RIGA - Prime Minister Valdis Dombrovskis has announced that Latvia may need another 1 billion euros in aid, in addition to the 7.5 billion that international institutions have already agreed to lend.
"Latvia might revise the distribution of the 7.5 billion euro loan it has raised from international institutions, to earmark a bigger portion for filling the budget deficit and reduce the allocation for the stabilization of the financial market," Dombrovskis told journalists at a recent EU summit.
Of the current 7.5 billion euro loan, 2.7 billion euros are allocated for stabilizing the financial sector. Dombrovskis said financial stabilization could be accomplished with less money.
"Our first priority is to negotiate on budget deficit levels and how to achieve it and maintain stability in the country, [to] remain on track of reaching our goal of reducing our deficit to 3 percent in 2011 and joining the eurozone in 2012," Dombrovskis said.
The Latvian government may also launch additional negotiations with the International Monetary Fund on possible changes to a memorandum signed by the government and the fund in 2008, as well as to Latvia's macroeconomic stabilization and recovery program.
"The situation has changed, the previous talks and the program was based on a prognosis that our GDP would drop 5 percent. Now we expect a drop of 12 percent or more. Thus there are grounds to talk about a new situation and some points of the program could be updated," Latvian Finance Minister Einars Repse told the press after an extraordinary Cabinet meeting.
The minister noted that the existing memorandum of understanding has not been fulfilled 100 percent and that the IMF mission might demand that the government meets all its commitments in detail.
Repse explained that Latvia will try to persuade the IMF to allow the country to increase its budget deficit to 7 percent from 5 percent of GDP.
"This is the government's proposal. I do not say it must be the final one. The talks are beginning tomorrow and will continue for some time. At any rate, we are no longer living in an isolated world, we cannot make decisions unilaterally if we need support from international creditors," Repse said.
Repse explained that there are "fairly strong indications that IMF might not suffice with this planned budget reduction." He said that further budget cuts might be required.
The finance minister said it would be necessary to revise the budget programs 's indicating that some of them could be reduced or even canceled 's and that it was necessary to boost the efficiency of the public administration. Any proposals need the approval of the international lenders, including the IMF.
Though the financial situation may look bleak, all hope is not lost as Angela Merkel, the German chancellor, said that the Baltic states have a greater hope for recovering faster than larger countries in the EU.
"Being smaller and more elastic, Lithuania and the economies of the other Baltic states have hope of recovering faster than larger European countries," she said.