IMF "concerned" at social costs of Latvia's spending cuts

May 7, 2009, 14:44 GMT

Riga - The International Monetary Fund (IMF) hinted on Thursday that it may allow revised terms on a multi-billion euro aid package for Latvia - currently suffering the European Union's deepest recession - in order to alleviate potential social unrest.

The IMF has pledged a 7.5-billion euro (10 billion dollar) economic assistance package to Latvia, as the country's prime minister has repeatedly warned of a potential national bankruptcy, despite planned spending cuts of around 40 per cent.

Speaking in Washington in response to a question from the German Press Agency dpa, IMF spokesman David Hawley confirmed that the organization will send a review mission to the troubled Baltic state soon in order to discuss a revised budget 'and many other issues.'

'It's important to consider the social dimensions. The Fund supports the authorities but of course is concerned about social costs and will do whatever it can within the framework of the programme to protect the vulnerable,' Hawley said.

Budget proposals drawn up by the government of Latvian Prime Minister Valdis Dombrovskis allow for a 7 per cent deficit for 2009, despite the fact that the terms of the economic assistance package brokered by the IMF in late 2008 require Latvia to limit its deficit to a maximum 5 per cent of GDP.

Failure to stick to the agreed limit would make Latvia ineligible for future tranches of the loan. One payment has already been missed because of slow progress in implementing reforms.

But the 2 per cent discrepancy between the agreed limit and the planned budget seems to point towards Latvia winning some extra leeway from a group of lenders that includes the IMF, World Bank and European Commission.

Prime Minister Dombrovskis has repeatedly stated that failure to receive the bail-out money would send the Baltic state into a state of effective bankruptcy.

Even planned cuts of 40 per cent to government spending would not bring Latvia close to the 5 per cent threshold, according to Finance Minister Einars Repse, who travelled to the IMF in Washington in April as part of his effort to win revised terms.

The scale of cutbacks in areas such as education, healthcare and business support is causing growing anger in Latvia.

Just two years ago, Latvia boasted the best growth figures in the EU, but on May 4 the European Commission predicted the Latvian economy would shrink by more than 13 per cent in 2009, worse even than neighbouring Lithuania and Estonia.