RTTNews - The International Monetary Fund on Monday said it reached an agreement with Latvia on a policy package, which would help the country overcome a difficult economic situation while ensuring debt sustainability and protecting vulnerable groups.

Under the arrangement, the IMF would enable Latvia to draw SDR 178 million, equivalent to US$278.3 million or EUR195 million. The IMF said the disbursement associated with the completion of its first review, along with the EUR1.2 billion given by the EU would provide the necessary finance to Latvia to ensure that essential public services, especially support to those most severely hit by the crisis, could be maintained in the back of a steep drop in government revenues.

Moreover, it would also ensure that the country meets its international payment obligations and provide resources to support the financial system, the lender said.

The IMF report said the economic contraction in Latvia was more severe than expected, reflecting a collapse of domestic demand and a rapid narrowing of the current account deficit. The lender noted that the downturn revealed significant weakness in government finances, which caused the fiscal deficit to widen above initial targets. The government in turn, proposed a strengthened policy measure to address the fiscal imbalance in 2009 and beyond in a sustainable way, while pursuing structural reforms.

However, the IMF pointed out that further structural reforms on both the revenue and expenditure side of the budget would be necessary to ensure that the deficit declines in 2010 and in future years, consistent with the government's goal of qualifying for euro adoption as soon as possible.

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