World Bank: Latvia to lead EU in growth, maintain high inflation

  • 2005-07-27
  • Staff and wire reports
RIGA - A leading World Bank economist said that Latvia should lead the EU in economic growth this year and that the country would need 16 years to catch up to Western Europe's standard of living.

Speaking in a video-conference last week, Thomas Laursen, a World Bank expert on Europe and Central Asian economies, said that Latvia will lead the European Union in GDP growth with 7 percent. According to the bank's predictions, GDP will grow by no less than 3.5 percent in all new EU member states, though the Baltic states will undergo the most robust expansion, with Lithuania's economy growing 6 percent and Estonia's 5.6 percent.

Laursen also predicted in his research that Latvia would need 16 years to reach the level of older EU member states in terms of GDP per capita, giving it the distinction of becoming the fastest state to do so. By comparison, the World Bank expects Slovakia will need 17 years, Lithuania, Estonia and the Czech Republic 18 years, and Poland as many as 41 to attain the same level.

Laursen said he believes that Slovakia and the Czech Republic will achieve 75 percent GDP level per capita of the old EU states within the shortest period 's or three and seven years respectively. Latvia could reach this level in 11 years, Lithuania and Estonia in 12, and Poland in 27.

Regarding current macroeconomic indicators, Latvia will also have the highest inflation in the union this year, Laursen added, at 5 percent. He stressed that the Economy Ministry's proposal to reduce the VAT on food products would not solve the country's inflationary problems. "There is very little hope that the inflation will slow down in Latvia in the near future," he said.

Still, he praised the government's efforts to take some steps in order to stem the rising prices. Latvia has had the fastest consumer price index growth in the EU over the past 11 months in a row and has become a reason for concern if the country plans to introduce the euro in 2008, as planned.

Last week the Bank of Latvia changed its inflationary target for 2005 from 4.5 percent to 6 percent. In June the government ordered the Economy and Finance ministries, as well as the Bank of Latvia, to seek solutions for curbing inflation. World Bank economists predicted that in 2006 Latvia would post 4 percent annual inflation, Lithuania 2.2 percent and Estonia 3 percent.

Indeed, the bad inflation news persists for Latvia. Last week the National Statistics Office reported that the producer price index has soared 7.3 percent year-on-year as of June.

In an another pan-Baltic survey, Baltic Macroscope, compiled by the SEB banking group, GDP per capita in Riga was shown to be at approximately 70 percent of the average EU level and the capital's economy will reach the European average in a decade.

Andris Vilks, an official from SEB Latvijas Unibanka, said, "At the moment the region of Riga is very quickly approaching the average level of the EU25 states, and it won't even take 10 years for Riga region to reach or even surpass this level."

He also said that despite the booming economic development over the last few years, Latvia still had not approached the level of other Baltic states by GDP per capita.

The survey showed that, as of 2004, GDP per capita in Latvia was 43 percent of the average EU level, in Lithuania 48 percent and in Estonia 51 percent.