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PARIS, June 22 (Reuters) - Latvia's currency peg is part of its programme with the International Monetary Fund (IMF) and there is no reason to reconsider it at this stage, the fund's chief economist Olivier Blanchard said on Monday.
Battling to avoid devaluing the lat and cope with an almost 20 percent slump in GDP, Latvia's government has announced harsh budget cuts that will spur reductions in state salaries of 20 percent and in pensions of 10 percent.
Last year, it was granted a 7.5 billion euro ($10.4 billion) loan from the IMF and the EU, which is gradually being disbursed in efforts to avoid a meltdown that would hammer Swedish banks and other Eastern European economies.
Blanchard told Reuters that the country's economic situation was much worse than it was when the programme with the IMF and the European Union was put together, with a much larger decline in output and substantially bigger fiscal deficit.
Latvia's currency is pegged to the euro. But the global credit crunch, coupled with an expected economic contraction in the Baltic state of about 18 percent this year, have fuelled speculation that Riga will be forced to devalue the lat.
Asked if a currency devaluation could be avoided, he said:
"The basis of the programme so far has been that this was going to be a programme with a peg."
"The programme has the peg, at this stage we have no reason to reconsider," he said on the sidelines of an investment conference.
The European Commission has said that it wants to avoid a devaluation of the Latvian currency at any cost and that the way to do so would be to push through Latvian budget deficit cuts this year and next. [ID:nLA339266]
Prime Minister Valdis Dombrovskis has vowed to do what is takes to maintain the peg and to adopt the euro in 2013 at the earliest. [nLA742504]
IMF personnel were now on the ground in Latvia, assessing the situation, a process that should not take a few more months.
"We are basically just looking at the numbers, trying to see what can be done. A decision will be made in time," he said.
What was clear to the IMF now was that "the size of the fiscal adjustment which is required is much larger, maybe it needs to take more time," said Blanchard.
The Washington-based IMF is keen to avoid a fiscal program in which adjustments would produce painful social cuts, he said. (Reporting by Tamora Vidaillet and Anna Willard; editing by Patrick Graham)