RIGA - The Cabinet of Ministers, during an emergency session on April 14, approved the agreement that will be signed with the international lenders, reports news agency LETA. The lenders expressed their support for 2011 budget amendments that were previously approved by Saeima, which envisage the reduction of the budget deficit to 3.7 of GDP (according to Latvia’s methodology) or 4.2 percent of GDP (according to the European Commission’s methodology) and carry out 27.9 million lats (39.8 million euros) in budget consolidation measures.
The Cabinet authorized Prime Minister Valdis Dombrovskis (Unity) and Finance Minister Andris Vilks (Unity) to sign a letter of intent which will be sent to the International Monetary Fund (IMF), as well as an additional agreement with the European Union. The documents will become available to the public at the end of May or the beginning of June, when the IMF and the European Commission will have confirmed them.
The lenders also supported the re-channeling of 300 million euros that was previously allocated for stabilization of the financial sector to budget deficit needs. This amount, however, will only be available after the plan for selling Citadele Bank will be submitted to the European Commission for approval at the end of May, said Dombrovskis.
The State Chancellery reported that in order to ensure economic stability and restore economic growth, as well as to join the eurozone in 2014, the government resolves to ensure that the 2012 budget deficit does not exceed 3 percent of gross domestic product. Dombrovskis added that Latvia will have to consolidate the state budget next year by an additional 150 - 180 million lats.
The government and lenders have agreed on the main directions for 2012 budget consolidation measures, most of which will be carried out by reducing expenditures, combating the shadow economy, increasing real estate taxes, making effective use of state subsidies, and ensuring the sustainability of the social insurance system. The government also resolves to carry out structural reforms in education and health care, and ensure the development of a social security network strategy for 2012 and 2013.
The 2011 budget amendments had earlier passed the full Saeima by majority vote, and ignored all proposals from opposition parties, in the second and final review. The majority rejected For a Good Latvia and All for Latvia-For Fatherland and Freedom/LNNK’s motion not to increase the excise tax on liquor, cigarettes and gasoline. The majority also turned down the proposal to significantly increase taxes on gambling, among many other proposals. The bill had received a large total of them - 145.
With the amendments, consolidated budget revenue next year is projected at 4.2 billion lats, whereas expenditures are set at 4.7 billion lats. Several taxes (excise tax, value added tax, gambling tax, etc.) will also be increased, which will net an additional 21.2 million lats to the state budget this year. The expenditures will be reduced by 6.7 million lats.
Combating the shadow economy is to net 45 million lats to the state budget. The state budget deficit will be reduced to 491.6 million lats.
By meeting Maastricht criteria in 2012, Latvia will be able to join the eurozone in 2014, which it is hoped will foster economic growth, attract new investments, and increase the welfare “of all Latvian residents,” emphasized the prime minister.
Mark Griffiths from the IMF said that the negotiations left a positive impression. The budget deficit will be reduced to 4.5 percent of gross domestic product (GDP) this year. In 2012, Latvia will try to reach a 2.5 percent deficit and focus on the fulfillment of Maastricht criteria.
Griffiths emphasized that the additional 150 to 180 million lats in budget consolidation measures will present a challenge for Latvia; however, Griffiths “is sure that the country will be able to handle it.”
The head of the European Commission’s mission in Latvia, Gabriele Giudice, lauded the agreement and stressed that the Commission recommends Latvia to focus on a 2.5 percent budget deficit. The lenders also emphasized that Latvia must continue to focus on structural reforms and utilization of European Union funds.