RIGA - After intense jockeying for position during the negotiations with the International Monetary Fund (IMF) regarding its proposed Letter of Intent, which would release a further 200 million euro loan to bolster Latvia's ailing economy, the ruling coalition members on July 28 all finally agreed to sign, reports news agency LETA.
The last holdout, until this morning, was the People's Party (TP), who indicated July 27 that they were not willing to sign. TP leader Mareks Seglins said that, in TP's opinion, "the planned reforms in Latvia mentioned in the agreement require support from society and the government's social partners, and there is need for a fuller explanation."
The other four ruling coalition parties - New Era, Civic Union, Union of Greens and Farmers and For Fatherland And Freedom/LNNK had already signed the letter, between the Latvian government and the IMF.
The 14-page-long draft, which stipulates what actions the government must take in bringing its spending and budget deficit under control, in order to receive further loans, however would remain confidential from the public until after signing.
After the signing took place, Seglins said "The letter of intent with the IMF is a confidential document that cannot be made public, but the government may tell the community what measures it will take to reduce the budget spending by 500 million lats (710 million euros) next year, as it has promised to the IMF."
At the meeting with Prime Minister Valdis Dombrovskis, agreement was reached that the government will start work on the 2010 state budget already next week. "The sooner we start, the clearer the situation will be to society," said Seglins.
He also said that Finance Minister Einars Repse could not yet say what the budget priorities would be next year, that "We cannot equally cut funding for all the national economy sectors." The Union of Greens and Farmers (ZZS), also refusing early agreement, had after a several hour debate finally decided to go along July 26.
According to Dombrovskis, the agreement with the IMF regarding Latvia's tax policy could be similar to the agreement Latvia already has with the European Commission: taxes will only be increased if the government fails to achieve an increase in budget revenue. Dombrovskis stressed that the controversial idea proposed earlier, for a 15 percent cut in pensions, is no longer on the agenda in the IMF talks. The matter of tax hikes in the Letter of Intent is 'conditional in form,' added Dombrovskis after meeting with the ruling coalition parties.
The government "will have to keep all of the promises it has made in amending this year's budget, but it will be successful in avoiding more tax hikes," he assures. Should the government fail in its mission, value-added tax will have to be raised to 23 percent and a progressive income tax implemented, Dombrovskis explained, adding that the social sector will remain a priority and that it will be fully protected from expenditure cuts.
Latvian President Valdis Zatlers warned however that cooperation with IMF is "necessary without a doubt." If the government doesn't receive funding from the international lenders, "the national budget would have to be cut by 1.5 billion lats, not just 500 million lats," he says.
Complaints have been heard from the Employers Confederation of Latvia, the Latvian Free Trade Unions Association, the Latvian Chamber of Commerce and Industry, and the Latvian Local Government Association, in a letter to the IMF, requesting to be part of the decision making process with the IMF.
The social partners say that they have not been able to meet with the IMF and that the prime minister is not listening to them; they have taken their request directly to the IMF representatives.
Interior Minister Linda Murniece has expressed doubts on the necessity to sign the agreement, if it includes additional budget cuts within the Interior Ministry. She says that the reforms already carried out have been planned so that the Interior Ministry will operate on the lowest budget possible, from next year. If more budget cuts are demanded, it would mean that departments like the State Police or the State Fire and Rescue Service would not be able to function. "If the police are forced to stop working, is this loan worth it?" she asks.
The European Commission has already transferred the second installment of its loan to Latvia, in the amount of 1.2 billion euros. IMF and EU funding is all part of a larger 7.5 billion euro support package.
IMF negotiators have been more demanding on what the Latvian government must achieve than what has been discussed in Brussels. For loans to continue, "it is up to Brussels to decide whether to go ahead or side with the IMF's [tougher] demands. Latvia can see there is a difference of opinion between the EU and IMF," says the deputy head at London's risk consultancy group Exclusive Analysis, Joanna Gorska, adding "They may want to take advantage of that," reports business daily Dienas Bizness.
Without external support, analysts say Latvia would face fatal economic consequences that would probably include the failure of its currency peg, deeper recession and a further rise in the number of defaults on foreign currency loans. Analysts add that trouble in Latvia could push the entire region back into crisis, and could leave both the EU and IMF picking up a costly bill.
On the other hand, effectively giving Latvia a blank check might lead other countries to also shrug off austerity cuts, simply expecting the EU to bail them out, even if the IMF won't.
"Effectively, what you are doing then is putting everything on to mainly the German taxpayer," said Danske Bank's Lars Christensen.
The IMF Letter of Intent reportedly consists of three parts, the first of which recounts the IMF-Latvia history of cooperation.
The second part lists steps to be taken to decrease the 2010 budget deficit, to 8.5 percent of GDP. Measures would include merging the regional development, environment and economy ministries, and a serious review of expenditures for such projects as the new National Library, to better reflect the current economic situation.
The third section lays out steps to be taken if spending fails to be curbed and if the budget deficit is not brought down. Among them would be a hike in VAT, to 23 percent, imposing a progressive income tax for all those earning more than 500 lats a month, and extending the legal retirement age.
Latvia has already signed a Letter of Intent with the European Commission that includes the possible 23 percent VAT rate.
Dombrovskis said he doesn't "believe there will be any major surprises" in the confidential agreement, saying that the agreement is "fairly general, without any strict or specific measures to reduce the budget deficit," and that the actions named are "just conditions in case the government fails to offer any other expenditure-cutting mechanisms."
The IMF required that the loan agreement document had to be signed by all ruling coalition parties, thereby receiving full commitment from the Latvian side for implementation.
