RIGA (AFP) — Latvia is facing a tough task meeting the terms of an International Monetary Fund-led bailout in the face of an ever-deepening recession, the IMF said Friday.
"Program implementation is proving challenging, especially in the fiscal area, while sharper-than-expected adjustment presents new risks and challenges," the IMF said in a report.
Meeting budget deficit targets may prove to be "extremely challenging" for Riga, warned the report, which was prepared in February but released Friday.
Recession casualty Latvia has been progressively tightening its belt to try to meet the requirements of a 7.5-billion-euro (9.7-billion-dollar) rescue package approved in December by the IMF and other lenders including the EU.
It has already received some 1.6 billion euros but two weeks ago failed to get a 200-million-euro tranche from the IMF because it was deemed not to have done enough.
Under terms of the bailout, the centre-right government is meant to bring its public deficit below five percent of gross domestic product.
Riga had unsuccessfully pleaded for some leeway as it slashed public spending -- including public sector pay, which sparked mass street protests -- and is trying to make still deeper cuts in June.
On Thursday, Finance Minister Einars Repse said "everything is pointing" to Latvia missing out on a payment of 1.7 billion euros from the EU unless it slashes spending by another 40 percent.
Prime Minister Valdis Dombrovskis has warned that Latvia may face bankruptcy if it fails to get the funds by June.
The IMF also pointed to concerns about political instability that could upset the drive to meet the terms of the bailout.
Its report was prepared shortly after Dombrovskis' embattled centre-right predecessor, Ivars Godmanis, resigned. Dombrovskis was confirmed in office in March.
With municipal elections looming on June 6, the government's room for manoeuvre is limited, the IMF said.
Latvia won independence from the crumbling Soviet bloc in 1991 and gained a reputation as an economic success story in the European Union, which it joined in 2004.
The economy of the country of 2.3 million people grew 11.9 percent in 2006 and 10.2 percent in 2007. But output fell 4.6 percent in 2008 and the government forecasts it will shrink 13.0 percent this year.
As the economy withered, the government in November nationalised the country's largest locally-owned bank, Parex, after masses of jittery customers withdrew their cash.
Overall, bank profits in Latvia fell 80 percent in 2008, the IMF said.
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