The agreement is a victory for Dombrovskis' government, as international lenders agreed to allow for the pension reinstatement without additional cuts.
RIGA — Latvia’s prime minister said a preliminary agreement has been reached on how to return pensions that were cut but must now be returned pursuant to a ruling by Latvia’s Constitutional Court.
Prime Minister Valdis Dombrovskis told reporters on Wednesday that the agreement between his government and mission representatives from the European Union and the International Monetary Fund was reached and that final approval rests with the lenders’ executive boards. Though details are not clear, it is likely that lenders, seeing Latvia’s legal predicament, will allow the government to increase the maximum allowable deficit from 8.5 percent of gross domestic product.
The preliminary deal is a breakthrough for the government, which seemed to be at a complete loss of words by the court’s decision in late December.
To their credit, the ministers immediately said they would respect the ruling despite the challenge it presented given the complicated nature of the 2010 budget.
The current budget program maintains a deficit of 7.5 percent – with the 1 percent difference providing some room for maneuver for Dombrovskis and the Cabinet. Latvia needs some 185 million lats (€265 million) — 80 million in back payments and 105 million to make full payments beginning March 1 — in order to comply with the court’s decision. To pay the full amount this year without having to raise taxes Latvia will have to increase the budget deficit by 1.5 percent, according to the finance ministry.
Granted, the decision allows the government, which is virtually bankrupt, to postpone the complete payment of pension for several years (by July 2015), but politicians fear that if this money goes unpaid populists will seize the opportunity and promise full payment as part of an election campaign pledge.
The justice ministry, controlled by the People’s Party, which is openly bickering with Dombrovskis’ New Era Party on a daily basis, will have to approve any amendment to the agreement with lenders. The ministry could call for parliamentary approval of the measure.
Meanwhile, finance minister Einars Repše has proposed paying the 80 million lats in accrued indebtedness on pensions immediately.
“The finance ministry will do all the necessary work to make it possible to pay the debt during the winter months, when citizens’ expenditures are greatest due to the heating season,” Repše said in a statement.
