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Latvia Trying To Reach Agreement With Donors: PM

Latvia is working on additional measures to reach an agreeement with international donors, the premier's office said Friday, after doubts were raised on the country's commitment to make big budget cuts.

Prime Minister Valdis Dombrovskis said Latvia is working on "additional measures" in order to "reach agreement with international loan providers". He is looking forward to an "intermediate conclusion" during the European Union Monetary Affairs Commissioner Joaquin Almunia's visit to Riga on October 13.

The International Monetary Fund, the European Union and Sweden had agreed a 7.5 billion euros rescue package for Latvia in December last year. Recently, Sweden voiced criticism on the country's unwillingness to commit to the required budget cuts of 500 million lats a year until 2012.

Latvia has planned only a budget cut of 325 million lats for next year, which is 175 million lats less than what is required by donors. According to the premier's office, the government is exploring ways to implement the 175 million lats in budget cuts. The government expects the budget deficit to fall to 10% this year and 8.5% in 2010.

There was an 18.7% year-on-year decline in Latvia's gross domestic product in the second quarter, after an 18% fall in the first quarter. The country's current account surplus reached a record high in the second quarter, at 14.2% of GDP.

Earlier in the week, Fitch said the Latvian economy may contract 18% this year and by 4% next year. The rating agency expects a current account surplus of 6% of GDP this year. Government debt is expected to rise to 61% of GDP by 2011 from 20% last year. Moreover, parliamentary elections in 2010 could complicate the budget process and spending cuts could raise public discontent, the agency said.

According to Fitch, a possible downgrade in ratings could take place if Latvia fails to implement budget cuts and maintain the targets set out by EU/IMF program. Moreover, a devaluation of the exchange rate, given the high level of external debt (129% of GDP in 2008) and foreign-currency bank loans (91% of the total), could lead to a downgrade.

by RTT Staff Writer

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