IMF warns that economy could overheat

  • 2006-06-07
  • From wire reports

HOW MUCH? Latvia has seen a sharp increase in nearly every sector of the economy, from real estate to groceries.

RIGA - The International Monetary Fund has warned that Latvia must put the brakes on its rapid economic growth in order to prevent the economy from overheating and inflation from spiralling out of control. "The steep rise in domestic demand that was brought about by EU accession has increased economic vulnerability in several areas, including a high current account deficit, the increasing burden of foreign debt, steep salary and price inflation, and strong increase in housing prices," said head of the IMF mission Rachel Van Elkan.

"On top of this, there are a growing number of loan transactions being carried out in foreign currencies without guarantees against risks." The repercussions of Latvia's inflation should not be underestimated, she said, adding that the government needs to work on curbing this economic imbalance. Speaking on behalf of the IMF mission, Van Elkan emphasized that Latvia needed to "reduce the risk of a negative scenario and lay the foundations for a sustainable growth in the medium-term."
The IMF representative said there was no easy way to reduce Latvia's high domestic demand and its effect on the economy, since, as a member of the EU and the Exchange Rate Mechanism II, Latvia's monetary policy instruments are limited.
But there is still hope, she added. If the government postponed its planned personal income tax cut, Latvia could possibly reduce its high domestic demand. The IMF has suggested that Latvia introduce a personal income tax from money gained in real estate transactions, since people are currently being encouraged to invest, which fuels mortgage lending.

Van Elkan added that the IMF mission had provided Latvia with several other recommendations on how to improve its situation.
The IMF began its work in Latvia on May 25 and completed its mission on June 6. Representatives studied and compiled data on the Baltic state's macroeconomic development, which is necessary for the IMF's annual report on Latvia's economic development, monetary and fiscal policy, which it presents to the board of IMF executive directors. Such reports are prepared for each IMF member state.