(Adds details from IMF conference call)
By Lesley Wroughton
WASHINGTON, Dec 23 (Reuters) - The International Monetary Fund on Tuesday gave final approval for a 1.68 billion euro ($2.35 billion) rescue package for Latvia that aims to stabilize an economy shaken by the global credit crisis.
The program, announced on Friday as part of a broader 7.5 billion euro package, is the largest ever by the IMF for any Baltic state.
“The current global financial crisis has brought Latvia’s vulnerabilities to a head,” the IMF said in a statement. “Years of unsustainably high growth and large current account deficits have coalesced into a financial and balance-of-payments crisis.”
The IMF aid is part of a package for the ex-Soviet state that includes financing from the European Union, Nordic countries, the Czech Republic, Poland, fellow Baltic state Estonia and the World Bank.
The deal will allow Latvia to keep its lat currency peg to the euro at the present exchange rate but at a cost of painful adjustments in other areas that will drive down real wages and lower budget spending.
The IMF mission chief to Latvia, Christoph Rosenberg, said the decision to keep the peg was influenced by the possible impact a devaluation would have had on Latvia’s neighbors.
“This was very much on our minds,” Rosenberg told a conference call with reporters.
The IMF said Latvia’s program had three objectives: to stabilize the financial sector, restore depositor confidence, and to avoid a disorderly adjustment of the exchange rate peg.
He said Latvia has made it clear that adopting the euro was its goal.
“They ... want to do this as fast as possible and the program is designed to help them do that,” Rosenberg said. “Euro adoption is clearly the strategy for Latvia to get out of the situation where it’s vulnerable to these kinds of capital flows.”
He said wage growth in Latvia had increased sharply since 2001 and far exceeded productivity gains, and large bonuses for public servants would be affected by the cutbacks.
“The number of wage cuts are up to 25 percent which sounds large, and it is, but let’s remember we had a tripling of wages in the years before (2001-2007), so we’re rolling back some of this,” he added.
Latvia agreed to keep its budget deficit in 2009 below 5.0 percent of gross domestic product and to bring it to 3.0 percent of GDP in 2011.
“Given the economy slowing as quickly as it is, our estimate was that the deficit would have been about 12 percent of GDP in 2009, and so the government has put measures in place to bring that to about 5.0 percent which is financable,” he added.
In a joint statement, finance ministers from Denmark, Finland, Norway and Sweden said they stood ready to provide credits of up to 1.8 billion euros to Latvia contingent on the sucessful implementation of the program.
Nordic countries are involved in the loan package because Nordic banks are heavily invested in Latvia and other Baltic states, and would be hurt if Latvia’s economy or the others went into freefall.
Reporting by Lesley Wroughton; Editing by Chizu Nomiyama