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Money trouble

June 12, 2009

The Latvian government has agreed to slash pensions and state sector salaries in a bid to keep the country afloat financially. Riga must cut costs to qualify for more financial aid from the EU and the IMF.

Latvian Prime Minister Valdis Dombrovskis
PM says drastic cuts have "saved [Latvia] from bankruptcy"Image: RIA Novosti

Latvia's prime minister says last-minute state budget cuts have saved his country from bankruptcy. The country is seeking to avert the possible devaluation of its struggling currency, and it needs to reduce budget shortfalls in order to qualify for crucial financial aid from the European Union and the International Monetary Fund.

The country has been particularly hard hit by the current recession, and is facing an economic contraction of up to 20 percent this year.

Prime Minister Valdis Dombrovskis described the decision to slash 500 million lats ($1 billion) from budget expenses as "very difficult", but necessary if Latvia wants to receive the next installment in a 7.5 billion euro ($10.6 billion) bailout plan which was inked in December.

"Yes, with yesterday's decisions the state has really been saved from bankruptcy," he told public radio.

Comprehensive Cuts

Pensions have been worst hit by the budget cuts. Retirees are facing reductions of 10 percent to their pensions, and the government has cut a whopping 70 percent from the allowances of pensioners who still work.

State sector salaries have been reduced by one fifth across the board.

Latvian teachers protesting earlier this year against the wage cuts as part of the government's bid to cut costs.
Latvian civil servants - in this case teachers - took to the streets to protest in JanuraryImage: DW/Birgit Johannsmeier

The government also intends to cut the limit for income-tax free earning, and to reduce allowances for parents by 10 percent. However, the parties did agree not to increase income tax this year.

These savings are part of a bid to ensure a windfall of 1.2 billion euros (roughly $1.7 billion) later this month or early in July from the EU and IMF, with whom Latvia agreed on a 7.5 billion euro rescue package last year.

Still risks

Parliament is yet to approve the changes and was due to vote on the budget amendments by June 17, but this could change according to the prime minister.

"We are considering the possibility of accelerating this process and for parliament to vote on Monday already," Dombrovskis told Latvia's LMT television channel. He also said that officials were soon to get to work on finding ways to cut another 500 million lats from the 2010 budget.

Latvia has to reduce its budget deficit to three percent of gross domestic product in the next few years if it is to qualify for entry into the eurozone. Its currency, the lat is currently pegged to the euro with a view to making this a reality, however, if Latvia's economic woes worsen, the currency could be devalued, which would be a major blow to the country's eurozone entry bid.

Ratings agency Moody's cautiously announced on Thursday that the Latvian currency would probably avoid this thanks to domestic efforts and help from the EU.

"Moody's also stresses that the possiblity of a devalution cannot be ignored, as the economic and social pressure in Latvia will continue to be elevated for some time," it said.

In January, Latvian citizens rioted in the streets of Riga, unhappy with the worsening economic climate in their country.


Editor: Chuck Penfold