RIGA - Latvia boasted the highest rate of economic growth among the three Baltic states in the first quarter of 2004, with gross domestic product expanding an astonishing 8.8 percent over the same period last year.
Though strong, Lithuania and Estonia were less impressive, with their economies growing by 7.7 percent and 6.8 percent respectively over the first three months of the year, according to preliminary data.
Latvia's GDP grew to 1.5 billion lats (2.3 billion euros) from January to March, led by trade, transport and communications, the processing industry and construction. Trade accounts for 18.7 percent of GDP, while transport and communications 15.5 percent.
Although the news was praised by politicians, central bankers cautioned against excessive growth and its repercussions on macroeconomic indicators.
"Annual growth of over 8 percent cannot be maintained year from year and is dangerous to economic development in the future," said Bank of Latvia President Ilmars Rimsevics, who announced on June 14 that the bank had revised its estimate of annual GDP growth up to 7.5 percent.
Together with the Finance and Capital Market Commission, the bank said it was analyzing ways to slow down lending, which is the leading factor behind the increasing consumption. "We think that the Latvian government should act to make sure the budget deficit is below 1 percent next year and remains around 1.2-1.5 percent this year, instead of the planned 2 percent," Rimsevics was quoted as saying.
In March the bank raised the core interest rate in lats by 0.5 percentage points to 3.5 percent to curb steeply climbing domestic demand, although the effect of the measure has been considered negligible since many consumers can (and do) borrow in dollars and euros.
Rimsevics said however that the bank would not raise rates again and would instead look for other ways to prevent the economy from overheating.
On the back of this high economic growth inflationary worries returned, with the consumer price index jumping 1.3 percent in May compared with April, while year-on-year growth was 6.2 percent.
Finance Minister Oskars Spurdzins said the price rise was causing concerns but that it was not dangerous. It was mostly due to the so-called "May 1 factor."
"The price increase was brutal on the part of traders, but it is not permanent inflation. All countries joining the EU have gone through it," said Spurdzins.
Economy Minister Juris Lujans said the inflationary trend was due to the steep rise in fuel prices. He said inflation would slow down during the second half of the year, and consumer prices would grow by no more than 5 percent for the year.
Spurdzins, who also said inflation would slow down in the second half of the year, said that since growth was so high the state would not have to sacrifice budget expenditures for the sake of macroeconomic stability.
In Latvia long-term interest rates were 10.9 percent annually, up 2 percentage points in March over February and 3.2 percentage points on March 2003. In Lithuania the rates on long-term loans in local currency in March were 5.2 percent annual, down 0.4 percentage points over a month and 1.2 percentage points over a year, while in Estonia the local currency long-term rates were 5.3 percent in March, down 0.2 percentage points from February but up 0.7 percentage points on March 2003.
Last year Lithuania posted the fastest growth among the three Baltic states at 9 percent, while Latvia's expanded by 7.5 percent and Estonia by 5.1 percent.
