RIGA (AFP) The deepening economic crisis in Latvia is forcing lenders, such as Sweden, to rethink the terms of a rescue package for the recession-hit Baltic state, an IMF official said Thursday.

"The recession this year is much more severe than anticipated so there has to be some flexibility. We have to respond to changes in circumstances," Mark Griffiths, the head of an International Monetary Fund mission to Latvia, told reporters after meeting Prime Minister Valdis Dombrovskis.

Dombrovskis said Riga feared the economy would contract by "16 to 18 percent" this year compared with 2008.

Latvian authorities have issued increasingly doom-laden forecasts as the extent of the country's crisis becomes clearer. They have previously said output could drop by 16.5 percent.

In December, the IMF and the European Commission -- the European Union's Brussels-based executive arm -- as well as leading regional investors such as Sweden agreed to give Latvia a 7.5-billion-euro (10.5-billion-dollar) bailout.

IMF and Commission officials are currently in Riga taking stock of progress in a government belt-tightening and economic reform drive which is part of the package.

Latvia, a former Soviet-ruled republic of 2.3 million people which joined the EU in 2004, had boasted double-digit economic growth in recent years thanks to robust domestic consumption stoked by rising wages and easy credit.

Now, however, it is now in the grip of the 27-nation bloc's sharpest recession.

Under the bailout deal Latvia pledged not to run a deficit -- the amount by which a country's spending exceeds its income over the year -- of more than 5.0 percent of gross domestic product.

The government has been pleading with lenders to allow a 7.0-percent deficit, thereby giving it more leeway.

"It's important not to talk about specific numbers right now, it's very early in the mission," said Griffiths, whose team is due to stay in Riga until June 8.

The government is facing mounting public discontent over measures including civil service pay cuts, social security reductions, plus school and hospital closures, as well as rising unemployment.

Riga has decided to tear up its 2009 budget and produce a new one from scratch, which is it planning to submit to parliament by Monday.

The government has faced criticism from the Latvian central bank for its alleged sluggishness.

The European Commission also took Riga to task Thursday, saying budget cuts alone were not a way out of the crisis.

"Simple cutting of budget expenditure unfortunately does not resolve the situation," Iveta Sulca, head of the commission's office in Latvia, said in a statement.

"Budgets cuts are not reform. The situation can be stabilised through real reforms now and today so that the Latvian economy be put on a long-term (growth) pattern tomorrow," she said.

In March, Latvia missed out on an instalment of the bailout funds after failing to satisfy lenders.