IMF will release funds to Latvia but cites economic challenges

Aug 12, 2010, 17:00 GMT

Riga - The International Monetary Fund (IMF) said Thursday it would pay Latvia the latest tranche of a multi-billion-dollar bailout loan but warned that the Baltic state still faced 'a number of challenges' to get its recession-hit economy back on track.

Following its latest inspection mission in July, the IMF said in a statement it would release 105 million euros (135 million dollars), bringing its total disbursements to 1.15 billion euros.

Latvia's total loan package is for 7.5 billion euros and includes contributions from the European Commission, the World Bank and regional governments.

The IMF said Latvia's economy 'appears to be bottoming out with positive annual growth expected to return in 2011,' though growth was forecast to remain 'well below pre-crisis levels.'

The challenges facing Latvia include 'substantial fiscal adjustment,' restoring and maintaining competitiveness, and large private-sector debt that will inhibit growth, the IMF said.

Latvia's economy grew extremely rapidly for a number of years until 2007, when credit and housing bubbles burst with disastrous consequences. In 2009 the economy contracted by 18 per cent - the world's largest recession.

The IMF released its document as World Bank president Robert B Zoellick arrived in Latvia to see for himself how the loan money is being spent.

Peter Harrold, the World Bank's director for Central Europe and the Baltics, told the German Press Agency dpa that the Latvian government deserved credit for the way it had responded to the crisis.

'I have heard it said that Latvia packed six years of reforms into six months. The situation was extreme. We really need to emphasize how extreme it was relative to anything else we have worked with elsewhere,' he said.

'In a number of countries we are at a turning point - I think Latvia is one of them.'

On Monday Prime Minister Valdis Dombrovskis responded to improving gross domestic product by declaring 'the recession is over' ahead of a general election due to take place in October.