RIGA - If the present rate of inflation in Latvia keeps up, Riga may soon become far and away the most expensive Baltic capital, with prices 20 - 30 percent higher than in Tallinn or Vilnius, a leading bank reported last week. According to SEB Latvijas Unibanka, Latvia's inflation, which at the end of April reached an annual rate of 8.9 percent, threatens to place Riga in a league by itself among the region's large cities.
As the bank's chief economist Andris Vilks explained, "Our economic growth also equals that in Estonia, but in the two [other Baltic] countries inflation is not such a big problem."
Indeed, in Estonia annual inflation was 5.5 percent at the end of April, while in Lithuania it reached 4.9 percent. By comparison, annual inflation in the 13-member eurozone in March was 2.96 percent.
"We cannot just blame the steep pay raises and economic growth for that. Salaries in Latvia are only slightly above the average level in Lithuania, and they are even lower than in Estonia," Vilks said.
In the past, reports comparing the cost of living in the Baltic capitals have typically placed Tallinn in first place, though some indicators showed that Riga was the most expensive. If current inflation levels continue, however, Riga will outpace its northern rival.
At the same time, Estonia is bracing for even higher inflation due to a new batch of excise taxes approved by the government last week. (See story on Page 11.) Inflation is set to increase to 6.5 percent in 2008, analysts say.
Analysts at leading European banks have been increasingly critical of the Baltic states in recent months and rating agencies have already downgraded Latvia and placed a negative outlook on Lithuania (see story on Page 11.)
Curiously, SEB's Vilks believes consumers should be more aware of the risks they pose to the economy.
"If consumers were just a bit more critical and did not accept so blindly the prices dictated by the market, [prices] would not rise so fast," the economist reckons.
"Unlike the rest of Eastern Europe, people in Latvia are quite ostentatious 's they want to show off. If they buy a car, it must be the most expensive one, if a house, it must be the biggest one, which skyrockets inflation," he said.
Moreover, Latvian residents are rather skeptical about the existing pension system and the state, and therefore don't save as much as they should, said Vilks.
In his opinion, the reason for such skepticism is the bitter experience of past economic crises and Latvia's overall political culture, which is characterized by corruption and inadequate income of officials.
Although inflation is high, Latvia's economy is not facing any serious risks this year, but future prospects will largely depend on investors' confidence, Vilks said.