IMF approves latest Latvia bailout payment

Jul 22, 2010, 8:21 GMT

Riga - The International Monetary Fund (IMF) said Thursday it would pay the latest instalment of Latvia's 7.5-billion-euro (9.5-billion-dollar) international loan after hard-hitting austerity measures were judged to be working.

The Washington-based lender approved payment of a 105-million-euro tranche of the IMF's 1.8-billion-euro contribution to the total loan amount.

'Strong policy actions... have helped stabilize the economy, restore confidence, and limit spillovers from financial market turbulence elsewhere in Europe,' an IMF statement said.

The IMF's Naoyuki Shinohara praised Latvia's efforts to reform its unbalanced economy but warned that much work remained.

'Exports and industrial production are rebounding strongly. To support more rapid growth and to put euro adoption within reach, it will be important to ensure sustained fiscal adjustment, reduce unemployment, improve competitiveness through structural reforms, and restore the financial sector to health,' Shinohara said.

Latvian finance minister Einars Repse welcomed the IMF's decision and said the results of his reforms could be seen in falling interbank lending rates. Continuing payments from the IMF and EU helped insulate the economy against economic turmoil elsewhere, he said.

The IMF announcement comes two days after the European Union made a similar decision concerning its contribution to Latvia's bail-out package.

The European Union's executive, the European Commission, on Tuesday said Latvia could receive a 200-million-euro payment.

Latvia suffered the worst recession in EU history in 2008-09, seeing the economy contract by 18 per cent after its credit-driven spending boom imploded.

It was forced to turn to the European Commission and IMF for a 7.5-billion-euro rescue loan, which was given in return for savage austerity measures including big wage and social spending cuts.

The deal also commits Latvia to boosting competitiveness, cutting down on bureaucracy and getting its budget deficit to a sustainable level.

Latvia has pledged to cut 800 million dollars from its 2011 budget to keep up with the rescue programme.

The breakdown last week of talks between the European Commission, the IMF and Hungary led to speculation that other countries with loans such as Latvia might consider backing out of their commitments. However, the decisions by the commission and IMF to keep paying suggest they are convinced that Latvia is prepared to stay the course.

The continuing payments will also boost the election prospects of Prime Minister Valdis Dombrovskis ahead of a general election due in October.