Riga - Latvia, the Baltic state that is currently undergoing the sharpest recession in the European Union, gave further evidence of the severity of its economic woes Monday when official figures suggested its economy contracted by nearly a fifth in the first quarter of
2009.

Compared to 2008's figures, Latvian Gross Domestic Product (GDP) was down by 18 per cent according to initial estimates from the Latvian statistics office.

Industrial growth fell by 22 per cent and retail trade was down by 25 per cent as consumers felt the effects of wage cuts and rising unemployment.

The crucial hotel and restaurant sector, which is a valuable source of foreign currency, all but collapsed recording a 34 per cent drop.

With tax revenues falling sharply despite increases in Value Added Tax and hikes on duty for items such as alcohol and tobacco, the outlook for Latvia remains bleak.

"GDP is currently performing much worse than people were forecasting a month or even a week ago," Nordea Bank analyst Andris Laurins told the German Press Agency dpa.

"Everything depends on the coming two quarters. If we don't see a slowdown in this freefall, the annual data will be worse than forecast," Laurins warned.

That in turn could affect Latvia's chances of meeting its obligations under the terms of a 7.5-billion-euro (10-billion-dollar) loan brokered by the International Monetary Fund (IMF).

Further bad news emerged when the country's financial regulator released figures Monday showing that the number of loan payments in arrears is increasing as sharply as GDP is falling.

22 per cent of Latvia's 6.3 billion lats (12 billion dollars) of household loans were in arrears at the end of March, an increase of 4.5 per cent on 2008's year-end figure, the Financial and Capital Markets Commission said.

Swedish banks dominate the Latvian financial sector and have become much more circumspect about issuing loans in recent months after years in which credit was freely available on the back of a booming Latvian economy.

Worries that rising levels of default in Latvia might severely impact the Swedish financial sector have been increasing and are part of the reason Latvian Prime Minister Valdis Dombrovskis spent Monday on the other side of the Baltic Sea a working visit to Sweden. (dpa)