Latvia's finance ministry proposes setting up stabilization fund

  • 2007-10-10
  • By TBT staff
RIGA - Finance Minister Oskars Spurdzins has called for the creation of a stabilization fund as a means to combat inflation and save money from the current growth cycle for "rainy day."
The reserve fund, according to Spurdzins' plan, would be filled with nearly the entire budget surplus planned for 2008, or nearly 180 million lats (257 million euros), the equivalent of 1.0 percent of gross domestic product. In the following two years the fund could absorb even more.

The fund could also contain a large part of the proceeds from the upcoming sale of Lattelecom, the monopoly land-line telephone service provider, which is shaping up to be the largest privatization in Latvia's history. Earlier this year Prime Minister Aigars Kalvitis suggested that some two-thirds of the cash 's or approximately 280 million lats 's from the sell-off should be used to establish a stabilization fund.
Spurdzins' proposal, however, comes with a major asterisk. The minister wants to have the exclusive right to approve, or veto, any decision to use the funds.
As Modris Sprudzans, an adviser to the minister, told the Bizness & Baltija daily, "The minister fears that these funds could be used ineffectively and for purposes other than what they're designated for. So full control should be concentrated in his hands."

What's important is that the state needs to start saving money, the adviser stressed. Exactly how the money could be used eventually is of secondary importance right now, he suggested. 
Export-rich countries such as Norway and Russia also have massive reserve funds soaking up cash from oil exports. In Russia, the fund was established in 2004 and now boasts a staggering $140 billion that the country can tap should oil prices suddenly plummet.
Karlis Leiskalns, a lawmaker from the People's Party, to which Kalvitis and Spurdzins belong, told Bizness & Baltija that the idea of a reserve fund is good but that all proceeds should be used to boost production and exports.

Latvia's economy is currently the fastest-growing in Europe. At the same time it has high inflation, an enormous current account deficit and a yawning labor market deficit. These imbalances have given rise to fears of a possible meltdown, and economists are advising the government to use fiscal policy 's i.e., spend less 's as an instrument to prevent a worse-case scenario.
A reserve fund would also demonstrate the government's vow to be more frugal at a time when the country's leadership, including President Valdis Zatlers, is calling on Latvians to spend less and save more.
The government confirmed the draft 2008 budget on Oct. 8, calling for a 1 percent surplus and a freezing of state and municipal wages (though doctors and teachers will receive a 10 percent raise).
Still, it was unclear whether the budget would pass a vote in Parliament. A member of For Fatherland and Freedom, a junior coalition partner, hinted last week that the party might not support the budget. In particular, he said the party was unsatisfied with the privatization model for Lattelecom.
Parliamentary speaker Gundars Daudze, however, expressed confidence on Oct. 8 that the budget would pass in the legislature.

The situation is fraught with political repercussions since, according to Latvia's constitution, a government must resign if it cannot pass the budget.
Lattelecom is slowly becoming an apple of discord for the ruling coalition. The smell of the extravagant sum of money the state stands to gain 's nearly a billion dollars U.S. 's has ministers drooling, particularly now that the deal is drawing to a close. One idea is to use the revenue for building roads in the provinces; another is to help finance the new national library, itself a matter of dispute in Latvian society.
Spurdzins is calling on the government to calm down. He said the haggling over Lattelecom reminded him of a group of hunters arguing over how to divvy up the bear that they have yet to kill.

Indeed, should a reserve fund be established, then the arguing will be over a bear already slain, and that too could be enough to crash the coalition, which might then have to watch from the sidelines as the members of a new government assume power and calmly divide the spoils.