Latvian growth rocketed as the private sector gorged on cheap credit from overseas. But when capital inflows ceased with the credit crunch, the bubble burst. And the downturn is being made worse by Latvia's currency peg. It has tied the lats to the euro to qualify for entry into the single currency. But that means the currency cannot fall, and thereby boost growth via exports. So the government has to engineer a so-called 'internal devaluation' - prices and wages must fall for competitiveness to be restored. That involves painful austerity measures, a pre-requisite for more help from the IMF.
RIGA- The recently approved budget amendments for 2009 have reduced all teachers' salaries by half as of Sept. 1. The teachers will be receiving the bare minimum subsistence amount, 172 lats per month.
In order not to exceed the allocated budget, more dramatic cuts will have to be introduced in schools in the last four months of 2009. In other state-funded institutions salaries will be curbed already sooner, with the budget amendments becoming effective July 1.
