RIGA — Latvia’s government agreed to a budget proposal Saturday after a prolonged series of emergency meetings, but the lack of cuts has the bailed-out Baltic state’s international lenders irate.
Latvian Prime Minister Valdis Dombrovskis’ announcement Saturday that the political discussions about the state budget for 2010 are finished turned out to be short-lived as discussions on the international level have only escalated since then.
Both Sweden’s finance minister Anders Borg and Prime Minister Fredrik Reinfeldt warned Latvia on Sunday that the currently approved budget cuts are not enough, which means that the continuation of the loan program pushed by the International Monetary Fund is in danger. Borg also warned the heads of the Swedish banks with Latvian subsidiaries such as SEB and Swedbank about the upcoming political turmoil in Latvia. According to the Swedish newspaper Svenska Dagbladet, Borg suggested that even devaluation and state insolvency could be down the road for Latvia.
Mandated cuts
The agreement with the IMF entails that Latvia’s state budget for 2010 must be cut by 500 million lats (€705 million). But at Saturday’s emergency budget session the government instead agreed to cut only 225 million lats (€317 million), with 100 million lats (€141 million) to be collected in new and amended taxes. The remaining 175 million lats (€247 million) will be covered by budget cuts already implemented this year. Sweden, which currently holds the rotating presidency of the European Union, is one of the international lenders to Latvia and is the headquarters of many banks heavily invested in Latvia, disagrees with this plan.
“They cannot behave like this,” said Borg while taking part in the IMF and World Bank meeting in Istanbul on Sunday. ‘They must have a responsible fiscal policy in the budget for 2010. The patience of the international community with Latvians is limited, and they must act very, very responsibly.”
Reinfeldt echoed this on Monday when his Latvian colleague Valdis Dombrovskis visited Stockholm.
“We will stress the importance of them following their agreements, since they are fully dependent on further loan payments,” Reinfeldt said.
However, Dombrovskis continued to defend his government’s budget plan on Monday, saying the 500 million lats are supposed to be 8.5 percent of the budget deficit.
“Now it turns out that to reach these 8.5 percent it could be enough with a smaller reduction of expenses,” Dombrovskis said in Stockholm. Dombrovskis characterized Borg’s comments as “aggressive,” saying that the IMF and EU Commission were not nearly as harsh during their negotiations with Latvia this summer and too many budget cuts might actually harm Latvia’s economy and increase social tensions.
Death by 500 million cuts?
Analysts familiar with Baltic economic conditions support both the Latvian and Swedish position. Margarita Dunska, an economist at the University of Latvia, is skeptical about the criticism from Sweden.
“It is actually not Sweden that asks to cut the budget by 500 million lats, it is the IMF,” Dunska told Baltic Reports. “Taking in consideration the situation in the country, such budget cuts are virtually impossible. You cannot implement these reforms in two months, because they would normally take years to accomplish.”
Peteris Strautins, a senior economist at DnB Nord Bank, begs to differ.
“The international lenders want to see a sustainable budget in Latvia. At the same time, Latvian government tries to maintain budget deficit which is too big. The Latvian position is by its nature suicidal,” Strautins told Baltic Reports. According to Strautins, the Latvian government pay more attention to reviving its economy instead of spending to shield the citizenry from the effects of the downturn.
The Saeima will start debating the budget proposal in the end of the month. But just next week Joaquín Almunia, EU Commissioner for Economic and Monetary Affairs, will visit Latvia with the budget cuts question on the top of his agenda.
