Little hope to bend the IMF

Although Finance Minister Einārs Repše has spoken of a successful start to Latvia's talks with a delegation from the International Monetary Fund (IMF), these talks will mainly focus on technical matters, agreement on accounting procedures and budget methodologies. It is difficult to imagine that there would be any serious problems with agreement on "how to count the beans".

The fundamental problem is "do we get any more beans" and that depends on cutting the budget deficit to 5 % of GDP, not the 7 % that the Latvian government thinks it can cajole from the IMF. Whatever sympathies the IMF may feel for Latvia's situation (harsh public sector wage cuts of 20 % or even more), the international agency basically has its hands tied by a number of factors. One is that other East European countries (Romania is the latest) may be seeking loans, and easing Latvia's terms would set a bad precedent. The precedent could also carry over into other countries outside of Europe. Unfair though it is, the IMF is unlikely to accept the argument that other, bigger European countries are pushing the envelope beyond the 5 % limit, nevermind the US.

So it appears that Latvia's budget cuts fall far short of what the IMF demands in order to continue paying out its line of credit to Latvia, and the government will have to cut spending to beyond the bone or risk government insolvency by the summer. Those deeper cuts may well have close to the same effect as insolvency, as public services could be reduced to the point of collapse at the same time as pensions may be reduced, something that could be the last straw before new social disorders (taking to the streets by the unemployed or by youths tossing paving stones on behalf of their grandparents).

One knowledgeable source I encountered by chance recently  says that the IMF might cut a deal with the Latvian government in return for a devaluation of the lat, something the IMF brought up in its initial talks with Latvia late last year, but which the government rejected and its position was respected by the IMF. However, being allowed to boost the budget deficit to, say 6 % of GDP in return for letting the lat float in a 15 % range from its current peg wouldn't solve very much. The thousands of mortgage paying (in EUR) public employees would, in addition to their 20 % pay cut, see a rise of as much as 15 % in their monthly payments. Eventually, the devaluation would also boost input prices for domestic goods (energy, raw materials) and sharply increase the price of imports, including many essentials (wintertime fruits and vegetables) for which there is no domestic substitute, not to mention fuel prices.

Faced with these two impossible choices, Prime Minister Valdis Dombrovskis, in my mind, still stands as " the fall guy" for the previous (mis)governments. Perhaps this is meant as a final death stab to the reformist New Era (Jaunais Laiks) party, which had already done a fairly good job of slouching toward its own grave after splitting and losing some of its people to the new Civil Union (Pilsoniskā Savienība). The reason for this --bizarre and irrational as it may seem -- is to protect, at almost any price,  the current ruling elite (elites?) from serious challenge by a political force that at least to a large extent believes in clean, efficient governance.