Latvia cuts pensions, declares escape from 'bankruptcy'

13th June 2009, Comments 1 comment

The government, which is desperately trying to bridge a yawning budget deficit, decided late on Thursday to slash public-sector pay and pensions and family allowances, and not to raise taxes.

Riga -- Latvia said on Friday it had staved off bankruptcy by new sharp cuts in public spending to meet international bailout conditions amid the deepest recession in the European Union.

"With yesterday's decisions the state has really been saved from bankruptcy," Prime Minister Valdis Dombrovskis said after a marathon cabinet session, although the measures must yet be approved by parliament

The government, which is desperately trying to bridge a yawning budget deficit, decided late on Thursday to slash public-sector pay by 20 percent and pensions and family allowances by 10 percent, and not to raise taxes.

Dombrovskis said on Latvian radio that the government would try to speed up the adoption of the latest cutbacks, with a vote in parliament possible as early as Monday, although the chamber's budgetary commission later cautioned that Wednesday was more likely.

The government had held talks with labour union leaders and the national pensioners' federation before deciding on the cuts, in an effort to ward off the spectre of more of the street protests which have occurred in Latvia in recent months.

Unions, however, warned that they planned nationwide protests on Thursday.

After a previous round of cuts failed to stem the crisis, Dombrovskis's embattled five-party coalition scrambled to beef up the austerity package to fulfil the terms of a bailout steered by the International Monetary Fund.

Without such steps, Latvia faced missing out on a new instalment of the 7.5-billion-euro (10.5-billion-dollar) rescue package agreed in December by the IMF and other lenders including the European Union.

Under the terms of the bailout Latvia has to do all it can to rein in its public deficit, the amount by which the government, welfare and local authority budgets exceed revenues.

Last week, parliament approved a public deficit equivalent to 9.2 percent of Latvia's gross domestic product, nearly double the 5.0 percent first agreed with lenders. Dombrovskis did not say what impact the latest cuts would have on the figure.

Dombrovskis -- who came to power in March after a previous government collapsed amid the economic crisis, unrest in the streets and rebellion in the coalition -- had warned that Latvia's coffers could be empty within weeks.

"Apparently we have avoided the worst case scenario," he said Friday at a meeting of the Baltic Economic Forum, a business and political gathering focused on Latvia and its neighbours Estonia and Lithuania, which are also in crisis.

Latvia, a country of 2.3 million people which broke free from the crumbling Soviet bloc in 1991, enjoyed breakneck economic growth in recent years after joining the European Union in 2004.

But the economy went off the rails last year as rampant inflation and a bursting credit bubble were compounded when the global economic crisis hit its major trading partners in Western Europe and Russia.

The Latvian economy is expected to contract by 18 percent this year.

The government is fending off mounting speculation that it may be forced to devalue the national currency, the lat, which is pegged to the euro.

Arguing that the euro peg is a sign of financial credibility and crucial to its goal of joining the eurozone, Riga is adamant that it will not devalue.

Breaking the peg would have far-reaching implications, because some 90 percent of loans in Latvia are in foreign currencies for which banks gave better interest rates, while Latvians are paid in lats.

Devaluation would be likely to spark a wave of loan defaults, pushing the banking system to breaking point.

There are mounting fears that the Latvian crisis could hit other ex-communist states and even spill beyond the region because Western banks dominate the Baltic market.


1 Comment To This Article

  • lejaskalns posted:

    on 18th June 2009, 13:19:39 - Reply

    It is somewhat exaggerated to talk of continuing unrest in Latvia. Apart from one demonstration last winter, after which a small element rioted and caused damage, all protests and demonstrations (of which there has not been a vast number) have been perfectly peaceful.

    The Parliament has now passed the cuts package, and it does contain some small tax increases, by way of higher rates of excise duty on beer and spirits, and increases in the tax on gambling and games of chance. A significant reduction in the personal allowance (by over 60%) for income tax is also by way of a back-door tax increase.

    A 2% increase in the standard rate of VAT has not been ruled out for next year, when a further LVL 500 million (approx. EUR 719 million) of cuts have been scheduled.

    Zigurds Kronbergs