Latvian Prime Minister welcomes fresh IMF cash injection

Aug 28, 2009, 9:04 GMT

Riga - Latvian Prime Minister Valdis Dombrovskis on Friday welcomed a decision by the International Monetary Fund (IMF) to release 195 million euros (280 million dollars) to help the Baltic state's stricken economy.

Speaking on Latvian television, Dombrovskis said the payment 'sends a positive message to the markets' and shows his government's hard-hitting economic reforms are working but that work on the 2010 budget needs to proceed if future IMF payments are to be made.

The latest payment from the IMF has already been transferred and will appear in state coffers 'at the beginning of next week' he said.

On Thursday the IMF executive board in Washington approved the payment after considering Latvia's progress in making structural reforms and slashing spending.

In a new development, 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 signed last year by Dombrovskis' predecessor, Ivars Godmanis.

Commenting on the decision, 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.

'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,' Strauss-Kahn added.

An earlier scheduled payment of 200 million euros was postponed due to what the IMF said was slow progress instituting reforms. 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 includes contributions from the European Union, World Bank and regional governments. Not including Thursday's release, the IMF has already paid out 585 million euros of its share of the bail-out.

In June the Latvian Parliament approved budget cuts worth 500 million lats (1 billion dollars), with similar amounts due to be saved in both 2010 and 2011.

Pension payments and wages have been reduced, and the unemployment rate has climbed to 17 per cent from 6 per cent a year ago.

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.