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Pessimism takes over economic outlook

  • 2007-01-24
  • By Gary Peach
RIGA - Latvia's oven-hot economy has triggered an increasing number of bleak outlooks among the holy trinity of bureaucrats, businessmen and analysts in the first three weeks of 2007 (See opinion Page 15).

The much anticipated advance against the country's inflationary and labor market woes never materialized last year, and officials are admitting that no headway will likely be made during 2007. More tellingly, two camps continue to lock horns about what to do: the government is blaming external factors and says its hands are tied, while the Central Bank suggests the Cabinet is being lackadaisical.

Last year, the economy expanded by some 11 percent 's the highest rate in the EU. On the flip side, however, inflation amounted to 6.8 percent. Average annual inflation, the measure used by the EU to gauge preparedness for adopting the euro, was 6.5 percent, far beyond the level permissible for meeting the Maastricht criteria.
Worse, with energy, transport and labor prices set to rise sharply this year, consumer prices will follow suit'sand could even break last year's result.

The government, which was re-elected in October's parliamentary elections, continues to shrug its shoulders in exasperation. Inflationary trends, top ministers say, are beyond its control.
Prime Minister Aigars Kalvitis recently stated that inflation was likely to begin falling in 2009 's 2011.
"We cannot do anything about [inflation] earlier [than 2009-2011] due to objective reasons for inflationary growth," Kalvitis said, "and they have not been caused by Latvia's internal policy or other financially irresponsible decisions. They are external factors."

Finance Minister Oskars Spurdzins, who, like Kalvitis, is from the People's Party, sings from the same song sheet. In an interview with Bizness & Baltija last week, he said, "Interfering in the [inflationary] process is permissible when it reaches 10 percent."
As he points out, cutting the budget deficit will have minimum effect on consumer price increases: for every 1 percent that the deficit is slashed, inflation will fall 0.4 percent, the minister explained.

Contrast this with the position of Central Bank chief Ilmars Rimsevics. At a recent press conference, he made it abundantly clear that the government wasn't doing its job to tackle inflation. "Considering that external factors influence inflation in various countries equally, but since the rate of inflationary growth differs, then it is obvious that the reasons [for high inflation] have to be sought within," said the central banker.

"The high inflation in Latvia is first of all due to strong internal demand," stressed Rimsevics.
The government, however, has been reluctant to rein in that runaway demand. Ministers have repeatedly stated that their primary goal is to facilitate long-term growth to reach convergence with EU standards as soon as possible'sand not switch the coinage in their wallets.

"Ultimately, introducing the euro is not an end but a means to an end," said Spurdzins.
Still, where it could have acted to stem domestic demand, the government sat on its hands. For instance, a planned real estate tax was postponed indefinitely, giving speculative property investments extended life. More and more Latvians have bought real estate for the benefit of the nearly tax-free capital gains. Banks, for their part, are only too happy to loan the money.
Thus the government appears incapable'sor unwilling'sto tackle the inflationary conundrum. Granted, it has set up a working group comprised of the country's top experts, but this appears to be too little too late. Inflation has plagued Latvia for quite some time now, and an expert group could have been created a year ago, if not sooner.

The working group is expected to report on its findings in the beginning of March.
In a recent poll among local businessmen, Parex Bank found that more than three-fourths of Latvian entrepreneurs expect inflation in 2007 to continue charging ahead.
Meanwhile, The Economist opined that Latvia's economy shows manifold signs of overheating, the most troubling of which is the country's yawning current account deficit due to robust consumer demand.