RIGA - A former chief of Sweden's central bank has said that Latvia's leadership missed the opportunity to rein in inflation when it had the chance and that the country's economy is headed for a harder fall than the one in Estonia.
Bengt Dennis, speaking to the daily Diena in an interview, pointed out that inflation in Latvia 's at nearly 18 percent the highest in the European Union 's started to accelerate before the surge in global energy and food prices, indicating that much of the price pressure was home grown.
In Dennis' opinion, the main reason for Latvia's runaway inflation was the abnormally high domestic consumption, followed by the government's failure to stabilize the situation. He said the best way to restrict consumption would have been to raise VAT.
"It is clear that the only way it was possible to restrict consumption was to raise the value added tax," he said.
"All this is written in taxation textbooks 's it is even taught at schools! Now I am afraid it is too late to take any measures. And now that inflation is so high there is a very big risk that people, households and investors will think that this is going to continue, thus creating strong inflationary expectations," Dennis said.
Remarkably, the former central banker said it is much easier to reduce inflation from 4 to 2 percent than from 15-16 to 7-8 percent. "Of course, everybody expects inflation to start declining at last 's it must happen sooner or later. The current situation is painful, and its solution will take time," he said.
As regards economic growth, Dennis said Latvia's GDP would continue declining and the nadir would soon be reached.
"We see where Estonia currently is, and it has to be remembered that there are many similarities between Latvia and Estonia. The only difference is that imbalances in Latvia are much more stronger. My prognosis, therefore, is that the correction of GDP growth will be harder for Latvia than for Estonia," he said.
Estonia's GDP barely moved in the first quarter of the year, up 0.1 percent compared to the same period last year.
"Consumption will fall very steeply. So slipping into negative growth is possible," Dennis said.
"In my opinion, you are already very close to the lowest point. Estonia and Latvia are classic examples of what is taught at school. You can do something to avert this situation, but the problem is that the government did not want to, while the central bank could not do anything about it," he said.
Speaking of the health of financial institutions, Dennis said the volume of bad loans was bound to rise. He doubted, however, that credit losses would reach a dangerous level.
"In the long-term, the advantage of Latvia and Estonia is that their banking systems are very resilient and solid. Yes, the amount of bad loans will increase, but the banks will endure it. And they will stay here," Dennis said.
