Still living beyond its means

RIGA - Latvia remains “on target” to adopt the euro in 2014, Prime Minister Valdis Dombrovskis (Unity) said on Jan. 27, but at the same time he described the International Monetary Fund as an “unpredictable partner” in ongoing budget negotiations, reports DPA. Latvia is the beneficiary of a 7.5 billion euro loan bailout package from the IMF, the European Union and other lenders. The terms of that package are regarded as among the toughest imposed during the global economic crisis, requiring savings by the government equivalent to 16 percent of gross domestic product since 2008.

The IMF believes Latvia’s 2011 budget needs to find additional savings of 50 million lats (71.4 million euros) in order to keep to an agreed budget deficit of less than six percent of GDP.
Dombrovskis voiced concern about the IMF’s target numbers at an event hosted by the American Chamber of Commerce in Latvia. He said the lenders had revised the deficit target to 5.4 percent, and then lowered it again. “Unfortunately, during our discussions with the IMF and European Commission, we have discovered that six is not six,” he said. “Six is not even 5.4. Currently 6 is 5.4 minus 50 million lats.”

Dombrovskis restated Latvia’s hopes to adopt the euro in 2014, but acknowledged that meeting the Maastricht criterion on inflation would be difficult because it was a “moving target.” The inflation target changes according to a formula based on the average of the three countries with the currency bloc’s lowest rates.
Finance Minister Andris Vilks (Unity) remains evasive about the planned 50 million lats budget consolidation measures, and points out that the Finance Ministry’s task force, which is working on the development of a budget consolidation plan, is open to suggestions from politicians and experts.

Speaking on Latvian State Television on Jan. 26, Vilks emphasized that spending cuts are possible in all sectors where they would benefit the state in the long term. He did not rule out possible austerity measures in the welfare sector, for example, lifting pensions’ supplemental benefits.

Since it is difficult to forecast precise fiscal indicators, Latvia must be more conservative in its policy, said IMF spokeswoman Anne-Marie Gulde-Wolf in an interview with business information portal Nozare.lv. The more conservative policy is necessary so that not only the IMF, but also the European Union and other partners of the international bailout loan would be assured that Latvia is stabilizing its economy and finances, thus providing the basis for the introduction of the euro.

When asked why Latvia must carry out an additional 50 million lats budget consolidation measures, Gulde-Wolf pointed out that the IMF has come up with this number after the assessment of the current budget situation. The additional 50 million lats budget consolidation measures are needed for Latvia to be able to achieve its goal - introduction of the euro. Latvia was forced to turn to the international lenders at the end of 2008 as the economy was gripped by deep recession made worse by the global economic crisis. Forced to take over the substantial liabilities of the collapsed Parex bank, the country’s second largest, the government was brought to the brink of bankruptcy.