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Latvia wrangles with IMF over budget deficit

  • 2001-10-25
  • Leah Bower
RIGA - With a deficit a third larger than this year's, the draft of next year's budget is complicating relations between the Latvian government and the International Monetary Fund.

The draft, approved and sent to Parliament Oct. 19, sets the budget deficit at 140.4 million lats ($226.45 million), or 2.46 percent of gross domestic product.

The IMF, however, has advised that the 2002 national deficit should be lower than the 1.7 percent of GDP it is running this year.

The fund now says it may cancel its precautionary standby loan agreement with Latvia, which since the early 1990s has allowed the government access to credit if needed and signifies international approval of the nation's economic policy.

"You can be fairly sure the IMF won't support the budget deficit in its current form," said Adalbert Knobl, the IMF's representative for Latvia and Estonia.

But many in government, as well as some economists, say the IMF's target deficit is too low for a developing economy.

Roberts Remess, of Latvia's Economists' Association, said Latvia is doing well to keep its budget deficit under 3 percent of GDP.

"For transition countries it isn't so important if the deficit is 2 percent or 2.5 percent," he said. "This budget is still stable."

Revenue under the 2002 consolidated budget is expected to be 1.52 billion lats and expenditure 1.66 billion lats, said Baiba Melnace, spokeswoman for the Finance Ministry.

The budget is based on the assumption that GDP will grow 6 percent and inflation 3 percent - figures most find reasonable.

While much of the world is facing a global economic downturn, Remess said the effects would be muted in Latvia because the domestic economy is more dependent on the health of specific markets such as wood, textiles and oil transit.

"Of course it is difficult to forecast situations in specific sectors, but 6 percent is not unreasonable," he said.

It is the deficit, not economic expectations, that remain the sticking point in the proposed 2002 budget.

Much of the spending expected to contribute to the deficit will be on social programs such as pensions and on investment in transport infrastructure - spending that would be difficult to cut without many citizens feeling the pinch, Remess said.

Reducing corporate taxation - a move the IMF recommends Latvia put on hold - would also increase the gap between income and spending next year.

Oskars Spurdzins, an MP with the People's Party, part of the ruling coalition, and parliamentary secretary to the Finance Ministry, acknowledged that the size of the planned deficit was not ideal but argued in favor of the government's spending plans.

Spending on NATO and European Union membership, as well as on pensions and health care had to continue, he said.

The IMF's concerns, however, center around Latvia's high current account deficit, which could be worsened by an increasing budget deficit, Knobl said.

Imports currently exceed exports by around 7 percent of GDP, a level far too high for a transitional economy, said Knobl.

In an attempt to broker a compromise the IMF is sending representatives to Riga to meet with government officials Oct. 24.

"We don't say Œyou should cut this' we just say reduce where you can," Knobl said, adding the IMF was willing to be flexible on its deficit suggestions.

Spurdzins said the tri-party coalition, comprising the People's Party, Latvia's Way and Fatherland and Freedom, is aware it may need to re-evaluate the situation.

"We must not ignore the IMF's opinion," he said.