Bloomberg News

Latvia Seeks Lender Accord With Budget Measures, Vilks Says

November 09, 2011

(Updates with GDP data in 11th paragraph.)

Nov. 9 (Bloomberg) -- Latvia is seeking to satisfy lenders including the International Monetary Fund with a plan to save 122 million lati ($239.5 million) in next year’s budget, Finance Minister Andris Vilks said.

“We hope that tomorrow in our negotiations with the IMF we will get their support,” Vilks said yesterday in a telephone interview from the capital, Riga. “The indication is that we are somewhere close to that.”

Latvia will hold more talks with the IMF and the European Commission, after failing to agree this week on the size of budget measures needed to reach a 2012 deficit of 2.5 percent of gross domestic product. The lenders led a group that granted the country a 7.5 billion-euro ($10.4 billion) emergency loan three years ago.

The Baltic nation sought a bailout after its second-biggest bank needed a state rescue and a debt-fueled property bubble burst. The government, which has implemented tax increases and spending cuts of more than 16 percent of GDP since 2008, is planning its last budget before the rescue program ends next month.

“We’re arguing on what the right number is -- I think it can be more substantial than some people believe,” Gabriele Giudice, head of the commission’s mission, told a news conference on Nov. 7. “It’s a number that’s not much lower than the 150 million lati to 180 million lati,” the commission and the IMF estimated in April.

‘Paid Too Much’

Consolidation beyond 2.5 percent of GDP wouldn’t be “affordable” as Latvians “have paid too much” in recent years, Vilks said.

Should the lenders fail to approve the measures, the budget will be sent to parliament where only minor changes can be made, Vilks told Latvijas Radio today in a separate interview. The government may make changes to the budget next year should revenue come in below plan, he added.

The lenders want the government to raise real estate taxes and reduce the non-taxable minimum for pensions, TV3 reported last night, citing “unofficial information.”

The IMF and EU proposed lowering the non-taxable minimum from 160 lati to 140 lati, which would reduce pensions that hit that threshold by 5 lati a month and save 22 million lati, TV3 reported, without saying where it got the information.

Commitments

“We have indicated to the lenders that there are certain things that we are committed to: not raising taxes, except for a few nuances, and not decreasing pensions,” Prime Minister Valdis Dombrovskis said today in an interview with the Latvian Independent Television program 900 Seconds.

Latvia’s economy expanded a preliminary 5.7 percent in the third quarter, the quickest pace in almost 4 years and the third-fastest in the EU, as manufacturing, consumption and construction grew, the central statistics office reported today. The government expects GDP to grow 4.5 percent this year and 2.5 percent next year.

The yield on Latvia’s $500 million 2021 Eurobond was little changed today, remaining at 5.85 percent, the lowest level since Sept. 21.

The government will continue providing cash for a program that guarantees Latvian adults a minimum income, the Baltic News Service quoted Welfare Minister Ilze Vinkele as saying. The minister had proposed municipalities assume the burden of the program, according to comments published by Diena newspaper on Nov. 3. The IMF had opposed ending federal support for the benefit, given the rate of unemployment in some areas.

No New Taxes

There will be “no new taxes, no wage cuts, no cuts in the welfare system and no cuts in pensions” in the latest measures, Vilks said.

The government plans to raise revenue through better tax collection, a more expansive real-estate tax, lower spending in some ministries, a reduction in the income-tax split with municipalities, carbon-quota sales and income from speeding fines.

“We would expect Latvia to remain committed to its deficit targets and to implement additional unplanned consolidation in the event of a prolonged deterioration in the global macro outlook,” David Petitcolin, an emerging-markets analyst at Royal Bank of Scotland Group Plc in London, wrote in a report yesterday.

--Editors: Douglas Lytle, Alan Crosby

To contact the reporters on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net;

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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