RIGA - Latvia emerged the apparent winner in a semantic dispute with the European Commission, which in the Baltic state's opinion had failed to include fresh data in its recent report on the troubled economy.
Central Bank and Finance Ministry officials were irked that the commission had concluded in its Feb. 13 report that Latvia's economy, which is racked by a number of imbalances, was still threatened with a "hard-landing" scenario.
The ministry sent a letter of protest, which Brussels acknowledged.
The "softer" report on Latvia's economy, the fastest growing in the European Union, now says the "economic scenario is attended by very high risks to macroeconomic stability, including continued overheating with a substantial risk of an abrupt slowdown at a later stage."
It is unclear where the subtlety lies between "hard landing" and "abrupt slowdown," but a ministry spokeswoman told Bloomberg news that it was satisfied with the newer, "much softer variant" of the report.
With inflation at 15.8 percent and growing and a current account deficit of over 20 percent of GDP 's both the highest in the 27-member EU 's Latvia's economy has overheated and is in danger of skidding to a halt. According to the classic "hard-landing scenario" (about which so much has been written), GDP growth could fall to 2 percent or less. For one of Europe's poorest nations trying to catch up with richer nations, this would be disastrous.
Latvia's leadership is therefore ultra-sensitive to open speculation of a hard-landing or a currency devaluation since, if anything, such talk scares away investment, which is badly needed to boost manufacturing and output.
Finance Ministry officials admit that the macroeconomic situation is complicated, but they insist that recent numbers show a reversal of trends in recent months. Fourth-quarter GDP was 9.6 percent, down from 11 percent in the third quarter. Retail sales and bank lending have fallen dramatically, and real estate prices are ticking down by about 2 's 3 percent per month.
Inflation, both the ministry and the Central Bank insist, will begin to fall in the second half of the year.
"I think that it is more or less clear that inflation will not decrease earlier than the second half of the year, taking into account prices for heating and energy," Finance Minister Atis Slakteris told Latvian public radio on March 3.
"It is a reality with which Latvia will have to learn to cope," he said.
The minister, who refused to predict how high inflation could reach, said oil and food prices were rising throughout the world, not only in Latvia. In April a new electricity tariff will take effect, while in summer a gas hike is expected.
Slakteris reiterated that the inflation-reduction plan was in effect and no further measures were necessary.
"The economic indicator that can be measured by the finance minister is how much money the state collects in taxes every day, every month, and one of the strongest indicators is the value added tax," he said. "Revenues from VAT are not growing as planned. There is a small gap, but it is there."
He stressed that the government should be careful to ensure that economic development does not stop altogether, which is a risk.
The private sector is particularly worried about the latter. DnB Nord Banka President Andris Ozolins said that the anti-inflation plan has worked and that domestic demand has softened to the extent that the government must now work to kick start it again.
"We should underscore that further cooling of the economy should not be continued, on the contrary, the economy should be stimulated," Ozolins was quoted as saying.
Construction companies have appealed to the government to cancel the 10 percent down payment requirement on real estate that has apparently brought housing starts in Latvia next to nil.
