IMF throws cold water over Latvia's balanced budget promise

  • 2007-05-02
  • By TBT staff
RIGA - The International Monetary Fund has said it doubted Latvia's ability to balance the budget this year despite the government's promise to do so as part of its inflation-fighting plan. Rachel van Elkan, head of the IMF's mission in Latvia, said that after studying the budget plan for the year she concluded that a balanced budget for 2007 wouldn't be achieved.

Van Elkan said that the government's revenue expectations 's which include the sale of Lattelecom (see story on Page 7) 's would be insufficient to cover the planned budget deficit.
Van Elkan is part of a rising chorus of skepticism in the international banking community about Latvia's program to combat an overheating economy and its attendant pitfalls 's inflation, asset bubbles and risk of harming long-term growth prospects.
Latvia's economy grew 11.9 percent last year 's the highest in the European Union 's fed largely by consumption. Loans to households grew 60 percent year-on-year as people borrowed to buy homes, cars and consumer durables.

Finance Minister Oskars Spurdzins dismissed the IMF's conclusion, saying that a balanced budget was an achievable goal.
He said if the government decided not to distribute additional funding in this year's budget amendments it would succeed in achieving a balanced budget in line with the Cabinet's inflation curbing plan, which was approved in the beginning of March.
Spurdzins explained that revenues are accruing rapidly and the additional income could be used to cover the expected deficit. He admitted that the budget will not show a significant surplus either but said that it would still be balanced.
Revenues to the state budget in 2007 are foreseen at 4.2 billion lats (6.2 billion euros), up 24.2 percent from 2006, while expenditures are expected to reach 4.3 billion lats, up 26.3 percent year-on-year. The budget deficit, according to the latest data, is expected to be 1.4 percent of the GDP.
However, the IMF believes Latvia would only be able to start tackling its unique set of economic risks when the surplus reaches at least 2 percent of GDP.

Van Elkan admitted the budget deficit would decrease but that the reduction would be insufficient to guarantee stability for the national economy and could even aggravate the situation.
In her opinion, the budget should have a surplus of at least 2 percent of GDP.
Van Elkan said the first legislative amendments prepared under the government's inflation curbing plan were insufficient. She said they are a significant step toward solving the complex economic situation in Latvia, but to make a significant difference the inflation-curbing plan had to be fully implemented.

Van Elkan said that after discussing the economic situation of Latvia with several state officials, she had the impression that the inflation-curbing plan would not alter consumers' behaviors and expectations.
"Institutions are looking at each other, waiting to see who will make the first step to cut costs," she said.
The IMF mission also pointed to serious problems concerning Latvia's current account deficit 's the highest in the European Union 's the overly rapid development of the real estate and construction markets, the high national debt (10 percent of GDP, according to Eurostat), as well as the increasing number of borrowers 's which has resulted in a situation where one-sixth of all consumption in the country is financed by foreign funding.

The inflation-curbing plan the Latvian government approved in March this year aims to eliminate the budget deficit in 2007 without amending the government budget, which would increase its costs.
Local analysts and economists have tended to view the situation more optimistically. Martins Kazaks, head economist at Hansabanka, the largest bank in Latvia, said the risk of a devaluation had been minimalized since the Bank of Latvia has closed the foreign exchange market to foreign banks, which could speculate and thereby apply pressure to the Latvian lat.
"In the short-term a devaluation is very unlikely," he said. "In the medium term it depends on the macroeconomic situation."