Riga - Latvian members of parliament embarked on a lengthy debate Thursday over government proposals to slash the national budget in order to win approval from the International Monetary Fund (IMF) for an economic assistance package thought to be worth up to 6 billion dollars.

Parliamentarians were greeted by protestors as they arrived at the Latvian parliament, the Saeima, in Riga. A crowd consisting mainly of public sector employees who face the sack as part of the proposed austerity package made their feelings known, but quickly faded away in the cold weather.

According to the proposals, Latvia will save around 1 billion lats (1.85 billion dollars) by cutting spending and increasing revenues in 2009, a sum equivalent to 7 per cent of the small Baltic state's GDP.

Specific measures include raising value added tax to 21 per cent from 18 per cent, and slashing public sector wages by 15 per cent, on top of extensive job cuts.

Though not officially confirmed, it is believed that the IMF will only agree to help Latvia with a loan when it has proof of the country's commitment to reform in the form of broad cross-party support for the cutbacks. The Latvian government has consistently refused to say how much money it wants from the IMF.

Latvian president Valdis Zatlers made a speech at the start of the parliamentary session urging government and opposition MPs to find common ground for the good of the country. "We will have to be very modest in our demands in the near future and all expenses will have to be considered very carefully by the state in general and each individual in particular. Yet, austerity is not an end in itself, we also need well-thought-out investments to support economic recovery," Zatlers declared.

One of the leading economic commentators on the region, Danske Bank chief analyst Lars Christensen, said the reforms were welcome but had come much too late.

"There is no doubt that the announced measures will be painful and are likely to be very unpopular, but a fiscal tightening of this magnitude seems necessary to avoid a devaluation of the Latvian lat. The failure of the Latvian government to act earlier now means that there are no easy solutions out of the crisis," he said. Other countries in the region, including Sweden, are also ready to offer financial assistance once Latvia shows it is serious about balancing its books.

Swedish Finance Minister Anders Borg confirmed in Stockholm on Wednesday that he has had talks with the Latvian government, the IMF, the European Union, the European Central Bank and representatives of other Nordic countries about helping the stricken Baltic state.

"We all realize that the situation in Latvia is severe but we strongly support the substantial progress that has been made from the Latvian government side - the fiscal restructuring program is one of the most credible that we have seen," Borg told reporters.

Asking for handouts from neighbours marks an ignominious fate for Latvia, whose economy had been booming for more than a decade.

But this year things have deteriorated rapidly thanks to a combination of high inflation, spiralling wages, the bursting of a property bubble and the effects of the global credit crunch. National GDP contracted by 4.6 per cent in the third quarter of 2008 alone.

The country's largest home-grown bank, Parex Banka, was recently nationalised and much of the rest of the financial sector is under Scandinavian ownership, with SEB, Swedbank, Nordea, DnB Nord and Danske Bank all represented. (dpa)