Latvian Prime Minister Valdis Dombrovskis acknowledged
yesterday he is hopeful of securing revised terms on a
E7.5-billion IMF bail-out package to arrest the Baltic
states downward economic spiral.
Dombrovskis told Emerging Markets he had received
certain encouraging signals that we could reach an
agreement from international lenders including the IMF,
the World Bank and the European Union on allowing Latvia to
loosen its budget deficit for 2009 to 7% of GDP from 5%.
In a broad hint that an announcement could come soon, he
added that the IMFs board could vote on the loan package
following a report from a fund mission to Latvia next week.
What we need to do is go through the formal
procedures. A review mission is coming which will make
recommendations and take them to the IMF board for a
decision, he said in an interview in Riga.
The deficit cap was a condition of the IMF loan brokered
last December, but was based on a predicted GDP contraction of
5%, subsequently revised to 12.9%.
But analysts say meeting even a 7% deficit target will be a
struggle, as the economy could contract by 16.5% this year,
according to figures released Wednesday by the central
The IMF disbursed the second tranche of its loan programme
to Ukraine this month having revised the accepted budget
deficit from zero to 4% of GDP.
Dombrovskis said that Latvia has also asked for more
flexibility on the IMF loans spending terms. We are
not asking for any additional money, but we feel we can
reallocate the existing E7.5 billion euro package to move part
of the money which had been forseen for banking sector
stabilisation to cover the budget deficit, he said.
The successful rescue of Parex Bank, in which the EBRD
recently took a stake, helped stem widely anticipated banking
turmoil, he said. But we expect to stick to the programme
targets for 2010 and 2011, he added.
Data released this week showed growth plummeted 18%
year-on-year in the first quarter, with expectations high that
worse may follow. Dombrovskis said the economy could be
at the lowest point in the second quarter.
We expect a gradual recovery afterwards even though we
dont expect economic growth the resume before the second
half of 2010.
He said he feared the economy could enter a negative
spiral, an exit from which is something we need to
discuss with international lenders.
If we prepare a budget with certain cuts and then we
discover the economy is even slower partly as a result
of the budget cuts we reduce our expenditure, it slows
down the economy, reduces our revenue and what do we do next?
Reduce expenditure again, said Dombrovskis.