RIGA - Latvia must renegotiate with international lenders to allow for a higher budget deficit or risk economic collapse, incoming Prime Minister Valdis Dombrovskis has warned.
Dombrovskis' proposed Cabinet, which was officially announced as The Baltic Times went to press and faces a parliamentary vote on March 12, are faced with the enormous task of clawing the country back from economic annihilation.
"Certainly we are facing huge problems and it's clear that we need to deal with that very quicklyâ€¦ [This is] the only way we can is move toward economic recovery. In order to move there we must first ensure our country is solid," Dombrovskis told The Baltic Times.
The coalition formally reached an agreement on the government declaration on March. 10, which outlines a roadmap for Latvia's economic recovery.
Latvian president Valdis Zatlers tasked Dombrovksis, a member of the center right party New Era, with forming a new government following the Feb. 20 resignation of former Prime Minister Ivars Godmanis and the collapse of government.
The new government line-up will include members of New Era, the People's Party, the Greens and Farmers Union, Fatherland and Freedom and the Civic Union.
The would-be coalition has agreed to trim 399 million euro (280 million lats) from the 2009 budget, amounting to 7 percent of the country's Gross Domestic Product.
The move comes following revelations Latvia's budget deficit had blown out to more than 996 million euro 's or 5 percent of GDP.
However, latest estimates by the Finance Ministry suggest the economy is likely to shrink by 12 percent, meaning the budget deficit could reach 10 percent this year.
Plans to widen the country's budget deficit will be subject to the approval of the principle donors of a 7.5 billion euro financial relief package to help ease Latvia's worsening economic crisis.
Dombrovskis said there was no concrete indication from international lenders yet as to what level of budget deficit, if any, they would allow.
Under the conditions of the IMF-led loan, Latvia agreed to keep its budget deficit to within 4.7 percent of gross domestic product in 2009.
Speaking to TBT following a meeting on planned budget amendments, Dombrovskis said the security of international loan payments is key to Latvia's long-term recovery.
"As the government has already admitted, in case we do not continue to receive this international loan the treasury has only enough money until late June. The threat of bankruptcy is near and very immediate," Dombrovskis said.
On March 10 ministers of the Economic and Financial Affairs Council (ECOFIN) called for Latvia to "rigorously" implement wage cuts and implement other measures to achieve the deficit target of 5.3 percent of GDP, or 613 million lats.
However, Dombrovskis said the government intended to reopen negotiations with the IMF and EU on setting a 7 percent benchmark target as a matter of urgency.
The IMF declined to comment on possible renegotiations with the Latvian government or conditions likely to be attached to further financial assistance.
An IMF spokeswoman said it was likely an IMF mission would return in the future to continue discussions with the Latvian government, but did not say when.
"We do not know when the mission will return, but, when they do they will discuss all the aspects of the program with the authorities. We will be able to discuss those issues in public then and we do not have much to add at this point," the spokeswoman told TBT.
An EU spokeswoman also declined to comment on "theoretical" future negotiations with Latvia.
TRIMMING THE FAT
In the meantime, Dombrovskis has announced plans for dramatic wage and spending cuts across all sectors.
Under painful measures proposed in the government's draft budget amendments wages across the entire public sector are expected to be cut by 20 percent.
Funding for the Health Ministry, higher education and medical services is likely to be slashed by up to 25 percent. Subsidies to local authorities would also be trimmed, along with a 45 percent reduction of funding for teachers' wages.
Other proposed measures earmarked by the prime minister include the introduction of capital gains tax and further increases to the excise tax on alcohol and tobacco.
It is also planned to reduce social security contributions payable under the national funded pension scheme from 8 to 2 percent. The government does not intend to make pension cuts. The 37-year-old former finance minister has foreshadowed even more radical cuts should Latvia's request to lending partners be denied.
"Of course another threat to long-term recovery is our fiscal policy and that while having a severe recession we are still doing huge budget cuts. The government recently raised taxes, which of course only worsens recession, not that we have much of a choice on this," he said.
Ongoing political instability in Latvia has raised fears the bail-out package could be jeopardized.
The previous IMF mission from Washington arrived in Riga on Feb. 17 but was forced to abandon its visit following Godmanis' resignation.
In a statement explaining the reasons for cutting short the visit Christoph Rosenberg, the head of the IMF mission, said intense politicking in the fallout of the government's collapse had undermined the mission's work.The IMF mission had been in Latvia to monitor disbursement of the massive economic stimulus package brokered by the IMF in December 2008.
"The program supported by the IMF, the EU, and other bilateral and multinational donors is meant to sustain policies that will put Latvia back on a sustainable path, not particular political parties or coalitions," Rosenberg said in a statement.
Latvia has already received 600 million from the IMF.
Earlier this month the EU paid a first installment of 1 billion euros to Latvia as part of a financial assistance totaling 3.1 billion euro.
Further installments are due on the condition Latvia meets strict economic and political reforms.