Central Bank: economy to nosedive next year

RIGA 's Representatives of theLatvian Central Bank have said that the country will see a sharp slowdown nextyear.

Central bank spokesman Martins Gravitis told the Baltic News Service thatalthough the Bank of Latvia expects Latvia'sGDP to contract by 4 percent in 2009, and the government has agreed with theInternational Monetary Fund to reckon with a 5 percent GDP drop, thediscrepancy in these forecasts is relatively small.

The Bank of Latvia representative admitted that Latviacould not afford to increase its budget deficit further to obtain additionalfunding to stimulate the economy. The government, Gravitis said, must think howto finance the budget deficit. Increasing the budget deficit further would onlyexpand the external debt and foster imports, thus postponing the solution ofeconomic issues.

Peteris Strautins, a senior social economics expert with Swedbank, said thatthat the prognosis of the 5 percent GDP drop was realistic, but called thegovernment's approach to the budget deficit very tough.

"In line with all textbook theories, the government in this situationshould let the budget deficit grow in order to stabilize the situation,"Strautins said, adding that it is necessary now to stimulate consumption. Theexpert presumed that the present tight approach to the budget deficit might beattributed to the government's efforts to speed up euro adoption and thereforebring the budget deficit in line with the Maastrichtcriteria.

Strautins also pointed out that the government would not increase budgetrevenues by raising some taxes but that the measure could help ease the drop inrevenues.

Prime Minister Ivars Godmanis told journalists Thursday that his governmentwas going to base amendments to the 2009 budget, due to be made in March, on aforecast that the economy will shrink by 5 percent in 2009, and the budgetdeficit will thus be revised to 3 percent of GDP with a prospect of reducing itto 2.5 percent of GDO by the year's end.

He said that these were the economic growth indicators that Latviawas discussing with the International Monetary Fund (IMF).