(Adds GDP slide in Q3, analysts)
By Patrick Lannin
RIGA, Dec 9 (Reuters) - Latvia plans about 1 billion lats ($1.82 billion) of belt-tightening measures in its 2009 budget as part of an agreement to win a vital rescue loan from the IMF and the European Commission, officials said on Tuesday.
Latvia had to seek help after sliding into recession and rescuing its second-largest bank, Parex Bank, last month. New gross domestic product (GDP) data deepened the gloom, showing a third quarter fall in the economy that was deeper than thought.
Budget steps in 2009 are to include spending cuts of about 700 million lats and revenue rises of 300 million, including a VAT rate rise to 21 percent from 18 percent, Finance Minister Atis Slakteris said. The income tax rate could be cut to 23 percent from 25 percent, he added.
"If Latvia does not get international credit resources then there could be a failure to pay wages and pensions. The state will become insolvent," Slakteris told a meeting of parliament's budget and finance committee.
He declined to say how much the government wanted to borrow from the IMF and European Union as talks were still going on.
The government is due to have a meeting at 4 p.m. (1400 GMT) to finalise the economic plan that will be a basis for the IMF loan. It hopes parliament will approve the plan on Thursday.
Slakteris said approval of the plan by Latvia this week could allow the IMF to give it final backing before Christmas.
He said the government aimed to keep the 2009 budget deficit within 5 percent of GDP, the level to which the IMF would agree.
BOOM TO BUST
Latvia expects the main aid to come from the IMF and EU, with Sweden, whose banks are heavily invested in Latvia, also playing a role. The IMF has said it was working on a sizable aid package, which would include preserving the exchange rate peg.
Swedish banks like Swedbank, SEB and Nordea could face large loan losses in a devaluation as this would make it harder for people to repay their loans as their incomes are in lats and many borrowings are in euros.
Latvia has gone rapidly from boom to bust due to the credit crunch. The Swedish-owned banks which were fuelling a consumer boom have pulled back on lending and state revenues have shrunk. The Parex rescue added to the government's woes.
Central bank chief Ilmars Rimsevics told the parliamentary committee Latvia could have avoided crisis if the government had put aside funds "for a rainy day" instead of running budget deficits.
Fresh GDP data highlighted the problems as they showed a contraction in the economy of 4.6 percent in the third quarter, worse than the 4.2 percent in a flash estimate last month.
It came after 0.1 percent growth in the second quarter and was in sharp contrast to the 10.9 percent growth of the third quarter of 2007. "It is very hard to find any positive aspects (in the data)," said Nordea Markets analyst Andris Larinsh. (Reporting by Patrick Lannin; Editing by Tomasz Janowski and Christian Lowe)