Analytics, EU – Baltic States, Financial Services, Latvia, Loan, Taxation

Latvian lawmakers on March 25 passed a bill to cut value-added taxes for hotels in a move that threatens to undermine the crisis-hit country’s EUR 7.5 billion (USD 10 billion) rescue package from the IMF and European Union, writes LETA.

The vote, which defied an agreement with lenders not to cut taxes, came as Latvia’s coalition government struggles to maintain power in the face of growing opposition to the austerity measures imposed as a condition of IMF support.

Latvia has been hailed as a role model for Greece after pushing through reforms aimed at cutting its budget deficit from 12% of gross domestic product to 3% by 2012.

But rising political turbulence in Riga highlights the difficulties for any democratic government trying to win backing for the spending cuts and tax increases typically involved in an IMF bail-out, and balancing competing pressures from the IMF and the EU, the Financial Times writes.

Latvia’s biggest party, the People’s party, broke from the ruling coalition last week because of its support for the tax cuts. The government has avoided collapse but the remaining four ruling parties no longer command a majority in parliament.

The IMF and EU have kept funds flowing to Latvia but Prime Minister Valdis Dombrovskis (New Era) has warned the country against testing lenders’ patience – pointing to the example of Ukraine, whose IMF program was suspended after the government broke spending promises, the Financial Times explains.

Brussels and the IMF agreed a joint bail-out when Riga asked both for assistance at the end of 2008, with EUR 3.1 billion contributed by the EU, EUR 1.7 billion from the IMF and a further EUR 2.7bn from other lenders. Tensions have sometimes flared, for instance last summer when the IMF held back loans while pressing Latvia to make more reforms even though the European Commission had paid out its latest installment.