Cabinet approves 9.2 percent budget deficit

  • 2009-06-03
  • By Kira Savchenko
RIGA - Latvia's government has agreed to make amendments to the 2009 budget that will increase the deficit to 9.2 percent of gross domestic product (GDP), despite the International Monetary Fund (IMF) and the European Commission both saying no to a deficit of 7 percent.
The newly agreed upon amendments are based on a forecast of GDP dropping 18 percent this year.
Latvia's standby agreement with the IMF originally targeted a 4.9 percent budget deficit and it is still unclear whether the international creditors will accept a larger gap.

"This budget deficit is bigger than the previous ones but it is more realistic," Finance Minister Einars Repse told a news conference, adding that it was clear the deficit would have to be lowered as the nation's international debt would only grow with a larger deficit in place.  
Finance Ministry spokeswoman Diana Berzina said a new budget deficit target has not been formally agreed upon with the international lenders.
 "Officially we have not received an agreement on such a big budget gap. The 4.9 percent deficit, promised by (former Prime Minister) Ivar Godmanis' government is still a formal condition," Berzina said. 

Unless both the IMF and the European Commission approve these final amendments, Latvia won't get the next loan tranche of 1.2 billion euros 's 16 percent of the total 7.5 billion euro loan.  
The incumbent Prime Minister Valdis Dombrovskis has repeatedly warned this could lead to the country going into default.  
According to the last budget amendments, revenue is projected at 3.98 billion lats (5.69 billion euros) and expenditures at 5.05 billion lats. 

The budget deficit has been affected by cuts across the board.
Public sector salaries are to be cut 20 percent while other expenditures have been reduced by 40 percent. The biggest cuts are to take place in the Transport Ministry 's 109.5 million lats, the Health Ministry 's 39.3 million lats and the Defense Ministry 's 30.8 million lats.  
According to an official document in December, annual average inflation is expected to remain negative at -1.7 percent, the average salary in the national economy will fall by 12 percent and unemployment will hit 15.8 percent. 

In spite of the dramatic cuts the deficit-ridden budget is bleeding money. Therefore, the budget is to be "peeled" even further, said Dombrovskis.
"We are already working on new ideas, which might help to improve these amendments. We are planning to submit them before the budget law gets reviewed by parliament in the second reading on June 12," he said.
Dombrovskis again ruled out any devaluation plans, saying that devaluation was not an option the government was looking at.

"Our economy stabilization plan is based on the stability of the lat," he said.
Parliament is expected to approve the budget amendments in the first reading on June 6.