Latvia struggles to meet conditions of IMF handout

Apr 21, 2009, 18:50 GMT

Riga - The Latvian government outlined a bleak scenario Tuesday of spending cuts even more stringent than those already announced as the embattled Baltic state struggles to meet economic criteria laid down by the International Monetary Fund (IMF).

Speaking after a lengthy extraordinary meeting of the cabinet, Finance Minister Einars Repse said the situation 'forces us to look into expenses we promised to leave untouched earlier.'

Those expenses are likely to include politically sensitive items such as pensions and healthcare, which had been partially shielded during earlier rounds of cutbacks.

Previously announced wage reductions of 20 per cent for public sector workers have already sparked demonstrations by doctors, teachers and police officers.

Further cuts will prove even less popular, raising the pressure on the five-party coalition government which has only been in power since mid-March.

Repse indicated that Latvia's contributions to the European Union and NATO could be reduced and expressed hope that he could renegotiate the terms of a 7.5-billion-euro (9.7-billion-dollar dollar) economic aid package brokered by the IMF, despite his failure to do so until now.

One of the main conditions of the deal was that Latvia would limit its 2009 budget deficit to 5 per cent of GDP, but even by cutting budget expenditure by 40 per cent, Latvia would still have a budget deficit of more than 7 per cent, Repse said.

Latvia has already missed out on one 200-million-euro payment from the IMF because of its inability to get reforms in place quickly enough and it risks missing a one-billion-euro payment due in June that would send the country to the verge of bankruptcy, according to earlier statements by Prime Minister Valdis Dombrovskis.

However, Repse claimed Latvia could manage even if the IMF refused to pay up, though he admitted the result would be yet another round of cuts.

'If talks do not succeed - and we should always take such a possibility into account - we should be ready to survive on our own. We are considering such a scenario. There will be no catastrophe, we will manage,' he said.

After years of strong growth since it won its independence from the Soviet Union in 1991, Latvia's economy imploded in 2008. Official estimates say GDP will shrink by at least 13 per cent in 2009, the largest projected contraction in the EU.