EU's Almunia says Latvia must stick to aid conditions (Roundup)

Oct 13, 2009, 15:12 GMT

   Riga - European Monetary Affairs Commissioner Joaquin Almunia arrived in the troubled Baltic state of Latvia Tuesday to push for the country's adherence to a 7.5-billion-euro (11-billion dollar) aid package.

   'It is a painful path but there is no alternative,' he told journalists after a lengthy series of meetings in Riga.

   Speaking to journalists alongside Prime Minister Valdis Dombrovskis, Almunia said he welcomed a preliminary agreement to reduce the planned 2010 budget deficit by 500 million lats (1 billion dollars).

   'This was the figure agreed in our programme in June, and now the political commitment of the government to translate this figure to the budget is very good news,' Almunia said.

   The total savings will comprise spending cuts and additional revenues. 'Both sides of the budget have to contribute - not only expenditure but also the revenue side,' Almunia said.

   The consequences of the Latvian parliament's rejecting the budget when it is debated in November would be 'obvious' Almunia said. He refused to be more specific.

   'What is clear is that without the support of the European Commission and other international lenders, the solutions to the problems in the Latvian economy will not be met,' he said.

   Putting state finances on a sustainable basis would 'open the doors to euro adoption,' Almunia said, describing devaluation of the lat as 'a hypothesis that I don't consider.'

   Dombrovskis ruled out further changes to the value-added tax and pensions payments and said Latvia would not introduce a progressive tax regime to replace its flat-rate system.

   Latvia's bail-out package had been called into question by disputes in the government and with international lenders, including the European Union, International Monetary Fund (IMF) and World Bank, over the size of cuts needed in the 2010 state budget.

   The EU and IMF insist Latvia must stick to its commitments. Dombrovskis had suggested that smaller cuts than originally planned could be made and still allow Latvia to remain within an agreed budget deficit limit of 8.5 per cent of GDP.

   Five hundred million lats were slashed from the 2009 budget in June. Measures included pay cuts of around a third for public sector workers, cuts in pensions and large-scale layoffs in the education sector - all of which the government argues are placing an unbearable strain on some of the weakest members of society.

   However, the government has been split on whether to introduce a new property tax. The largest party within Dombrovskis' shaky coalition, the People's Party, has also backed the devaluation of the national currency, the lat.

   Almunia said he spoke to party leaders and told them that all alternatives to budgetary consolidation were 'wrong, not viable or more painful.'

   After a decade-long economic boom, Latvia was plunged into crisis last year with the emergency nationalization of the country's second- largest bank, Parex, at a cost of more than a billion dollars.