IMF agrees to give Latvia next tranche of bail-out cash

Aug 27, 2009, 20:58 GMT

Riga/Washington - Financially troubled Latvia saw a bail-out agreement with the International Monetary Fund (IMF) given approval Thursday in a move that releases 195 million euros (280 million dollars) to help its stricken economy.

The IMF executive board in Washington approved the payment after considering Latvia's progress in making structural reforms and slashing spending, it confirmed in a statement.

Latvia will be allowed to run a fiscal deficit of up to 13 per cent of GDP, compared with 5 per cent in the original agreement.

IMF Chairman and Managing Director Dominique Strauss-Kahn said: 'Latvia's economy is suffering a much deeper contraction than envisaged at the launch of the programme. This reflects both the more-pronounced unwinding of the credit and real-estate bubble, as well as the much worse international environment than originally anticipated.'

'The significant revision of the 2009 fiscal deficit target minimizes further pressure on economic activity and increases the scope for spending on social safety nets. Latvia's large fiscal deficit will need to be reduced through strong corrective policies over several years,' Strauss-Kahn said.

An earlier scheduled payment of 200 million euros was postponed due to what the IMF said was slow progress instituting reforms, while the five-party coalition government of Valdis Dombrovskis has struggled to present a united front concerning the deal.

IMF money accounts for 1.7 billion euros of a 7.5-billion-euro economic bail-out package that also includes contributions from the European Union, World Bank and regional governments.

On June 16, the Latvian Parliament held an extraordinary session to approve budget cuts worth 500 million lats (1 billion dollars). Similar amounts are due to be slashed in both 2010 and 2011.

The cuts reduced pension payments and wages and led to big job losses in the public sector.

The Latvian economy contracted 19.6 per cent year-on-year in the second quarter of 2009, with the figure for the year as a whole was expected to be similar after a decade-long boom fuelled by cheap credit and a housing-market bubble turned into a spectacular bust.