Analytics, Economics, Financial Services, Latvia

Valdis Dombrovskis.

"The recession in Latvia is significantly deeper than elsewhere," the government leader admits.

He reminds about the main purpose of the economy stabilization program – to ensure that in 2011 the budget deficit level does not exceed 3% of the gross domestic product (GDP), so that Latvia would meet the criteria for joining the euro area.

"The moment we join the eurozone, at least some part of the macroeconomic risks will disappear. We must use this chance," Dombrovskis underlines.

Commenting on how the 3% budget deficit limit could be attained, the prime minister draws attention to the planned structural reforms foreseen in the agreement signed with the International Monetary Fund (IMF).

As regards the tasks assigned to the ministries, the situation is the following: as previously defined, public sector salaries have to be curbed by 20%, furthermore, ministries have to draw up plans for cutting other expenses by 20, 30 or 40%, after evaluating which programs are priorities and should be continued, and which functions could be given up, Dombrovskis explains.

In terms or budget revenue and spending, Latvia could return to approximately the same level as in year 2006.

"The main thing that we have to understand is that the IMF has clearly said that it is not ready to finance a much larger budget deficit than previously planned," the prime minister underlined, admitting that this means around 5% of the GDP.

Commenting on the planned structural changes, Dombrovskis points out that reformed will be education, health care, civil service and state administration. The government has resolved to give up bureaucratic control procedures, which will make it possible to downsize these sectors' institutions.

The prime minister also admits that Latvia has to concentrate on the "plan A" – ensuring the receipt of the international loan. "We must realize that globally the IMF functions, to some extent, as the last-chance lender. Countries that turn to the IMF cannot obtain loans anywhere else. Therefore it would be rather naive to hope that we could receive the EUR 7.5 billion elsewhere in case we have problems with the IMF. We have to continue working with the lenders we have. We should keep in mind that the rescue package the lenders are offering is considerable – 35% of the GDP."

Asked if this implies that "plan B" means state bankruptcy, the prime minister said: "Well... That is why I restate – we should concentrate on the "plan A"."

Initially, it was planned that Latvia would receive EUR 200 million (LVL 140 million) from international lenders in March, however, it did not happen because the previous government did not prepare the required state budget amendments on time. Latvia expects to receive the next tranche of around EUR 1 billion from the European Commission. In order to receive it, it is necessary to introduce state budget amendments and to forward them to Saeima by the end of May, so they could be adopted by mid-June.

"If we fail to introduce the amendments to such extent that we could receive further tranches from the lenders, then, of course, we will have problems," Dombrovskis admits.