Ministers change tune on economic outlook, but are they two years too late?

  • 2007-08-22
  • By Gary Peach

CHANGE OF HEART? Kalvitis has been forced to reassess his outlookon Latvia's economy, which is increasingly criticized internationally.

RIGA- Finally, a top governmentofficial has come out andsaid what many 's from theerudite analyst to the bewilderedconsumer 's have been waiting tohear about Latvia's irrationaleconomic boom, which is threateningto propel the country into aprolonged cold spell."Salaries have been growing at acosmic speed during the rule of thepresent government," PrimeMinister Aigars Kalvitis told a publicprivate council on Aug. 15, referringto the current 33 percent annualrise in gross salaries."If pay rises continue at thesame rate, we will simply blow upthis country," he said.

Such illustrious hyperbole 'sLatvia "blowing up" thanks to atime-bomb of skyrocketing wages,high inflation, a labor market crunchand easy credit 's is a far cry from officialrhetoric as recently as a yearago.Previously ministers braggedabout Latvia's double-digit GDP indicatorsand shrugged off eurozonemembership deadlines, reiteratingthat the primary economic goal wasto raise living standards to averageEU levels as quickly as possible.As Finance Minister OskarsSpurdzins said last December, "If wedo not maintain the growth rate [of 7- 10 percent], then of course we willnot reach the average EU living standardsthat soon, or we will probablynever reach them at all."And so the ruling coalition continuedto compile growth-stimulatingbudgets at a time when drasticfiscal restraint was in order.

AsValdis Dombrovskis, a member ofthe opposition party New Era, toldthe Russian language Telegrafrecently, the government's economicpolicy has been "to push the pedal tothe metal."The results are well known 's andcontinue to haunt Latvia. On Aug. 17Fitch, a major international ratingsagency, downgraded several of theBaltic state's ratings. "The Latvianeconomy is severely overheating,and Fitch considers the policy reactionof the government to be insufficientto restore the economy to a sustainablegrowth path," the agencysaid in a statement.The criticism echoes sentimentin other agencies, banks and internationalfinance institutions such asthe IMF: Latvia's government hasn'tdone near enough to combat overlyhigh economic expansion.

Arguably, the Kalvitis government,which has been in controlsince December 2004, made itsbiggest mistakes when it compiledpro-growth budgets for 2006 and 2007.On Nov. 14, 2006, the Cabinetannounced a budget plan with a 1.4percent (of GDP) deficit, whichParliament eventually passed. Withthat stroke the government's primarylever of economic regulation 'sfiscal policy 's was thrown to thewind.In fact, as of last year a balancedbudget wasn't even seriously consideredin the country's medium-termplans. Finance Minister OskarsSpurdzins said on Dec. 11 that a zerodeficitbudget "could be achieved by2010."In the meantime, average annualinflation reached 6.5 percent lastyear, considerably above the government'starget of 5 - 5.5 percent set inDecember 2005.The Finance Ministry, in fact,has consistently been way off mark.

In December the ministry predictedinflation in 2007 would be 5.9 percent.It is now clicking along at 9.5 percentand breaking records on a monthlybasis.Past mistakes aside, the questionnow is whether the government hasthe will to make the painful decisionsto prevent a meltdown. One idea thatis being floated is to link all wageincreases for state-sector employeeswith productivity. But this is likely totrigger a further exodus of doctors,teachers, policemen, postal workersand public transportation driversand intensify Latvia's labor crisis.Shelving state-subsidized buildingprojects is another idea, and perhapsthe most crucial since publicdemand is "squeezing out" privatedemand, particularly in the constructionsector. Kalvitis told thecouncil last week that the governmentcould no longer invest in newdevelopment projects, since budgetmoney is going to salary hikes. Yetthe Castle of Light, the grandioselibrary project, is proceeding asplanned and will soak up some 11million lats (15.7 million euros) thisyear.

Even Bank of Latvia ChairmanIlmars Rimsevics has warned aboutthe macroeconomic repercussions ofthis project, but the demiurge behindthe library, Culture Minister HelenaDemakova, is a fellow party memberof Kalvitis. Construction is slated tobegin Nov. 18.Transport Minister AinarsSlesers is as equally keen on a newinternational airport for Riga,though the government has yet todecide how to finance this.Meanwhile, ministers also seemto be changing their tune on guestworkers. In December Kalvitis saidthe government did not plan to openthe country's doors to foreign workersand that employers should beencouraged to raise productivity andto raise salaries."If borders are opened up, allthis [present growth] will bedestroyed, so the borders will not beopened," Kalvitis said Dec. 13.

On Aug. 20, however, Slesers wasquoted as saying Latvia shouldattract guest workers to fill the yawninglabor deficit. "In such an intensivephase of development we simplydon't have the resources," he said,suggesting that foreigners could beinvited to work on specific constructionsites.Slesers, in fact, seems to havetaken the opposite standpoint fromKalvitis on the question of risingsalaries. In an interview with BalticNews Service, he said that the salaryincreases are the only way of stoppingpeople from leaving Latvia, andconversely, to get them to return."We have to create workplacesenabling people to earn good money,"said the minister, predicting thatRiga would become one of Europe'smost expensive cities.