Latvia faces "incredibly tough" year, says IMF

Riga - Latvia, which is currently experiencing the European Union's harshest economic recession, faces an 'incredibly tough' 2009, representatives of the International Monetary Fund (IMF) said Thursday. On the same day that an IMF mission held talks with Latvian Prime Minister Valdis Dombrovskis in Riga as it begins to assess progress introducing hard-hitting reforms and budget cuts, the organization published an interview in its 'IMF Survey' with mission chief Mark Griffith and regional director Christoph Rosenberg in which they warned that even tougher times were ahead for the embattled Baltic state. '2009 will be an incredibly tough year. Latvia will need substantial assistance from the international community to ease the social costs of the crisis,' Griffith said. Rosenberg said Latvia had been 'on the IMF's radar screen' for a long time and that as far back as 2005, the IMF had warned publicly that the economy was in danger of overheating. Those warnings went largely unheeded as Latvia rode a wave of easy credit, rapidly rising wages and huge gains in real estate prices. But last year the property bubble burst, credit dried up and the government was forced to bailout local bank Parex, sending Latvia to the edge of bankruptcy. 'Output fell by an estimated 18 percent year on year in the first quarter of 2009, and could fall by a similar amount for the year as a whole,' said Rosenberg, who denied the IMF was to blame for the widespread lay-offs, wage cuts and closures that are affecting thousands of ordinary people. 'The budget choices facing Latvia today are extremely difficult. But it's also important to remember that without assistance from the EU, the IMF, and other partners, Latvia wouldn't have been able to run a budget deficit at all. It might even have had to run a surplus, in which case the adjustment would have been much, much harsher than it already is,' Rosenberg said. In December 2008 the IMF brokered a 7.5-billion euro (10 billion dollar) economic assistance package to Latvia with money also coming from the EU, World Bank and countries such as Sweden which have big stakes in the Latvian banking sector. However, Latvia has already missed out on one payment of 200 million euros after reforms were deemed to be moving too slowly. The latest IMF mission will recommend whether or not Latvia receives the next 200 million euro tranche. Budget proposals drawn up by the government allow for a deficit of up to 7 per cent of GDP, despite the fact that the terms of the economic assistance package require Latvia to limit its deficit to a maximum 5 per cent of GDP. Prime Minister Dombrovskis is hopeful that lenders will loosen the requirement in the wake of worsening economic data. The IMF mission will conclude its visit to Latvia on June 5.