Latvia warned not to make poor pay price of austerity

(RIGA) - International watchdogs on Monday hailed the economic reforms Latvia enacted during a deep recession, but urged it to ensure that the poorest do not bear the brunt of austerity.

In a report marking almost 12 months since the Baltic state wrapped up a three-year, 7.5-billion-euro ($10 billion) bailout programme from the International Monetary Fund and European Commission, both bodies gave Riga the thumbs up.

"Macroeconomic developments in recent times have been impressive and show that Latvia has successfully used the financial assistance program to introduce economic reforms," the European Commission said following a joint monitoring visit with the IMF.

The commission -- which is the executive body of the 27-nation European Union -- said that it expected Latvia's economy to grow by 4.3 percent this year compared with 2011.

But it warned that more was necessary, including better targeting of social support for disadvantaged groups, strengthening the judicial system and better management of state-owned businesses.

In a separate statement, the IMF said that it expected the economy to expand by 5.0 percent.

It underlined, however, that austerity risked being carried too far in some areas.

"The cuts to and decentralisation of the guaranteed minimum benefit could adversely affect the most vulnerable segment of society," the IMF said.

"This measure should be reconsidered following the study being prepared by the World Bank, and replaced with benefit reforms consistent both with improving incentives to work and ensuring adequate safety net coverage," it added.

The international rescue plan was implemented after 2004 EU entrant Latvia swung from breakneck economic growth fuelled by easy credit and spiralling wages into the world's deepest recession during the global crisis.

Its economy shrank by a cumulative 25 percent in 2008-2009, and its centre-right government introduced austerity measures far beyond those applied by other embattled EU nations.

The former Soviet-ruled republic of two million aims to join the eurozone in 2014 and has in the past been hailed by the IMF as an example of effective austerity.

"As a result of present and past efforts, euro adoption in 2014 appears within reach," said the IMF.

Latvia insists adopting the euro makes sense for a small economy whose key trade partners already use the currency.

A key goal of the austerity drive was to meet eurozone criteria covering a country's debt, deficit and inflation -- rules breached by most of the currency bloc's 17 members.