Latvia to slash deficit, inflation in 2006

  • 2005-10-05
  • From wire reports
RIGA - The government has approved a draft budget for 2006 that calls for cutting the budget deficit to 1.5 percent of GDP and reducing inflation to 4.5 percent.
Revenues next year are expected to amount to 3.2 billion lats (4.5 billion euros) and expenditures to 3.3 billion lats, with the resulting deficit coming to 145 million lats, or 1.5 percent of GDP.

GDP for 2006 is estimated at 9.4 billion lats.

Many economists were most concerned with the consumer price index. The Finance Ministry has predicted that inflation will slow from the present level of over 6 percent to 4.5 percent next year and then to 2.8 percent in 2007.

In a letter attached to the budget, the ministry explained that the current set of macroeconomic indicators are not conducive to a significant slowdown in Latvia's inflationary level, the highest in the European Union, particularly in light of the planned increases in energy prices, excise-tax adjustments, domestic demand and low-interest rates.

The ministry said insufficient competition and the low rate of the national currency to the euro would also push prices up.

Still, ministry officials saw a silver lining in that many of the factors that ratcheted up prices after EU accession will play a smaller role in future price formation.

Inflation will comprise 6.4 percent in 2005, ministry officials said.

The high inflation rate has caused concerns about Latvia's prospects to adopt Europe's single currency, the euro, in 2008 as planned.

Finance Minister Oskars Spurdzins predicted that this year's budget deficit could stay at 1.5 percent of GDP and not 1.68 percent as originally planned. He told reporters that tax authorities have collected more revenues than expected.

The minister also noted that local authorities have received large sums from the amended budget for investments, but since some municipalities would not manage to spend all the funds the latter will be automatically be used for covering the budget deficit.

Bank of Latvia President Ilmars Rimsevics predicted that the 2005 budget deficit would not reach 1.68 percent of GDP. He explained that for the last four years the deficit turned out to be smaller than planned, a trend brought about by robust economic growth and improved tax collection.

Under next year's budget, GDP growth is planned at 7.5 percent.