Gov. collapse increases IMF program risks

Feb 25, 2009
TBT Staff

RIGA- The international credit rating agency Fitch Ratings has said that the collapse of the Latvian government may increase the Baltic state's risk of failing to implement the requirements under the program agreed upon with the International Monetary Fund (IMF) when Latvia sought international financial aid.

 

Fitch said in a statement that the collapse of the Latvian coalition government could delay the adoption of budget amendments to maintain Latvia's budget deficit at 5 percent of GDP, as required by the IMF under a 7.5 billion euros loan program agreed in December 2008.

Fitch believes that a failure to maintain budget controls could delay the disbursement of international funds to Latvia, and lead to renewed pressure on the lat.

While Latvia has a history of short-lived coalition governments, the collapse of the four-party coalition government headed by Prime Minister Ivars Godmanis has come during a period of severe economic stress, said Fitch.

Fitch has estimated a contraction of around 10 percent in 2009 which implies that the government will have to take supplementary measures to meet its target budget deficit of 5 percent of GDP. The current Latvian budget is based on the assumptions of a 5 percent contraction of the economy in 2009 and an inflation rate under 6 percent.

Failure to agree to Prime Minister Godmanis' proposal to cut expenditure by reducing the number of ministries was a contributing factor to the government's collapse, said Fitch.

 

The rating agency believes that Latvia's new government will include parties from the present coalition and that there is little appetite to shift policy away from the requirements of the IMF program.

 

"Nevertheless, the extent of the recession and economic pain from the austerity measures being felt by the country increases the risk of a popular backlash and could thwart the sustained implementation of the IMF program," said Fitch.

Fitch noted that deposit withdrawals from the Latvian banking system were continuing: 16 percent of total non-resident deposits have been taken out of the system since the beginning of December. Around a quarter of the withdrawals were from Parex Banka, where a deposit freeze on large private depositors is still in place.

 

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