2009-07-29

On 27 July, Latvia received a loan of 1.2 billion euros from the European Union as part of the second tranche of the international loan granted to the country in December 2008. The difficult conditions on which the EU is making dependent the availability of further funds to Riga (500 million euros in the fourth quarter) and the lengthy negotiations concerning the release of 200 million euros to Riga from the IMF prove that international creditors are rather sceptical about the government's ability to stabilise the financial condition of the state, which is facing the gravest economic slump in its history (according to IMF forecasts, Latvia's GDP will fall by 18% this year and by 4% next year).

In the memorandum signed on 20 July by the EU and Latvia, Riga undertook to consult with the European Commission and the IMF all decisions which may significantly affect the financial condition of the state. The document provides for a planned size of the budget deficit this year (10% of GDP) and its gradual reduction in the next years (to 3% of GDP in 2012). To achieve this goal, new taxes are expected to be introduced next year (including on capital gains), a potential increase of the VAT rate (from 21% to 23%), and introducing a later retirement age will be considered. Such actions, as well as staff reductions in the state administration, education and healthcare announced for the next few months, are a result of the state budget breakdown, the deeper cause of which was the failure to conduct reform of the state finances and an excessive increase in budget spending at the time of the economic boom in the preceding years. Carrying out those abandoned reforms is inevitable at present and is seen as the main condition for further loans by foreign creditors. <pas>

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