INTERVIEW: Latvia's new PM tells it straight to public and IMF

By bne IntelliNews March 31, 2009

Mike Collier in Riga -

He's a tall, bright young leader with huge responsibility on his shoulders. Charged with saving his country from economic disaster, his skills as a communicator provide a startling contrast with his predecessor. That's probably where the parallels between US President Barack Obama and Valdis Dombrovskis should end.

At 37, Dombrovskis, who became Latvian prime minister on March 12, is Europe's youngest leader. Until a few weeks ago, he was an obscure Member of the European Parliament, or MEP. He speaks four languages fluently, has degrees in economics and physics, and answers questions in clear, concise language - all of which makes him vastly over-qualified compared to most domestic politicians in Latvia.

While Obama has the task of turning around the juggernaut that's the US economy, Dombrovskis' task is on a smaller scale but even more urgent - to stop the wooden rowing boat that's the Latvian economy sinking without trace. And as part of this, he has already set about trying to persuade the International Monetary Fund (IMF) to loosen the limit on Latvia's permitted budget deficit for 2009 from 5% to 7% to avoid a total economic collapse.

"When I was nominated, my first public statement was that Latvia is on the verge of bankruptcy. It is indeed so," Dombrovskis told bne during a special briefing session. While some assumed that statement was a slip of the tongue from a novice, Dombrovskis makes it clear that it was a very deliberate act to signal he'd be open and honest. He's been as good as his word. While Obama dresses up his policies in high-falutin' rhetoric, Dombrovskis is concentrating on giving it to the Latvian people straight.

IMF sets up shop

Looking into the future, Dombrovskis said the toughest period would be during a fresh round of budget cuts, which are currently being drawn up and are likely to be put to parliament in June. "It will include quite severe budget cuts on top of what has already been done," Dombrovskis admitted, but insisted that the dithering and incompetence of the previous government leaves him with little choice.

Measures that his predecessor Ivars Godmanis did take in order to win a €7.5bn economic aid package brokered by the IMF have even hindered rather than helped the situation. "Certain things didn't work as expected - for instance raising VAT rates didn't bring rises in VAT revenues," Dombrovskis said. In fact, all it did was dampen consumption even more and lead to rapid growth in the "grey" economy that doesn't pay tax.

"What we are now suggesting is another 2.6% of GDP fiscal adjustment on top of the 7% fiscal adjustment committed to by the previous government. It's really quite extreme," Dombrovskis admitted. "Certainly there are going to be very unpopular measures. The question is: do we have a choice? The second choice is just to go bankrupt and that would be even worse."

In a bid to avoid total collapse, he's trying to persuade the IMF to loosen the limit on Latvia's permitted budget deficit for 2009 from 5% to 7%. The reason is that the original bailout agreement was based on a far-too-rosy view of Latvia's economic prospects. "The economic forecast has worsened since the previous package was agreed on the assumption of a 5% recession. Meanwhile it's 12%. Even with additional public sector wage reductions to 20%, we arrived at a budget deficit of 7% of GDP. That's our current proposal to open our negotiations with international lenders," Dombrovskis said, adding that he has already presented his proposals to EU bigwigs, such as European Commission President José Manuel Barroso.

He may just carry it off, too. On March 26, the IMF confirmed to bne that it was planning to open an office in Latvia - hardly the act of an organisation about to ask for its money back.

But whatever financial miracles Dombrovskis can perform, his greatest vulnerabilities will remain political ones. A large part of his government consists of the same tinpot politicos who stood by or actively participated in Latvia's disastrous credit splurge. Their true allegiance is questionable and if they see the opportunity to offload responsibility for Latvia's big bust onto Dombrovskis when things get really tough, they will probably do so. While moves to dismantle the boards of publicly-owned companies staffed by placemen earning handsome salaries are popular with the electorate, the promise of further wage cuts and layoffs for ordinary workers are not, and there is no shortage of populist demagogues waiting to step in and "save the nation" by promising pensions and hangings if Dombrovskis' cool rationality is deemed too painful.

Dombrovskis has no illusions about his position, saying that he had to think long and hard about whether to even accept his nomination as PM. "I think it is too early to say whether this was the right choice or not. If we succeed in making the budget amendments and other tasks - and I see that we can succeed - then I would say that this was right choice," he said.

What's not in doubt is that Latvia is currently up the creek. Valdis Dombrovskis may be its last chance to grab a paddle.


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INTERVIEW: Latvia's new PM tells it straight to public and IMF

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