RIGA - Speaking at a press conference May 15, Bank of Latvia President Ilmars Rimsevics said that the inflationary pressure would persist over the coming months and policymakers need to do more to boost exports in order to cushion the economic downturn.
Rimsevics said that the price for electricity, which catapulted 39.2 percent in April, would continue to exert upward pressure on consumer prices, which reached an annual growth rate of 17.5 percent last month, the highest in 12 years.
He pointed out that the price for bread alone rose 5.2 percent last month, while dairy products stabilized 's both reflecting a slowdown in domestic demand.
"So with slower economic growth, an inflation drop might be expected in mid-summer at earliest," said Rimsevics.
"We should take into account that it will be a gradual process 's there will still be a strong impact of energy resource price hike (electricity and gas) on inflation, which will not allow it to drop in the coming months," he said.
The central banker said exports had become the driving force in the economy now that domestic demand was waning, and he urged the government to implement necessary measures to facilitate further export growth.
"It is necessary to facilitate the sustainability of exports, realizing that a drop in external demand is possible. What's more, the manufacturing industry, which is an essential part of exports, continues to show steep cost increases and falling confidence," he explained.
Export-boosting measures will ensure Latvia's competitiveness on global markets, Rimsevics added.
He praised the government's program to support small and medium sized businesses via Latvia Mortgage and Land Bank, a state-owned lending institution. Also, the construction of the national library might boost the building industry, he added.
In Rimsevics' opinion, there are significant capital resources 's foreign investment, EU funds, repatriated funds from Latvians abroad 's that could help stimulate growth.
An Economy Ministry study has shown that first quarter growth 's 3.6 percent 's was mainly influenced by a steep decline in demand. As a result, retail sales, construction, and real estate fell sharply.
According to the ministry, the contribution of these three industries to the economic growth in the first quarter amounted to 0.7 percent, or one-fifth, of total growth, while in 2007 they provided almost 6 percent, or over half, of GDP growth.
Manufacturing is also suffering. Industrial production declined 4.7 percent year-on-year in the first quarter of 2008, pointing to a serious decline in competitiveness. Rever-sing the current downturn will be impossible without solving this problem, ministerial experts said.
The Economy Ministry said that any stimulus package could not be linked to domestic demand only, and the emphasis should be shifted to foreign demand. Asked about wage gains, Rimsevics said, "Nobody can fight inflation with primitive freezing or even reducing of wages. At present it would be more important for state institutions and private companies to take care of the best employees so they do not leave and go abroad when economic activity slows down," he said.
