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Latvia's crisis at critical level

  • 2009-03-25
  • By Kate McIntosh

MEET THE PRESS: Despite some positive economic indicators, Dombrobskis told foreign media that Latvia should brace for the worse.

RIGA - Latvian Prime Minister Valdis Dombrovskis has warned of more troubled times ahead, saying the country's economic crisis would enter a critical phase following the introduction of severe budget cuts.
Government discussions are continuing on the roll out of budget amendments, which is likely to include massive cuts across the entire public sector.

"The toughest period is the next budget amendments and certainly it will include quite severe budget cuts," Dombrovskis said at a press conference on March 23.
Dombrovskis, who faced a grilling by a contingent of international press, did not rule out the possibility that Latvia may need an additional 1 billion euros to stave off financial collapse. (see story Page 12).
However, the newly appointed prime minister stressed the government had not made any formal request to international lenders and any discussion remained theoretical.

"Given the pretty harsh economic situation there could be a possibility that Latvia would need more international loans and certainly one cannot exclude this," he said.
"Is Latvia's government requesting an additional billion now? The answer is no," he added.

Dombrovskis said the government would need to make fiscal adjustments  of 2.6 percent of gross domestic product on top of the 7 percent already committed by the previous government.
The new Latvian government, which took over on March 12, hopes to persuade the International Monetary Fund and the European Commission to allow a budget deficit of 7 percent of GDP.

The government has been forced to revise its deficit amount following estimates the economy is likely to shrink by more than the forecast 12 percent.
Under a 7.5 billion euro rescue package from international lenders Latvia had agreed to keep its budget deficit to within 4.7 percent of GDP this year.

Dombrovskis, who has previously warned Latvia is facing bankruptcy by June if it fails to slash spending, conceded meeting its obligations was now "close to impossible."
"Certainly they [budget cuts] are going to be very unpopular. But, do we really have a choice. The second choice is just to go bankrupt," said Dombrovskis.
"Of course there will need to be a lot of explanation about what are the alternatives of not implementing these measures," he said.

A working group is currently undertaking an audit of public administration to identify areas of excessive expenditure in the health and education sectors.
Negotiations with the IMF are scheduled to take place in Riga from March 26 to 29.

POSITIVE SIGNS

Despite the dire economic predictions, harsh austerity measures are starting to bear fruit for the troubled Latvian economy.
Dombrovskis told media there had been several positive developments which were helping to keep Latvia's economy moving.

These include improvements in the banking sector, energy efficiency programs and trade growth.
In January the country showed a current account surplus for the first time in recent years.
A landmark agreement has also been reached with Parex Bank, taken over by the government at the end of last year to save the stricken bank from collapse, on the repayment of the first portion of a 775 million euro syndicated loan.

His words offer a tentative ray of hope for the struggling Baltic State which has had to contend with political riots, government collapse and bankruptcy fears in the past three months.
 "Our austerity measures are starting to bear fruit and we have some positive measures in the banking sector. There have been some positive signs, [but] on top of this we must now cut our budget expenditures," he said.
Dombrovskis was appointed prime minister following the collapse of Ivars Godmanis' ruling coalition amid criticism of his government's handling of the crisis.

Support for the former premier waned following mass riots in Riga on Jan. 13 calling for the government to be sacked.
Whether his successor can win popular public support and turn Latvia's troubled economic fortunes will be largely dependent on the new government's ability to renegotiate the agreement with international lenders and the development of sound fiscal policy.

Dombrovskis admitted to media the decision to take on the role had been a difficult one, but would not yet comment on whether he felt it was the right choice.
"There is a commitment to do those jobs. I can see the way we can succeed and if we do, then I think it will be the right choice," he said.