RIGA - The European Commission (EC) has signed off on a second loan installment for Latvia totaling 1.2 billion euros, following the government's decision to implement a wide reaching economic stabilization plan.
The payment is part of a 7.5 billion bailout package approved in December by the International Monetary Fund, EC and other lenders to wrest Latvia's deteriorating economic situation.
The move comes amid tough new measures recently approved by the government in a bid to secure future international aid payments.
The new center-right government has slashed 500 million lats (711.43 million euros) from budget expenditures 's including controversial cuts to pensions and state sector salaries.
Under the terms of the financial rescue package, Latvia had agreed to meet strict conditions including wide reaching economic and structural reforms to public administration.
In March the IMF withheld a payment of nearly 200 million euros after Latvia failed to meet its obligations.
The Latvian government is believed to be cooperating with the IMF, which is currently assessing the situation in Latvia before making a decision on ongoing financial support.
The government's actions have been praised by the EC, with all 27 European Union member states expressing support for the budget amendments and financial recovery strategy.
In a press statement following the EC's decision Prime Minister Valdis Dombrovskis foreshadowed further cuts, saying budget amendments were only the first phase of a longer-term stabilization plan.
Dombrovskis said future cuts will require a number of important measures in order to reduce the public administration apparatus by at least 30 percent and ensure government spending corresponds to budgetary revenue.
"Only then will we have fulfilled the main objectives of the structural reforms, namely 's a small-sized, professional and society-oriented public administration, and good-quality health care and education systems," he said.
EU finance ministers have confirmed that 2012 is the deadline for Latvia to reduce its budget deficit below the required 3 percent of gross domestic product (GDP).
The 3 percent budget deficit restriction is a prerequisite for the introduction of the euro.
The government's wide reaching reforms 's which include a major overhaul of the public administration, business, education, welfare and healthcare sectors 's has drawn stinging criticism from unions and social advocacy groups.
Some 10,000 education workers took to the streets in Riga to protest cuts to the education sector in April.
The government's measures drew fresh demonstrations in June with several thousand people gathering for a public rally organized by union groups.
However, Dombrovskis has repeatedly warned failure to secure future loan payments would push Latvia to the brink of bankruptcy.
"We must recognize that the economic crisis is not only a difficult period of time but also the most appropriate moment to implement long-needed reforms which were previously put aside due to lack of political will," said Dombrovskis.
The previous Ivars Godmanis-led government, which stood down amid public criticism of its handling of Latvia's economic crisis, failed to reach an agreement on appropriate budget amendments.