• The Latvian People’s Party – the biggest party in the ruling coalition – is refusing to sign a deal that would ensure support from the IMF.
  • The failure of Prime Minister Dombrovskis (from the New Era Party) to secure the People’s Party’s backing is a serious blow and might very well be the trigger for the IMF to finally say “no” to Latvia.
  • We do not rule out that Dombrovskis might be able to convince the People’s Party to support the IMF deal, but we would not be surprised if the IMF is beginning to lose faith in the prime minister’s ability to deliver on his promises.

The political farce over the Latvian government’s attempts to secure the next instalment of the IMF loan unfortunately seems to be continuing.

On Sunday, Prime Minister Dombrovski promised investors, the European Commission (EC), the IMF, the Latvian central bank and the Latvian public that all five parties in the coalition government would sign a deal to ensure support from the IMF. Once again Dombrovski seems to have been overly optimistic in this communication, as the largest party in coalition government – the People’s Party – has announced that it would not back the deal with the IMF before it gets more clarification (whatever that means…).

This is very bad news. Not only does this show that Dombrovskis does not really have a mandate from the different coalition parties to negotiate with the IMF, but it should also raise serious concerns within the IMF and the EC about the political situation in Latvia. Both the IMF and the EC have for a long time demanded broad political backing for the fiscal reforms. The ongoing farce about the IMF deal shows that such a consensus is nonexistent. This makes it increasingly hard for the IMF to continue negotiations – and it will probably also raise serious concerns both in Brussels and Stockholm.

In the local Latvian media it is reported that the People’s Party’s reluctance to support the IMF deal is a result of IMF’s apparent demands to stop all public-private partnerships (PPP) in Latvia. We believe it is very likely that this has indeed been a demand from the IMF, as observers have seen this as a key source of extracting "rent" from EU-sponsored infrastructure projects. To put it in another way – PPP has been perceived as a source of corruption in Latvia for years.

Finally it might be noted that the People’s Party was the leading governing party during the bubble years and is widely blamed in Latvia for failing to avoid the crisis.

Dombrovskis might still be able to convince the People’s Party to sign up to the IMF deal, but we are worried that the IMF might no longer be willing to give Dombrovskis the benefit of the doubt.