Forecasts for Latvian GDP vary wildly, while IMF predicts hard-landing

  • 2008-04-16
  • By TBT staff
RIGA - An informal debate erupted last week over how Latvia's economy will fare this year, with foreign analysts generally predicting doom and gloom and local experts adhering to their typically Panglossian outlook. The first salvo was fired by the International Monetary Fund, which forecast in its latest report that Latvia's economy 's the fastest growing in the EU over the past three years 's would undergo a hard landing and suffer a bout of stagnation in 2009.

Gross domestic product is expected to drop to 3.6 percent this year and 0.5 percent in 2009, the IMF predicted. Inflation this year would amount to 15.3 percent this year and 9.2 percent next year.
The IMF forecast reads a worst-case scenario for Latvia, where the government is struggling to correct macroeconomic imbalances while maintaining strong growth.
A spokesman for the Bank of Latvia slammed the forecast, saying it was typical of the IMF.
"All in all, this is a kind of the continuation of a tradition 's at least for the last five years the prognoses of IMF colleagues for Latvia have constantly been lower than the actual results," Martins Gravitis said.
As he explained, "any prognosis is based on assumptions, and the IMF, probably, is operating with even more conservative assumptions, underestimating some growth factors that the Baltic states are showing after accession to the EU."

The Bank of Latvia believes that GDP growth will end up at 6 percent this year and 5 percent in 2009, the spokesman said. Foreign investment will remain strong, as will exports and income sent home by Latvians working abroad.
GDP growth was 11.9 percent in 2006 and 10.2 percent last year, the best results in the European Union. 
The Economy Ministry also reacted to the IMF report, announcing that, according to its estimates, GDP would expand 5.5 percent this year. However, the ministry said weaker external demand and increased competition in global markets could impact the economy negatively.
"In such case, growth in Latvia can be even weaker than 5.5 percent," a ministry spokesman told the Baltic News Service.

Prime Minister Ivars Godmanis earlier forecast GDP growth at 6 percent for 2008.
Meanwhile, private sector analysts who jumped in the debate were generally less sanguine than the government but more upbeat than the IMF.
"While we agree with the IMF that Latvia's GDP is not likely to show a steep increase this and next year, the assessment of Latvia's export potential is too pessimistic," said Kristine Jakubovska, a spokeswoman for Hansabanka.

Meanwhile, the Economy and Finance ministries on April 10 submitted a series of stabilization measures to the government in order to prevent the economy from slipping too quickly.
"The draft plan contains measures the government should implement in the next couple years to stimulate the economy. At present the most important task is to ensure the necessary conditions for sustainable growth," Economy Minister Kaspars Gerhards said.
In his words, the government has to ease administrative pressure on businesses, facilitate the launch and development of businesses with various financial instruments and a stimulative tax policy, and provide state support for exports.

The proposals were part of a government report underscoring that Latvia's economy started to slow in the last quarter of 2007 and that the rate would continue falling in 2008 and 2009. The period of cheap and easily accessible foreign capital is over and the price of foreign capital will be significantly higher in the future, the report said.
The ministries' plan analyzes three policy directions 's fiscal improvements, production stimulation and the development of a knowledge-based economy.
"Most of the measures included in the macroeconomic stabilization plan whose implementation will begin in 2008 and 2009 will yield results only in three to four years," the Economy Ministry said.
"Some measures, especially concerning fiscal consolidation and boosting budget efficiency, will make a positive impact as soon as 2008, curbing domestic demand and thus also imports, as well as not exerting additional pressure on inflation," the ministry said.

Central Bank President Ilmars Rimsevics has recommended that the government cancel the 10 percent down payment requirement for new property purchases, a measure that went into effect last summer in order to deflate the property bubble (see story on Page 5).
He also advised Prime Minister Ivars Godmanis that the government not waive the 1 percent surplus in the budget despite declining revenues.
"It is very important to keep heads cool and not to think that some budget policy relaxation measures could improve the situation. It is essential to maintain the budget surplus at 1 percent and not to regard it as a mystical reserve that could be used to compensate for the budget shortages," Rimsevics told reporters after meeting the head of government.
The Bank of Latvia governor also pointed out that revenues to the government budget are slightly falling behind target and that it was necessary to monitor the situation closely so that ministers do not miss the chance to cut expenditures.

In the first quarter of 2008, the Latvian government budget accumulated a 70 million lats (99.6 million euros) fiscal surplus, which is 2 million lats more than a month ago, according to the State Treasury's figures.
Revenues to the Latvian government budget are expected to reach 5.5 billion lats this year, while expenditures are planned at 5.3 billion lats, and the surplus at 163 million lats.