Latvia budget gap of 2.5 percent of GDP in 2012

RIGA: Latvia agreed revised budget targets with the IMF and EU on Wednesday that will cut its deficit to 2.5 percent of GDP in 2012, keeping its plans to join the euro in 2014 on track.

The agreement came during talks on a review of Latvia's IMF/EU bailout, agreed at the end of 2008.

The talks are held regularly to agree benchmarks for economic measures, particularly cutting the deficit.

Under the new agreement, Latvia will cut its budget deficit this year to 4.2 percent of GDP from a previously planned 5.4 percent of GDP, subject to new budget measures being approved by parliament on Thursday, and reduce it further to 2.5 percent of GDP in 2012.

Latvia needs to get its budget deficit to below 3 percent of GDP in 2012 as it eyes euro adoption in 2014.

"Concerning the 2012 budget, an agreement has been reached on a preliminary consolidation amount which is between 150 million and 180 million lats ($306.7 million to $368.1 million)," after a meeting with International Monetary Fund and European Union officials.

"This consolidation amount might bring us to a lower budget deficit level of 2.5 percent of GDP.

A stronger-than-expected economic recovery means the value of cuts needed to reduce the deficit next year has fallen sharply from roughly 300 million lats previously estimated.

Dombrovskis said the IMF approved additional budget amendments planned by the government for this year including tax rises and spending cuts, subject to their approval by parliament on Thursday.

The prime minister said the two sides also agreed to use some of the 600 million euros ($870.2 million) set aside for eventual problems to cover the budget deficit.

However, a precondition for this was to submit a sale plan to the EU for a bank, Citadele, that was rescued by the state and which was one of the main reasons Latvia needed the bailout.

Negotiations with the IMF and EU would continue on Thursday, the prime minister said, when the government was also expected to approve new documents linked to the programme, a letter of intent with the IMF and a memorandum of understanding with the EU.