Riga - The economy in Latvia could collapse by nearly a fifth in 2009, admitted Prime Minister Valdis Dombrovskis Monday, as the recession in the embattled Baltic state lurches from bad to worse.

Speaking on national radio, Dombrovskis said his government was projecting an 18 per cent reduction in Gross Domestic Product (GDP) instead of its previous figure of
12 per cent.

"We are planning a contraction of 18 percent, not 12 percent, so we must plan further cuts to reduce the deficit," Dombrovskis said.

Under the terms of a 7.5-billion-euro (10.6-billion-dollar) economic aid package brokered by the International Monetary Fund (IMF) in December 2008, Latvia must limit its budget deficit to 5 per cent of GDP.

However, the agreement assumed Latvian GDP would fall by just 5 per cent in 2009, a figure that now seems wildly optimistic as Latvia experiences the European Union's harshest recession.

Latvia has already missed out on a 200-million-euro payment because of its slowness implementing structural reforms and an IMF mission is currently in the country to assess whether it will qualify for the next payment.

Measures that have been introduced, including public sector wage cuts of 20 per cent and large-scale layoffs, have prompted numerous groups to stage protests including nurses, teachers, students, farmers, police and young mothers.

In response to the worsening outlook, the government is set to present a fresh set of budget amendments to the Latvian parliament on Tuesday which seek to save around
960 million dollars.

However, the budget amendments plan for a budget deficit of 8.2 per cent of GDP, which signal that either the IMF is prepared to change the level of the budget cap or that the state is heading towards imminent bankruptcy.

Adding further fuel to the economic fire engulfing Latvia at the moment, the country's statistics office revealed Monday that unemployment rose to 11.3 per cent at the end of May.

Meanwhile the Latvian central bank confirmed it had spent nearly 200 million dollars supporting the national currency, the lat, on money markets last week, amid renewed fears that a devaluation may take place.

Though government policy remains firmly opposed to devaluation as the country seeks to fulfill the Maastricht criteria and adopt the euro, on Monday Justice Minister Mareks Seglins broke ranks and called for a debate on the pros and cons of devaluation.

"We have to work out whether there would be any gain from it," he told reporters. (dpa)