Further spending cuts a priority says Latvian Central Bank

Oct 20, 2010, 9:13 GMT

Riga - Latvian Central Bank Governor Ilmars Rimsevics said Wednesday that the incoming government of Prime Minister Valdis Dombrovskis would have to cut around 400 million lats (792 million dollars) from its 2011 budget plans.

Speaking at the central bank's annual conference in Riga, Rimsevics said past opportunities for the Baltic EU member state to catch up with richer European economies had been 'totally wasted' thanks to spendthrift government policies.

'We stand at the same starting position as in 2004,' Rimsevics said, before praising recent efforts to rebalance the economy by means of the toughest austerity measures seen in the European Union.

'The story will be finished only with the budget of 2011 - this is the last and most important piece of consolidation,' Rimsevics warned, 'We need at least one more budget consolidation of approximately 400 million lats.'

Prime Minister Valdis Dombrovskis has pledged to continue with hard-hitting reforms introduced since he came to power in March 2009 after winning a parliamentary election on October 2.

Public-sector wages have been cut by more than a third and pensions have been frozen as the government tries to restructure an economy that contracted 18 per cent in 2009 after a credit and housing bubble burst.

Dombrovskis also faces having to pay back a 7.5-billion-euro (10-billion-dollar) bailout loan signed by his predecessor, which was brokered by the International Monetary Fund (IMF), EU and other international lenders.

Under the terms of the deal, Latvia must limit its budget deficit to 8.5 per cent of GDP this year and 6 per cent next year. However, Rimsevics urged policymakers to aim for more ambitious targets if conditions allowed.

'The 6 per cent deficit which is the target for the government is the minimum... We could have a faster level of fiscal consolidation,' Rimsevics said.

'If refinancing is performed in balanced budget conditions then Latvia will not have a problem refinancing [the loan]... however, if not then we might have problems,' he said.