RIGA - Bank of Latvia officials sounded alarm bells last week when they stated that the country's record-high rate of inflation and current account deficit could likely delay introduction of the euro.
"The latest figures are shocking," Bank of Latvia President Ilmars Rimsevics said at a Sept. 10 press conference.
The state statistics office reported that annual inflation had reached 7.8 percent, while the previous week it was announced that the current account (which roughly reflects a country's trade balance) deficit could be as high as 13.5 percent of GDP.
Worse, the government's recent decision to increase spending not by 66 million lats (100 million euros), but by 119 million lats is likely to exacerbate inflation figures, Rimsevics explained.
"The Bank of Latvia believes that at least part of the excess tax revenues should have been used for reducing the budget deficit," he said, stressing that only a reduction in the deficit would allow the country to introduce the euro by 2008.
Government officials have shrugged off concerns that the additional spending might lead to inflation, claiming that the budget deficit would remain at 2 percent, well below the 3 percent required for introduction of the euro.
The central banker said that, given the current record-high rate, 2005 to 2006 might not be enough time to rein in inflation following the Maastricht criteria.
Analysts added that the bank's statement was likely to lead to a political confrontation with the government, particularly now that the budget debate is about to begin.
"Such harsh words from the Bank of Latvia are something in themselves 's you could even say it's a bit scary 's and it's most likely that the long discussion between the government and the Bank of Latvia in coming months will turn into a politicized affair," Zigurds Vaikulis of Parex Asset Management told the Baltic News Service.
Hansabank Markets senior analyst Liene Kule said that any delay in the euro could be a good thing, since the Bank of Latvia could still regulate the economy through its interest-rate mechanism.
Latvia is set to peg its national currency to the euro in January 2005.
The Bank of Latvia decided on Sept. 9 to leave its refinancing, deposit, and Lombard interest rates unchanged. The refinancing rate was last changed in March when it was raised to 3.5 percent.
Also, Rimsevics said last week that marking prices of goods in stores in both lats and euros would be premature, as the exchange rate could still change.
"Considering the inflation rate and current account deficit, the European Central Bank may want the exchange rate altered," he said, adding that the ECB has done so in a number of countries.
Prime Minister Indulis Emsis has said that prices in Latvia should be shown in both lats and euros as of next year for people to get used to the new currency introduction.