Latvia, a country of 2.3 million people which broke free from the crumbling Soviet bloc in 1991, enjoyed breakneck economic growth in recent years after joining the EU in 2004.

But the economy went off the rails last year as rampant inflation and a bursting credit bubble were compounded when the global economic crisis hit its major trading partners in Western Europe and Russia.

The Latvian finance ministry expects the economy to contract 18 percent this year, in a far cry from the double digits posted as recently as 2007, when robust domestic consumption was still being powered by rising wages and easy credit.

In the face of the deepest recession in the 27-nation EU, Latvia is relying on the bailout to stay afloat.

The payment of one tranche was delayed in March after Riga failed to satisfy lenders. To obtain the next 1.7-billion-euro chunk, due at the end of this month or in early July, Latvia had to continue tightening its belt.

A round of cuts in December had failed to stem the crisis. Dombrovskis's embattled five-party coalition -- which took office in March after the previous government collapsed -- scrambled to beef up the austerity package.

The measures passed Tuesday, due to come into force from July 1, cut retirement pensions by 10 percent.

Among other moves were a 20-percent cut in public-sector pay -- including salaries for government members.

In addition, the tax-free minimum monthly income was lowered to 35 lats from the current 90 lats, and the minimum wage to 140 lats from 180 lats.

The European Commission and finance ministers said in a statement that the latest cuts will be quickly assesed and a decision on releasing the next tranche of aid "will be taken without delay".