancountriesindi- In 2003,therecoveryofeconomicactivitywasongoinginseveralparts GLOBAL ECONOMICENVIRONMENT deficit. Estonia'sGDPincreasedby4.7%in2003. imports causeddeteriorationofthetradebalanceandahigher currentaccount in privateconsumption).Exportsofgoodswentupby9.7%, yet theexpansionof nomic growthsloweddownalsoinEstonia(mainlyasaresult ofaslowergrowth part, offsetbyamarkedexpansionofexports,andGDPincreased by4.2%.Eco- an impedimenttoitseconomicprogress.Thedeclineindomestic demandwas,in the slowhouseholdconsumptiongrowthdeterminedbyasteep riseinpriceswas of inventoriesincreasednotablybothinHungaryandSlovenia. AstoSlovakia, whereas growinginvestmentfiguredasthedrivingforceinSlovenia. Theamount the domesticdemandinHungarywasdrivenbystrongerhousehold consumption, other hand,strengthenedatarapidrate.With realpersonalincomeincreasing, due toaweakexternaldemand.Thedomesticdemandinthese countries,onthe growth rateinthesecountriesdroppedto2.3%and2.9%,respectively,mainly The economiesofSloveniaandHungaryrecordedsimilargrowthtrends.GDP less notablethanin2002. investment growth.Progress inexportsofgoods andserviceswasconsiderably ing by8.9%year-on-year.Itwasmainlydeterminedprivateconsumptionand economy ofLithuaniarecordedaparticularlynotablepick-up,withGDPincreas- Government expenditurewas,inpart,offsetbyincreasinginvestment.The and exportsgrewmorerapidlythanin2002,adeclinethegrowthof GDP increasedby2.9%alsointheCzechRepublic. Bothprivateconsumption the levelofpreviousperiodandalsothatcorresponding2002. slowed down,andinthesecondhalfof2003expenditureforinvestmentexceeded the economicdevelopment.Thedeclineingrossfixedcapitalformationgradually ing by3.7%.Bothprivateconsumptionandexportgrowthhadapositiveeffecton In Poland, theeconomicgrowthacceleratednotablyin2003,withGDPincreas- tries deteriorated. major drivingfactorbehindthegrowth,currentaccountofanumbercoun- ward trendinthemajorityofcountries.Asdomesticdemandstillwas paratively highacrosstheregion,whereasinflationcontinuedtofollowadown- exports. Unemploymentratesremainedbroadlyunchangedbutwerestillcom- of tradeimproving,theeconomicactivitywasenhancedalsobyexpansion economic growthintheregionwasdrivenbydomesticdemand,yetwithterms moderately improvingonlyinthethirdandfourthquarters.To agreatextent,the gary continuedtodecline,particularlyinthefirsthalfof2003,withsituation grew fasterthanin2002.Bycontrast,theeconomicactivitySloveniaandHun- East Europewereuneven.GDPofPoland, theCzechRepublic andLithuania The economicdevelopmenttrendsof2003indifferentcountriesCentraland 2003, excessivebudgetdeficitprocedurewasimplemented. to 2%.With thebudgetbalanceworseninginseveralcountriesofeuroarea Since thebeginningof2003,inflationineuroareahadbeenfluctuatingclose failed topushupthedomesticdemandessentially,anditwasstillweakin2003. end oftheyear.Thelowinterestratesincountrieseuroarea,however, 2003 (byatotalof75basispoints)andleftitathistoricallow2.0%untilthe The EuropeanCentralBankloweredthebaseinterestrateontwooccasionsin appreciation oftheeuroagainstUSdollar. accelerated (mainlyowingtoexportgrowth)attheendof2003inlinewith decline incompetitivenessnotwithstanding,theeconomicgrowtheuroarea environment becamemorefavourableforeconomicactivitiesintheeuroarea.A with simultaneousgrowthinanumberofworldregions,theexternaleconomic 9

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200310 index increasedby3.6%year-on-year(seeChart1). 3.2% forgoodsand2.1%services.InDecember2003,theconsumerprice was2.9%(1.9%in2002),including In 2003,theannualaverageinflationinLatvia INFLATION ANDPRICES Russia's GDPgrewby7.3%in2003. less, thesteepriseininvestment(12.9%)fostereddomesticdemand,and to channellingofanincreasinglygrowingshareincomeintosavings.Neverthe- sumption wasstrengtheningataslightlyslower(by7.3%)pacethanin2002due rapid growthintherealincomeofpopulationnotwithstanding,privatecon- favourable situationontheglobalenergyandnon-ferrousmetalsmarket.The was determinedbyboththerobustdomesticdemandandexports,attributedtoa The economicgrowthinRussia acceleratednotablyincomparisonwith2002.It wage rose8.3%andtherealnet wage7.8%year-on-year.Thisrealgrowth wages andsalariesexceededthe annualinflationrate;hencetherealgross increased by11.4%andtheaverage netwageandsalaryby10.9%.Therisein in 2003.Incomparisonwiththepreviousyear,averagegross wageandsalary economy wasLVL 192.49andtheaveragemonthlynetwage andsalaryLVL 138.07 The averagemonthlygrosswageandsalaryofpersonsemployed inthenational to theaverageannualinflationalsogrew,reaching0.3percentage points. tion increasedandreached0.5percentagepoints.Thecontribution offuelprices prices increased.In2003,thecontributionofadministered prices tototalinfla- dropped 3.1%).At thesametime,influenceofnon-foodproductandservice by fallingpricesforsomeparticularfoodstuffs(e.g.meatand meatproductprices on totalinflationweakened;inaddition,growthwas slightly sloweddown In 2003,theeffectsofchangesinfoodprices(measuring0.8 percentagepoints) products (7.9%),influencedsincespringbytheappreciationofeuro. substantially (by5.9%).Itwasdeterminedmainlybyariseinpricesformedical new heatingseasonsetin.In2003,population'sspendingonhealthcareincreased increased. Highergastariffs,inturn,causedariseheattariffsaswell,whenthe following adecisionofthePublicUtilityCommission,gassupplychargeswere tries andtheconsiderablystrongereuroincomparisonwithyear2002.InJuly, majortradepartnercoun- ence wasreinforcedbypoorharvestsalsoinLatvia's months, pricesofunprocessedfoodnotablyinfluencedtotalinflation.Thisinflu- Due toapoorharvestandhencealsomodestdomesticsupplyinthesummer with thehighpreviousbaseeffectceasingtoexist,inflationrose3.7%inJune. of thepreviousyear).Insecondquarter,euroappreciatedmarkedly,and the beginningof2003,lowinflationpersisted(inpartdeterminedbyhighbase Factors contributingtotheriseinpriceschangedseveraltimesduringyear.At D . 6.1 5.9 7.0 7.9 8.3 8.3 Service sector Goods-producing sector GDP Source: CentralStatisticalBureauofLatvia. value, termsoftradeimprovedby0.9%in2003. With theexportunitvaluegrowingatasomewhatfasterpacethanimport industries accountingforthelargestshare. appliances, electricalequipment,mineralproducts,andthechemicalallied port vehicles,basemetalsandarticlesofmetals,machinerymechanical the chemicalandalliedindustries(4.8%).Real importsgrewby12.0%,withtrans- (14.1%), mineralproducts(10.1%),transportvehicles(8.5%),andtheoutputof a resultofnoticeablyhigherpricesforbasemetalsandarticles The importunitvaluegrewby6.9%(5.8%inthepreviousyear).growthwas prices. The growthinexportswasassociatedwithanincreasebothexportvolumeand wood andarticlesofwood,transportvehiclesshowingthelargestincrease. grew by8.6%,withmachineryandmechanicalappliances,electricalequipment, (1.5%), andpulpofwood,paperpaperboard(0.5%).Overall,realexports ery andmechanicalappliances,electricalequipment(1.7%),transportvehicles (6.7%) wasthehighest.Amoderatedecreaseinpricesregisteredformachin- wood andarticlesof(8.2%),basemetals factured articles(mainlyfurniture;14.9%),textilesandtextile(14.0%), for productsofthechemicalandalliedindustries(18.7%),miscellaneousmanu- The exportunitvalueincreasedby7.9%in2003(by2.7%2002).pricerise struction costindexdropped1.3%. of fabricatedmetalproducts(exceptmachineryandequipment;0.4%).Thecon- for manufactureofelectricalmachineryandapparatus(1.8%), furniture andmanufacturingn.e.c.(8.4%).Producerpricesdropped,bycontrast, registered formanufactureofwearingapparel(14.8%),basicmetals(9.6%),and ducer priceindexgrewbyanaverage3.2%in2003.Thelargestrisewas sales, producerpricescontinuedtopickup.Incomparisonwith2002,thepro- In linewithanincreasingdemandforindustrialoutputaccompaniedbyimproved crease inthepublicsector'swages. in 2003wasthefastestlastfiveyears,caused,toanextent,byalargein- (see Table 1).GDPatcurrentpricestotalled5872.2millionlats. the year-on-yearGDPincreaseof8.8%andoverallannual growthof7.5% and externaldemand.Growthwasparticularlysignificantinthe firstquarter,with In 2003,therapidgrowthofnationaleconomywasaresulthighdomestic DOMESTICPRODUCT GROSS tic demand,andmanufacturing (a9.1%growth)withanincreasingvolumeof services sector.Construction(a 13.7%growth),mainlydrivenbyastrongdomes- In 2003,thegoods-producing sectorgrewatanoticeablyhigherratethanthe 012002 2001 2003 7.0 8.4 7.5 11

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200312 to vacanciesdecreasedmarkedly. with thegrowingnumberofregisteredjobvacancies,ratio ofunemployment In 2003,theshareoflong-termunemployedremainedbroadly unchanged.Inline percentage points,respectively). nounced inthedistrictsofRçzekne andDaugavpils(anincreaseof2.82.2 on theotherhand,levelofregisteredunemploymentroseandwasmostpro- decline by1.3and1.2percentagepoints,respectively).Inthemajorityofdistricts, almost allcities,exceptVentspils (DaugavpilsandRçzekne recordingthelargest disparities continuedtopersist.In2003,unemploymentdeclinedsubstantiallyin ployment rate,inturn,was0.3percentagepointsbelowthe2002level.Regional economically activepopulation(8.5%attheendof2002).Theaverageunem- 2003 remainedbroadlyunchangedandaccountedfor8.6%ofthetotalnumber The numberoftheunemployedregisteredwithStateEmploymentServicein was changed,andthedataofpreviousyearwerere-calculatedaccordingtoit. At thebeginningof2003,methodologycalculatingunemploymentrate in comparisonwith2002. portsexpandedby5.0% increasing by10.6%.Overall,freightturnoveratLatvian product pipelineoperatedefficiently,withthevolumeoftransporteddieseloil portsbyrailpickedup25.8%.Theoil (including crudeoil)transportedtoLatvian tions alsodevelopedsuccessfully(a7.9%increaseyear-on-year).Transit cargoes Despite theoilmainstandingidleallyear,transport,storageandcommunica- 16.4%). Theturnoveratconstantpricesofpubliccateringgrewby15.8%. Hotels andrestaurantspostedaremarkablyrapiddevelopment(anincreaseof ing foodstuffs,whileretailingoutsidestoresnarrowed. withstanding, salesvolumesincreasedinnon-specialisedstorespredominantlytrad- clothing, footwearandleathergoods.Expansionofthesupermarketnetworknot- (a riseof12.8%)grewmostrapidly(by35.6%)atstorestradingtextilearticles, real contributiontototalvalueaddedincreasingby11.3%.Retail tradeturnover The developmentoftheservicessectorwasmainlydeterminedbytrade,withits ing branches. ucts andbeverages,furniture,manufacturingn.e.c.,someothermanufactur- growth inmanufactureofelectricalmachineryandapparatusn.e.c.,foodprod- demand. Strengtheningofboththeexternalanddomesticdemanddetermined apparatus, andmachineryequipmentn.e.c.wasdrivenmainlybytheexternal cept furniture),basicmetals,radio,televisionandcommunicationequipment products. Growthinmanufacturingofwoodandproductscork(ex- cated metalproducts(exceptmachineryandequipment),rubberplastics turing sectorssuchasmanufactureofothernon-metallicmineralproducts,fabri- The riseinconstructionledtoanincreasetheoutputofanumbermanufac- growth ingoodssector. new orders,bothinforeignanddomesticmarkets,weremajorcontributorstothis mand for Latvia's commoditiesinexternal marketsgrewandcompetitiveness was mand forLatvia's A somewhatsluggisheconomic growthacrossEuropenotwithstanding,thede- Foreign trade deficitwas1338.5millionlats(seeTable 2). with 2002,exportsofgoodsincreased by17.2%andimportsofgoods19.7%. foreigntradeturnoverreached 4639.8millionlatsin2003.Incomparison Latvia's FOREIGN TRADE ANDTHEBALANCEOFPAYMENTS mot 0. 2497.4 1 408.8 –945.2 2201.6 1 256.4 Balance Imports Exports Russia (base metals, plasticsandproductsthereof,pharmaceuticalproducts). group ofCIScountries,exports rosetoUkraine(woodandarticlesofwood) cal appliances,electricalequipmentwerethemostimportant exportgoods.Inthe stuffs, productsofthechemicalandalliedindustries,machinery andmechani- and metalspostedthelargestincrease.OfexportstoCIS countries,food- metals, pharmaceuticalproductsandfoodstuffs,whileofexports toNorwaywood chinery, andopticalinstrumentsapparatus;Lithuaniaincreased purchasesof As toEstonia,thelargestgrowthwasrecordedinexportsof wood,textiles,ma- other countries,mainlytoEstonia,LithuaniaandNorway,rose markedlyaswell. wood andarticlesof(34.7%totalexportsthese goods).Exportsto articles toSweden.TheUnitedKingdomwasthemajorexport marketforLatvia's articles, furnitureandwoodtoGermany,ofwood,equipment andtextile Exports ofmetalsandwoodincreasednotablytotheUnited Kingdom,oftextile rise inexportswasregisteredfortheUnitedKingdom,GermanyandSweden. (15.3%), andbasemetalsarticlesof(12.8%).Themostnotable dominated bywoodandarticlesof(47.0%),textilestextile (20.0%) wasevenlargerthanthatintotalexports.ExportstoEUcountrieswere from 60.4%in2002to61.8%2003.TheincreaseexportsEUcountries principalexportpartnersweretheEUcountrieswhosesharegrew Latvia's were generallyontherise. 25.3% indicatingthatproductionandexportsofgoodswithahighervalueadded goods intotalexportswasnotsizable,2003,ofthesegrewby wood, paperandpaperboard(by9.9millionlats).Althoughtheshareofcapital beverages andtobacco;by6.7millionlats)declined,asdidexportsofpulp textile articles.Exportsoffoodindustry(includingalcoholicandnon-alcoholic parel, notknittedorcrocheted,determinedthegrowthinexportsoftextilesand exports wasregisteredforsawnwood,woodworkandfuelwood.Articlesofap- exportgoods.Ofwoodandarticlesofwood,asubstantialincreasein Latvian and mechanicalappliances,electricalequipment(7.1%)werethemostimportant articles (12.6%),basemetalsandofmachinery In 2003,woodandarticlesof(35.2%totalexports),textilestextile 2002). of goodsincreased.Itcovered38.2%thetotalforeigntradedeficit(39.6%in exports ofwoodandarticlesexpandingrapidly,thesurplusthisgroup chemical andalliedindustries,asimportsoftheseproductsgrewnoticeably.With appliances, electricalequipment,transportvehicles,mineralproducts,andthe The largestincreaseintradedeficitwasregisteredformachineryandmechanical in partresultingalsofromapriceriseundertheimpactofstrongeuro. both exportsandimportsofgoodswasmoresizablethanintheprecedingyears, most pronouncedly(by30.9%and19.0%,respectively).Overall,thegrowthin mined theriseinimports.Importsofcapitalandintermediategoodsexpanded not impaired.Thestrengtheningdomesticdemandandtheexportgrowthdeter- Source: CentralStatisticalBureauofLatvia. 012002 2001 –1 088.6 –1 338.5 2 989.2 1 650.6 2003 13

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200314 travel services deficit, as in comparison with 2002, the spending of Latvian travel- travel servicesdeficit,asincomparison with2002,thespendingofLatvian cit. Themoderatedeclineintheservicessurplusresultedfrom anincreaseinthe edly. Theservicesandcurrenttransferssurpluscovered55.3% ofthegoodsdefi- come postedagrowingdeficit,whilethecurrenttransferssurplus increasedmark- The servicessurplusremainedbroadlyunchangedincomparison with2002;in- count deficit. imports growingmoresteadilythanexports,determinedarise inthecurrentac- (7.6% ofGDPin2002).Growththegoodsdeficit(by249.4 millionlats),with The currentaccountdeficitofthebalancepaymentsin2003 was9.2%ofGDP came stable. tive pricechangesgrowing,therealeffectiveexchangerate index ofthelatsbe- with aslow-downintheappreciationpaceofeuroand theindexofrela- of developingcountriesand6.8%againstthosedevelopedcountries).Inline exchange rateindexofthelatsdropped6.0%in2003(4.4%againstcurrencies the strongappreciationofeuro.Incomparisonwith2002,realeffective of thelats(6.4%onaverageannually),which,inturn,wasessentiallyaffectedby wasprimarilyaresultofdropinthenominalexchangerate partners ofLatvia, exchange rateindexofthelats,measuredagainstcurrencies13majortrade a positiveeffectontheincomefromexports.Thedeclineofrealeffective The realeffectiveexchangerateindexofthelatscontinuedtofallin2003andhad dollars contracted(to26.7%;32.1%in2002). (reaching 53.5%;47.7%in2002),whereastheshareoftransactionsUS In foreigntradetransactionsof2003,theshareeurocontinuedtogrow als). (mineral products,metals,andwood)Ukraine(transportvehiclesmet- vehicles, mineralproducts,andmetals),threeCIScountries–Russia, Belarus Germany (transportvehicles,metals,machinery,andplastics),Estonia imports fromothercountries.Thelargestgrowthinwasrecordedfor stuffs, includingalcoholicandnon-alcoholicbeveragestobacco,dominated ment, productsofthechemicalandalliedindustries,mineralfood- articles ofbasemetals;machineryandmechanicalappliances,electricalequip- port goodsfromtheCIScountriesweremineralproducts,andbasemetals transport vehicles,andproductsofthechemicalalliedindustries.Majorim- were dominatedbymachineryandmechanicalappliances,electricalequipment, (6.3%). ImportsfromtheEUcountries(51.0%oftotalimports;53.0%in2002) Lithuania (9.7%),Russia (8.7%),Finland(7.4%),Estonia(6.4%)andSweden principalimportpartnerswereGermany(16.1%oftotalimports), Latvia's dominated thegroupofmineralproducts. allied industries,whilelargerimportsofdieselfuel,naturalgasandmotorspirit ucts accountedforthemostsizableincreaseingroupofchemicaland largest growthwasregisteredinimportsofpassengercars;pharmaceuticalprod- metals andarticlesofbase(9.3%).Inthegrouptransportvehicles, the chemicalandalliedindustries(10.1%),mineralproducts(9.9%),base cal equipment(21.1%oftotalimports),transportvehicles(10.5%),products growth wasrecordedinimportsofmachineryandmechanicalappliances,electri- increasedimportsofallprincipalgroupsgoods,andthelargest In 2003,Latvia Peru, Spain,Portugal andIcelandcontinuedtostrengthensubstantially. mark (6.0%).ExportstoanumberofrecentlyexploredmarketsinChina,Japan, Germany (14.9%),Sweden(10.6%),Lithuania(8.2%),Estonia(6.6%)andDen- majorexportpartnersweretheUnitedKingdom(15.5%oftotalexports), Latvia's rent accountdeficit. foreign directinvestmentbalance(187.4millionlats)covered34.5%ofthecur- almost infull,andreserveassetsincreasedby38.5millionlatsyear-on-year.The In 2003,inflowsofcapitalweresufficienttocoverthecurrentaccountdeficit income fromdirectinvestment,deficitposteda29.1millionlatsincrease. ume ofconstructionandfinancialservices.Inlinewithnon-residents'growing panding transportationservicesrenderedbyroadandrail,aswellalargervol- surplus oftransportationservicesandothergrew,mainlyowingtoex- lers increasedby17.9millionlatsmorethanthatofnon-residents.The lats indicatedpositiveresultsof thepensionreform. budget wasexceptionallygood, anditsfiscalsurplusintheamountof18.3million 10.4% andexpenditureby8.4% in2003.Theperformanceofthesocialinsurance parison with2002,revenueofthecentralgovernmentspecial budgetincreasedby fiscal surplus(18.8millionlats)ofthecentralgovernmentspecial budget.Incom- The fiscaldeficitofthegeneralgovernmentconsolidatedbudget wasoffsetbythe from 6.9%in2002to5.2%2003. Consequently, theshareofcorporateincometaxintotal revenuecontracted dropped 14.4%primarilyasaresultof3.0percentagepoints lowertaxrate. determined byhigherlabourremuneration.Revenue fromcorporateincometax (a shareof32.0%)roseby6.8%.Thegrowthinrevenuefrom thetwotaxeswas as ofJanuary1,2003,revenuefromstatecompulsorysocialsecurity contributions the overallsocialsecuritycontributionratewasloweredby2.0 percentagepoints personal incometax(ashareof20.5%)wentup14.9%year-on-year.Although share of25.6%)andcustomsduties(by24.4%;a1.0%).Revenue from sharp increaseinimportsenhancedrevenuefromvalueaddedtax(by19.9%;a primarily resultingfromhigherexcisetaxrevenueonoilproducts.Therelatively excise taxgrewby19.5%(itssharereaching11.8%oftotalrevenue),thisgrowth Incomparisonwith2002,taxrevenueincreasedby12.3%in2003.Revenue from its expenditure(11.3%and9.2%,respectively). of thegeneralgovernmentconsolidatedbudgetpostedamorerapidgrowththan get revenueexceededtheprojectedamountby1.1%.Year-on-year, therevenue and expenditureforinvestment88.6%).At thesametime,governmentbud- only 97.1%oftheprojected(regularexpenditure97.7%,capital92.0% ers intheinteriorsystem2003,governmentbudgetexpenditurereached remuneration forvarioussocialgroupssuchasmedicalstaff,teachers,andwork- Despite anincreaseintheminimumwageandsalaryfrom60latsto70 payments forservicesandinvestment)beingmadeonlyatthecloseofyear. crease inDecemberresultedfromthemajorityofprojectedpayments(including and thecentralgovernmentspecialbudgetwassharplyincreased.Suchanin- in Decemberwhentheexpenditureofbothcentralgovernmentbasicbudget deficit ofthegeneralgovernmentconsolidatedbudgetpostedamarkedriseonly ture undertheinterimbudgetatbeginningofyear(January–March).The corded afiscalsurplus,resulting,inpart,fromtherestrictingeffectsonexpendi- In thefirst10monthsof2003,generalgovernmentconsolidatedbudgetre- come ofbudgetrevenuesandthepolicyrestrictingGovernmentexpenditure. (2.5% ofGDP)andbelowtheprojections;itwasachievedduetoabetterout- 103.2 millionlatsor1.8%ofGDP, whichwasconsiderablylowerthanin2002 In 2003,thegeneralgovernmentconsolidatedbudgetpostedafiscaldeficitof FISCAL POLICY 15

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200316 countries. quidity. Ofliquidassets,47.1% wereclaimsoncreditinstitutionsoftheOECD central governments)accounted for33.5%oftotalassets,ensuringadequateli- claimsoncreditinstitutionsandforeigncentralbanks, securitiesissuedby Latvia, At theendof2003,banks'liquidassets(vaultcashanddeposits withtheBankof stitutions shranksomewhat(to23.2%). non-profit institutionsservicingthem)),whereastheshareof claimsoncreditin- ing 52.4%(includinga13.3%riseinloanstohouseholds(private personsand In 2003,loanscontinuedtogainimportanceinthestructureof banks'assets,reach- 482.0 millionlats)wasrecordedinbanks'equity. was 71.5millionlats(aftertaxes;27.0%higherthanin2002). Ariseof25.6%(to lats) and21.5%(to3730.5millionlats),respectively.Thebanking sector'sprofit loans (includingtransitcredit)anddepositsgrewby41.2% (to3001.0million rate: assets(excludingtrustassets)expandedby29.3%(to5 716.7millionlats), In 2003,allmajorbankperformanceindicatorscontinuedto improveatarapid investment (53.9%attheendof2003). (a year-on-yearincreaseof8.5%),withnoessentialchangeintheshareforeign At theendof2003,totalpaid-upsharecapitalbankswas 307.9millionlats yet beencompleted. in thejoint-stockcompany pany Stateisthesoleownerofjoint-stockcom- tal wasamere6.7%.TheLatvian reporting year,theGovernment'sstakeinbankingsector'spaid-upsharecapi- AtNearly thewholebankingindustryisinprivatehandsLatvia. theendof banks tive officesof Bank Finland Plc branchof At theendof2003,22banks,28creditunionsandLatvia BANKING SECTOR lats) intheGovernment'sforeigndebt. from thedomesticbanks.Thisbroughtabouta9.7%reduction(to419.6million due torefinancingofseveralcomparativelyexpensiveforeignloansbyborrowing bond issue,whereasthedomesticdebtdenominatedinforeigncurrenciesincreased denominated inthenationalcurrencygrewby82.4millionlatsasaresultof (an increaseof135.1millionlatsagainsttheend2002).Thedomesticdebt 2003). TheGovernment'sdomesticdebtwas426.7millionlatsattheendof2003 debt rosesubstantially(from38.6%attheendof2002to50.4% the domesticmarket;henceshareofGovernment'sdebtintotal lion lats).ThebudgetdeficitwasfinancedbytheGovernmentborrowingsfrom In 2003,theGovernment'sdebtincreasedby90.1millionlats(reaching846.3mil- increased by11.5%andexpenditure9.1%). the localgovernmentconsolidatedbudgetwerebetterthanin2002(e.g.revenue which in2003wassubstantiallysmallerthan2002.Likewise,fiscalindicatorsof primarily resultedfromthedeficitofRigacitylocalgovernmentbasicbudget, The fiscaldeficitofthelocalgovernmentconsolidatedbudget(22.3millionlats) creased inalmostallmajorexpendituregroups. expenditure rose13.7%andtotalrevenue14.6%year-on-year.Expenditurein- centralgovernmentbasicbudgetdeficitwas110.9millionlatsin2003.TotalThe Latvijas Hipotçkuunzemesbanka AsiaUniversalBank Dresdner Bank wereregisteredintheRepublic Likewise,representa- ofLatvia. , Nadra Bank Latvijas Krâjbanka

AG , HSH Nordbank and . TheGovernmentalsohasa7.1%holding East BridgeBank , abankwhoseprivatisationhasnot

AG andjoint-stockcommercial operated inRiga. Nordea cies. Banks' growingdependenceonforeignfundingisanotherpotentialriskfactor. to limitthepotentialcreditriskandmaintainhighqualityofloanportfolio. households, pushesbankstobemoreprudentwhenapplyingtheircreditpolicies Nevertheless, therapidgrowthinlendingrecentyears,particularlyto tions, maintaininghighprofitability,liquidityandcapitaladequacyindicators. ation inthebankingsectorremainedstableunderfavourableeconomiccondi- overall macroeconomicsituation.TheReport concludedthat,ingeneral,thesitu- sess thestabilityandvulnerabilityoffinancialsystemincontext financial institutions;itprovidesamacro-prudentialanalysiswiththeaimtoas- leasing companies.TheReport doesnotcoverthefinancialpositionofindividual system, payingparticularattentiontothebankingsectorandperformanceof financial the potentialadversefactorsandrisks,whichmightaffectLatvian bility Report the Market Commission,preparedandpublishedthefirstissueof inclosecooperationwiththeFinancialandCapital In 2003,theBankofLatvia, million lats)and34.4%(to0.9lats),respectively. year dropof1.6%).Theirpaid-upcapitalandequityexpandedby37.1%(to0.7 lion lats),respectively.Creditunions'profitwas58.6thousandlats(ayear-on- loans anddepositsincreasedby53.7%(to3.2millionlats)47.4%2.6mil- role inthefinancialsector.In2003,theirassetsgrew44.2%(to3.9millionlats), theydonotplayasignificant Although creditunionsdeveloprapidlyinLatvia, of 1to5years)remainedalmostunchanged(6.0%). 1.3 percentagepoints,to73.2%).Theshareofmedium-termdeposits(maturity decreasing slightly(from21.3%to20.1%),thatofdemanddepositsincreased(by in 2003.With theshareofshort-termdepositsintotalattractedbybanks Non-bank depositsreceivedbybanksgrewslowerthanloansgrantedtonon-banks 4.5 percentagepoints(to18.9%). centage points(to65.3%),whereasliabilitiestocreditinstitutionspickedupby In 2003,theshareofnon-bankdepositsinbanks'liabilitiesshrankby4.2per- years) decreased(from44.4%to38.1%). (from 18.7%to20.3%),whereasthatofmedium-termloans(maturity15 The shareofshort-termloans(maturityupto1year)alsorecordedaslightrise original maturityofover5yearsincreasedfrom36.9%to41.6%loanportfolio. Compared totheendof2002,sharelong-termloansnon-bankswith 1 and privatepersons,aswell thedemandforcashrecordedamarkedincrease. record high(99.4millionlatsor 4.6%),whenbothlendingtodomesticenterprises drop onlyinJanuary(0.9%).In December,thegrowthinbroadmoneyreacheda whereas inthefourthquarter the increasewas9.2%),showingaminorseasonal (in thefirsthalfof2003,M2Xexpandedby7.6%,insecond halfitgrew12.6%, more rapidrateinthesecondhalfofyear,particularlyso in thefourthquarter (M2X increasewas20.8%in2001and21.0%2002).Broad moneygrewata most unchangedgrowthrateinthemoneysupplyforthird consecutiveyear nationaleconomyresultedinanal- Chart 2).TherobustgrowthoftheLatvian increased by21.1%,amountingto2258.7millionlatsatthe endoftheyear(see arereflectedinAppendix1oftheReport.of Latvia In2003,broadmoneyM2X bankingsystemandtheBank The principalmonetaryaggregatesoftheLatvian MONEY SUPPLY Currencyoutsidebanks +depositsofdomesticenterprisesandprivate personsinthenationalandforeigncurren- . Itwillbepublishedsemi-annually.ThegoaloftheReport istoassess Financial Sta- 1 17

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200318 2002 to2.6in2003. ing savingsfacilitatedadecreaseinthevelocityofmoneycirculationfrom2.8 reaching 2.80inDecember(2.472002).Economicstabilityandgrow- With lendingexpandingrapidly,themoneymultipliercontinuedtorisein2003, total moneysupply.M1,themost liquidcomponentofM2X,increasedby16.2%. tic moneysupplyM2Dexpanded by23.4%,recordingahighergrowththanthe With theshareofnationalcurrencyinmoneysupply growing,thedomes- counted forthelargestshareof totaldeposits(62.4%;59.1%attheendof2002). in theshareofdepositseuro. At the endof2003,depositsreceivedinlatsac- foreigntrade determinedaconsiderableincrease(62.0%) importance inLatvia's slight drop(0.8%)in2003,whereastheappreciationof euro anditsgrowing depositors uptonow.Thus,theresidentnon-bankdepositsin USdollarsposteda longed depreciationoftheUSdollar,mostpopularforeign currencywiththe One ofthereasonsfordeclineindepositsforeigncurrency wasthepro- in depositslatsthanthoseforeigncurrency(32.3%and15.5%, respectively). Higher returnandconfidenceinthenationalcurrencyensured amorerapidrise and 51.7%,respectively. private persondepositsintimeanddemandaccountedfor64.4% a slightincrease,amountingto57.2%(56.8%attheendof2002).Theshare points, to31.7%.Theshareofprivatepersondepositsindomesticposted mained unchanged(41.7%),whereasthatoftimedepositsgrewby2.5percentage Theshareofdemanddepositsinbroadmoneyre- ment instrumentsinLatvia. 26.6% (29.1%attheendof2002),reflectingdevelopmentnon-cashpay- observed inDecember(4.6%).Currencyoutsidebanksbroadmoneyshrankto 10.7% (11.9%in2002).Themostrapidseasonalgrowththiscomponentwas posted anincreaseof58.0millionlats(almostthesameamountasin2002)or such timedepositsanddemanddeposits,seeChart3).Currencyoutsidebanks persons thanin2002(by335.9millionlatsor25.4%;formonthlydynamicsof the bankingsectortoattractmoredepositsfromdomesticenterprisesandprivate The stablemacroeconomicenvironmentandrisinghouseholdincomeenabled 487.5 millionlatsor64.0%of loanstoprivatepersonsweregrantedforhouse to aconsiderableincreaseinhousingloans(2.1times;atthe endofDecember, toprivatepersonsstillretainedthehighestgrowth(76.3%),largelydue Lending 30.3% and20.7%oftotalloansgranted,respectively). credit andindustrialaccountedforthelargestamounts outstanding(30.4%, types oflendingalsoexpanded.At theendof2003,mortgageloans,commercial credit (55.0millionlatsor62.0%)andoverdraft(27.0 lats or41.8%);other lats or14.7%and92.1million21.2%,respectively), sodidconsumer mercial creditandindustrialpostedamoremoderate growth (98.5million Mortgage loansgrew1.9timesyear-on-year,amountingto772.6 millionlats.Com- for 84.1%oftotalloansgranted(84.3%attheend2002). amounts outstanding,seeChart4).At theendof2003,long-termloansaccounted same short-termloansexpandedby114.4millionlatsor39.3%(formonthly prises andprivatepersonsincreasedby578.7millionlatsor37.1%,whereasthe grew moreimportant.In2003,thelong-termloansgrantedtodomesticenter- efficient systemofownershiprightsandcollateralregistration,mortgagelending enterprises andprivatepersons.With therealestatemarketexpandingandamore and alsoreducedcreditriskspromotedfurthergrowthinlendingtodomestic the globalfinancialmarketsandhenceanincreaseincreditinstitutions'funds, The stableeconomicsituation,growingincome,aswelllowinterestrateson government grew1.6times,amountingto250.2millionlats. assets (42.6%attheendof2002).Thebankingsystem'snetclaimsoncentral to domesticenterprisesandprivatepersonsreached45.0%increditinstitutions' private persons(494.8millionlatsor36.5%in2002).At theendof2003,exposure an increaseof693.1millionlatsor37.5%inloanstodomesticenterprisesand loans (793.4millionlatsor39.1%;570.539.8%in2002),including The sustainedgrowthinmoneysupplywasdeterminedbyanincreasedomestic as wellprivatecompanies. lats, withaslightdecreaseininvestmentdebtsecuritiesofforeigngovernments debt securities,respectively).Claimsonforeignnon-banksgrewby86.3million ing anincreaseof245.3millionlatsand157.9indemanddeposits million lats),withclaimsonforeignbanksexpandingby304.8lats(includ- demand deposits).Ariseinthebankingsector'sforeignassetswaslower(409.1 and anincreaseof331.2millionlatsinnon-residentnon-bankdeposits(mostly liabilities toassociatedandaffiliatedcreditinstitutionsroseby245.9millionlats) including apickupof378.9millionlatsinliabilitiestoforeignbanks(ofthem, assets. In2003,foreignliabilitiesofthebankingsectorgrewby732.0millionlats, increasing trendtoinvestpartoffundsborrowedfromnon-residentsindomestic banking systemdeclinedby276.7millionlatsin2003.Itwasdeterminedthe foreignreservesincreased,net assetsofthe Although theBankofLatvia's 19

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200320 year, whereasthatonlong-termdepositsinlatsshrankby0.6 percentagepoint. interest rateonshort-termdepositsinlatsgrewby0.3percentage pointyear-on- deposits (seeChart5).InDecember,duetofluctuationsthe weightedaverage 2.7% and3.7%forshort-termdepositsbetween4.6% 5.2%forlong-term of 2002.Theweightedaverageinterestrateondepositsinlats fluctuatedbetween enterprises andprivatepersonsremainedasstabletheywereinthesecondhalf In 2003,theweightedaverageinterestratesondepositsreceivedfromdomestic in othersthedownwardtrendobservedforseveralyearscontinued. 2003. Thus,lendingratesincreasedforsomematuritygroupsandcurrencies,while on averagethanin2002,butstillshowinganupwardtrendthesecondhalfof loans (ratesonwithafloatingratearepeggedtothem),postinglowerrates cline wasslower.Itdeterminedbyinterbankinterestratesonlonger-term were loweronaveragethanin2002.Theyreachedhistoriclows,thoughthede- and currencyspectrum(particularlyonloansgrantedintheOECDcurrencies) vate personsaswellonloansgrantedtothisgroupofcustomersforallmaturity In 2003,interestratesondepositsattractedfromdomesticenterprisesandpri- LENDING ANDDEPOSITRATES euros graduallyincreasedandthatintheUSdollarsdecreased. 2003. Ofloanstoresidentnon-banksinforeigncurrencies,theshareoflending the shareofloansgrantedinlatsdecreasedby0.5percentagepoints(to45.1%) able increaseinloanslatswasalsoretained(302.0millionor35.8%).Thus, granted inforeigncurrencies(391.0millionlatsor38.9%),althoughaconsider- More favourablelendingratesfacilitatedasomewhathighergrowthinloans points). turing (14.8%;anannualdropacrossalltheabovesectorswas1.6percentage lending todomesticenterprises),financialintermediation(15.8%)andmanufac- At theendof2003,largestshareloanswasgrantedtotrade(20.3% million latsor1.7times)andmanufacturing(by14.227.7%). mostly intrade(by40.4millionlatsor1.5times),financialintermediation16.6 personal serviceactivities(20.9millionlatsor1.9times).Short-termloansincreased hunting andforestry(21.2millionlatsor37.0%)othercommunity,social 37.3%), hotelsandrestaurantssector(21.5millionlatsor1.7times),agriculture, ness activities(89.8millionlatsor1.8times),construction(28.3 all sectorsoftheeconomy,withhighestgrowthinrealestate,rentingandbusi- largest shareofgrowthinlendingtodomesticenterprises.Theyincreasedacross loans(anincreaseof269.1millionlatsor22.9%)accountedforthe Long-term exceeding thegrowthinloanstoprivatepersonsby33.7millionlats. purchases). In2003,loanstoenterprisesgrewby25.6%(to363.3millionlats), market indexesforlonger-termlatstransactionsincreasedinthisperiod. growth intheamountofloansanddecreasebanks'profitmargin,asmoney mained unchangedyear-on-year(7.4%)asaresultofincreasingcompetition, centage point).Theweightedaverageinterestrateonlong-termloansinlatsre- rate onshort-termloansinlatsreached5.8%(ayear-on-yearincreaseof0.4per- long-term loans;seeChart6).InDecember2003,theweightedaverageinterest between 5.1%and5.8%forshort-termloans7.0%7.9% terprises andprivatepersonsinlatswereminorovertheyear(interestrates Changes intheweightedaverageinterestratesonloansgrantedtodomesticen- percentage point(to2.8%),respectively). currencies decreasedyear-on-year(by0.3percentagepoint(to1.7%)andby0.6 average interestratesonshort-termandlong-termdepositsreceivedintheOECD percentage pointsand1.8points).InDecember2003,theweighted reached 1.7percentagepointsand1.9points,respectively(inDecember2002,1.1 the weightedaverageinterestratespreadsforshort-termandlong-termloans to thedownwardtrendininterestratesofmajorcurrencies:December2003, average interestratesondepositsinforeigncurrenciescontinuedtodecreasedue and privatepersonsinlats.Moreover,thegapgraduallyexpanded,asweighted behind amorepronouncedgrowthindepositsreceivedfromdomesticenterprises deposits inforeigncurrencieswiththesamematurity,beingdrivingfactor The weightedaverageinterestratesondepositsinlatswerehigherthanthose tions grewby25.7%(to105.1 billion lats). times (to9.7billionlats),whereas thatofinterbankloanstoforeigncreditinstitu- interbank loansgrantedtodomestic banks,likeinthepreviousyear,increased1.5 In 2003,lendingontheinterbank marketcontinuedtoexpand.Theamountof INTERBANK MARKET short-term andlong-termloans,respectively. cline: 1.9percentagepoints(to–0.2%)and2.8 points (to1.0%)for 3.8%), respectively.Therealinterestratesondepositsinlats alsopostedade- term loansfellby1.8percentagepoints(to2.2%)and2.2 points(to In 2003,withgrowinginflation,therealinterestratesonshort-term andlong- dropped by1.6percentagepoints(to4.2%). currencies roseby0.3percentagepoint(to4.5%),whereasthat onlong-termloans and theeuro).Theweightedaverageinterestrateonshort-term loansintheOECD It wasmostlydeterminedbylowerbaseratesofforeigncurrencies(theUSdollar currencies werelowerthanthoseonloansgrantedinlatswiththesamematurity. In December2003,theweightedaverageinterestratesonloansinOECD 21

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200322 expanded to84.5%(82.5%attheendof2002). shrank (by7.9millionlatsor6.0%).Thecashcomponentofthemonetarybase slightly of banksandotherdomesticfinancialinstitutionswiththeBankLatvia creased by59.5millionlatsor9.6%;12.0%in2002),whereasdemanddeposits growth wasobservedinthedemandforcash(in2003,currencycirculationin- ing 806.8millionlatsattheendofperiod(seeChart7).Amoremoderate the BankofLatvia. 1 In 2003,monetarybaseM0 MONETARY BASE (4.0% atthebeginningofyear). reaching 4.3%onloanswith6-monthmaturityattheendofreportingyear loans tonon-banksarequiteoftenpeggedthisindex)somewhatincreased, In thesecondhalfof2003,moneymarketindexRIGIBOR(interestrateson throughout theyear(1.4%–1.8%). average interestrateonovernightloansinthesecurrencieswasconsiderablylower were affectedbyadropininterestratesontheglobalmoneymarket,and ing to3.2%inDecember.Interestratesoninterbankloansforeigncurrencies November, theaverageinterestrateonovernightloansinlatsreached3.7%,fall- a slightriseintheinterestratesontransactionslatsatendofyear.In the rapidincreaseinlendingandhighinterbankmarketdemandforlatscaused age interestrateonovernightloansinlatswas2.5%–3.1%atthattime.However, ensuring stableandlowinterestratesonthelatstransactions.Theweightedaver- In thefirst10monthsof2003,bankingsectorenjoyedadequateliquidity, tenance period. banks adjustedtheaveragebalanceonreserveaccountformain- rates werecharacteristicofthelastdaysreservemaintenanceperiodwhen Short-termfluctuationsoftheinterbankmarketinterest by theBankofLatvia. terbank marketinterestrateswereinthelowerpartofratebandset loansand time depositsremainedunchanged,whereasthein- Lombard Latvia's were amended,resultinginimprovedbankliquidity.InterestratesontheBankof terms forthecalculationofandcompliancewithbankreserverequirement At thebeginningof2003,minimumreserverequirementwasreducedand of whichovernightloansaccountedfor86.2%. inthenationalcurrencytotalled 5.4billionlats, currencies postedapickup.Loans On thedomesticinterbankmarket,loansgrantedbothinlatsandOECD assets of the Bank of Latvia (46.2millionlatsor5.9%), withtheBankofLatvia assets oftheBankLatvia The growthinthemonetarybase wasmainlyeffectedbyanincreaseinnetforeign Lats innotesandcoinscirculation +demanddepositsofdomesticbanksand otherfinancialinstitutionswith Lats 1 grew6.8%(considerablyslowerthanin2002),reach- reaching ahighinNovember(3.6%). months attheendofyear.Infirsteight2003, itwas2.8%–2.9%, being considerablylowerthaninthepreviousyearandincreasing onlyinsome on repoloanschangedinlinewiththeinterbankmarketinterest rates,generally at 3.0%asofSeptember2002(seeChart10).Theaverageweighted interestrate refinancingrateremainedunchanged In thereportingyear,BankofLatvia's lats) and36.4%(2.1millionyear-on-year,respectively. loansdropped19.3%(28.5million loansandautomaticLombard mand Lombard lion lats,respectively.Theamountofrepoloansgrew5.1times year-on-year;de- 28-day maturityweregrantedintheamountof2515.2million latsand94.6mil- smaller amountofrepoloanswere28-daymaturity.Repo loansof7-dayand underrepurchaseagreementswerepredominantlyof7-daymaturity; a Loans monthly averageamountsoutstanding,seeTable 3). loans accountedfor98.8%,1.1%and0.1%,respectively(for automatic Lombard loansand credittobanks,repoloans,demandLombard Of theBankofLatvia's the governmentsecuritiesportfolioheldbycentralbank(2.1millionlats). (18.2millionlats)andadecreasein Government depositwiththeBankofLatvia credittobanks.Themonetarybasedecreaseddueanincreaseinthe Latvia's tic credit,aconsiderableincrease(28.6millionlats)wasobservedintheBankof at theendof2003;44.7millionlats2002).However,totaldomes- million lats),asthedomesticcreditremainedalmostunchanged(44.4lats netdomesticassetspostedminorchanges(anincreaseof5.5 The BankofLatvia's netforeignassets(seeChart9)was102.1%(103.0%attheendof2002). Latvia's in December2002),whilethebackingofnationalcurrencywithBank (see Chart8)andinDecembercoveredgoodsimportsof3.3months(of3.7 netforeignassetstotalled824.0millionlats the endof2003,BankLatvia's currency swaps,theiramountdecreasedby77.5millionlatsovertheyear.Thusat currency purchasedwas97.4millionlats).Althoughthecentralbankalsooffered purchasing foreigncurrency(inthereportingyear,nettotalamountof 23

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200324 eebr6. 34.6 31.0 36.1 33.0 22.4 32.1 13.1 13.9 63.5 6.0 69.8 76.8 7.5 63.2 73.2 70.0 11.3 89.2 22.5 66.3 39.6 41.6 74.8 42.5 December November October September August July June May April March February January Since theeurostrengthenedagainst allotherSDRbasketcurrenciesinthere- reaching itshighattheendof the year. dollar by10.9%(from1.6100 at theendof2002to1.78582003), low onDecember9,2003(106.74). TheBritishpoundappreciatedagainsttheUS from 118.79attheendof2002to107.222003(by 9.7%),reachingits lems intheMiddleEast.TheUSdollardepreciatedagainst theJapaneseyen the IraqiconflictandcaptureofSaddamHusseinwould notsolvetheprob- US Federal Reserve Systemcontinued toreduceinterestrates.Eventheendof substantial riseinstockpriceswasobserved,despitetheaccounting scandals.The except forthoseofemploymentandnewjobs.Inviewthe optimistic outlook,a very endoftheyear.TheUSeconomicgrowthindicatorsconsiderably improved, 1.0492 attheendof2002to1.25952003),reaching itshighatthe In thereportingyear,euroappreciatedagainstUSdollar by20.0%(from once in2003. of Englandwastheonlyonefourmajorcentralbanksto raisethebaserate currencies. TheUKeconomy,initsturn,demonstratedrobustgrowth,andBank were themajorfactorsbehindexchangeratefluctuationsofSDRbasket mies ofEUcountries,aswellJapan'sfailuretoimplementeconomicreforms and foreigntradedeficit,theslowgrowthevenslowdowninnationalecono- SDR basketcurrenciesbeingitsmainfeatures.ThesubstantialUSbudgetdeficit ket, theappreciationofeuroanddepreciationUSdollaragainstother In 2003,considerablevolatilitywasobservedontheglobalforeignexchangemar- FOREIGN EXCHANGE MARKETANDLATVIA'S EXTERNALDEBT 012002 2001 2003 51.7 95.8 41.5 79.3 84.5 56.9 65.9 69.9 55.9 33.9 28.9 23.7 and the euro as set by the Bank of Latvia, seeChart11). and theeuroassetbyBankofLatvia, the endof2003(0.5319;forevolutionexchangeratesUSdollar The USdollarexchangeratewasathighonJanuary8,2003(0.5905)andlow vis thelatsfrom0.5844atendof2002to0.53352003(by8.7%). The USdollardepreciatedagainstotherSDRbasketcurrencies.Itdeclinedvis-a- reaching alowonJanuary3,2003(0.6094)andhighattheendof(0.6730). 0.6714 attheendof2003(by9.4%)ondomesticforeignexchangemarket, porting year,itappreciatedagainstthelatsfrom0.6135atendof2002to equalling 3.8%ofannualexports, wereusedtoserviceforeigndebtin2003(in- lats fromtheWorld Bankandotherinternational institutions.102.5millionlats, agreements concludedinprevious years:theGovernmentreceived9.4million 2003. In2003,theGovernmentcontinuedtomakeuseof fundsunderloan foreign currenciesamountedto419.6millionlats(7.1%of GDP) attheendof According tothedataprovidedbyTreasury, theGovernmentexternaldebtin direct investorsconstitutedanotableshare(33.4%)ofcorporate debt. debt ofthecorporatesector(1586.2millionlats)atend 2003.Liabilitiesto liabilities(1058.2 millionlatsor66.7%)dominatedintheexternal Long-term at theendof2003. by banks.Netexternaldebtofthebankingsectoramounted to767.1millionlats 2 517.5millionlats).Ofbankshort-termliabilities,75.6%were depositsreceived (including long-termliabilitiesof421.4millionlatsandshort-term liabilitiesof At theendof2003,bankingsector'sexternaldebtwas2938.8millionlats residents were420.2millionlats. end oftheyear.LiabilitiesGovernmentandmonetaryinstitutionstonon- term debttotalled1898.5millionlatsand3046.7lats,respectively,atthe andshort- 11.3%, 5.7%and83.0%oftheexternaldebt,respectively.Long-term debt-related directinvestment,debtsecuritiesandotherinvestmentamountedto served inthebreakdownofexternaldebtbyinstrument.At theendof2003, and 32.1%,respectively,attheendofyear.Noessentialchangeswereob- abilities, banks'liabilitiesandenterprises'accountedfor8.5%,59.4% sult, thebreakdownofexternaldebtbysectorchanged:Governmentli- respectively, whereastheGovernmentdebtshrankby29.3millionlats.Asare- and corporatesectors'debtincreasedby729.2millionlats108.3lats, nal debtamountedto1484.9millionlats(25.3%ofGDP).In2003,thebanking GDP) attheendof2003.Foreign assetstotalled3 460.4millionlatsandnetexter- residents increasedby808.2millionlats,reaching4945.2lats(84.2%of externaldebttonon- rest oftheworldinlatsandforeigncurrencies),Latvia's principle ofresidency:liabilitiesresidents,includingtheGovernment,to According totheinternationalinvestmentposition(classifiedaccording ` 25

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200326 was approximately40–60basis points,fallingto20–30basispointsattheendof eurobond yieldsandGerman government securitiesyieldsofthesamematurity and 3.69%attheendof2003.At theendof2002,spreadbetweenLatvian tion inNovember2008)were4.35%and4.23%,respectively, shrinkingto3.80% At eurobonds(redemp- theendof2002,bidandaskratesquotedforLatvian dents andnon-residentsheld30.6%,20.0%2.5%,respectively. otherresi- the stockofgovernmentsecuritiesoutstanding;Bank Latvia, banksheld46.9%of not showsignificantchanges:attheendofyear,Latvian rity spectrum,seeChart12).Thestructureofgovernmentsecurities holdersdid 375.8 millionlats;forthestockofgovernmentsecuritiesoutstanding ofallmatu- In 2003,thestockofgovernmentsecuritiesoutstandingincreased by28.2%(to interest rates,therobusteconomicgrowthandprospective accesstotheEU. cept them.Thedecreaseinrateswasalsodrivenbyadropthemoneymarket position toreducethehiddenratesdeterminedatauction,andbankshadac- Since thegeneralgovernmentbudgetdeficitwasnothigh,Treasury wasinthe menced theissuanceof10-yearbonds,averageyieldatauctionsreaching5.05%. ernment resumedissuing3-yearbonds(withtheaverageyieldof4.01%)andcom- Gov- bonds fellto4.64%(5.53%in2002).Afterathree-yearbreak,theLatvian bills shrankto3.25%(4.02%in2002),andtheweightedaverageyieldof5-year 3.52% in2002to3.15%2003.Theweightedaveragediscountrateof12-month was 6months.Theweightedaveragediscountrateofthesebillsdroppedfrom At primaryauctions,theshortestmaturityofgovernmentsecuritiesauctioned way. lion lats(2.5timesexceedingtheamountissuedin2002)weresucha Inthereportingyear,government securitiesintheamountof38.5mil- of Latvia. yield rateoftheprevioussecuritiesauctionsamematurityheldatBank CentralDepository,usingthe fixed ratenon-competitiveauctionsattheLatvian banks bid70.1%ofthetotaldemand.Part ofgovernmentsecuritieswere soldat served intheprimarymarketofgovernmentsecurities,asfourmostactive market ofgovernmentsecurities(18banksin2002).Highconcentrationwasob- In 2003,17bankstookpartincompetitivemulti-priceauctionstheprimary used tofinancethebudgetdeficit. in thereportingyear;therefore,securitiesissuesdomesticmarketwere the 2003generalgovernmentbudgetdeficit.However,noeurobondswereissued budget deficitfor2002,andthusnewsecuritiesissueswerenecessarytofinance the receiptsfromeurobondissueof2001tofinancegeneralgovernment supply ofgovernmentsecuritieswasincreasedsincetheGovernmentusedpart lion latsandTreasury bondsintheamountof102.9millionlats)weresold.The amount of138.2millionlats(includingTreasury billsintheamountof35.3mil- auctions. Banks'demand1.8timesexceededthesupply,andsecuritiesin amount of199.6millionlats(anincrease2.7times)atcompetitivemulti-price than in2002.Inthereportingyear,governmentsecuritiesweresupplied market ofgovernmentsecurities,andtheamountsecuritiessuppliedwashigher governmentsecurities.In2003,theTreasuryLatvian heldauctionsintheprimary auctions ofandaccountingforgovernmentsecuritiesintheprimarymarket continuedtoactastheGovernment'sagentinorganising The BankofLatvia SECURITIES MARKET Government externaldebtdecreasedby44.9millionlatsyear-on-year. cluding 48.5millionlatsforprepaymentsunderloansfromtheWorld Bank).The tic marketfactorswasthebuyback ofminoritysharesinseveralcompanies. indexes ofthedevelopedand neighbouringcountries.Oneofthekeydomes- accessiontotheEUandimprovementin stockexchange tive voteforLatvia's lions oflatsto608.3millionslats.Ariseinstockpriceswas drivenbytheposi- reaching 228.4points.Thestockmarketcapitalisationincreased from418.3mil- In 2003,theDowJonesRigaStockExchangeindex(DJRSE) improvedby41.8%, aswell. in interestratesLatvia outlook forariseininterestratesthefuture,whichmight result inanincrease tors: lowinterestrateswereobservedontheglobalfinancial markets,withan ket index(6-monthRIGIBOR),makingthesesecuritiesmore attractivetoinves- coupon ratesofanumberthenewbondissueswerepegged tothemoneymar- new issueswithmaturityof5–10yearswasdefiniteeconomic projects.In2003, syndicated loantothestatejoint-stockcompany lats wasthemostsignificantofthem.Threenewbondissueswereheldtogranta the statejoint-stockcompany of theNordicInvestmentBank,joint-stockcompany still accountedforthehighestturnover(118.3millionlats),whereas 143.2 millionlats(24.3%lessthaninthepreviousyear).Governmentsecurities In 2003,thetotalturnoverofdebtsecuritiesonRigaStockExchangewas bond yields. 2003. ThespreadnarrowedmostlyduetoariseinGermangovernmentlong-term the limitedliabilitycompany whereas thestockredeemedaccountedfor7.4millionsoflats.Aclosedissue times (to101.8millionsoflats).Newissuesamountedto61.6lats, CentralDepository,increased2.1 nominated inlats,registeredwiththeLatvian In 2003,thestockofoutstandingpubliclytradedcorporatedebtsecuritiesde- mary auctionsaswellfromthelowmoneymarketinterestrates. year. Thefallresultedfromadeclineinyieldsongovernmentsecuritiesatpri- bonds were5.40%and5.00%,droppingto5.10%5.05%attheendof ruary 17,uponopeningtrading,therespectiveyieldsquotedfor10-yearTreasury spectively, whereasattheendof2003theyshrankto4.05%and3.85%.OnFeb- demption inMay2007)ontheRigaStockExchangewere4.85%and4.20%,re- At theendof2002,bidandaskratesquotedfor5-yearTreasury bonds(re- for thestockofgovernmentsecuritieswerefixed. declined astheyieldshadbecomelowbut,unlikeprivatesecurities,couponrates ties, asthecouponratemightincrease.Theturnoverofgovernmentsecurities and investorswereencouraged,offeringthemissuesoffloatingratedebtsecuri- turnover ofprivatedebtsecuritiesincreasedasnewissuesweremadeavailable to 11.5millionlats,8.0millionsoflatsand5.4respectively.The Lattelekom Latvijas Hipotçkuunzemesbanka bonds intheamountof25.6millions Latvenergo Latvijas Unibanka . Thepurposeofmost bonds amounted and 27

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200328 were listedontheofficial,secondandfreelists,respectively). companies madeupthefreelist(atendof2002,three,tenand49 listed ontheofficiallist,ninecompanieswereincludedsecondand24 continued tobequotedonthestockexchange;ofthem,threecompanieswere on theRigaStockExchange.At thebeginningof2004,shares36companies the freelistfailedtocomplywiththisrequirementandwereexcludedfromlisting the keyrequirementsofaregulatedmarket.Almosthalf(20)companieson conclude anagreementonfurthertradingoftheirsharesinordertocomplywith 2003, companieswhosesharesweretradedontheRigaStockExchangehadto lated market,andthecirculationofsecuritiesnottradedpublicly.Byend the circulationofpubliclytradedsecuritiesandrelevantregulationsinaregu- "OnSecurities".Thenewlawstrictlydistinguishesbetween superseding theLaw "OntheFinancialInstrumentsMarket"tookeffect, On January1,2004,theLaw nafta shares inthejoint-stockcompanies In 2003,thestockmarketturnoverincreasedby6.9%(to80.4millionsoflats), being themostliquidones. Latvijas Gâze , Latvijas Balzams and Ventspils INTERNATIONAL COOPERATION INTEGRATION INTOTHEEUROPEANUNION ing HousesoftheCentraland Eastern Europe,ameetingof organised severalinternationalmeetings(ameetingoftheClubClear- Latvia Baltic MonetaryandFinancialCommittee.Inthereporting year,theBankof Representatives participatedintheworkofNordic- oftheBankLatvia information withthecentralbanksofothercountries. continueditscooperationandexchangeofexperience The BankofLatvia ASSISTANCE COOPERATION WITHFOREIGNCENTRAL BANKSANDTECHNICAL Observance ofStandardsandCodes withinternationallyacceptedstandardsandpreparingthe in Latvia auditingthecomplianceofstatistics 2003, anIMFmissionworkedinLatvia, etary andFinancial StatisticsManual withthemethodologyincorporatedin compiled bytheBankofLatvia toassessthecompliance ofthestatistics and FinancialStatisticsarrivedinLatvia the IMFArticlesofAgreement.InJuly2003,MissionMonetary Further cooperationwiththeIMFwasbasedonconsultationsunderArticleIVof becamethecoordinating institutionfortheIMFaffairsinLatvia. Latvia andtheBankof the IMFweredelegatedtoGovernorofBankLatvia, 2003, thefunctionsofauthorisedrepresentativeRepublic in ofLatvia Pursuant totheRepublic CabinetofMinistersResolution ofLatvia ofMarch20, participation intheactivitieswithinBankforInternationalSettlements. Reconstruction continuedits andDevelopment.Likewise,theBankofLatvia sociation, theInternationalFinanceCorporationandEuropeanBankfor Bank forReconstruction andDevelopment,theInternationalDevelopmentAs- continueditsactivitiesasamemberoftheIMF,In 2003,Latvia theInternational INTERNATIONAL FINANCIALINSTITUTIONS Central Banksandthecentralbanklegislationweremaintained. to coreoperationofthecentralbanks,integrationwithinEuropeanSystem ing groupsoftheEuropeanCommission.BusinesscontactswithECBrelated well astheEUEconomicandFinancialCommitteesub-committeeswork- committees andworkinggroupsoftheEuropeanSystemCentralBanks,as participatedasobserversintheworkof representatives oftheBankLatvia the meetingofGeneralCouncilECBforfirsttime.AsMay2003, participatedasanobserverat June 26,2003,theGovernorofBankLatvia Regular exchangeofinformationandcooperationwiththeECBcontinued.On odology fordraftingstatisticalreports. regulations relatedtotheoperationofpaymentsystemsandgoverningmeth- legislation inconformitywiththeEUandupdatedBankofLatvia's draftedproposalsforamendmentstoLatvia's tion intotheEU.TheBankofLatvia integra- GovernmentandgovernmentalinstitutionstopromoteLatvia's Latvian continueditsparticipationinthejointactivitiesof In 2003,theBankofLatvia In the reporting year, technical assistance to the Bank of Latvia wasmostlyex- In thereporting year,technicalassistanceto theBankofLatvia the BankofLatvia. internal auditexperts.Anofficial delegationofthecentralbankChinavisited settlement systemusersgroup) and aninternationalworkshopforthecentralbanks' (ROSC). (issued bytheIMFin2000).InSeptember Logica , therealtime Report onthe Mon- 29

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200330 and humanresourcemanagement. the specialistsofcentralbankonissuesforeignexchangeoperations initsturn,providedtechnicalassistancetoGeorgia,advising The BankofLatvia, tion ofexternalaffairsandissuesrelatedtopersonnelpolicycentralbanks. Baltic CentralBanksinEstonia,discussingissuesoffinancialstability,coordina- employeesattendedtheAnnualSeminarof In May2003,theBankofLatvia's Switzerland andtheUK. the CzechRepublic, Estonia, France, Germany,Italy,Lithuania,theNetherlands, Institute, andalsoparticipatedinseminarshostedbythecentralbanksofAustria, the IMFInstitute,World Bank,theEuropeanCommissionandJointVienna employees participatedinanumberoftrainingsessionsorganisedbytheECB, sector's performance.Undertechnicalassistanceprogrammes,theBankofLatvia's ontheissuesofmonetaryresearchandassessmentfiscal Bank ofLatvia In 2003,cooperationwiththecentralbankofGermanycontinued,advising well asadvisoryservicesonissuesrelatedtotheoperationofcentralbanks. by therelevantofinternationalfinancialinstitutionsandforeigncentralbanks,as tended intheformofinvitationtoparticipateworkshopsandcourseshosted BANK OFLATVIA'S MAINTASKS 2003 HIGHLIGHTSOFNORMATIVE ACTSADOPTEDINPURSUITOFTHE as ofJanuary1,2004). and SubmittingNon-Banks'StatisticalDocumentsinElectronic Form" (ineffect passedthe"RegulationThe ExecutiveBoardoftheBankLatvia forCompiling October 9 piling the'QuarterlyReport onServices'"(ineffectasofJanuary1,2004). passedthe"RegulationThe BoardofGovernorstheBankLatvia for Com- September 11 ing aCashCollectionLicense"(ineffectasofAugust 1,2003). passedthe"RegulationThe BoardofGovernorstheBankLatvia for Receiv- (ineffectasofAugustTime DepositsattheBankofLatvia" 1,2003). andthe"Regulation"Regulation Loans" forReceiving forGrantingLombard Bank the tion fortheSecuritiesSettlementSystemOrganisedbyBankofLatvia", madeamendmentstothe"Regula-The BoardofGovernorstheBankLatvia ary 1,2004). piling the'Report onNetOpenForeign ExchangePosition' "(ineffectasofJanu- passedthe"RegulationThe BoardofGovernorstheBankLatvia forCom- 2004). piling the'Report onMoneyMarketTransactions' "(ineffectasofJanuary1, passedthe"RegulationThe BoardofGovernorstheBankLatvia forCom- July 17 fect asofAugust 1,2003). for Reverse Repo Tenders (inef- ofSecuritiesOrganisedbytheBankLatvia" madeamendmentstothe"RegulationThe ExecutiveBoardoftheBankLatvia August 1,2003). for Repo Tenders (ineffectasof ofSecuritiesOrganisedbytheBankLatvia" madeamendmentstothe"RegulationThe ExecutiveBoardoftheBankLatvia for Tenders ofShort-Term CurrencySwaps"(ineffectasofAugust 1,2003). madeamendmentstothe"RegulationThe ExecutiveBoardoftheBankLatvia (ineffectasofAugustLatvia" 1,2003). for Tenders oftheSecondaryMarketforSecuritiesOrganisedbyBank madeamendmentstothe"RegulationThe ExecutiveBoardoftheBankLatvia June 26 tion forCreditTransfers" (ineffectasofJanuary1,2004). madeamendmentstothe"Regula-The BoardofGovernorstheBankLatvia is totakeeffectonJanuary1,2005). Use oftheIBAN"(ineffectasJanuary1,2004,exceptforParagraph 4.2,which adoptedthe"RegulationThe BoardofGovernorstheBankLatvia forthe 2004). paring InterestRate Reports byCreditInstitutions"(ineffectasofJanuary1, adoptedthe"RegulationThe BoardofGovernorstheBankLatvia forPre- May 15 shall submitdataonalldebtorstotheRegister ofDebtors(asperJune2,2003). 2003, banksandbranchesofforeignregisteredintheRepublic ofLatvia ter ofDebtors"(ineffectasJune2,2003),wellresolvedthatbyOctober1, passed"RegulationThe BoardofGovernorstheBankLatvia fortheRegis- January 16 tion forTenders ofShort-Term CurrencySwaps"(ineffectasofFebruary 17,2003). adoptedanewversionofthe"Regula-The ExecutiveBoardoftheBankLatvia January 9 31

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200332 January 1,2004). lation forCompilingthe'AnnualReport onForeign Investment'"(ineffectasof lation forCompilingthe'QuarterlyReport onForeign Investment'"andthe"Regu- tion forCompilingInformationonForeign Settlements byNon-Banks",the"Regu- madeamendmentstothe"Regula-The BoardofGovernorstheBankLatvia (in effectasofJanuary1,2004). piling the'MonthlyReport onNaturalPerson JobContractsforWorking" Abroad' passedthe"RegulationThe BoardofGovernorstheBankLatvia forCom- diary Services'"(ineffectasofJanuary1,2004). "Regulation forCompilingthe'QuarterlyReport onTransportation andInterme- approvedaneweditionofthe The BoardofGovernorstheBankLatvia (ineffectasofJanuary9,2004). Deposits attheBankofLatvia" andthe"Regulation Loans" forReceivingtion forGrantingLombard BankTime madeamendmentstothe"Regula-The BoardofGovernorstheBankLatvia (in effectasofJanuary9,2004). "Regulation ontheSecuritiesSettlementSystemOrganisedbyBankofLatvia" approvedaneweditionofthe The BoardofGovernorstheBankLatvia November 13 taining theRegister ofDebtors". approvedthe"ProcedureforMain- The ExecutiveBoardoftheBankLatvia November 6 Price Auctions' ". GovernmentSecuritiesatCompetitiveMulti- for InitialPlacementofLatvian passedtheresolution"On'RegulationThe ExecutiveBoardoftheBankLatvia October 16 REPORT OFTHEBANKLATVIA'S EXECUTIVEBOARD in Julyand ( Latvia International ratingagenciesmadeannouncementsonassigninghigherto the euroinLatvia. onDecember9isanimportantmovetowardstheintroductionof ment ofLatvia ticipation intheEconomicandMonetaryUnion(EMU)passedbyGovern- preparationforfull-scalepar- the referendum.TheProtocol DecisiononLatvia's with theEUTreaty, whichwonthesupportofnationviapositivevotein vices ofthelatsnotwithstanding,itwillbereplacedwitheuroincompliance exceptionally memorableeventforthecountryanditscitizens.Honorableser- accessiontotheEuropeanUnion(EU)wasan 20 atthereferendumonLatvia's was putintocirculationmarkedonMarch5.ThepositivevoteSeptember – lats tenth anniversarysincethefirstbanknoteofrestorednationalcurrency–5 duetoseveralreasons.The The year2003wasparticularlysignificantforLatvia loans grantedtonon-banks. of theyearwasnotreflectedinchangesaverageweightedinterestrateson interest rateswerestilllow,andamoderategrowthintheirlevelthelatterhalf in 2003anddidnotchangetheinterestratesithadformerlyset.Moneymarket didnotsubjectitsmonetarypolicytoanyadjustments Hence theBankofLatvia anced economicsituationwithoutimpairingoverallmacroeconomicstability. borrowing facility–indicatedthattherobustgrowthwasstillunderlyingabal- producers tocompeteonexternalmarketsandprevalenceoflong-termforeign productivity thaninwagestheproductionsector,sustainedabilityofLatvian higher growthin required formodernisation.Nevertheless,anumberoffactors– large amountoffinancing the rapidlystrengtheningdomesticdemandand The currentaccountdeficitofthebalancepaymentsgrewunderimpact ued in2003.Influencedbysupplyeffects,theaverageannualinflationwas2.9%. exportersinmajorexportmarketscontin- effectiveperformanceofLatvian and economy,supportedbystrongdomesticdemand growthoftheLatvian Steady able growthoftheeconomy. euro area,wereatarecordlowlevel,creatingpreconditionforfurthersustain- ported accelerationoftheeconomicgrowth.Baserates,bothinUSand second halfoftheyear.InUS,encouragingmonetaryandfiscalpoliciessup- diminished, providingastimulustotheeconomicactivityineuroarea in comparisonwiththebeginningofyear,uncertaintyfinancialmarkets In 2003,theglobaleconomicenvironmentshowedongoingpositivechanges,and, ernors. concerning monetarypolicyandothercentralbankingissues to theBoardofGov- BoardofGovernorsandsubmitted16reports resolutions fortheBankofLatvia's drafted38 daily businessoftheBank.TheExecutiveBoardBank ofLatvia usage ofmonetarypolicyinstrumentsand183resolutionson conductingother ExecutiveBoardconvened46meetings andpassed23resolutionsonthe Latvia's cerning monetarypolicyandotheractivityareasofthecentral bank.TheBankof BoardofGovernorscon- regulations, aswelldecisionsoftheBankLatvia's andotherlaws "OntheBankofLatvia" business incompliancewiththeLaw ExecutiveBoardmanagedtheBank's In thereportingyear,BankofLatvia's ation abroad. Fitch Ratings Fitch Ratings inJuly)andonimprovingtheiroutlook( in

November) thereby reflecting Latvia's positiveevalu- November) therebyreflectingLatvia's Standard &Poor ' s 33

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200334 ernors. BoardofGov- compliance withtheGuidelinesapprovedbyBankofLatvia's the externalassetmanagerswasreplaced.All managers operatein managers intheUnitedKingdom,andUS.At thebeginningof2003,one hasbeenemployingthree externalasset Since October1994,theBankofLatvia foreign financialinstitutionsofhighcreditrating. goldreserveswereplacedinshort-termdepositswith tracts. TheBankofLatvia's and mortgagebackedsecuritiescallablebonds,interestratefuturecon- in highqualitydebtsecuritiesofcreditinstitutionsandcorporateentities,asset foreignreserveswerealsoinvested lated bytheGuidelines,BankofLatvia's tries oftheeuroarea,UnitedKingdomandJapan.Within thelimitsstipu- securities issuedbythegovernmentsandgovernmentagenciesofUS,coun- invest itsforeignreservesinsafeandliquidfinancialinstruments,primarily continuesto tion systemintroducedatthebeginningof2003.TheBankLatvia It waspossibleduetoanewfinancialriskmanagementandperformanceattribu- principles ofreservemanagementandwithacentralfocusonriskminimisation. January 1,2004).TheGuidelineshavebeenimprovedwithoutamendingthecore Foreignlines forManagingtheBankofLatvia's Reserves" in2003(ineffectasof BoardofGovernorsapprovedaneweditionthe"Guide- The BankofLatvia's US dollars. 0.541, inturn,resultedanincreasetheamountofforeignreservesterms thedepreciationofUS dollaragainstthelatsfrom0.594to Bank ofLatvia); against thelatsfrom0.610to0.674(inaccordwithexchangeratesetby of foreignreservesintermseurosshrankduetotheappreciationeuro BoardofGovernors.Theamount the GuidelinesapprovedbyBankofLatvia's investing itsforeignreservesintheexternalfinancialmarketscompliancewith generatedincomeby which 90.0millionwereUSdollars.TheBankofLatvia in theamountof80.3millioneurosor100.0USdollarswerebought, 137.8 millioneuros(171.6USdollars).InDecember,foreigncurrencies significant currencyinterventionsbuyingforeigncurrenciesinthenetamountof conducted million USdollarsattheendof2002).In2003,BankLatvia 327.3 million USdollars;1 whereas intermsofUSdollarstheyincreased(to1535.1 232.2 millioneurosattheendof2003(1292.52002), 1 million latsattheendof2002).Intermseuros,foreignreservesdeclinedto currencies andSDR,amountedto830.5millionlatsattheendof2003(788.4 foreignreserves,whichconsistofgold,convertible foreign The BankofLatvia's foreign exchangemarket. fluctuated dependingonmutualfluctuationsoftheirexchangeratesintheglobal since 1994).Theexchangerateofthelatsagainstindividualforeigncurrencies taining thepegoflatstoSDRbasketcurrencies(XDR1=LVL 0.7997 didnotchangeitsforeignexchangeratepolicy,re- In 2003,theBankofLatvia RESERVES THE BANKOFLATVIA'SFOREIGNEXCHANGE POLICYANDFOREIGN deposits (2.0%), theinterestrateonbanks' 14-day timedeposits(2.25%), the interest ratesonthestandingfacilities, i.e.theinterestrateonbanks'7-daytime didnot changetherefinancingrate(3.0%)and In 2003,theBankofLatvia the employedmonetarypolicy instrumentsbroadlyunchanged. continuedtopursueatightmonetarypolicywiththerange of The BankofLatvia THE BANKOFLATVIA'S MONETARY POLICYINSTRUMENTS in 2002). million latsin2002),whiletheweightedaverageinterestrate was2.90%(2.97% end-of-day balanceonshort-termcurrencyswapsaveraged78.3 millionlats(28.8 currency swapdealsincreased4.5timesascomparedwiththe previousyear.The creased, pushingdownthedemandforcurrencyswaps.In 2003, thevolumeof ventions purchasingforeigncurrencies,themoneymarket resources inlatsin- engagedininter- year. Howeverattheendofyear,whenBankLatvia short-termcurrencyswapsconsiderablyincreasedinthefirst halfofthe Latvia's currency swapauctionssincetheendof2001),banks'demand fortheBankof hasnotheldlong-term the amountof59.0millionlatsin2003(theBankLatvia werecompletelyredeemedin As long-termcurrencyswapsoftheBankLatvia est ratessetforrepoauctionsinlinewithchangesmoneymarket interestrates. loweringminimuminter- transactions declinedalongsidewiththeBankofLatvia actions) droppedfrom3.22%in2002to2.97%2003.Theaverageratesonrepo average interestrateon7-dayrepurchaseagreements(96.4%oftotalrepotrans- ments in2003was57.1millionlatsor2.6timesabovethat2002.Theweighted resourcesinlats.Theaverageend-of-daybalanceonrepurchaseagree- of Latvia's 5.1 timeslargerthanin2002becausebanksincreasedtheirdemandfortheBank tice oftheEuropeanCentralBank(ECB).Thevolumerepotransactionswas continuing toharmonisetheusageofmonetarypolicyinstrumentswithprac- turity butceasedtoofferrepurchaseagreementsof91-daymaturityinsuchaway offeredrepurchaseagreementsof7-and28-dayma- In 2003,theBankofLatvia million lats(340.8in2002). 549.3 million lats(510.5in2002),whereascurrencyswapsamountedto1 deposits diminished.Repo transactionswereconductedintheamountof2609.8 ments andcurrencyswaps.Ascomparedwith2002,thesignificanceofbanks'time In 2003,themostoftenusedmonetarypolicyinstrumentswererepurchaseagree- lats attheendof2002). reserve requirementsreached106.0millionlatsattheendof2003(145.1 the reservebaseincreasingandratiodecreasing,volumeof and onebranchofaforeignbankweresubjecttothereserverequirements.With agreements wereexcludedfromthereservebase.Atendof2003,22banks its redeemableatnoticewiththeperiodofover2years,andrepurchase abroad, non-bankdepositswithagreedmaturityofover2years,depos- 2 years issuedbyabank,non-bankdepositsreceivedbankbranchesopened Republic Non-callabledebtsecuritieswiththeoriginalmaturityover ofLatvia. debt securitiesissuedbyabankorbranchofforeignregisteredinthe were calculatedbasedontheaveragebalanceofnon-bankdepositsreceivedand the 23rddateoffollowingmonth.Thereservebaseandrequirements compliance period,whichstartedwiththe24thdateofmonthandendedon overthereserve on thesettlementaccountofabankwithBankLatvia ance withthereserverequirementswasensuredbyaveragebalanceoffunds 3.0% andvaultcashbalancesexcludedfromthereservebase.In2003,compli- As ofJanuary24,2003,thereserveratioforbankswasreducedfrom5.0%to monetary policyinstrumentswastobelimited. million latsviaspottransactions,henceattheendofyearusageother boughtforeigncurrenciesinthenetamountof97.4 In 2003,theBankofLatvia economy. tion inLatvia's 20 days(6.0%)andover(7.0%).Thisdecisionwasdictatedbythesitua- loanswithmaturityofupto10days(5.0%),from11 interest rateonLombard 35

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200336 companies used inRIGIBIDandRIGIBORcalculations(alreadycomprising joint-stock interbank market.In2003,thelistofbankswhosemoney marketquotesare money marketratesontransactionsinlatsalsotheconditions ofavolatile banks thatwereactiveintheinterbankmarketandabletoconduct operationsat lation ofRIGIBIDandRIGIBOR"basingquotationlistson thequotesofthose "Regulationbank market)inaccordancewiththeBankofLatvia's fortheCalcu- (deposit ratesintheinterbankmarket)andRIGIBOR(lendinginter- continuedtoquotetwomoneymarketindices–RIGIBID The BankofLatvia 2002. was 45.8millionlatsattheendof2003,which47.3%morethan The end-of-daybalanceofGovernment'sdepositsinlatswiththeBankLatvia GovernmentcontinuedtodepositfundswiththeBankofLatvia. The Latvian of banks. hadnoneedtolimitliquidity were conductedin2003becausetheBankofLatvia As inthepreviousyear,noreverserepotransactionswithgovernmentsecurities in 2002). ties pledgedunderrepurchaseagreements,was65.5millionlats(8.6%largerthan excludingsecuri- the governmentsecuritiesportfolioheldbyBankofLatvia, January and18.3millionlatsin2003).In2003,theaverageend-of-daybalanceon creased owingtoredemptionofsecurities(intheamount11.3millionlatsin ated withreplenishmentofthegovernmentsecuritiesportfolio,whichhadde- in thesecuritiessecondarymarketwereconductedFebruary andwereassoci- interventions year bonds)intheamountof17.2millionlats.TheBankLatvia's governmentsecurities(5-and10- purchasedLatvian In 2003,theBankofLatvia times morethanin2002)offeredbytheBankofLatvia. tively usedtheintra-daycreditfacility(inamountof918.3millionlats;1.7 points lowerthanin2002).For thepurposeofliquiditymanagement,banksac- loanswas5.00%in2003(23basis weighted averageinterestrateonLombard loanmaturityperiodwaslonger.The in 2002;howevertheaverageLombard loansweregrantedintheamountof30.6millionlatsor20.9%lessthan Lombard loanswhentherespectiveperiodwasclosing.In2003, had touseLombard monetaryoperationsatthebeginningofareservemaintenanceperiod, Latvia's having notdemandedtheentirevolumeoflatsresourcesofferedinBank loanswas1.9timeslargerbecausesomebanks, end-of-day balanceonLombard loans.Ascomparedwith2002, theaverage which 97.9%weredemandLombard loanswas0.3 millionlats,of In 2003,theaverageend-of-daybalanceonLombard already below1millionlats. however inDecember,theaverageend-of-daybalanceofthesetimedepositswas actively usedinthefirstquarterof2003,whenreserveratiowaslowered; facility, butin2003theyusedonlythe14-dayfacility.Thisinstrumentwasmore year). Banksandotherfinancialinstitutionswereoffered7-14-daydeposit institutions was2.6millionlatsin2003(7.8timessmallerthantheprevious The averageend-of-daybalanceontimedepositsofbanksandotherfinancial Vereinsbank mented withajoint-stockcompany loan andbanks'timedeposit orders, aswellsecuritiestransferordersatthe paymentandsettlementsystems,thetimeperiodforreceivingLombard Latvia's As ofJanuary9,2004,duetotheextensionoperatingtime oftheBank In 2003,amendmentswereintroducedtoseveralregulationsof theBankofLatvia. Hansabanka

Rîga , the Latvia Branchof , theLatvia , Latvijas Krâjbanka Baltijas Tranzîtu banka Nordea BankFinland Plc , LatvijasUnibanka . , Parekss-banka ) wassupple- , priate collateral. settlements inforeigncurrencieswithone-daydelayusingsecuritiesasanappro- arrangements, ontheotherhand,wereofferedtooptformakingauction-related wasalsoextended.ParticipantsBank ofLatvia intheshort-termcurrencyswap pilot projectoncompilingand submittingnon-banks'statisticalreportstobesub- piling andSubmittingNon-Banks' StatisticalDocumentsinElectronicForm", a With BoardofGovernorspassingthe"Regulation theBankofLatvia's forCom- ary 1,2004). terly Report onTransportation andIntermediaryServices' " (ineffectasofJanu- of Governorsapprovedaneweditionthe"Regulation forCompilingthe'Quar- Board purpose ofstreamliningtheprocessreportcompiling,Bank ofLatvia's January 1,2004).Following theexchangeofopinionwithrespondentsandfor the "Regulation forCompilingthe'QuarterlyReport onServices'"(ineffectasof BoardofGovernorspassed theBankofLatvia's received fromresidentsofLatvia, With aviewtoobtainmoreaccurateinformationaboutservicesdeliveredbyand and improvementofcompliancewithinternationalstandards. ments andfinancialstatisticscontinuedwiththeprimaryfocus ondatacollection balanceofpay- In 2003,themethodologicalworkinrespectofpreparingLatvia's BALANCE OFPAYMENTS ANDFINANCIALSTATISTICS in theinternationalcoinprogram continueditsparticipation circulation asofMarch25,2003).TheBankLatvia In 2003,250000new1-latscoinsfeaturinganantoncoin'sreversewereissued(in thousand lats)accountedforonly0.001%ofcurrencyincirculation. 11.4% in2002).Thetotalnominalvalueofcounterfeitsdetected2003(6.3 204.0 millionlatsor14.1%waswithdrawnfromcirculation(119.0 of currencyincirculation2.1times(1.72002).Oftheamountprocessed, 445.0 millionlats)exceededtheamount amount ofcurrencyprocessedin2003(1 ticity andfitnessforcirculationbyusingautomatedcashprocessingsystems.The Banknotes andcoinsreceivedfromthebankingsectorwerecheckedforauthen- million lats).Overthelastfiveyears,currencyincirculationhasgrown1.8times. In 2003,currencyincirculationincreasedby9.6%(from622.6millionlatsto682.1 CASH MANAGEMENT secure vaultandcashprocessingpremisesmeetingcentralbankingstandards. canprideitselfonhavingamodernand plished, andonemoreregionofLatvia In November2003,thereconstructionofLiepâjaBranchbuildingwasaccom- and15354abroad. were soldinLatvia put intocirculationasofFebruary 28,2003.In2003,10388commemorativecoins under theinternationalcoinprogram serving thedesignof5-latssilvercoinstruckbeforeWorld War IIwasissued nationalcurrency,acoinpre- the tenthanniversaryofrestorationLatvian Time silver coin tling wasstruckandputintocirculationasofFebruary 20,2003.Byissuing1-lats of the2004OlympicGamesinAthens, acoindedicated toGraeco-Roman wres- circulation asofAugust 28,2003).Underaninternationalcoinprograminhonor Ltd. Underthisprogram,asilvercommemorativecoin oftheprogram Kurzeme (incirculationasofDecember9,2003),thesecondseries Latvia. Times andValues Hansa Cities The SmallestGoldCoinsoftheWorld wascommenced.To commemorate organisedbytheMintofFinland Valmiera was issued(in and 37

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200338 and Users Payments Manual external debtinaccordwiththerequirementsofIMFpublications dard (includingpublishing,asofJune,quarterlyinformation onthecountry's Eurostat, andalsowithintheframeworkofIMFSpecialData DisseminationStan- Statistics Yearbook and IMFpublications website payments statisticsthroughitsregularpublications,theBank ofLatvia's proceededwithdisseminationoffinancialandbalance The BankofLatvia cal data. the qualityofbothbankandmonetaryaswellbalance ofpaymentsstatisti- IMF ROSC to thesignificanceofimprovingdatabreakdownbycountry.InSeptember, balanceofpayments,withattentionbeingdrawn the qualityofdevelopingLatvia's the IMF. InAugust, representatives oftheECBprovidedapositiveassessment proposed anumberofimprovementstostatisticalinformationforsubmission etary andfinancialstatisticswiththerequirementsofManual,Mission required, providerecommendations.Acknowledginggeneralcomplianceofmon- in statisticalinformationwiththemethodologyincorporated of theBankLatvia's Statistics MissionvisitedtheBank,anditspurposewastoassesscompliance intheareaofstatistics.InJuly,IMFMonetaryandFinancial Bank ofLatvia In 2003,representativesoftheIMFandECBassessedperformance Service, andtheCentralStatisticalBureauofLatvia. representatives oftheMinistryFinance,StateTreasury, theStateRevenue quality improvementofgovernmentstatistics.Theworkinggroupcomprisedalso data underapilotproject,andtookpartinworkinggroupdealingwiththe commencedcollectionofrelevantstatistical terly financialaccountsinLatvia, assumedresponsibilityforcompilingquar- ernment statistics,theBankofLatvia Having examinedtheECBrequirementsforquarterlyfinancialaccountsandgov- (ECB/2001/13) inrelevantregulations. ing theconsolidatedbalancesheetofmonetaryfinancialinstitutionssector der theRegulation (EC)No.2423/2001oftheEuropeanCentralBankconcern- was compiledthusalsomanagingtoincorporatetherequirementsstipulatedun- At thecloseofreportingyear,areportonflowsstatisticscreditinstitutions gence criterion. regular basistoensuremonitoringofthecompliancewithMaastrichtconver- selectedlong-terminterestratestotheECBona submits informationonLatvia's As ofJuly2003,withintheframeworkinterestratestatisticsBankLatvia lations andprovidesanswerstocreditinstitutions'mostoftenaskedquestions. Rate Reports ofCreditInstitutions developedandplacedonitswebsite Bank ofLatvia purpose ofenhancingauniformapproachtocompilingthenewreports, port onMoneyMarketTransactions' "(ineffectasofJanuary1,2004).For the standards forinterestratestatistics,andthe"Regulation forCompilingthe'Re- of CreditInstitutions"(ineffectasJanuary1,2004)thusintroducingtheECB Board ofGovernorspassedthe"Regulation forCompilingInterestRate Reports With aviewtobroaderrangeofcollectedstatisticaldata,theBankLatvia's was implemented. forbalanceofpaymentsstatistics mitted inelectronicformtotheBankofLatvia Monetary andFinancial StatisticsManual (editionof2003). (Reports ontheObservanceofStandardsandCodes) ` (5thedition)and , withthehelpofBankforInternationalSettlementsand International Financial Statistics , whichcomprisessamplesofinterestratecalcu- External DebtStatistics:GuidetoCompilers byIMFstaff(editionof2000)and,if Manual forCompilingInterest and Balance ofPayments Mission assessed Balanceof have notbeenregisteredinthe Republic shallsubmitanopiniononthe ofLatvia, payment systemswasalsoincorporated intheregulation.Inaddition,banks,which to fulfiltheirobligationsarisingfromtheparticipationin BankofLatvia's A requirementtothesystem'sparticipantssubmitopinions ontheircapability system, till4.30p.m. ingly extendingtheoperationtimeofSAMS, theinterbankautomatedpayment "Regulation accord- forInterbankSettlementsEffected by theBankofLatvia", der tointroducetwoclearingcyclesintheEKS,amendments weremadetothe banks toensureitsfullcompliancewiththecurrentmarket requirements. Inor- a bank.Thenewversionofthesystemwasdevelopedinclose cooperationwith volume ofbankcustomerpaymentsinlatsonthedaytheyhave beensubmittedto ond clearingcycleintheEKSmakesitpossibletoeffecta considerablylarger cycles, thusincreasingsettlementspeedandefficiency.Theintroduction ofasec- version oftheEKShasanextendedoperationtimetill3.00p.m.andtwoclearing system (EKS),anditcommenceditsoperationatthebeginningof2004.Thenew developedanewversionoftheelectronicclearing In 2003,theBankofLatvia available tocustomersinallbanksLatvia. haspublishedaninformationalbookletonthe IBAN,anditis Bank ofLatvia identifier oftheaccountbothfordomesticandcross-borderpayments.The tions ineuros;however,beginningwithJanuary1,2005,theIBANwillbesole ers upontheirrequest,shoulditbenecessaryforcross-borderbusinesstransac- payments ineuro"providesforthedutyofbankstoissueIBANstheircustom- European Parliament andoftheCouncil19December2001"Oncross-border accessiontotheEU,RegulationUpon Latvia's (EC)No2560/2001ofthe prise, identitynumberorname). details ofthebeneficiary(inaccuraciesinregistrationnumberanenter- ments whichmightberejectedordelayedbecauseofanyinaccuracyinbanking duced tofacilitatestraightthroughprocessingandreducethenumberofpay- beneficiary, indicatedinthepaymentdocument.Thisprovisionhasbeenintro- basis ofthespecifiedIBANonly,withoutcheckingotherbankingdetails receiving bankwillbeentitledtocreditfundsthebeneficiary'saccounton IBANspecified,the stipulate thatuponreceivingapaymentwiththeLatvian lation forCreditTransfers" (ineffectasofJanuary1,2004).Theamendments sary conditionsforimplementingtheIBAN,amendmentsweremadeto"Regu- as wellbydisseminatinginformationotherwise.Inordertoensuretheneces- the accountnumberreplacementbyspecifyingIBANinstatements, neous credittransferswillthusbeprevented.Banksnotifytheircustomersof corresponds tothestandardaccountnumberatbeneficiary'sbank,anderro- indicated, theoriginator'sbankwillbeabletocheckwhetherspecifiedIBAN IBAN receiving acustomer'spaymentdocumentwiththebeneficiary'sLatvian the useofIBAN,replacingcurrentcustomeraccountnumbers.Upon PAYMENT SYSTEMS organisation statejoint-stockcompany from January1,2004toDecember31,whenbanksandthenon-profit form non-cashpayments.Theregulationprovidesforatransitionperiodlasting institutions andotherregisteredintheRepublic thatper- ofLatvia tobemetbycredit dure forassigning,validatingandusingtheIBANinLatvia for theUseofIBAN"(ineffectasJanuary1,2004),stipulatingproce- BoardofGovernorsapprovedthe"RegulationIn May2003,theBankofLatvia's continued. count NumberstandardinLatvia In 2003,preparationsforimplementingtheIBAN,InternationalBankAc- Latvijas pasts havetoensuretransition 39

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200340 tice severalrequirementsthereof. complied with;nevertheless,itwasestablishedthatbankshad notputintoprac- the year.Theresultsofsurveyindicatethatrecommendations arelargely survey onthecompliancewithrecommendationswasconducted attheendof tions forTransactions EffectedbyMeansofElectronicPayment Instruments",a "Recommenda-In ordertoassessbanks'compliancewiththeBankofLatvia's system andtheassociatedrisks. centrs payment systems.Cooperationwiththelimitedliabilitycompany none ofthebanksauditedwouldcauseadditionalrisksto the BankofLatvia's banks' paymentsystemsin2003.Asaresultoftheauditit wasconcludedthat eration withtheFinancialandCapitalMarketCommission, continuedauditing Within incoop- theframeworkofpaymentsystemoversight,BankLatvia, were addressed. ment systemsweresetforth,andotherissuesrelatedtothepaymentpolicy payment systemsweredeveloped,oversightguidelinesforlarge-valueeuropay- methodology developedbytheECBwasagreed,oversightprinciplesforretail the compatibilityofsystemsandinfrastructure.Thenewpaymentstatistics nity toparticipateinplanningthesystemalreadyduringitsprojectstageandstudy havinganopportu- management andoperationalissuestheBankofLatvia TARGET version wasdeveloped, discussingthesystem'soperationalprinciples, TARGET onlyafterjoiningtheEMU.At the same timeaprojectofnew like mostofthecentralbanksEUcandidatecountries,isexpectedtojoin participate inTARGET priortojoiningtheeuroarea,thereforeBankofLatvia, banksdidnotexpresswillingnessandnecessityto system infrastructureinLatvia, in theEMU.Inviewofpotentialcostsandalreadyexistingsettlement countries wereofferedanopportunitytojoinTARGET beforetheirmembership possibility toeffectreal-timecross-borderpaymentsineuros,theEUcandidate willneeditforimplementingthemonetarypolicy.Toof Latvia providebanksa TARGET willensureinfrastructureforsettlementsintheeuroarea,andBank joinstheEMUandintroducessettlementsineuros,connectionto Latvia Gross settlementExpressTransfer When system)hasbecometopicalforLatvia. the issueonitsparticipationinTARGET (Trans-European Automated Real-time on variousissuesconcerningpaymentsystems.With accessiontotheEU, Latvia's mittee oftheEuropeanSystemCentralBanks(ESCB)anditsworkinggroups status ofobserversinthediscussionsPayment andSettlementSystemsCom- participatedinthe In thereportingyear,representativesofBankLatvia in2002. ducted bytheBankofLatvia Payment SystemsasformulatedbytheBankofInternationalSettlements,con- interbank paymentsystemswiththeCorePrinciples forSystemicallyImportant system, issuedin2002,andthecomplianceassessmentofBankLatvia's payment the ECBrecommendationsforimprovingoperationofLatvian dated andsupplemented.Theregulationhasbeenamendedinaccordancewith lems withintheSAMS orcommunicationsnetworkdisruptions,havebeenup- problems withtheconnectiontoSAMS, orwheretherearetechnicalprob- in emergency,forcaseswhenanyparticipantthesystemencounterstechnical tance, irrevocabilityandfinality.ProceduresfortheSAMS andEKSoperations the system,aswellmoreaccuratelydefinesmomentsofapayment'saccep- more detailedcriteriaforabank'sparticipationandsuspensionofitsoperationin paymentsystems.Theregulationalsoprovides legal riskintheBankofLatvia's fulfil itsobligationsinthesystem.Theaboverequirementwillhelpreduce impact oflegislationtheircountryregistrationonthebank'scapabilityto wasalsocommencedtoassesstheoperationofpayment cardpayment Banku servisa per paymentintheEKSwas377.50lats(2.5%lessthan2002). to performtheirmutualpaymentsoutsidetheEKS.In2003,averageamount for thedeclineinvolumeandamountwasanagreementbetweenseveralbanks 5.6 billionlats(ayear-on-yeardropof8.0%and10.3%,respectively).Thereason In thereportingyear,EKSprocessed14.8millionpaymentsinamountof reaching 40.3%oftotalpaymentsprocessedbytheSAMS. than in2002).In2003,theshareofinterbankpaymentsSAMS grew4.9%, 2003. Thevolumeofprocessedpaymentsreached127.7thousand(16.3%higher whichinturnwasfacilitatedbyahighdemandforlatsresources of Latvia, amount ofinterbankoperationsaswellbetweenbanksandtheBank reaching 33.5billionlats.Suchanincreaseinpaymentswasdeterminedbythe In 2003,thetotalamountofpaymentsprocessedbySAMS increasedby56.0%, adapted wasconductedonthebasisof essential informationsystemsof theBankofLatvia sults, informingtheBoardofGovernors thereof.Anin-depthriskanalysisofall approveditsre- TheExecutiveBoardof theBankofLatvia the BankofLatvia. at thecloseof2002,acomplexanalysisalloperationalrisks wasconductedat Pursuant totheregulationapprovedbyExecutiveBoardof theBankofLatvia used. and allrelevantupdateshavebeenmadeinlinewithchanges inthetechnologies mation systemsandtheirusage,theissuesofprivacyhavebeen statedaccurately, been madetotheregulationwithrespectassigningresponsibility fortheinfor- InformationSystems".Essentialamendmentshave Security oftheBankLatvia's ExecutiveBoardapprovedtherevised"RegulationThe BankofLatvia forthe portant operations. ers systems,includingperformanceanalysis,problemcompilation andotherim- cessfully, ensuringuniformadministrationoftheoperationsallessentialserv- tion systems.Acentralisedserveradministrationsystemwasalsointroducedsuc- tection andpreventionsystem,thusincreasingtheoverallsecurityofitsinforma- successfullycompletedtheintroductionofintrusionde- The BankofLatvia and useoftherelevantinformation. ensuringauniformandcentralisedcompiling introduced attheBankofLatvia, A newbookkeepingsystemforfixedassets,intangibleassetsandinventorieswas tion withthesecuritiessettlementsystem. informationsystemstoensuretheirintegra- made inanumberofBankLatvia's ably enhancedlevelofautomationandsecurity.Substantialchangeshavebeen Thenewsystemensuresconsider- its usewascommencedintheBankofLatvia. The developmentofthenewsecuritiessettlementsystemwasalsocompletedand tion requiredforcompilingthestatebalanceofpaymentswascompleted. the informationsystemenablingnon-bankstosubmitelectronicallyinforma- duction oftheIBAN,wasaccomplishedsuccessfully.In2003,development the aimofensuringpossibilityhavingseveralclearingcyclesandintro- The newversionoftheEKSandrelatedinformationsystems,developedwith "OnCreditInstitutions",orotheressentialcontractualbreaches. stated intheLaw their debtorswhofailtomakecontractualpayments,orhavemadebreaches eration. There,theRepublic creditinstitutionsregisterinformationon ofLatvia On June2,2003,theinformationsystemofDebtors'Register starteditsop- INFORMATION SYSTEMS Information SecurityForum ' s methodology. 41

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200342 questions regardingtheintroduction oftheeuroinLatvia. containinganswerstothemostessential booklet publishedbytheBank ofLatvia, receiveda information formakinganinformed choice.EachhouseholdinLatvia accession totheEU.Via media,theprospectivevoterscouldacquireexhaustive rials, comprisinganalysisofeconomicbenefitsandrisksassociated withLatvia's preparedawiderangeofinformational mate- ship intheEU,BankofLatvia member- In September2003,inviewoftheupcomingpeople'svoteon Latvia's commemorative coins,issuedbytheBankofLatvia. possibility toattendanexhibitiondisplayingthecoinsandbanknotes, including anditsimpactonthe nationaleconomy.AtLatvia theRigaGallery,peoplehada toanalysethemonetarypolicyimplementedbyBankof University ofLatvia representatives ofthepublictoaconferenceanddiscussionat theBigHallof invitedeconomists,bankingexperts,businessmen,journalistsandother Latvia 2003, thedaywhenfirstlatsbanknoteswereputintocirculation, theBankof national currencyforthedevelopmentofeconomy.OnMarch5, initiatedapublicdiscussionontheimportanceof tion, theBankofLatvia At thebeginningof2003, ontheeveoftenthanniversarylatsrestora- in thenationaleconomy,followedbyquestionandanswersessions. dia aboutresolutionspassedbytheBank'sBoardofGovernorsanddevelopments Governorheldregularpress conferencestoinformtheme- The BankofLatvia's andabroad. tency ofthecentralbanktobepublishedinpressbothLatvia Bank's employeespreparedmaterialsdiscussingissuesfallingwithinthecompe- Governors andExecutiveBoardtheBank'sactivitiesonaregularbasis.The Mass mediareceivedinformationonresolutionspassedbytheBank'sBoardof Policy Context ance ofPayments ronment. the uniforminformationsystemsofESCBandtelecommunicationsenvi- Active cooperationcontinuedwiththeECB toensuretheBank'sabilityjoin evaluation. with soundoperationalandsecurityrequirements.TheBankreceivedaveryhigh of theinformationsystemsenvironmentmembersaboveorganisation Security StatusSurvey,conductedeverytwoyearsandassessingthecompliance Monetary ShocksinLatvia and madeavailabletoprofessionalsineconomicsfinance: expertswerepublished working papers,severalstudiesbytheBankofLatvia's lutions bytheBank'sBoardofGovernorsandExecutiveBoard.Inaseries andabroadprovidedinformationonreso- economic developmentsinLatvia the keyeconomicandmonetaryindicators.Thebulletin At publishedits thebeginningof2003,BankLatvia economy. the publicaboutitsactivitiesanddevelopmentsinLatvian toinform press, televisionandradiowerethemediausedbyBankofLatvia In thereportingyear,Bank'sownpublicationsaswellInternet, INFORMATION TOTHEPUBLIC tookpartinthe The BankofLatvia that year. The Bank of Latvia's that year.TheBankofLatvia's economyfor provide acomprehensivereviewofthedevelopmentsinLatvian Report 2002 toreflectitsoperationandfinancialperformanceresults,aswell and and MeasuringOutputGapinLatvia Latvia , Interest RateTerm StructureinLatviatheMonetary ' s BalanceofPayments (Key Items) Monetary Review Information SecurityForum , Monetary Bulletin . Averss unReverss Bank ofLatvia informedabout Transmission of ' s , Information Latvia analysed : Annual ' s Bal- and theradiobroadcast participatedintheproductionofTVbroadcast The BankofLatvia and studentsofsecondaryschools. and developmentsinthenationaleconomytostudents,teachersofeconomics The Bank'semployeesprovidedlecturesontheactivitiesofBankLatvia official newspaperoftheRepublic ofLatvia. financial developments in Latvia andabroad. financial developmentsinLatvia as otherofficialinformationweredisseminatedthrough The officialexchangeratesquotedandregulationsdevelopedbytheBankaswell larly frequentlysearchedfor. website,wasparticu- participationinit,availableontheBankofLatvia's Latvia's Bank's website(www.bank.lv).ThecomprehensiveinformationontheEMUand money,andotherareasofinterestwereavailableonthe ment systems,Latvian theregulationsadoptedbyBank,financialstatistics,paymentandsettle- Latvia, publications,regularlyupdatedinformationontheBankof All BankofLatvia's the ECB,atRigaStockExchangebuilding.Severalthousandpeoplevisitedit. attend atravellingphotoexhibition"TheMakingoftheEuro",commissionedby madeitpossibleforthegeneral publicto In September2003,theBankofLatvia the "Regulation Budget" and takingintoac- forManagingtheBank ofLatvia's ExecutiveBoarddraftedthe2004budgetinaccordance with The BankofLatvia's budget. for theprocedureofdrafting,approving andmonitoringtheexecutionofBank's Theregulationprovides proved bytheBoardofGovernors oftheBankLatvia. compliance withthe"Regulation Budget"ap- forManagingtheBankofLatvia's budgetfortheyear2003proceededin The managementoftheBankLatvia's Commission ontheexecutionof2003budget. approved budget,andreportedtotheBank'sBoardofGovernors andBudgetary penses wereincurredandlong-terminvestmentsmadein accordance withthe relevant Bank'sorganisationalunits,madesure,onaregular basis,thattheex- ExecutiveBoard,togetherwiththeheadsof Governors. TheBankofLatvia's Boardof accordance withthe2003budgetasapprovedbyBank of Latvia's In thereportingyear,expenseswereincurredandlong-term investments madein MANAGEMENT OFTHEBANKLATVIA'S BUDGET conducted. Thelimitedliabilitycompany In 2003,oneinternalqualityauditoftheBank'smanagementsystemwas 2000. since The qualitymanagementsystemhasbeenfunctioningattheBankofLatvia QUALITY MANAGEMENTAT THEBANKOFLATVIA sulting agement systemisperformedbythelimitedliabilitycompany Since November2003,themaintenanceandupdatingofBank'squalityman- were detectedintheBank'squalitymanagementsystem. serious deficienciesandmajornon-compliancewiththestandardISO9001:2000 requirements ofthestandardISO9001:2000.Duringcertificationaudit,no fication auditoftheBank'squalitymanagementsystemincompliancewith onacontractualbasis. Lata spogulî , whichreflectandanalyseeconomic Bureau Veritas Latvia Latvijas Vçstnesis performedacerti- Zygon BalticCon- Kâ bankâ ,

the 43

BANK OF LATVIA: ANNUAL REPORT 2003 BANK OF LATVIA: ANNUAL REPORT 200344 – Governor of 2003,wasasfollows: asattheend The compositionoftheBoardGovernorsBankLatvia, THE BANKOFLATVIA'S ORGANISATIONAL STRUCTURE posits. thousand latsin2002)waslargelycomprisedofinterestontheGovernment'sde- interestexpense(2659thousandlats;3815 debt securities.TheBankofLatvia's government stantial changesintheamountofinvestmentmadeLatvian slightly shrank,sincetheyieldonthesesecuritiesdroppedin2003,withoutsub- government debtsecurities(4216thousandlats;4725latsin2002) repo transactionsrecordedayear-on-yeargrowth.InterestincomefromLatvian tered intheRepublic (961thousandlats);asaresult,theamountof ofLatvia mostly underlayanincreaseininterestincomefromloansgrantedtobanksregis- 2003; 30762thousandlatsin2002).Ahigherbanks'demandfortheresources effect ontheinterestincomefromforeignoperations(27327thousandlatsin eign debtsecuritiesandmoneymarketinterestrateshadacontinuousnegative ernment securitiesandmoneymarkettransactions.Adecreaseinyieldsonfor- gov- secure financialinstrumentsofhighliquidity,andincomefromtheLatvian mainly derivedfrominvestinggoldandconvertibleforeigncurrencyreservesin sand latsin2003(32497thousand2002).Thenetinterestincomewas netinterestincomeamountedto30652thou- lats in2002).TheBankofLatvia's earned11908thousandlatsinprofit(14434 In 2003,theBankofLatvia FINANCIAL RESULTS OFTHEBANKLATVIA consecutive years. BoardofGovernorsforseveral vestments priorapprovedbytheBankofLatvia's SDR basketcurrencies,aswelltheexpenditureprojectionsforlong-termin- andtheissuingcountriesof for theeconomyandfinancialmarketinLatvia count theworkingplansofBank'sorganisationalunitsfor2004,outlook withintheESCB,andtakingintoac- cessful integrationoftheBankLatvia oneofthekeygoalsbeingasuc- "OntheBankofLatvia", laid downintheLaw tasks,as organisational units.TheywerepreparedobservingtheBankofLatvia's count theincome,expenditureandlong-terminvestmentprojectionsofBank's – DeputyGovernor – MembersoftheBoardGovernors: – ChairpersonoftheExecutiveBoard asattheendof2003, wasasfollows: The ExecutiveBoardoftheBankLatvia, – MembersoftheExecutiveBoard: – DeputyChairmenoftheExecutive Board: Ilmârs Rimðçviès Andris Ruselis Harry Bush Valentîna Zeile Varis Zariòð Arvils Sautiòð Vita Pilsuma Valentîna Kolotova Mâra Raubiðko Harijs Ozols Mâris Kâlis Grava Roberts L. Helmûts Ancâns Reinis Jakovïevs , , , . , , ; . ; ; , , ; , ity AssuranceDivision. partment: InformationSystemsSecurityDivisionandQual- System SecurityandQualityAssuranceDivisionoftheInformationSystemsDe- As ofApril1,2003,twodivisionswereestablishedonthebasisformer partment wasrenamedtheMarketOperationsDepartment. Foreign ExchangeDepartment.AsofAugust 1,2003,theForeign ExchangeDe- tence oftheMonetaryPolicy Department,wereincludedinthefunctionsof were restructured:thedomesticmarketoperations,formerlywithincompe- tions, theMonetaryPolicy DepartmentandtheForeign Exchange Department To ensureauniformperformanceandcontrolofthe Bank'sfinancialtransac- Policy Department. search wererecruitedfortheMacroeconomicAnalysisDivisionofMonetary New employeesstudyingfinancialsystem'sstabilityissuesanddoingin-depthre- sis DivisionoftheStatisticsDepartment. cial StatisticsDivisionwasestablishedonthebasisofformerAnaly- services sectorandforeignbranches).Asaresult,GeneralEconomicFinan- sphere ofcompilingstatistics(compilingfinancialaccounts, In cooperationwiththeECBandEurostat,newtrendsweredevelopedin continuedtoimproveitsorganisationalstructure. tions, theBankofLatvia structure tothearrangementsetupbyECBdischargeitsrespectivefunc- To operationandapproximateitsorganisational optimisetheBankofLatvia's 2003, 59%weremalesand41%females. employees attheendof2002,respectively).OfBank'sstaff,as which 26wereemployeeshavingajobcontractfordefiniteperiod(721and14 employeeswas743,of At theendof2003,numberBankLatvia's employees toapplyfortemporary orpermanentemploymentattheECB.Four Resources inthefieldofpersonnel selection.ItispossiblefortheBankofLatvia's In 2003,theBankcontinued cooperation withtheECB'sDirectorateHuman ing lecturerwasinvitedfrom staffontheglobalfinancialmarkets,avisit- the expertiseofBankLatvia's in thefieldsofbusinesspresentationsandeffectivecommunication. To improve the EnglishandFrench languageaswellcomputerskillstraining,in-depthstudies their internationalbusinessmeetingandpresentationskills. TheBankoffered possibility todeveloptheirskillsofbusinessEnglishwriting, aswellenhance in theECBScommitteesandworkinggroupsasobserverssince May2003hada proving skillsnecessaryforsuccessfulcooperationwiththeECB. Thoseinvolved personneltraining, particularattentionwaspaidtoim- In theBankofLatvia's social securitycontributionswasusedfortheneedsofpersonnel training. In 2003,3.8%oftotalexpenseonwages,salariesandother personnel costsand participated ininternationalprofessionalcertificationprogrammes. ing andinformationtechnologies.AnumberoftheBank'semployeessuccessfully metrics, foreignexchangeoperations,paymentsystems,statistics,bankaccount- the latestdevelopmentsinfieldsofmonetarypolicy,macroeconomics,econo- andabroad toimprovetheirexpertiseandfollow shops andconferencesinLatvia studies, aswelladditionalprofessionaltraining,participatinginseminars,work- employeescontinuedtheiracademic In thereportingyear,BankofLatvia HUMAN RESOURCESDEVELOPMENT Sensei Inc (US). 45

BANK OF LATVIA: ANNUAL REPORT 2003 46 employees of the Bank of Latvia have made use of this opportunity. The coopera- tion with the ECB is further developed through closer contacts and individual employee exchange programmes organised by the Personnel Department of the Bank of Latvia.

The Bank's cooperation with the Centre for Central Banking Studies of the Bank of England continued as well. Members of the Bank's Board of Governors and Executive Board, and heads of the Bank's organisational units had an opportunity to participate in a workshop in Latvia on the strategic management processes, as well as in an international seminar on strategic management, internal control sys- tems and physical security issues. Representatives from the ECB and the central banks of Austria, Denmark, Estonia, Iceland, Lithuania, Malta and Norway also took part in the seminar.

It has already become a tradition for the Bank of Latvia's professionals to share their expertise with their colleagues. Special seminars were held for recently hired employees to inform them about the Bank's tasks and its organisational units' fulfilling these tasks, whereas representatives of the Monetary Policy Department BANK OF LATVIA: ANNUAL REPORT 2003 REPORT BANK OF LATVIA: ANNUAL and Payment Systems Department told their colleagues about the essence and areas of their work.

The Bank of Latvia conducted job performance and development appraisal meet- ings between an employee and his/her direct supervisor in 2003 as well. The pro- cess of job performance and development appraisal is still further elaborated. The attitude of employees and supervisors towards these meetings is positive in most cases. THE BANK OF LATVIA'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003 BANK OF LATVIA: ANNUAL REPORT 200348 THE BANKOFLATVIA'S BALANCESHEET DOMESTIC ASSETS FOREIGN ASSETS ie ses1 42032798 6 702 34 200 11749 3 905 64382 12 3 018 62 273 13 10 30 690 11 59 320 9 Other domesticassets assets Fixed securities Government Transitcredits tocreditinstitutions Loans eteet 1001197 3 893 1000 4 51025 930 7 41 55543 8 4 101 144 75 737313 101 144 774834 6 5 Other foreignassets Settlements Shares intheBankforInternational International MonetaryFund currencies foreign Convertible Special DrawingRights Gold TOTAL ASSETS Notes ASSETS 1 Theaccompanyingnotes setoutonpages54to78areanintegral partofthesefinancialstatements. (at theendofyear;inthousandslats) 1 162 716 937 526 2003 1 100242 146321 894613 2002 1 040934 CAPITAL AND RESERVES DOMESTIC LIABILITIES ASI ICLTO 16 LATS INCIRCULATION Harijs Ozols Mâris Kâlis Roberts L.Grava Helmûts Ancâns Reinis Jakovïevs Mâra Raubiðko BANK OFLATVIA cn. (attheendofyear;inthousandslats) (cont.) EOADMIES22,25,26 by theBankofLatvia These financialstatements,whicharesetoutonpages48to78,wereauthorised ITEMS MEMORANDUM CAPITAL AND RESERVES TOTAL LIABILITIES, Notes FOREIGN LIABILITIES CAPITAL ANDRESERVES LIABILITIES, uoenUingat52531 28389 37928 532 25000 19712 45787 25000 21 20 20 10 362 7 787 62 079 European Uniongrant 3 012 18, 19 80 254 Valuationaccount 134 223 capital Reserve 1 670 capital Nominal 123 810 17 Other domesticliabilities Balances duetootherfinancialinstitutions Balances duetotheGovernment Balances duetocreditinstitutions o-ovril urnis3 37 5 674 679 8 260 36 – 677 15 110 388 149 104 423 14 Other foreignliabilities Non-convertible currencies Foreign bankdepositsinlats International MonetaryFund Convertible foreigncurrencies ' S EXECUTIVEBOARDS ' s ExecutiveBoardonMarch1,2004. 1 100242 213 521 682 145 113 545 91 031 2003 1040934 209676 622632 116778 91848 2002 49

FINANCIAL STATEMENTS BANK OF LATVIA: ANNUAL REPORT 200350 THE BANK OF LATVIA'S PROFIT AND LOSS STATEMENTTHE BANKOFLATVIA'S PROFITANDLOSS GROSS domesticinterestandsimilarincome Domestic operations GROSS foreigninterestandsimilarincome Foreign operations INTEREST ANDSIMILARINCOME GROSS domesticinterestexpense Domestic operations GROSS foreigninterestexpense Foreign operations INTEREST EXPENSE noefo rni rdt 442 24 4 725 2507 157 783 4 216 1 838 94 1 744 28 098 25 395 Income fromgovernmentsecurities Income fromtransitcredits Interest onloanstocreditinstitutions International Settlements Dividends onsharesintheBankfor Income fromdebtsecurities institutions institutions andotherforeignfinancial Interest ondepositswithforeigncredit ntttos3 73 32 127 3 055 8 560 2 590 29 institutions Interest ondepositsofotherfinancial Interest ongovernmentdeposits Interest ondepositsofcreditinstitutions Interest ondeposits NET INTERESTINCOME Notes (in thousandsoflats) 27 327 5 984 2 651 2003 30 652 8 30762 5550 3688 2002 127 32497 OTHER OPERATING EXPENSE OTHER OPERATING INCOME aais ae n te esne ot 9358 724 9 385 Salaries, wagesandotherpersonnelcosts tems". ating expense"inthe financial statementsfor2002,isstatedunder thecaption"Maintenanceofinformation sys- charges". ating expense"inthefinancialstatements for 2002,arestatedunderthecaption"Depreciationandamortisation and lossstatementfor2002. (323thousandlats),which werereportedunderthecaption"Otheroperatingexpense"inprofit Bank ofLatvia cn. (inthousandsoflats) (cont.) 3 2 1 APPROPRIATION OFPROFIT PROFIT BEFOREAPPROPRIATION TOTAL otheroperatingexpense Informationsystemmaintenanceexpense(769 thousandlats),whichwasreportedunderthecaption"Otheroper- Amortisationchargesofintangibleassets(96 thousandlats),whichwerereportedunderthecaption"Otheroper- Additionally includesaccidentinsurance, healthinsuranceandlifepremiumpaymentsmadebythe nraei eev aia 5 9 093 7 859 3 812 3 449 636 84 425 Increase inreservecapital 23 769 1 832 1 200 180 1 857 1 200 753 22 Other operatingexpense Banknote productionandcoinagecosts 1 798 Renovation andrepaircosts 2 302 Maintenance ofinformationsystems Capital MarketCommission Costs offinancingtheFinancialand 12, 13 Depreciation andamortisationcharges Social securitycosts rftaporae oteSaebde 4095 341 4 049 Profit appropriatedtotheStatebudget Notes 2003 994 19738 11 908 2002 605 1, 2,3 2 1 3 14434 18668 51

FINANCIAL STATEMENTS BANK OF LATVIA: ANNUAL REPORT 200352 LOSSES THE BANKOFLATVIA'S STATEMENT OFTOTAL RECOGNISEDGAINSAND RESULT ONREVALUATION urnis2 50–11860 570 6582 21 4531 4 currencies liabilities denominatedinforeign Result onrevaluationofassetsand reserves gold Increase arisingfromrevaluationof E EUTO EAUTO PROFIT BEFOREAPPROPRIATION NET RESULT ONREVALUATION 2002. "Result onrevaluationofassets andliabilitiesdenominatedinforeigncurrencies" inthefinancialstatementsfor currencies. financial statementsfor2002,isreportedas aresultonrevaluationofassetsandliabilitiesdenominatedinforeign the caption"Increasearisingfromrevaluation ofgoldandsharesintheBankforInternationalSettlements" TOTAL 2 1 Increaseinfairvalueofnon-tradedfinancial derivativecontracts(9366thousandlats)wasincludedinthecaption Revaluation onsharesintheBankforInternationalSettlements(154thousand lats),whichwasreportedunder euto eauto fscrte 1–0693 734 –10 659 9 366 21 –3 119 21 Result onrevaluationofsecurities non-traded financialderivativecontracts Increase/decrease (–)infairvalueof Notes (in thousandsoflats) 2003 11908 –8 677 3 231 2002 1, 2 2 14434 22256 7822 THE BANKOFLATVIA'S CASH FLOWSTATEMENT rsn rmoeaigatvte 24 (1) arising fromoperatingactivities Net cashandequivalentsinflow Monetary Fund" inthecashflowstatementfor2002. sand lats),whichwas reported asaseparatecaption"Repayment of thecreditfacilityprovidedbyInternational Acquisition ofintangibleassets 1 24 (2) Net cashandequivalentsinflow Acquisition offixedassets Additionally includes repaymentofthecreditfacilityprovidedbyInternationalMonetaryFund (6098thou- Notes (in thousandsoflats) 32242 2003 28658 –3198 –386 2965 2002 1 –1687 –905 373 53

FINANCIAL STATEMENTS BANK OF LATVIA: ANNUAL REPORT 200354 NOTES TOTHEBANKOFLATVIA as separateinvestmentportfolios. and foreigncurrencyreserves managed byexternalassetmanagersare tions. Goldreserves,foreigncurrency reservesmanagedbytheBankofLatvia liabilitiesinforeign currencies tootherinstitu- correspond totheBankofLatvia's folios. Portfolios ofborrowedreservesarecomprisedforeign reserves,which Foreign reservesaremanagedbyclassifyingthemintodifferentinvestmentport- monetarypolicyobjectives. ing totheBankofLatvia's and earningincomewithintheframeworkofacceptablerisk withoutcontradict- lines, includingpreservingthevalueofforeignreserves,ensuring theirliquidity eign reservesproceedsincompliancewiththebasicprinciples setoutintheGuide- Managingoffor- as approvedbytheBoardofGovernorsBankLatvia. ForeignManaging theBankofLatvia's Reserves" (hereinafter,theGuidelines), reserves (hereinafter,foreignreserves)inaccordancewith the"Guidelinesfor managesfinancialrisksrelatedtoforeigncurrencyandgold The BankofLatvia daily activities. isexposedinits the mostsignificantfinancialriskstowhichBankofLatvia Market (price,interestrateandcurrencyrisks),creditliquidityrisksareamong FINANCIAL RISKS Bank ofLatvia. tions, aswellimprovementsintheriskmanagementframeworkmadeby reviewsauditors'findingsandrecommenda- Governors oftheBankLatvia, Auditingof Latvia's Committee,whichcomprisesthree membersoftheBoard nal Audit Departmentpersonnelonaregularbasis.At leastquarterly,theBank ecutive Board.TheriskmanagementframeworkissubjecttoreviewbytheInter- Ex- given riskmanagementsystemsisinthecompetenceofBankLatvia's headedbythesecuritymanagerofinformationsystems.Monitoring Latvia tional riskiscoordinatedbytheRiskManagementWorking GroupoftheBank managementofopera- Market OperationsDepartment.AttheBankofLatvia, aremanagedbytheInvestmentCommittee andthe risks oftheBankLatvia operationaldevelopments.Financial financial marketsandtheBankofLatvia's which is continuouslyupgradedinlinewith of GovernorstheBankLatvia, management frameworkundertheprinciplesandguidelinessetforthbyBoard ExecutiveBoardhasestablishedarisk functions. Therefore,theBankofLatvia's and theoperationalriskarisingfromactivitiesinpursuitofBank'sprimary activitiesarefinancialrisks The mainrisksassociatedwiththeBankofLatvia's 2. RISKMANAGEMENT – actingasafinancialagentfortheGovernmentofRepublic ofLatvia. tional financialinstitutions; – representationoftheRepublic inforeigncentralbanksandinterna- ofLatvia balanceofpayments; – compilingandpublishingoffinancialstatisticsLatvia's tion ofasmoothfunctioningthepaymentsysteminLatvia; – organisationandmanagementoftheinterbanksettlementsystempromo- – issueofthenationalcurrency,bothbanknotesandcoins; – managementofforeigncurrencyandgoldreserves; – implementationofmonetarypolicy; anditsprimaryobjectivesareasfollows: "OntheBankofLatvia" under theLaw operates wasestablishedonJuly31,1990.TheBankofLatvia The BankofLatvia 1. PRINCIPAL ACTIVITIES ' S FINANCIALSTATEMENTS Parameters for a benchmark portfolio reflecting the return target and acceptable 55 level of financial risks, as well as the structure of investments are set out for each portfolio type in the Guidelines. On a daily basis, the Risk Management Division of the Market Operations Department monitors the compliance of foreign re- serves with the requirements set out in the Guidelines.

For the purpose of financial risk management, the Bank of Latvia has established the Investment Committee that develops the investment management strategy, approves the investment tactics and sets detailed limits for financial risks in ac- cordance with the Guidelines. The Investment Committee reviews the investment strategy once a quarter. Once a week, the Investment Committee reviews reports and forecasts for developments in financial markets, which are prepared by for- eign reserves investment portfolio managers, and approves the investment man- agement tactics for the forthcoming week.

MARKET RISK NOTES TO FINANCIAL STATEMENTS Market risk is exposure to losses due to adverse changes in financial markets (for example, movements in interest rates or exchange rates). The Bank of Latvia manages interest rate risk inherent mainly in financial instruments sensitive to interest rate fluctuations by using a modified duration limit set individually for each investment portfolio.

The Bank of Latvia monitors the currency risk by determining open currency po- sition limits. For foreign currency reserves portfolios, except for portfolios of bor- rowed reserves, the foreign currency profile of the net position on financial in- struments, which corresponds to the structure of the SDR basket of currencies, is taken as a benchmark. For portfolios of borrowed reserves, the currecy structure is formed in compliance with parameters of respective liabilities. Deviations from the benchmark currency structure give rise to the open currency position. Every day, the Risk Management Division of the Market Operations Department moni- tors the compliance of the modified duration limits and open currency positions with the Guidelines and the related resolutions passed by the Investment Com- mittee.

The aggregated market risk of foreign reserves portfolios, except for portfolios of borrowed reserves, is managed by determining the portfolio tracking error limit. It is calculated as the annualised standard deviation of the difference in return between the investment portfolio and a respective benchmark portfolio.

The Bank of Latvia manages interest rate risk by investing only in financial instru- ments denominated in the currencies of the countries of the Organisation of Eco- nomic Cooperation and Development (OECD).

The Bank of Latvia does not hedge interest rate risk, which is related to domestic financial assets in order to avoid a conflict with the monetary policy objectives pursued by the Bank.

Exposure of the Bank of Latvia to market risk (as at the end of 2003) is provided in Notes 27 and 28.

CREDIT RISK Credit risk is exposure to losses resulting from a counterparty's default. The Bank of Latvia's exposure to credit risk results from investments in foreign debt securi- ties and short-term cash and gold deposits, as well as short-term lending to do- mestic credit institutions. BANK OF LATVIA: ANNUAL REPORT 200356 improving the Bank of Latvia's risk matrix. improving theBankofLatvia's Bank's organisationalunitsand identifiesandclassifiesrisksbymaintaining Working Group,whichevaluatesandsummarises riskreportspreparedbythe hasestablishedtheRiskManagement and minimisingrisks.TheBank ofLatvia Risks", whichlaysdowntheprocedure foridentifying,documenting,assessing Executive Boardhasadoptedthe"Regulation forManagingtheBank ofLatvia's and definesresponsibilitiesinrespectofmanagingrisks.The BankofLatvia's Guidelines", whichspecifiesthesetofdocumentsnecessaryfor riskmanagement Security BoardofGovernorshasadopted"TheBank Latvia's Bank ofLatvia's which review,onaregularbasis,theoperationalriskmanagement system.The InformationSystems, egy andtheCommitteeforManagingBankofLatvia's ComplexSecurityStrat- tee forManagingtheDevelopmentofBankLatvia's hasestablishedtheCommit- security andinformationsystems,theBankofLatvia to inadequateinternalcontrolsystem.To minimiseoperationalriskinherentin pliance withsecurityrequirementsandotherinternalorexternal factorsrelated unexpected interruptionofoperation,unauthoriseduseinformation, non-com- Operational riskisexposuretofinancialandnon-financiallosses resultingfrom OPERATIONAL RISK structure bysectorofissuerorcounterpartyisprovidedinNote29. asset investment infinancialinstrumentsofthesamegroup.TheBankLatvia's managesliquidityriskalsobysettinglimitsonthemaximum The BankofLatvia vided inNote24. cashanditsequivalentsispro- liabilities. ThestructureoftheBankLatvia's tions. InvestmentsaremadesoastoensuretimelymeetingoftheBankLatvia's investing itsgoldreservesinshort-termdepositswithforeignfinancialinstitu- issued byinternationalinstitutions,foreigngovernmentsandcorporates,while foreign exchangereservesinliquiddebtsecuritiesandotherfinancialinstruments managesliquidityriskbyinvesting of assetsclosetofairvalue.TheBankLatvia Liquidity riskisassociatedwithafailuretomeetliabilitiestimelyanddispose LIQUIDITY RISK Fitch Ratings is evaluatedonthebasisofratingsassignedbyinternationalratingagencies limits oninvestmentsofdifferentcreditqualityintheGuidelines.Credit in foreigndebtsecuritiesandshort-termcashgolddepositsbyestablishing managesexposuretocreditriskrelatedinvestmentsmade The BankofLatvia Bank of Latvia tocreditrisk(asattheendof2003)isprovidedinNotes2931. Bank ofLatvia nors andmonitorstheadequacyofcollateralonaregularbasis.Exposure BoardofGover- list referredabovewiththerequirementsofBankLatvia's cies. TheMonetaryPolicy Departmentreviewsthecomplianceofsecuritieson BoardofGovernorsinrespectlong-termliabilitiesforeigncurren- of Latvia's tional ratingagenciesarenotbelowthethresholdsestablishedbyBank Executive Boardandwhoseissuers'ratingsassignedbyinterna- Bank ofLatvia's have beenincludedonthelistofsecuritiesapprovedbyChairperson governmentsecuritiesandsuchprivatesectordebtsecurities,which of Latvian Short-term loansgrantedtodomesticcreditinstitutionsaresecuredbycollateral compliance withtheGuidelines. Operations DepartmentisinvolvedindailymonitoringoftheBankLatvia's ated withitsforeignoperations,theRiskManagementDivisionofMarket with onecounterparty.InordertomonitorBank'sexposurecreditriskassoci- on themaximuminvestmentinfinancialinstrumentsofsameassetclassand , Moody ' s InvestorsService and Standard&Poor ' s . Limitsaresetalso In order to minimise operational risk, the Bank of Latvia has developed adequate 57 regulations for the improvement of the internal control system, and the Bank of Latvia's Executive Board monitors abidance by them jointly with heads of organi- sational units. Under the internal control system, information and relevant tech- nical resources are classified to ensure confidentiality, availability and integrity of information. The Bank of Latvia has appointed owners of information and infor- mation systems who are responsible for classification, risk analysis and protection of particular information or information systems, and determination of the access rights and usage procedure.

From time to time, the Bank of Latvia's management reviews the adequacy and availability of resources for ensuring the continuity of the Bank's operations in case of emergency.

In order to improve the organisation of the Bank of Latvia's operational activities and to minimise operational risk, the Bank of Latvia has designed and is continu- ously upgrading a quality management system. In 2003, the quality management NOTES TO FINANCIAL STATEMENTS system was improved, and since May 2003 it complies with the quality manage- ment system standard ISO 9001:2000.

Within the framework of measures for minimising total operational risk, the Bank of Latvia has insured certain operational risks.

3. PRINCIPAL ACCOUNTING POLICIES

A summary of the principal accounting policies adopted by the Bank of Latvia in the preparation of these financial statements is set out below. The adopted ac- counting policies have been applied consistently in the financial statements for the years ended December 31, 2003 and December 31, 2002.

BASIS OF PRESENTATION

These financial statements have been prepared in accordance with the historical cost basis of accounting, modified for revaluation of certain assets and liabilities as referred to in the accompanying notes.

FOREIGN CURRENCY TRANSLATION

Transactions denominated in foreign currencies are recorded in lats at the ex- change rates quoted by the Bank of Latvia for the day of the transaction. Mon- etary assets and liabilities denominated in foreign currencies are translated into lats at exchange rates set by the Bank of Latvia at the end of the year. The official exchange rates of the lats against foreign currencies as quoted by the Bank of Latvia are calculated taking into account the peg of the lats to the SDR on the basis of the exchange rate of the US dollar against the SDR, and the exchange rates of other currencies against the US dollar as quoted in the information sys- tem Reuters. Gains and losses resulting from the translation of monetary assets and liabilities denominated in foreign currencies are credited or charged to the balance sheet caption "Valuation account". BANK OF LATVIA: ANNUAL REPORT 200358 JPY GBP EUR USD XDR caption "Valuation account"totherelevantprofitandlossstatementcaption. the accumulatedrevaluationadjustmentistransferredfrom thebalancesheet caption "Valuation account"untiltheirdisposal.Upondisposal ofsuchsecurities, from revaluationofthesefinancialinstrumentsarereported inthebalancesheet at fairvalueinthebalancesheet.Adjustmentstoofsecuritiesarising governmentsecuritiesarestated Debt securitiesofforeignissuersandtheLatvian SECURITIES balance sheetcaption"Valuation account". deficit arisingfromtherevaluationofgoldreservesiscreditedorchargedto Gold reservesarerecordedatmarketvalueinthebalancesheet.Anysurplusor GOLD asset andsettletheliabilitysimultaneously. recognised amountsandthereisanintentiontosettleonanetbasis,orrealisethe nancial statementswhenthereisonlyalegallyenforceablerighttosetoffthe Financial assetsandliabilitiesareoffsetthenetamountreportedinfi- OFFSETTING FINANCIALASSETS ANDLIABILITIES assets andliabilities. and 2002didnotdiffermateriallyfromthereportedbookvalueofrespective Fair financialassetsandliabilitiesattheendof2003 valueoftheBank of Latvia's liabilities settledonanarm'slengthbasisbetweenknowledgeable,willingparties. Fair valueistheamountatwhichfinancialassetscouldbeexchanged,or FAIR VALUES OFFINANCIALASSETS ANDLIABILITIES XAU andusedincompilingthebalancesheetareasfollows: Latvia The principalexchangeratesofforeigncurrenciesandgoldsetbytheBank is included in the balance sheet of the Bank of Latvia atnominalvalueasclaims is includedinthe balancesheetoftheBank Latvia balancesheet.Therelatedfundingprovidedtothecounterparty Bank ofLatvia's curities purchasedunderreverse repurchaseagreementsarenotincludedinthe Reverse repurchaseagreementsareaccountedforas financingtransactions.Se- REVERSE REPURCHASE AGREEMENTS abilities arerecordedatnominalvalue. granted tocreditinstitutions,depositsandsimilarfinancialclaimsli- Loans FINANCIAL CLAIMSANDLIABILITIES LOANS TOCREDITINSTITUTIONS,DEPOSITSANDSIMILAR 0.00506 0.96 0.674 0.541 0.7997 2003 (attheendofyear) 223.44 0.00494 0.946 0.61 0.594 0.7997 2002 205.21 on domestic credit institutions or foreign credit institutions and other foreign fi- 59 nancial institutions, as appropriate.

The difference between the purchase and resale price of securities is treated as interest income and recognised in the profit and loss statement over the term of the agreement.

REPURCHASE AGREEMENTS

Repurchase agreements are accounted for as financing transactions. Securities sold under repurchase agreements are retained in the Bank of Latvia's balance sheet along with other securities that are not involved in these transactions. Fund- ing received from such sales is included in the balance sheet at nominal value as a liability to the counterparty.

The difference between the sale and repurchase price of securities is treated as interest expense and recognised in the profit and loss statement over the term of NOTES TO FINANCIAL STATEMENTS the agreement.

FINANCIAL DERIVATIVES

The Bank of Latvia enters into commitments involving forward exchange rate contracts, currency and interest rate swap arrangements and interest rate future contracts, which are reported in off-balance sheet accounts at their contract or notional amount. Subsequent to initial recognition and measurement, financial assets and liabilities arising from these derivative financial instruments are reval- ued on a regular basis and reported in the balance sheet at fair value. Fair value of respective financial assets and financial liabilities is obtained from quoted market prices or discounted cash flows. Discounted cash flows are modeled on the basis of financial instruments' quoted market prices and money market interest rates.

Any surplus or deficit arising from a change in fair value of forward exchange rate contracts and currency and interest rate swap arrangements is credited or charged to the balance sheet caption "Valuation account". Realised gains or losses arising from a change in fair value of interest rate future contracts are transferred to the profit and loss statement upon settlement.

ACCRUED INTEREST INCOME AND EXPENSE

Accrued interest income on debt securities of foreign issuers and Latvian govern- ment securities are reported under the balance caption "Convertible foreign cur- rencies" or "Government securities". Accrued interest income and expense on other financial instruments are reported under relevant balance sheet captions of other assets and liabilities.

FIXED ASSETS

Fixed assets are tangible long-term investments costing not less than 50 lats and with the useful life over one year. These assets are used in the provision of ser- vices as well as in the maintenance of other fixed assets and for the Bank of Latvia's administrative purposes.

Fixed assets are recorded at historical cost less accumulated depreciation. If the recoverable amount of a fixed asset is lower than its carrying amount, the carrying amount of the fixed asset is reduced to the asset's recoverable amount.

Depreciation is provided using the straight-line method over the useful life of the BANK OF LATVIA: ANNUAL REPORT 200360 fiefriue10 20 20 25–33 20 Tools Cash processingequipment Other officeequipment Computer equipment Office furniture Transport vehicles Buildings IMPAIRMENT OFASSETS ware isrecognisedintheprofitandlossstatementforrelevantperiod. tems whenincurred.Expenseonthemaintenanceofinformationsystemssoft- 14–20 the profitandlossstatementasexpenseonmaintenanceofinformationsys- arerecognisedin Costs relatedtosoftwaredevelopmentbytheBankofLatvia years. as specifiedintherelevantagreements;however,thisperiodmaynotexceed10 costs ofsuchsoftwareareamortisedovertheperiodlicenseduse software forinformationsystems,adjustedaccruedamortisation.Acquisition Intangible assetsincludecostsrelatedtotheacquisitionofrightsusespecialised INTANGIBLE ASSETS loss statementcaption"Otheroperatingexpense". of thefixedassetsasattimedisposalandisreportedunderprofit ondisposaloffixedassetsisdeterminedthebasiscarryingamount Loss in theprofitandlossstatementwhenincurred. Costs associatedwiththemaintenanceandrepairsoffixedassetsarerecognised ments designatedashedgesofexchangeriskassociatedwiththeirdevelopment. of individualfixedassetsincludesaneffectiveresultarisingfromfinancialinstru- In accordancewithgenerallyacceptedprinciplesforhedgeaccounting,thecost Other fixedassets The followingdepreciationrateshavebeenappliedonanannualbasis: land andworksofartarenotdepreciated. Assetsunderconstructionordevelopment, asset estimatedbytheBankofLatvia. Bank of Latvia's liabilitiestoholders oftherespectivebanknotesandcoins. Bank ofLatvia's incirculation"reportsthe tion" atnominalvalue.Thebalance sheetcaption"Lats incircula- gold circulationcoins,areincluded inthebalancesheetcaption"Lats exceptfor banknotesand coinsincirculationissuedbytheBankofLatvia, Lats LATS INCIRCULATION statement. included inthebookvalueofassetandarerecognised theprofitandloss specific provisionsforarelevantassetareestablished.Such provisionsarenot assets onaregularbasis.Ifanimpairmentofassethas occurred,adequate Relevant organisational unitsassessthequalityBankofLatvia's BankofLatvia's (percentage) 1–3 50 GOLD CIRCULATION COINS 61 Gold circulation coins (fineness .999) held in the vaults of the Bank of Latvia are included in the balance sheet caption "Other domestic assets", as their nominal value is directly supported by their content of gold. These coins are stated in the balance sheet at the market value of their content of gold.

When gold circulation coins are issued, they are excluded from the balance sheet caption "Other domestic assets". The respective coins in circulation are not in- cluded in the balance sheet caption "Lats in circulation", as their nominal value is directly supported by their content of gold.

COMMEMORATIVE COINS

The issued commemorative coins that represent the Bank of Latvia's liability to holders of these coins are included in the balance sheet caption "Lats in circula- tion". The issued commemorative coins that are not circulation coins are not in- NOTES TO FINANCIAL STATEMENTS cluded in the balance sheet caption "Lats in circulation".

CASH AND CASH EQUIVALENTS

For the purposes of the cash flow statement, cash and cash equivalents are de- fined as the amounts comprising convertible foreign currency in cash, demand deposits with foreign credit institutions and other foreign financial institutions, foreign debt securities, which are readily convertible to cash close to their fair value within twenty-four hours, excluding demand deposits from foreign financial institutions, domestic credit institutions, Latvian Government and other domes- tic financial institutions.

INTEREST AND SIMILAR INCOME AND EXPENSE

Interest income and expense are recognised in the profit and loss statement on an accrual basis.

Interest income includes interest on bonds purchased, loans granted and deposits made, as well as similar income, i.e., the result on disposal of debt securities, the result on changes in the fair value of interest rate future contracts and dividends on shares in the Bank for International Settlements.

Interest expense includes interest on time deposits attracted from credit institu- tions, deposits from the Government and other financial institutions and loans of foreign financial institutions.

FEES

Fees are charged or credited to the profit and loss statement on an accrual basis.

BANKNOTE PRODUCTION AND COINAGE COSTS

Banknote production and coinage costs are charged to the profit and loss state- ment when incurred. BANK OF LATVIA: ANNUAL REPORT 200362 nraei odmre au –4 531 51 025 – 248647 –13 –64 Increase ingoldmarketvalue Net changesresultingfromgolddepositsandtheirwithdrawals As atDecember31,2002 Foreign currencyincash foreign financialinstitutions Time depositswithforeigncreditinstitutions andother institutions andinternational Demand depositswithforeigncentralbanks,credit and corporateentities Debt securitiesofforeigngovernments,financialinstitutions 6. INTERNATIONAL MONETARY FUND Total 55 543 248 583 foreign currencies"wascomprisedofthefollowingassets: At balancesheetcaption"Convertible theendofyear,BankLatvia's lats attheendof2002). tion ofthesecurities(9095thousandlatsatend2003and8769 date ofacquisitionandinterestincomeaccruedsubsequenttotheacquisi- Interest bearingdebtsecuritiesincludebothinterestincomepurchasedatthe in short-termcashdepositsanddebtsecuritiesofhighliquidity. areinvestedprimarily Convertible foreigncurrencyassetsoftheBankLatvia 5. CONVERTIBLE FOREIGNCURRENCIES As atDecember31,2003 Movements ingoldreservesduring2003wereasfollows: 4. GOLD (BIS). AsatDecember 31,2002,theseshareswere denominatedinthegoldequiva- owns1 000 sharesintheBankforInternational Settlements The BankofLatvia 7. SHARESINTHEBANKFOR INTERNATIONALSETTLEMENTS 126 800thousandSDR. At theendof2003and2002,Republic totalquotaintheIMFwas ofLatvia's thousand SDR(101144lats). 478 At theendof2003and2002,Republic quotaintheIMFwas126 ofLatvia's IMF arestatedasabalancesheetliability(seeNote14). holdings inlatsandtheSystemicTransformation Facility (STF)grantedbythe asset denominatedinSDRandrecognisedthebalancesheet assets.TheIMF isrecordedasan cured bypromissorynotesissuedtheGovernmentofLatvia, The Republic quotaintheInternationalMonetaryFund ofLatvia's (IMF),se- ryone Amount in Troy ounces 695518 25710 52911 2003 (in thousandsoflats) 695 774 834 thousands 583043 of lats 65389 88092 2002 789 737313 lent (5 834 Troy ounces). On March 10, 2003 the Bank for International Settle- 63 ments re-denominated shares in the SDR. As a result of this re-denomination, nominal value of the Bank of Latvia's share holding in the BIS was 1 250 thousand SDR on December 31, 2003.

As a result of changes in gold market value and the BIS share re-denomination, the value of the Bank of Latvia's shares in the BIS decreased by 197 thousand lats during 2003, and at the end of 2003 the value of the BIS shares owned by the Bank of Latvia was 1 000 thousand lats (1 197 thousand lats at the end of 2002). This adjustment of the change in share value is reported under the balance sheet cap- tion "Valuation account".

8. OTHER FOREIGN ASSETS

At the end of the year, other foreign assets consisted of the following items: (in thousands of lats) NOTES TO FINANCIAL STATEMENTS 2003 2002 Non-traded financial derivative contracts with foreign financial institutions 4 628 3 319 Accrued interest income on deposits with foreign credit institutions and other foreign financial institutions 118 216 Other foreign assets 184 358

Total 4 930 3 893

9. LOANS TO CREDIT INSTITUTIONS

At the end of the year, credit facilities provided to domestic credit institutions were as follows: (in thousands of lats) 2003 2002 Repo loans by original maturity 59 320 30 545 7-day maturity 45 000 14 140 28-day maturity 14 320 16 405 Credit facilities provided under the European Union grant – 145

Total 59 320 30 690

10. TRANSIT CREDITS

The Bank of Latvia acts as an agent for the Government of the Republic of Latvia for distribution of funds received from various international institutions. This cap- tion states credit facilities granted under the Republic of Latvia's Government foreign borrowings to support the government investment programs (3 018 thou- sand lats; 11 749 thousand lats at the end of 2002). The Bank of Latvia is not exposed to any credit risk arising from transit credits. ot 907 7 208 6 35341302 3503 960 –8504 2068 –1847 5674 –756 29097 –1719 –3295 –887 depreciation Accumulated Cost As atDecember31,2002

BANK OF LATVIA: ANNUAL REPORT 200364 e okvle 914 2 39 4 19534200 44078 1985 4273 –67 641 410 1442 –9878 – 2776 329 7 2162 –1784 –2288 3 265 770 5826 –448 2121 – –801 38 777 –1 374 482 30375 29124 –83 –441 –1833 –16 32798 520 16 – 94 –3705 –130 –45 1656 –361 110 349 –1251 – –759 204 152 –114 – 513 – –364 349 –410 1278 –67 1 345 value book Net –364 2379 depreciation Accumulated Cost 28210 As atDecember31,2003 Net changeinaccumulateddepreciation Depreciation ondisposals charge Depreciation cost in change Net Disposals Adjustments Additions During 2003 value book Net Over 3years 1 to3years 6 to12months 3 to6months Within 3months The followingchangesinfixedassetstookplace2003: 12. FIXEDASSETS Total Residual maturity securities: government At heldthefollowingLatvian theendofyear,BankLatvia 11. GOVERNMENTSECURITIES ulig untr Cs rnpr te Total Other Transport Cash Furniture Buildings n adadofc rcsigvhce fixed vehicles processing office and and land qimn qimn assets equipment equipment (in thousandsoflats) 16907 43608 62273 1707 2003 51 – (inthousandsoflats) 3 7–422 –7 –38 24934 19379 13044 64382 6955 2002 70 13. OTHER DOMESTIC ASSETS 65 At the end of the year, other domestic assets consisted of the following items: (in thousands of lats) 2003 2002 Intangible assets 2 891 3 023 Currency swap arrangements with domestic credit institutions 567 2 800 Accrued interest income on loans to domestic credit institutions 36 81 Gold circulation coins in vault 32 147 Other domestic assets 379 651

Total 3 905 6 702

Intangible assets include the rights to use specialised software for information systems acquired by the Bank of Latvia. NOTES TO FINANCIAL STATEMENTS

In 2003, the following movements were observed in intangible assets: (in thousands of lats)

As at December 31, 2002 Cost 3 240 Accumulated amortisation –217

Net book value 3 023 During 2003 Additions 386 Amortisation charge –518 As at December 31, 2003 Cost 3 626 Accumulated amortisation –735

Net book value 2 891

14. INTERNATIONAL MONETARY FUND

At the end of 2003, liabilities to the IMF were comprised of the STF and IMF holdings in lats (see Note 6).

The credit facility under the STF has been provided to the Republic of Latvia with the aim of supporting the Government's economic and financial programme. The respective facility is scheduled for repayment in instalments until July 2004.

Movements in liabilities to the IMF during 2003 were as follows: (in thousands of lats) STF Holdings Total in lats As at December 31, 2002 9 146 101 242 110 388 Increase in holdings in lats – 132 132 Repayment –6 097 – –6 097

As at December 31, 2003 3 049 101 374 104 423 BANK OF LATVIA: ANNUAL REPORT 200366 Other foreignliabilities Accrued expense financial institutions Non-traded financialderivativecontractswithforeign LVL 500 Banknotes LVL 100 LVL 1 LVL 2 LVL 20 LVL 50 LVL 5 20 s 50 s 10 s 5 s 2 s LVL 10 LVL 5 LVL 10 Total banknotes Total coins 1 s LVL 100 Coins oia mutNme Percentage Number Amount Nominal circulation: At theendofyear,followingunitslats(LVL) andsantims(s)werein 16. LATS INCIRCULATION Total At theendofyear,otherforeignliabilitiesconsistedfollowingitems: 15. OTHERFOREIGNLIABILITIES thousand latsat theendof2003.Therespective coinsincirculationarenot in- coins incirculationincreasedfrom 1870thousandlatsattheendof2002to980 .999) withanominalvalueofLVL 100.Asaresult, thetotalnominalvalueofsuch continuedtoissuegold circulation coins(fineness In 2003,theBankofLatvia Total latsincirculation 140 369 237 391 650 865 97 328 11 768 50 717 71 866 53 194 31 280 6 504 2 627 4 980 1 655 1 227 1 095 2003 682 145 139 882 326 77 i huad (inthousands (in thousands 119 859 211 495 594 306 82082 54 140 73 908 52 822 28 326 6 640 9 751 2 417 4 731 1 477 1 122 2002 622 632 flt)of units) of lats) 137 792 957 302 – 11 768 13 133 16 547 24 532 11 870 10 639 88 247 54 777 3 252 1 404 1 014 9 961 7 187 2003 195 15 14 – – 3 – 12 085 14 770 22 447 10 575 10 564 79 196 47 874 3 320 1 199 1 083 9 751 9 461 7 391 2002 7 929 (in thousandsoflats) 164 2003 14 300 – – – 3 31 – 8 260 2003 14.3 20.6 34.8 10.5 95.4 1.0 7.4 1.7 0.7 0.4 0.3 0.2 7.8 0.1 0.2 4.6 100.0 0 0 0 5 444 2002 188 42 2002 13.2 19.2 34.0 11.9 95.5 1.1 8.7 1.6 0.8 0.4 0.2 0.2 8.5 0.1 0.1 4.5 5 674 100.0 – 0 0 cluded in the balance sheet caption "Lats in circulation", since their nominal value 67 is directly supported by their content of gold.

Among coins in circulation, there were also commemorative coins that did not represent any liability of the Bank of Latvia to holders of these coins, and their total nominal value was 963 thousand lats at the end of 2003 (930 thousand lats at the end of 2002). These coins are not included in the balance sheet caption "Lats in circulation".

17. BALANCES DUE TO CREDIT INSTITUTIONS

Balances due to credit institutions include balances on the settlement accounts of banks and other credit institutions opened with the Bank of Latvia, as well as time deposits in lats received from the above financial institutions. Credit institutions place their funds with the Bank of Latvia in order to comply with its minimum reserve requirement for banks, as well as to effect interbank and customer pay- NOTES TO FINANCIAL STATEMENTS ments, the Bank of Latvia's monetary policy operations and other settlements in the Bank of Latvia's payment systems.

At the end of 2003, demand deposits of credit institutions amounted to 123 810 thousand lats (131 793 thousand lats at the end of 2002). Credit institutions had placed no time deposits with the Bank of Latvia at the end of 2003 (they totalled 2 430 thousand lats at the end of 2002).

18. OTHER DOMESTIC LIABILITIES

At the end of the year, other domestic liabilities consisted of the following items: (in thousands of lats) 2003 2002 Profit appropriated to the State budget 4 049 5 341 Currency swap arrangements with domestic credit institutions 1 074 1 148 Accrued expenditure on completed construction works – 734 Deferred liabilities to constructors 640 813 Accrued interest expense on government deposits 256 215 Other accrued expense 1 088 824 Deferred income 5 400 Tax liabilities 14 139 Other domestic liabilities 661 748

Total 7 787 10 362 (by employee) Compulsory socialsecuritycontributions (by employer) Compulsory socialsecuritycontributions Personal incometax Tax onrealestate Value addedtax Other taxes

BANK OF LATVIA: ANNUAL REPORT 200368 Total possible losses. transferred tothereservecapital.Thecapitalshall beformedtocover profitremainingafter making theabovedeductionsshallbe The BankofLatvia's to theStatebudget. via's profitearnedduringtheyearendedDecember31,2003 shallbetransferred Lat- per centin2002and2004,respectively).Hence,34 oftheBank cable toresidentsoftheRepublic was19per cent(22perand15 ofLatvia to theStatebudget.OnDecember31,2003,enterpriseincometaxrateappli- earned duringthereportingyearforusageofStatecapitalshallbetransferred Enterprise IncomeTax", andapayment in theamountof15percentprofit "On annual profit,calculatedbyapplyingthetaxratesetforresidentsLaw establishesthatapartoftheBankLatvia's "OntheBankofLatvia" The Law the BankofLatvia". "On amountsto25millionlatsasprescribedbytheLaw tal oftheBankLatvia profitallocations.Theauthorisednominalcapi- sources andtheBankofLatvia's iscomprisedoftheStateallottedre- The nominalcapitaloftheBankLatvia 20. NOMINALCAPITAL ANDRESERVE CAPITAL 20) totheStatebudget. State capital(4049thousandlatsin2003;53412002;seeNote part oftheprofitearnedinreportingyearandpaymentforusage transfersa In additiontothetaxpaymentsindicatedherein,BankofLatvia calculatedandpaidthefollowingtaxes: In 2003,theBankofLatvia 19. TAXES iblte adIces aclto lis()Liabilities Claims(–) Calculation Increase Paid Liabilities 2 6 – – 6 – 14 3 2187–5 1 – – 1857 2007 22 – 1 834 2 008 8 8 2 – 687 – 687 9 2 3 – –32 423 – 391 8 7 122 – 172 – 288 1–2–9 – 2 – 11 2003 1 2518–2139 –32 5148 22 5 219 liabilities deferred (in thousandsoflats) 2002 21. VALUATION ACCOUNT 69 At the end of the year, the valuation account comprised the following items: (in thousands of lats) 2003 2002 Surplus on revaluation of assets and liabilities in foreign currency and gold 26 612 21 511 Deficit on revaluation of forward exchange rate contracts –4 258 –2 892 Deficit on revaluation of currency swap arrangements –507 –707 Surplus on revaluation of interest rate swap arrangements 946 2 899 Deficit (–)/surplus on revaluation of securities –3 081 7 578

Total 19 712 28 389

22. FINANCING OF THE FINANCIAL AND CAPITAL MARKET COMMISSION NOTES TO FINANCIAL STATEMENTS

Pursuant to Article 5 of the Transition Rules of the Law "On the Financial and Capital Market Commission", the operation of the Financial and Capital Market Commission shall be financed from payments made by financial and capital mar- ket participants, the State budget and the Bank of Latvia. In 2003, the Bank of Latvia covered expenses pertaining to the supervision of credit institutions in the amount of 1 200 thousand lats. The Bank of Latvia is to make such payments also from 2004 until 2006 according to the following schedule: 960 thousand lats in 2004, 600 thousand lats in 2005, and 240 thousand lats in 2006.

23. OTHER OPERATING EXPENSE

Other operating expense was as follows: (in thousands of lats) 2003 2002 Tax on real estate 423 102 Business travel 395 374 Maintenance of buildings, territory and equipment 360 354 Municipal services and rent of premises 344 361 Communications services 341 360 Acquisition of low value office supplies 301 378 Publications (including publications in mass media) 276 206 Personnel training 224 177 Insurance 195 144 Maintenance of transport vehicles 118 120 Legal and other professional fees 46 106 Transportation of valuables – 530 Other operating expense 613 600

Total 3 636 3 812 BANK OF LATVIA: ANNUAL REPORT 200370 Profit beforeappropriation Net changeinbalancesheetitems: Adjustments: Net decreaseinliabilitiestotheIMF Net increase(–)/decreaseinotherdomesticassets Net increase(–)/decreaseinSpecialDrawingRights Net decreaseingold financial instruments'marketvalueadjustment Net surplus/deficit(–)arisingfromrevaluationand ondisposaloffixedassets Loss intangible assets Depreciation offixedassetsandamortisation and other foreign investments and other Net increase(–)/decreaseinforeigndebtsecurities Net increase(–)/decreaseingovernmentsecurities Decrease intransitcredits Net increaseinloanstodomesticcreditinstitutions Net increaseinotherforeignassets for 2002. caption "Repayment ofthecreditfacilityprovided bytheInternationalMonetaryFund" inthecashflowstatement inflow (1) Reconciliation ofprofitbeforeappropriationtonetcashandequivalents 24. CASH FLOWSTATEMENT 1 operating activities Net cashandequivalentsinflowarisingfrom Includingrepaymentofthecreditfacility(6 098thousandlats)providedbytheIMF, whichwasreported underthe Increase inEuropeanUniongrant Net decreaseinotherdomesticliabilities institutions Net decreaseintimedepositsofotherfinancial deposits Net increase/decrease(–)intheGovernment'stime institutions Net decreaseintimedepositsofdomesticcredit Net increaseinlatscirculation Net increase/decrease(–)inotherforeignliabilities Net increaseinlatsdepositsofforeignbanks –12 881 –11 702 –28 630 –6 097 11 908 –1 037 2 665 2 302 2 109 8 731 (in thousandsoflats) 2003 –34 13 12 –6 624 –1 480 13 317 –2 430 59 513 32 242 2 586 1 – –39 667 –11 857 –6 098 –2 751 14 434 63 162 –1 887 1 798 1 555 6 863 2002 13 1 – 6 –15 892 –53 462 –19 570 66 629 2 965 –125 –450 257 7 (2) Analysis of cash and cash equivalents 71 (at the end of the year; in thousands of lats) 2003 Change 2002 Assets Convertible foreign currencies in cash 695 –94 789 Demand deposits with foreign credit institutions and other foreign financial institutions 52 911 –35 181 88 092 Foreign debt securities, which are readily convertible to cash within twenty-four hours 191 102 61 094 130 008 Liabilities Demand deposits from foreign financial institutions –460 –148 –312 Demand deposits from domestic credit NOTES TO FINANCIAL STATEMENTS institutions –123 810 7 983 –131 793 Demand deposits from Latvian Government –15 679 –4 858 –10 821 Demand deposits from other domestic financial institutions –800 –138 –662

Total 103 959 28 658 75 301

25. CONTRACTED CAPITAL OFF-BALANCE SHEET COMMITMENTS

At the end of 2003, the Bank of Latvia had capital off-balance sheet commitments in the amount of 33 thousand lats in respect of the acquisition of fixed assets (1 045 thousand lats at the end of 2002). Derivative exchangeratecontracts Spot exchangeratecontracts interest ratecontracts Other non-tradedfinancialderivative Gold interestrateswaparrangements BANK OF LATVIA: ANNUAL REPORT 200372 Forward exchangeratecontracts Currency swaparrangements with foreignfinancialinstitutions with foreignfinancialinstitutions with foreignfinancialinstitutions with domesticcreditinstitutions Interest ratefuturecontracts and spotexchangeratecontracts Total non-tradedfinancialderivativecontracts with foreignfinancialinstitutions with domesticcreditinstitutions with foreignfinancialinstitutions with foreignfinancialinstitutions exchange rateandfinancialderivativecontracts: At hadenteredintothefollowingspot theendofyear,BankLatvia alsoengagesincurrencyswaparrangements. monetary policy,theBankofLatvia interest rateandexchangerisksassociatedwithitsforeignreserves.Aspartof rate swaparrangementsandinterestfuturecontractsinordertomanage entersintoforwardandspotexchangeratecontracts,interest The BankofLatvia 26. FINANCIALINSTRUMENTS'OFF-BALANCESHEETACCOUNTS 237 427 28 600 75 707 7 522 2003 notional amount 35 572 3 679 Contract or x x 248 127 185 521 26 267 2002 37 56 467 25 483 x x 3 671 2003 946 567 sesLiabilities Assets – 4 628 183 567 11 Fair value 2 484 2 800 2002 540 – 3 319 2 800 (in thousandsoflats) 516 295 7 929 1 074 2003 – – 7 929 1 074 52 – 5 376 1 148 2002 – – 5 444 1 148 250 68 27. CURRENCY PROFILE 73 At the end of 2003 and 2002, the net position of the Bank of Latvia's assets, liabili- ties and memorandum items within the limits stipulated by the Guidelines corre- sponded to the currency profile of the SDR basket of currencies. At the end of the year, the currency profile of the Bank of Latvia's assets, liabilities and memo- randum items, as well as that of the SDR basket of currencies was as follows: (in thousands of lats) LVL XDR USD EUR GBP JPY Gold Other Total As at December 31, 2003 Foreign assets Gold – – – – – – 55 543 – 55 543 Special Drawing Rights – 75 – –––––75 Convertible foreign currencies – – 307 740 347 781 76 881 38 693 – 3 739 774 834

International Monetary Fund – 101 144 – –––––101 144NOTES TO FINANCIAL STATEMENTS Shares in the BIS – 1 000 – –––––1 000 Other foreign assets 4 628 – 47 127 111 12 5 4 930 Domestic assets Loans to credit institutions 59 320 – – –––––59 320 Transit credits – – 3 018 –––––3 018 Government securities 62 273 – – –––––62 273 Fixed assets 34 200 – – –––––34 200 Other domestic assets 3 901 – 4 –––––3 905

TOTAL ASSETS 164 322 102 219 310 809 347 908 76 992 38 693 55 555 3 744 1 100 242 Foreign liabilities Convertible foreign currencies – – – 149 ––––149 International Monetary Fund 101 374 3 049 – –––––104 423 Foreign bank deposits in lats 677 – – –––––677 Non-convertible currencies – – – ––––3636 Other foreign liabilities 7 959 – 98 202 –––18 260 Lats in circulation 682 145 – – –––––682 145 Domestic liabilities Balances due to credit institutions 123 810 – – –––––123 810 Balances due to the Government 45 753 75 818 33 608 ––––80 254 Balances due to other financial institutions 1 648 – 20 2––––1 670 Other domestic liabilities 6 898 – 5 884 ––––7 787 TOTAL LIABILITIES 970 264 3 124 941 34 845 – – – 37 1 009 211 Net position on balance sheet –805 942 99 095 309 868 313 063 76 992 38 693 55 555 3 707 91 031 Net position on financial instruments' off-balance sheet accounts 69 075 – –32 061 –46 319 6 836 56 982 –55 445 –2 876 –3 808 Net position on balance sheet and off-balance sheet accounts –736 867 99 095 277 807 266 744 83 828 95 675 110 831 87 223 BANK OF LATVIA: ANNUAL REPORT 200374 Conformity withthecurrencyprofile fcrece % 27 26 16 29 100.0 x x 12.95 100.0 11.64 1.07 32.64 0.17 42.77 12.23 x 10.95 949086 x 100.0 33.23 37 x 42.35 91375 – x –473 6 667 x 1 083 –3150 – x –51 338 75923 57672 13.28 67969 91848 1 040 934 100.0 9 854 10460 – 11.78 of currencies(%) 9 817 206306 0.11 –49743 52421 Currency profileoftheSDRbasket 262858 35.94 765 –112 52421 91998 off-balance sheetaccounts(%) 18251 – 32032 0.02 18251 39.00 position onbalancesheetand 429 –621 57509 420 Foreign currencyprofileofthenet 57509 13.20 288081 x 148391 of theSDRbasketcurrencies 256049 376 043 9 187 Conformity withthecurrencyprofile 11.56 375623 101185 accounts 91998 sheet off-balance 137590 x 907410 36.79 Net positiononbalancesheetand 820 –769 38.32 accounts sheet off-balance Net positiononfinancialinstruments' x sheet balance on position Net TOTALLIABILITIES x TOTALASSETS As atDecember31,2002 of currencies(%) Currency profileoftheSDRbasket off-balance sheetaccounts(%) position onbalancesheetand Foreign currencyprofileofthenet of theSDRbasketcurrencies (cont.) V D S U B P odOhrTotal Other Gold JPY GBP EUR USD XDR LVL (in thousandsoflats) 28. REPRICING MATURITY OF ASSETS AND LIABILITIES 75 (in thousands of lats) Interest bearingNon- Total interest Within 3–6 6–12 1–3 Over bearing 3 months months months years 3 years As at December 31, 2003 Foreign assets Gold 12 296 14 367 – – – 28 880 55 543 Special Drawing Rights 75 – – – – – 75 Convertible foreign currencies 183 079 17 813 49 979 356 434 156 235 11 294 774 834 International Monetary Fund – – – – – 101 144 101 144 Shares in the BIS – – – – – 1 000 1 000 Other foreign assets – – – – – 4 930 4 930

Domestic assets NOTES TO FINANCIAL STATEMENTS Loans to credit institutions 59 320 – – – – – 59 320 Transit credits – – – – – 3 018 3 018 Government securities 1 707 51 – 43 608 16 907 – 62 273 Fixed assets – – – – – 34 200 34 200 Other domestic assets – – – – – 3 905 3 905 TOTAL ASSETS 256 477 32 231 49 979 400 042 173 142 188 371 1 100 242 Foreign liabilities Convertible foreign currencies – – – – – 149 149 International Monetary Fund – – – – – 104 423 104 423 Foreign bank deposits in lats 367 – – – – 310 677 Non-convertible currencies – – – – – 36 36 Other foreign liabilities – – – – – 8 260 8 260 Lats in circulation – – – – – 682 145 682 145 Domestic liabilities Balances due to credit institutions – – – – – 123 810 123 810 Balances due to the Government 75 683 4 485 – – – 86 80 254 Balances due to other financial institutions 870 – – – – 800 1 670 Other domestic liabilities – – – – – 7 787 7 787 TOTAL LIABILITIES 76 920 4 485 – – – 927 806 1 009 211 Net position on balance sheet 179 557 27 746 49 979 400 042 173 142 x x Assets on financial instruments' off-balance sheet accounts 318 277 1 002 – 29 576 – x x Liabilities on financial instruments' off-balance sheet accounts 351 651 1 012 – – – x x As at December 31, 2002 TOTAL ASSETS 322 231 29 590 113 103 226 206 184 757 165 047 1 040 934 TOTAL LIABILITIES 62 746 – 935 2 722 – 882 683 949 086 Net position on balance sheet 259 485 29 590 112 168 223 484 184 757 x x Assets on financial instruments' off-balance sheet accounts 425 376 15 337 18 805 13 401 13 409 x x Liabilities on financial instruments' off-balance sheet accounts 454 279 14 458 18 064 – – x x BANK OF LATVIA: ANNUAL REPORT 200376 Claims Unclassified assets governmental institutions Foreign centralgovernmentsandother Other foreignfinancialinstitutions credit institutions Foreign centralbanksand Foreign localgovernments Domestic creditinstitutions centralgovernment Latvian International institutions Foreign corporateentities 2002) are reported as exposure to the Latvian centralgovernment. 2002) arereportedasexposuretotheLatvian interest incomeintheamountof36thousandlats(80 latsattheendof thousand lats(30545attheendof2002)and therelatedaccrued 59 320 under agreementstoreselldomesticcreditinstitutionsinthe amountof governmentsecurities purchased security. Asaresult,claimsarisingfromLatvian under repurchaseagreementsareclassifiedhereinaccording totheissuerof For thepurposesofcreditriskanalysis,claimsarisingfromsecuritiespurchased Total follows: assetsattheendofyearwasas The sectoralprofileoftheBankLatvia's 29. SECTORAL PROFILEOFASSETS discretion. which aresubjecttodisposalattheBankofLatvia's caption "Convertibleforeigncurrencies"representinvestmentsofhighliquidity, "Convertible foreigncurrencies".Allotherbalancesincludedinthebalancesheet sand latsattheendof2002),whichareincludedinbalancesheetcaption haspledgedsecuritiesintheamountof3121thousand lats(3228thou- of Latvia In accordancewithinterestratefuturecontractsdealingrequirements,theBank residual maturitydates. at carryingamounts,categorisedbytheearlierofcontractualinterestre-fixingor to achangeininterestrates.Assetsandliabilitiesreportedthistablearestated assetsandliabilities The tableabovereflectsthesensitivityofBankLatvia's (in thousandsoflats) 407 786 233 734 124 651 142 408 90 341 25 216 42 667 33 410 2003 1 100242 29 mutPercentage Amount 269830 106757 167120 292 475 113 100 13869 34760 42 878 2002 1 040934 145 2003 21.2 37.2 11.3 12.9 2.3 3.0 8.2 3.9 0 100.0 2002 25.9 28.1 10.3 16.1 10.9 1.3 3.3 4.1 0 100.0 30. FOREIGN ASSETS BY THEIR LOCATION OR THE COUNTERPARTY'S 77 DOMICILE

At the end of the year, the Bank of Latvia's foreign assets broken down by their location or the counterparty's domicile were as follows:

Amount Percentage (in thousands of lats) 2003 2002 2003 2002 European Union 450 800 432 605 48.1 48.4 United States of America 208 008 197 990 22.2 22.1 Japan 23 441 26 106 2.5 2.9 Other countries 112 869 70 792 12.0 7.9 International institutions 142 408 167 120 15.2 18.7

Total 937 526 894 613 100.0 100.0 NOTES TO FINANCIAL STATEMENTS

31. ASSETS BY CREDIT RATINGS ASSIGNED TO THE COUNTERPARTY

At the end of the year, the Bank of Latvia's assets broken down by categories of credit ratings assigned to the counterparty were as follows:

Credit Amount Percentage rating (in thousands of lats) 2003 2002 2003 2002 FOREIGN ASSETS Gold AAA 33 761 11 293 3.1 1.1 AA+ 7 217 13 210 0.7 1.3 AA 14 565 19 915 1.3 1.9 AA– – 6 607 0 0.6 Special Drawing Rights AAA 75 41 0 0 Foreign debt securities AAA 529 921 386 495 48.2 37.2 AA+ 23 593 52 680 2.1 5.1 AA 56 700 42 109 5.1 4.0 AA– 26 714 52 413 2.4 5.0 A+ 16 864 11 492 1.5 1.1 A 33 705 20 965 3.1 2.0 A– 8 021 16 889 0.7 1.6 Deposits with foreign credit institutions and other foreign financial institutions AAA 39 017 71 449 3.4 7.0 AA+ 1 799 19 826 0.2 1.9 AA 8 831 9 905 0.8 1.0 AA– 22 576 25 479 2.0 2.4 A+ 1 473 12 106 0.1 1.2 A 2 789 14 675 0.3 1.4 A– 2 136 41 0.2 0 Foreign currency in cash AAA 695 789 0.1 0.1 International Monetary Fund AAA 101 144 101 144 9.2 9.7 BANK OF LATVIA: ANNUAL REPORT 200378 DOMESTIC ASSETS oeg sesAAA Foreign assets on ocei ntttosDifferent Loans tocreditinstitutions rni rdt BBB+ Transit credits te oeg sesDifferent Other foreignassets hrsi h I AAA Shares intheBIS cre neeticm Different Accrued interestincome ntuet AAA instruments Derivative financial oenetscrte A– Government securities te Different Other Total categories ofcreditratingsassignedtothecounterpartywereasfollows: At foreignassetsbrokendownbymajor theendofyear,BankLatvia's TOTAL (cont.) Based on tive standingwithinthemajorcategoriesofanagency'sratings. ments. Ratingsbelow"AAA" aremodifiedbymarks "+"or"–"toshowtherela- and therating"A"counterparty'sstrongcapacitytomeet its financialcommit- commitments. Therating"AA" confirmsthecounterparty'sverystrongcapacity indicates anextremelystrongcapacityofthecounterparty to meetitsfinancial The rating"AAA" isthehighestpossiblelong-termcreditworthinessrating,which assetsasattheendofyear. tables showthebreakdownofBankLatvia's signed byotherinternationalcreditratingagencytothecounterparty, theabove 1 The Bank of Latvia isnotexposedtothe creditriskarisingfromtransitcredits. TheBankofLatvia Standard &Poor ' AA– AA AA+ A– A A+ AA A Different s category rating Credit creditratingsorotherequivalentas- rating Credit 1 (in thousandsoflats) (in thousandsoflats) 705 624 163 470 59320 62273 68 130 38 105 2563 1 000 3 018 2003 2003 799 634 579 1 100242 184 118 302 42 11 937 526 – mutPercentage Amount mutPercentage Amount 572 408 244 686 30690 11749 76 945 64 382 39 500 1517 1197 2002 2002 358 761 264 216 647 130 1 040934 574 894 613 – – 2003 2003 75.3 17.4 5.4 0.1 0.1 0.2 0.1 0.1 7.3 0.3 5.7 3.5 0 0 0 0 0 0 100.0 100.0 2002 2002 63.9 27.4 2.9 0.1 0.1 0.1 0.1 0.1 8.6 1.1 6.2 3.8 0 0 0 – 0 – 100.0 100.0 OF THEBANKLATVIA OFGOVERNORS REPORT TOTHEBOARD OFTHEAUDIT COMMISSION RS ON THESTATEAUDIT OFFICE 1 March2004 Riga ERNST &YOUNG "OntheBankofLatvia". Law andthe conformity withtheaccountingprinciplesadoptedbyBankofLatvia 2003, andtheresultsofitsoperationscashflowsforyearthenendedin asat31December material respects,thefinancialpositionofBankLatvia In ouropinion,thefinancialstatementsreferredtoabovepresentfairly,inall sonable basisforouropinion. overall financialstatementpresentation.We believethatourauditprovidesarea- used andsignificantestimatesmadebymanagement,aswellevaluatingthe financial statements.Anauditalsoincludesassessingtheaccountingprinciples amining, onatestbasis,evidencesupportingtheamountsanddisclosuresin the financialstatementsarefreeofmaterialmisstatement.Anauditincludesex- that weplanandperformtheaudittoobtainreasonableassuranceaboutwhether issued bytheInternationalFederation ofAccountants. Thosestandardsrequire We conductedourauditinaccordancewithInternationalStandardsonAuditing sibility istoexpressanopiniononthesefinancialstatementsbasedouraudit. management.Ourrespon- 48 to78,aretheresponsibilityofBankLatvia's the financialstatements).Thesestatements,whicharesetoutonpages and cashflowsfortheyearthenendedaccompanyingnotes(hereinafter, and therelatedstatementsofprofitloss,totalrecognisedgainslosses, We asat31December2003, haveauditedthebalancesheetofBankLatvia OF THEREPUBLICLATVIA 79

BANK OF LATVIA: ANNUAL REPORT 2003 RESOLUTION OF THE BANK OF LATVIA'S BOARD OF GOVERNORS

80 On March 24, 2004, the Bank of Latvia's Board of Governors passed Resolution No. 111/1 "On the Bank of Latvia's Annual Report for 2003".

Having reviewed the results of the audit of the Bank of Latvia's economic activity in 2003, the Bank of Latvia's Board of Governors resolves:

1 To approve the Bank of Latvia's Annual Report for 2003, including the balance sheet, profit and loss statement, statement of recognised gains and losses and cash flow statement.

2 To appropriate the Bank of Latvia's profit for 2003 in the following way. 2.1 4 049 thousand lats to be transferred to the state revenue. 2.2 7 859 thousand lats to be transferred to the Bank's reserve capital.

ILMÂRS RIMÐÇVIÈS GOVERNOR BANK OF LATVIA BANK OF LATVIA: ANNUAL REPORT 2003 REPORT BANK OF LATVIA: ANNUAL APPENDICES BANK OF LATVIA: ANNUAL REPORT 200382 e oeg ses368376323290216274220135258146138.6 194.6 205.8 2020.6 193.5 1939.9 242.0 1861.9 1868.4 297.4 1819.4 281.6 1708.4 299.0 1690.7 1644.9 312.3 1601.6 307.6 1571.5 1511.0 336.8 assets domestic Net Net foreignassets enterprises andprivate ofdomestic Loans ae(tedo ot;% ...... 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 on transactionsinlats(%) Weighted averageinterestrates rate (atendofmonth;%) refinancing Bank ofLatvia a n fmnh .8 .8 .8 .8 .6 .6 .7 .8 .6 .5 0.553 0.557 0.565 0.583 0.571 0.569 0.565 0.581 0.587 0.583 0.581 LVL vsEUR (at endofmonth) LVL vsUSD ae()8. 968. 548. 248. 568. 4186.2 84.1 80.7 813.0 85.6 761.1 83.9 835.6 82.4 762.6 749.7 774.7 83.9 758.2 771.0 85.4 784.0 784.3 746.7 –23.5 86.0 733.8 754.6 10.4 79.6 693.1 763.3 –13.4 84.3 764.8 730.6 –25.6 734.8 710.3 703.5 751.5 Net domesticassets Net foreignassets 709.2 base (%) Currency vsmonetary Monetary baseM0 Domestic moneysupplyM2D a n fmnh .2 .2 .2 .3 .6 .5 .5 .3 .4 .5 0.660 0.650 0.646 0.632 0.654 0.652 0.664 0.639 0.628 0.629 0.629 (at endofmonth) 2159.3 2134.5 2067.8 2061.9 2061.4 2005.9 1972.3 1944.0 1914.0 1879.1 1847.8 M2X money Broad BANKING SYSTEM BANK OFLATVIA n rvt esn ...... 3.8 2.9 3.1 3.0 3.0 3.1 3.2 3.1 2.9 2469.0 2391.2 2.8 2338.4 2281.7 2.9 2217.9 2143.7 2083.7 2027.9 and privatepersons 1982.2 1926.7 –60.6 1865.1 –58.5 –63.0 –60.6 –61.5 persons –67.0 –67.3 –63.4 –63.0 –69.6 –66.2 Other items(net) esn ...... 7.2 7.4 3.7 7.5 2.7 7.5 7.4 3.1 7.0 2.8 2.7 7.8 2.8 7.9 3.1 7.7 7.8 2.8 7.6 2.6 2.5 2.6 Time depositsofenterprises persons enterprises andprivate loansto Long-term Interbank loans rdt 065. 73.5 56.3 40.6 Credits fLti 1. 153.3 111.4 606.8 604.9 598.1 597.8 of Latvia Deposits withtheBank Currency incirculation esn 1. 4. 8. 0. 2. 5. 9. 9. 0. 6. 1584.4 1567.1 574.8 1507.5 567.5 1491.9 1499.5 560.3 1454.8 570.0 1426.5 561.9 1409.7 1383.0 551.1 1347.2 545.8 1319.5 534.2 531.0 531.9 528.3 persons enterprises andprivate Deposits ofdomestic Currency outsidebanks obns2. 926. 476. 0. 021397. 8450.0 88.4 73.6 103.9 80.2 102.3 63.5 64.7 60.8 29.2 27.9 12.6 To theGovernment(net) To banks nfrincrece 4. 4. 7. 8. 7. 8. 2. 1. 1. 3. 634.4 638.3 613.1 612.1 628.2 587.4 579.9 580.4 570.1 548.6 549.5 In foreigncurrencies MONETARY INDICATORS IN2003 Appendix 1 1 Currencyoutsidebanks +depositsofdomesticenterprisesand privatepersonsinthenationalcurrency. 1 9. 3. 4. 6. 9. 1. 3. 4. 5. 9. 1524.9 1496.2 1454.7 1449.7 1 433.2 1418.5 1392.4 1363.6 1343.8 1330.5 1 298.3 IIII IVIVI XXXI X IX VIII VII VI V IV III II I 701. 2. 4. 4. 3. 5. 6. 3. –52.8 –32.8 –62.2 –59.2 –38.8 –43.0 –49.8 –24.8 12.6 27.0 86136173145112173116105103.5 120.5 151.6 107.3 121.2 134.5 117.3 103.6 98.6 991. 934. 471. 56–2.8 55.6 11.4 44.7 41.4 59.3 13.6 39.9 5. 78–01–59–16–. –63.3 –2.9 –51.6 –15.9 –20.1 –7.8 –53.7 1. 2. 3. 3. 3. 3. 646.3 637.7 632.4 639.4 633.4 628.8 613.3 (at endofmonth;inmillionslats) 2 183.4 1 634.9 XII 75.4 2 542.6 1 657.7 2 258.7 –61.6 0.541 –17.2 –15.0 824.0 806.8 682.1 124.6 601.1 623.9 0.674 59.3 44.4 84.5 3.0 3.5 7.4 3.2 DOMESTIC ASSETS FOREIGN ASSETS ie ses3 5 2883 7 2703 4 2813 6 3323 6 4023 7 4627 33873 34012 4661 0 33960 4728 2429 61981 33302 1000 25 4878 68940 32861 6460 1000 4778 68838 32831 25 5649 1000 50000 69573 32844 8231 101144 4070 88355 1000 69373 32770 25 54422 101144 9706 73580 4173 69866 1000 32871 101144 53557 9981 103 890 765211 101144 61 69352 32848 5491 53485 1000 80165 711213 101144 10 084 69412 32657 53681 6320 788550 101144 1195 102 302 56 10 015 69305 715160 101144 51264 63468 5422 1129 9981 729595 101144 69479 48805 64657 56 729674 101144 5713 1131 52301 50931 60841 743 627 101144 3260 1207 695892 48136 101144 29249 213 assets Fixed 649010 48201 securities Government 3492 27921 1240 720457 53 Transitcredits 51431 691110 institutions credit to Loans 52850 53 assets foreign Other BIS the in Shares 116 Fund International Monetary currencies Convertible foreign Special DrawingRights Gold TOTAL LIABILITIES, AIA N EEVS9 9 3719 8 89438 90086 93721 92 992 CAPITALRESERVES AND ASI ICLTO 9 8 9 0 0 9 0 7 1 3 2 1 3 6 3 9 3 1 3 4 646268 637744 632417 639391 633363 628810 613334 606778 604892 221 598104 174 986 597788 DOMESTIC LIABILITIES LATSCIRCULATION IN CAPITAL ANDRESERVES 118 118 112149 112721 115183 FOREIGN LIABILITIES TOTAL ASSETS uoenUingat52525252525252525252532 532 532 532 532 532 532 532 532 532 532 European Uniongrant 4525 4527 4758 4577 5292 5458 6 304 6320 6084 7065 8137 assets domestic Other auto con 9523 6 6662 7 8812 0 9741 5 1961 1 16547 37928 16615 25000 37928 21966 25000 37928 18356 25000 37928 19724 25000 37928 26008 25000 37928 28851 25000 37 928 25978 25000 37928 26626 25000 37928 30261 25000 37928 29532 25000 37928 25000 Valuationaccount Reservecapital capital Nominal te oetclaiiis1 9 3349671 9 2581 9 5381 1 5121 8 17998 15884 15172 15610 15368 14690 12588 10890 637 9 13344 11392 liabilities domestic Other iaca ntttos3173942555782436 121 145 5798 128 886 104 161 2585 66776 893 99 3994 52491 312 98 49637 3 147 151833 110810 institutions financial Balances duetoother Government Balances duetothe institutions Balances duetocredit o-ovril urnis3 63 73 73 73 736 216 37 171 720 36 199 547 37 142 629 37 112 631 105947 37 105947 88 658 105947 36 105947 76 675 105947 9193 107472 37 696 2127 108996 6541 108864 50 37 549 108864 2646 108864 2573 552 679 108864 36 5448 569 240 36 595 liabilities foreign Other Non-convertible currencies Foreign bankdepositsinlats Fund International Monetary currencies Convertible foreign Appendix 2 THE BANKOFLATVIA 3 9 4 5 7 8 8 4 8 7 1 8 9 6 1 2 8 6 0 9 155006 200495 185864 216220 192469 218688 181674 183140 179185 924206 148656 873399 130 997 949853 875080 887237 886170 903273 851936 805252 877552 849 952 IIII IVIVI XXXI X IX VIII VII VI V IV III II I 8 4 2 0 8 3 3 7 8 4 0 5 7 0 9 0 3 1 7 9 1079212 1073894 1135717 1091300 1079706 1104858 1084947 1035076 984 437 1026208 980 949 1079212 1073894 1135717 1091300 1079706 1104858 1084947 1035076 984 437 1026208 980 949 6 7 1 2 4 6 0 7 2 5 5 5 1 0 5 4 0 241779 243806 303650 257 619 250652 271426 260305 220742 177310 662 ' S MONTH-ENDBALANCESHEETSFOR2003 1 9 3 9 1 5 0 6 5 5 1 2 102383 119321 150757 106360 118656 133690 116 395 2318 6 3148 1 5468 7 80007 80075 85426 81 816 83184 89468 92 311 9 1 5 1 0 1 7 1 2 1 6 111158 112269 114224 112474 112507 115154 997 0 6 3 4 1 2022 2211 1948 2036 3664 1 901 8 5 1 1 6 4239 5567 7413 5717 5753 6 882 1 6 3 1 3 7 0 9 119376 106390 135773 133613 112 964 (in thousandsoflats) 83 162716 774834 101 144 937 526 59320 34 200 62 273 55 543 XII 3018 4930 1000 1 100242 1 100242 682 145 123 810 213 521 104 423 113 545

75 APPENDIC ES 19 712 45 787 25 000 91 031 80 254 3905 7 787 1 670 8 260 532 677 149 36 neteti soit 2 – 32798 32819 – 22657 – 15117 4 726 assets Fixed Investment inassociate

BANK OF LATVIA: ANNUAL REPORT 200384 FOREIGN ASSETS DOMESTIC ASSETS o-ovril urnis 7 –– 3893 1197 51025 41 2006 – 1043 44443 101144 54 737313 3992 983 – 41917 101144 732799 3311 3 988 101144 42215 276 521512 1 788 101144 506582 assets foreign Other Non-convertible currencies BIS the in Shares Fund Monetary International currencies foreign Convertible Special DrawingRights Gold rni rdt 0102 3 86211749 30690 18612 18833 23835 42530 50110 30 387 63322 Government securities Transitcredits institutions credit to Loans OEG IBLTE 3 5 2 5 2 0 116778 TOTAL LIABILITIES, CAPITAL ANDRESERVES 122306 129053 134653 FOREIGN LIABILITIES TOTAL ASSETS ASI ICLTO 2 0 8 1 5 0 622632 556003 482314 214 333 426101 DOMESTIC LIABILITIES LATSCIRCULATION IN AIA N EEVS4 9 1307 2 91848 74927 61320 46398 CAPITALRESERVES AND uoenUingat555254531 524 522 515 European Uniongrant 1 519 Other domesticassets o-ovril urnis4 24 37 5674 – 679 41 5799 454 110388 – 6839 42 116012 158 – 5591 122014 42 321 – 128699 liabilities foreign Other Non-convertible currencies Foreign bankdepositsinlats Fund Monetary International Convertible foreigncurrencies te eevs2 4 2473 2 – 37 928 25 000 38224 5512 10 100 10362 32497 3297 4750 20913 3 012 62 079 134 223 25243 13709 2181 4750 10394 119 587 3 441 82 433 949 3 45 926 3 950 80 453 110 278 95 765 4 341 Valuation account reserves Other Reservecapital capital Nominal liabilities domestic Other Balances duetootherfinancialinstitutions Balances duetotheGovernment Balances duetocreditinstitutions accordance with the current Latvian governmentsecurities valuationpolicy. accordance withthecurrent Latvian "Other domesticassets"inthefinancialstatements for1999and2000. retrospectively. governmentsecuritiesvaluationpolicy acquisition cost,arestatedattheirfairvalue, applyingthecurrentLatvian THE BANKOFLATVIA Appendix 3 4 3 2 1 Restated governmentsecurities in to includetherevaluationresultarisingafter retrospectivelyrevaluingLatvian Restated toincludeintangibleassets, whichwerereportedunder"Fixedassets"inthefinancialstatementsfor1999. Restated toincludeaccruedinterest income onLatviangovernmentbonds,whichwasreportedunderthecaption governmentsecurities, whichinthefinancialstatementsfor1999and2000werereportedatamortised Latvian ' S YEAR-ENDBALANCESHEETSFORTHEYEARS1999–2003 5 0 6 5 8 8 894613 881489 669551 656 304 6 8 4 5 811146321 121 98 143859 165 181 9920 012002 2001 2000 1999 821 485 813 410 979 610 1 040 934 040 1 979610 813410 821 485 934 040 1 979610 813410 821 485 2, 3 1, 2 4 20 254 51 725 3112 4 2 1, 2 4 2 2 7 209676 226374 140 723 47564382 24 715 05728389 20 567 3126702 3142 (in thousandsoflats) 34 200 62 273 19 712 3905 101 144 774 834 937 526 162 716 55 543 59 320 1000 – 4 930 3 018 2003 1 100242 1 100242 75 – 104 423 113 545 213 521 123 810 682 145 45 787 25 000 91 031 80 254 8 260 7 787 1 670 532 677 149 36 – TE PRTN NOE3845750605 434 14 668 18 154 22 520 850 17 160 11 527 809 16 – – 100 16 3 884 – 2 030 – APPROPRIATION BEFORE PROFIT OPERATINGOTHER EXPENSE OTHER OPERATING INCOME LOSS ONDISPOSAL OFINVESTMENTINASSOCIATE SPECIFIC PROVISIONS NET INTERESTINCOME Domestic operations Foreign operations INTEREST INCOME Foreign operations INTEREST EXPENSE Domestic operations I .70068 .60090 .56096 .00055 .00053 .430.5410 0.5463 0.5520 0.5560 0.5530 0.5581 0.5650 0.5585 USD 0.5040 0.5640 0.5720 0.5740 0.5620 0.5680 0.5059 0.5070 0.5610 0.5767 0.5830 0.5040 0.5620 0.5717 0.5090 0.5109 0.5645 0.5830 0.4890 0.5800 0.5094 0.5685 0.5770 0.9460 0.5770 0.5150 0.5690 0.4770 0.4972 0.5842 0.5800 0.5150 0.5780 0.4750 0.9526 0.5790 0.5837 0.9360 0.4750 0.4850 0.5080 0.5890 0.5834 0.9260 0.4760 0.4817 0.9600 100JPY 0.5862 0.5890 0.9422 0.4774 0.4960 0.9110 0.4820 0.5850 0.9356 0.4846 0.4880 0.6600 0.5920 0.4880 0.9500 0.4820 0.9140 0.9213 0.4876 0.4820 0.9470 0.4910 0.9100 0.6680 0.4900 0.4925 0.6440 0.9220 0.9205 0.9360 0.4930 0.4883 0.6500 0.9130 0.9301 0.6740 0.4934 0.4960 0.6518 0.9367 0.9270 0.6290 0.9130 0.4980 0.6535 0.9208 0.9480 0.4970 0.9190 0.6610 0.9480 0.6320 0.6421 0.9195 0.9190 0.6580 0.9260 0.6440 0.9410 0.9243 GBP 0.6520 0.6444 0.6480 0.9250 0.9424 0.6420 0.6507 0.9462 0.9330 XII 0.6612 0.6530 0.6270 0.9600 0.6556 0.6560 0.9560 0.6240 0.6670 0.6335 XI 0.6260 0.6660 0.6140 0.6303 X 0.6410 0.6289 IX 0.6216 0.6380 VIII 0.6320 VII 0.6300 EUR VI V IV III II I 2003 1 1 aiu vrg iiu aiu vrg iiu aiu vrg iiu aiu vrg Minimum Average Maximum Minimum Average Maximum Minimum Average Maximum Minimum Average Maximum the interestexpensecaption "Foreign operations" inthefinancialstatementsfor1999and2000. have beenreducedby includingexpenseontransactionswithforeign debtsecurities,whichwerereported under Appendix 4 1 POUND, THEJAPANESE YENANDTHEUSDOLLAR THE BANKOFLATVIA Appendix 5 FOR THEYEARS1999–2003 THE BANKOFLATVIA Theamountsreportedundertheinterestincome caption"Foreign operations"fortheperiodfrom 1999 until2000 ' ' S EXCHANGERATES FORTHEEURO, THEBRITISH S PROFIT AND LOSS STATEMENTSS PROFITANDLOSS 07820–– – 32497 39484 290 29762 10 748 22 964 1712 7 59530762 35985 28075 21 771 7 5 9 3688 2797 3754 4 870 9 9 4 5550 6340 5496 6 096 9920 012002 2001 2000 1999 3 5 4 127 44 55 33 (LVL vsforeigncurrency) (in thousandsoflats) 11 908 19 738 30 652 27 327 2 651 5 984 2003 994 8 – – 85

APPENDIC ES BANK OF LATVIA: ANNUAL REPORT 200386 (Head ofDepartment–Modris Briedis) 8 INTERNALAUDIT DEPARTMENT 7.5 SystemsMaintenanceDivision(Headof–Edvîns Mauriòð) Askolds Kâlis) 7.4 InformationSystemsQualityAssuranceDivision(Head of Division– 7.3 InformationSystemsSecurityDivision(Headof –IlonaEtmane) Head ofDepartment–EgonsBuðs) 7.2 ComputerNetworkandServerSystemsDivision(Head of Division,Deputy 7.1 SystemDesignandProgrammingDivision(Headof –IlgvarsApinis) (Head ofDepartment–HarijsOzols;DeputyHead –IvoOdîtis) 7 INFORMATION SYSTEMSDEPARTMENT (Head ofOffice–GuntisValujevs) GOVERNOR6 5.4 DivisionofRigaBranch(Head–JânisKreicbergs) 5.3 Transport Division (HeadofDivision–ImantsVâcietis) Department – JurisLiepa) 5.2 CommunicationsandServiceDivision(HeadofDivision,DeputyHead 5.1 BuildingMaintenanceDivision(Headof–ArnisBçrziòð) (Head ofDepartment–EinârsCiðs) 5 GENERAL SERVICE DEPARTMENT (Acting HeadofDepartment–DijsOkoloviès) 4 CONSTRUCTIONDEPARTMENT 3.5 DivisionforTranslation andProtocol (HeadofDivision–GundegaVizule) 3.4 ClericalOffice(Headof–SvetlanaPetrovska) 3.3 Archive(Managerof–BaibaBlese) 3.2 Library(ManagerofLibrary,DeputyHeadDepartment–DaceGasiòa) Aija Grînfelde) 3.1 PublicationsDivision(HeadofDivision,DeputyHeadDepartment– (Head ofDepartment–AinaRaòíe) COMMUNICATIONS3 DEPARTMENT Andris Tauriòð) 2.4 MoneyExpertiseandEquipmentMaintenanceDivision(Headof– 2.3 CoinDivision(Headof–MarutaBrûkle) 2.2 MoneyOperationsDivision(Headof–AliteGrobiòa) 2.1 CashOperationsDivision(Headof–OskarsZaltans) Vilnis Kepe) (Head ofDepartment–Veneranda Kausa;DeputyHeadofDepartment– 2 CASHIER 1.2 InternalBankingOperationsDivision(Headof–AnitaJakâne) 1.1 CentralAccounting Division(Headof–MaijaKurpniece) Accountants – JânisCaune,AntonijaSileniece) (Head ofDepartment,ChiefAccountant – MârisKâlis;DeputyChief 1 ACCOUNTING DEPARTMENT THE BANKOFLATVIA Appendix 6 ' S ANDMONEYOPERATIONS DEPARTMENT ' S OFFICE ' S ORGANISATIONAL UNITSAT THEENDOF2003 16.1 AnalyticalUnit(Headof Unit –JurisJansons) Igors Fleitmanis,OïegsRîtiòð) (Head ofDepartment–Romualds Namnieks;DeputyHeads ofDepartment – 16 SECURITYDEPARTMENT Kristaps Otersons) 1 (cont.) Appendix 6 (Head ofDepartment,Press Secretary 15 PUBLICRELATIONS DEPARTMENT Elita Lukina) DeputyHeadofDepartment– (Head ofDepartment–IntaLovnika; 14 PERSONNELDEPARTMENT Natâlija Popova) 13.3 Account ServiceandMaintenanceDivision(Headof– 13.2 Payment SystemsOperationsDivision(Headof–AigarsTatarèuks) 13.1 Payment SystemsPolicy Division(Headof–AndaZalmane) Agnija Hâzenfuss) (Head ofDepartment–EgonsGailîtis;DeputyHead 13 PAYMENT SYSTEMSDEPARTMENT 12.4 SecuritiesSettlementDivision(Headof–AndaKalniòa) Mârtiòð Bitâns) 12.3 MonetaryResearch andForecasting Division(Headof– 12.2 FinancialMarketAnalysisDivision(Headof–MârtiòðPrûsis) 12.1 MacroeconomicAnalysisDivision(Headof–Vilnis Purviòð) Çriks Âboliòð,ZojaMedvedevskiha) (Head ofDepartment–HelmûtsAncâns;DeputyHeads 12 MONETARY POLICYDEPARTMENT 11.5 Payments andSettlementsDivision(Headof–UnaRuka) Aigars Egle) 11.4 AnalysisDivision(HeadofDivision,DeputyHeadDepartment – 11.3 RiskManagementDivision(Headof–DairaBrunere) 11.2 ExternalDebtManagementDivision(Headof–AgitaBirka) 11.1 Trading andInvestmentDivision(Headof–KârlisBauze) (Head ofDepartment–Roberts L. Grava) 11 MARKETOPERATIONS DEPARTMENT Edvards Kuðners, BrunoMaès) (Head ofDepartment–Pçteris Putniòð;DeputyHeadsofDepartment– 10 LEGAL DEPARTMENT Aleksandra Bambale) (Head ofDepartment–JurisKravalis;DeputyHead 9 INTERNATIONAL DEPARTMENT 8.2 InformationSystemAudit Division(Headof–JurisZiediòð) Anita Hâznere) 8.1 OperationalAudit Division (HeadofDivision,DeputyHeadDepartment– Vacancy. AsofJanuary 1,2004,Mr.MârtiòðGrâvîtis. 1 ; DeputyHeadofDepartment – 87

APPENDIC ES BANK OF LATVIA: ANNUAL REPORT 200388 (Director –ZaigaBlûma) 23 TRAINING ANDRECREATION CENTRE Anna Grigorjeva) (Branch Manager–SarmîteKleimane;DeputyBranch 22 VALMIERA BRANCH Anna Matisâne) Gricenko;DeputyBranchManager– (Branch Manager–Leonîds 21 RÇZEKNEBRANCH Ieva Ratniece) DeputyBranchManager– (Branch Manager–GundarsLazdâns; 20 LIEPÂJA BRANCH Bernarda Kezika) (Branch Manager–JolandaMateða;DeputyBranch 19 DAUGAVPILS BRANCH (Branch Manager–JânisStrçlnieks;DeputyBranchGunârsVîksne) 18 RIGABRANCH Iveta Salmiòa) 17.3 GeneralEconomicandFinancialStatisticsDivision(Headof– Daiga Gaigala-Liþbovska) 17.2 Balance-of-Payments StatisticsDivision(Headof– 17.1 BankingandMonetaryStatisticsDivision(Headof–ZigrîdaAuðta) Ilmârs Skarbnieks) (Head ofDepartment–AgrisCaune;DeputyHead 17 STATISTICS DEPARTMENT 16.9 Valmiera Division(Headof–AldisZemmers) 16.8 Rçzekne Division(Headof–AndrejsGugâns) 16.7 LiepâjaDivision(Headof–GintsLiepiòð) 16.6 DaugavpilsDivision(Headof–IlmârsSuhockis) 16.5 RigaDivision(Headof–AndisBçrziòð) 16.4 CentralDivision(Headof–EduardsBukovskis) 16.3 ArmamentUnit(Headof–JurisKuðíis) 16.2 EngineeringandTechnical Unit(Headof–Vilnis Gâbers) (cont.) Appendix 6 THE BANKOFLATVIA 1 Vacancy. AsofJanuary 1,2004,Mr.MârtiòðGrâvîtis. Training andRecreation Statistics Department Information Systems Daugavpils Branch Governor Payment Systems Communications Guntis Valujevs General Service Jolanda Mateða Egons Gailîtis Department Department Department Zaiga Blûma Harijs Ozols Agris Caune Aina Raòíe Department Einârs Ciðs Centre ' s Office ' S STRUCTURE AT S STRUCTURE THEENDOF2003 Operations Department Accounting Department EXECUTIVE BOARD of theExecutiveBoard Cashier Market Operations Deputy Governor Chairperson ofthe Leonîds Gricenko Leonîds Veneranda Kausa Ilmârs Rimðçviès Deputy Chairmen Roberts L.Grava Helmûts Ancâns Monetary Policy GOVERNORS Rçzekne Branch Jânis Strçlnieks Executive Board Helmûts Ancâns Reinis Jakovïevs Dijs Okoloviès Andris Ruselis Mâra Raubiðko Construction BOARD OF Riga Branch Department Department Department Mâris Kâlis Governor ' s andMoney Personnel Department Security Department Romualds Namnieks Legal Department Legal Sarmîte Kleimane Gundars Lazdâns Valmiera Branch Public Relations Press Secretary Liepâja Branch Modris Briedis Modris Pçteris Putniòð Internal Audit Juris Kravalis International Department Department Inta Lovnika Department 1 89

APPENDIC ES Bank of Latvia: Annual Report 2003

Latvijas Banka (Bank of Latvia) K. Valdemâra ielâ 2a, Riga, LV-1050, Latvia Tel.: +371 702 2300 Fax: +371 702 2420 http://www.bank.lv [email protected] Printed by "Premo"