Latvian Prime Minister Valdis Dombrovskis said July 22 that Riga will not accept International Monetary Fund (IMF) demands to further cut pensions. The IMF has required the pension cuts ahead of the 200 million euro ($285 million) tranche of the 7.5 billion euro ($10.7 billion) combined IMF and European Commission stabilization loan to Latvia. Riga already passed legislation June 16 to cut pensions by 10 percent in order to receive the 1.2 billion euro ($1.7 billion) tranche from the European Commission. Latvia is thus stuck in a difficult position: It must attempt to deal with the demands of the IMF and manage potential social unrest. The economic situation in Latvia is dire, with gross domestic product (GDP) expected to decline more than 13 percent in 2009, and unemployment set to double from 7.5 percent in 2008 to more than 15 percent in 2009. Latvia is under pressure from the IMF to cut its budget deficit, which is projected to balloon above 10 percent of GDP in 2009 and 2010. The IMF also wants Latvia to cut its spending by as much as $1 billion, or roughly 3.6 percent of GDP. Latvia already has conceded to the demands of the EU, which released a 1.2 billion euro ($1.7 billion) tranche July 8. However, according to a memorandum between the European Union and Latvia released July 21, the sticking point for the European Union was not so much Latvia's ballooning government budget deficit, but its banking system — which is closely tied to Sweden. The European Union demanded that Riga spend half of 1.2 billion euro ($1.7 billion) loan to aid the banking industry. The union has given Latvia until 2012 to bring its budget deficit under the EU-mandated level of 3 percent. The problem with a loan plan provided by multiple donor institutions is that each donor will have different demands. In this case, the IMF is pushing Riga further on the budget deficit and is not going to be appeased by Riga's decision to support the banking system, a clear move to placate current EU President Sweden and prevent contagion to other Central European banking systems. Latvia is therefore being forced to make policy decisions that could precipitate massive social upheaval. Specifically, the IMF wants Latvia to gut its pension commitments. Latvia is not the only country that is facing the dilemma of how to cut public spending. Hungary, another EU member state with an IMF loan, and Latvia's fellow Baltic states are all facing the challenge of reducing expenditures — both to fulfill demands by the IMF and to cut the need to seek external funding through the international bond market. This puts these governments, already under extensive political pressure due to the recession, at risk of social upheaval as the "summer of rage" enters its potentially hottest days.
