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Latvia gets fresh IMF loan, challenges remain
Thu Aug 27, 2009 5:41pm EDT
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By Patrick Lannin
RIGA (Reuters) - Latvia on Thursday won final approval from the International Monetary Fund for a delayed 200 million euro loan, part of a rescue package helping the country survive a deep recession and avoid devaluation of its lat currency.
The IMF backing for Latvia is a key element of a 7.5 billion euro rescue led last year by the European Union and the fund. The IMF loan, the second from the fund in the program, has been delayed since March over budgetary and economic policy disputes.
The executive board of the IMF has given approval to the loan tranche as well as the economic policies backing it, Latvia's Finance Ministry and the fund said in separate statements. An agreement on policies was initially concluded last month.
"The positive decision of the IMF board signals the trust given to the current government of Latvia," Finance Minister Einars Repse said in a statement.
He noted the fund's backing was a sign of support for decisions to slash spending in the 2009 budget by about 500 million lats ($1.01 billion), including public sector wage reductions and a 10 percent pension reduction for retirees.
He added, however, "we still need to work in this direction while preparing the state budget project for 2010."
The IMF said the loan deal was adjusted to allow Latvia to significantly increase its 2009 deficit to up to 13 percent of gross domestic product -- compared with a 5 percent of GDP ceiling previously. It also allows for 1 percent of GDP in additional resources for social spending.
"Latvia's economy is suffering a much deeper contraction than envisaged at the launch of the program," IMF Managing director Dominique Strauss-Kahn said in a statement issued in Washington.
While the higher deficit ceiling should ease pressure on economic activity, Strauss-Kahn said Latvia's "large fiscal deficit will need to be reduced through strong corrective policies over several years."
He noted that Latvia had taken some initial steps in this direction, but added "greater reliance on structural reforms would make the adjustment more permanent and credible."
KEEPING EURO PEG
Latvia's government is a fractious five-party coalition and tensions have mounted recently between third largest coalition party New Era, to which Prime Minister Valdis Dombrovskis and Repse belong, and the bigger People's Party.
The economy is facing an plunge in output of 18 percent this year, but the government and central bank -- despite urgings to the contrary from some economists -- has decided to cling to the peg of the country's lat currency to the euro.
The IMF and EU program is aimed at allowing the Latvians to keep the peg, but calls for deep spending cuts and a so-called internal devaluation of wages and prices.
The IMF said in a statement that the completion of the review enabled the immediate disbursement of an amount equivalent to about 195.2 million euros ($278.5 million). Continued...
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