Latvian minister wants to jump-start economy

  • 2008-03-12
  • By TBT staff

DRINK TO REVIVAL: Construction bosses are begging ministers to reverse some of the anti-inflationary measures that have put a crimp on the industry.

RIGA - Latvia's leadership has expressed alarm that the economy might have slowed too quickly and said urgent measures are needed to resuscitate certain sectors that have been hard hit by last year's anti-inflation plan.
"I think it's necessary to stimulate the economy and not to stress the fight against inflation as has been the case up to now," Prime Minister Ivars Godmanis told LNT television on March 5.
"We need to keep GDP growth at 7 's 9 percent 's it could fall by 6 percent by the end of 2009," he added. "So we should change our priorities, and economic growth should be in first place, not lowering prices."
The statement comes amid a slew of contradictory information among Latvia's economy. As the minister pointed out, certain sectors are indeed hurting, particularly construction and manufacturing, and may require a boost from the government.

Yet at the same time inflation continues to dog the economy and in February reached 16.7 percent, a new high.
The center-right government has repeatedly stressed that its overriding goal is to raise living standards to the level of West European nations; however, in the current global environment of rising food and energy costs, any policy measures to stimulate growth could easily backfire and bring more harm than benefit.
Economic activity is slowing, however. Latvia's statistics agency announced on March 10 that GDP in 2007 amounted to 10.2 percent, down from 11.9 percent in 2006. Fourth-quarter growth, however, was 8 percent, suggesting that the economy is indeed cooling off.
Credit growth in January was 31.8 percent 's the lowest level since 2000 's and this has meant fewer big ticket purchases such as new houses and cars.

The Dienas Bizness daily reported on March 7 that in the second half of 2007 the number of property deals worth more than 711,400 lats in the Riga area was only 26, down from 45 in the same period in 2006. New car sales, meanwhile, fell 21.5 percent in January and February compared with the same two months last year.
"The government needs to undertake some measures since trust in the country's leadership is falling by the day, and all we have is bad news," Maris Bensons, president of Latvia's Association of Car Dealerships, told the Bizness & Baltija newspaper.

The construction industry is suffering more than any sphere since several of the government anti-inflation measures adopted last summer 's including a mandatory 10 percent down payment on property purchases 's were directed at cooling the overexcited real estate market.
Construction volumes increased only 12.8 percent in 2007, while in the fourth quarter the figure was 6.8 percent, indicating that the plight in the industry is accelerating. Property prices have been falling 2 's 3 percent per month as a result of last year's anti-inflation plan.

Andris Doveiks, marketing director at Latvia's Ober Haus, told the Baltic News Service that if the 10 percent deposit requirement were lifted the government could stimulate the real estate market.
He said the government should lift the requirement for everyone across the board; rather, "Different types of support, for example, to new families, young professionals, are permissible only in the appropriate demographic contexts or to attract missing experts," he said.
The bottom-up pressure on the government comes at a time when Latvia is under duress from Brussels to tackle its macroeconomic imbalances, which include a current account deficit, excessive wage growth and inflation 's all of which are the highest in the EU.

Latvia's statistics agency announced on March 10 that inflation reached 16.7 percent in February, the ninth consecutive monthly gain. Food prices are up 21.3 percent compared with the same month last year, while housing costs 's gas, heat and electricity 's are up 23.5 percent. Housing costs in February increased 5.2 percent compared with January.
Government ministers and independent analysts agree that prices will continue to rise despite a contraction in domestic demand. Twenty percent inflation is not being ruled out.

A new tariff for electricity will go into effect on April 1, and natural gas prices are expected to jump in the summer after Russia's Gazprom raised its rates from the start of the year.
The situation is increasingly complex on the backdrop of global trends, where food and energy prices have soared to new highs on rising demand and a depreciating dollar. Thus Latvia's government risks playing with fire with any attempts to stimulate an already fragile economy.
As Ivars Geidans, chief executive at Merks, told Bizness & Baltija, "The economy needs some kind of stimulus, but it must be carefully thought out and weighed. Otherwise, we'll just jump from one ditch into another."