Tuesday

26th Jan 2021

Austerity measures imposed on Latvia in return for emergency loans

Latvia is to receive €7.5 billion in loans from the European Union and the International Monetary Fund to bolster its battered economy, hit hard by the ongoing global financial crisis.

The EU will stump up €3.1 billion of the package to the country, the latest European country and second EU member state to be forced to go cap in hand to Brussels and international financial institutions in the wake of the crash.

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  • The Latvian parliament: Dark days for the country's economy (Photo: Latvian parliament)

The IMF meanwhile will deliver €1.7 billion, with another €1.8 billion coming from Nordic countries Denmark, Finland, Sweden and non-EU nation Norway.

The European Bank of Reconstruction and Development together with the Czech Republic, Estonia, and Poland will also provide a total of €500 million.

The monies, announced on Friday (19 December) which will buttress the Latvian economy up to the first quarter of 2011, come in return for an agreed package of swingeing austerity measures, which the European Commission and the presidency of the council of economic and finance ministers described in a statement as "the Latvian authorities' firm commitment to implement a major programme of economic adjustment."

Wide-ranging structural reforms and wage reductions, particularly in the public sector have been approved by the country's parliament.

As part of the loan agreement, public sector wages are to be slashed by 15 percent in 2009 alongside deep cuts to government expenditures of 1 billion Latvian lats (€1.41 billion) alongside cuts to income tax and increases in VAT rates. The country aims to limit its budget deficit to five percent of GDP in 2009, falling still further to three percent in 2011.

In total, the package of austerity measures equal seven percent of GDP, while the loan amounts are equivalent to around a third of GDP.

"The financial assistance and the policy programme are designed to enable the economy to withstand short-term liquidity pressures while improving competitiveness and supporting an orderly correction of imbalances in the medium term," the commission and the ecofin council said.

Latvia has opted for the cuts and a maintenance of its existing exchange rate peg, rather than let the lat slide in order to stay on track for eventual euro adoption.

"This will also help meet the conditions for the adoption of the euro," the EU statement continued.

The specific conditions of the loans will be set in an upcoming Council decision and further spelled out in a memorandum of understanding to be concluded shortly with the Latvian authorities.

Superintendents

In effect, the commission and the ecofin council will become the superintendents of the Latvian economy, overseeing the implementation of the austerity package and ready to demand further cuts if necessary.

"The commission in collaboration with the economic and financial committee will monitor regularly and closely that the economic policy conditions attached to the financial assistance are fully implemented and may request additional measures when and if circumstances so require," the statement read.

The proposed medium-term financial assistance to Latvia from the EU will consist of a European Community loan, which has yet to be approved by the commission. This is expected to happen early in January. The loan will then require approval by the EU finance ministers.

The Nordic countries have participated in the scheme as a result of their heavy investment in the Baltics.

The EU in November also agreed to similar loans to Hungary worth some €6.5 billion. Beyond the EU, Belarus, Iceland and Serbia have also applied to the IMF for financial assistance to deal with the crisis.

The IMF board will meet before the end of the year to deliver its final approval to the deal.

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