RIGA - New Era candidate Valdis Dombrovskis has been appointed Latvia's new prime minister amid warnings the country is facing a catastrophic economic meltdown.
Latvian President Valdis Zatlers tasked Dombrovskis with forming a new government following the resignation of former Prime Minister Ivars Godmanis and the collapse of the ruling coalition on Feb. 20.
On March. 4 Dombrovskis announced his proposed Cabinet, which will include members from New Era, The People's Party, The Greens and Farmers Union, for Fatherland and Freedom and the Civic Union.
In an address to the media following his appointment, Dombrovskis said Latvia was teetering on the verge of bankruptcy. His comments, criticized by some as a political stunt, have also been backed by leading economists.
"The state is on the verge of bankruptcy. The outgoing government has not fulfilled its obligations under the agreement with the IMF," Dombrovskis told the Baltic News Service.
The new prime minister revealed that Latvia's 2009 budget is facing a 700 million lat (996 billion euro) shortfall.
The gap is twice what was predicted.
The country received a 7.5-billion-euro economic bail-out package from the International Monetary Fund and other international lenders.
TOUGH TASK
The incoming government is faced with the enormous task of steering the troubled Baltic state out of the worst recession since it regained independence.
One of its most pressing tasks will be to trim the 700 million lat budget gap as part of Latvia's obligations to the IMF and the European Commission.
Failure to comply with these commitments may jeopardize further financial assistance to the ailing Baltic country.
Dombrovskis has already foreshadowed tax hikes and drastic cuts to public spending in order to close the massive budget deficit.
Director of the Baltic International Centre for Economic Policy Studies (BICEPS) Alf Vanags said it was likely Latvia would need to borrow additional funding from international lenders to cover the massive budget blow out.
Vanags predicts tough conditions likely to be attached to further lending would also push ongoing debate on the devaluation of the lat to the forefront.
"There is one policy which might help [the economic situation] that is being categorically denied and that is the exchange rate instrument. Although they [the government] say it's the sacred cow and that it's absolutely not under discussion 's it clearly is," Vanags said.
"There was heavy discussion with the IMF last time about the exchange rate and it seems to me that it's not unreasonable that it will again come up for discussion," he said.
Vanags said the dire situation currently facing Latvia meant there were few remaining tools at the government's disposal to reduce the massive deficit.
"Somehow they will have to reduce expenditures or increase revenues, but it's not obvious where they can do much more," he said.
Increasing tax was not a quick fix solution, as previous hikes to VAT generated much less revenue than expected and drove down domestic spending.
Another possible scenario facing the government, said Vanags, was freezes on wages and pension payments.
Dombrovskis has previously said he would not support pension cuts or the devaluation of the lat, adding that the current agreement with the IMF was not dependent on devaluation.
However, Vanags said with few viable options available, the government may have to face up to some tough decisions.
"The government will simply be forced not to spend on something, and when the biggest budget expenditure is wages then what do you do? You stop paying your workers; the people most likely not to do anything about it, and that's a possibility," he said.
MOVING FORWARD
The new government will be subject to parliamentary approval.
Along with tough budget amendments, the new government will also be responsible for rolling out hard-hitting austerity measures including tax hikes and wage cuts.
The unpoular policy measures have greatly inflamed public opinion and are thought to have partly contributed to the collapse of the former government.
"The alternative is the bankruptcy of the state. The State Treasury will simply run out of money," Dombrokvskis said.
"Our main task now is to prepare budget cuts... there are no easy decisions," he said.
FINANCE WOES
Latvia is among the hardest hit of EU member states by the global economic slowdown. After years of spiraling growth, the country is facing the steepest economic decline since gaining independence in 1991, with GDP expected to shrink by as much as 12 percent in 2009.
Frustration over the Godmanis-led government's management of the worsening economic crisis had increased in recent months.
The public backlash boiled over into violent riots in Riga on Jan. 13, where protesters calling for the government's resignation clashed with police and attempted to storm parliament.
Godmanis, who later survived a Feb. 3 no-confidence vote, eventually stood down after losing the support of two major coalition partners.
The appointment of Dombrokvskis on Feb. 26 came following intense political jostling in Latvia's power circles.
Zatlers told journalists he ultimately chose the 37-year-old former finance minister over People Party's regional affairs minister Edgars Zalans because of his experience in the financial sector and European institutions.
It was Dombrokvskis and Zalans' second tilt at the premiership. Both were short listed for the job following the 2007 collapse of the Aigars Kalvitis-led government amid mass protests.
Dombrovskis was Latvia's finance minister from 2002 to 2004 and worked as an economist at the Latvian central bank from 1998 to 2002.
He has been a member of the European Parliament since 2004.
