RIGA - The head of Latvia's central bank has called on the government to scrap its proposal for a 1.85 percent deficit in 2009 in favor of a balanced budget.
"We believe that it is necessary to draw up a budget that would be as balanced as possible at all costs, and this is the first answer to the question of what should be done," Bank of Latvia governor Ilmars Rimsevics said in an interview with Dienas Bizness, published Sept. 15.
"Without a balanced budget, stopping the economic slowdown and recovery will be seriously hampered and will take longer," he said.
The Latvian economy has boomed in recent years and seen double digit growth since joining the EU in 2004. Earlier this month, however, the national statistics agency said economic growth in the second quarter was a mere 0.1 percent 's the slowest growth rate since 1995 's prompting the government to make widespread budget cuts.
On Sept. 11, the central bank cut its forecast for 2008 growth to a mere 0.5 to 1 percent 's a significant drop from the previous estimate of 2.5 percent.
Rimsevics said that in order to balance the budget, the Cabinet would have to revise the entire structure of government spending.
"While allocating funding, all institutions are given very precise, clear targets 's what they must achieve with the given sum. The government should go through all the functions it performs to find out whether it does not do too much," he said.
The Latvian government announced that it will draw up next year's budget with a deficit of 1.85 percent following significantly lower than expected tax income in 2008. The government has also altered the current budget, but it opted to maintain a token surplus of 0.5 percent.
In addition to a budget deficit, Prime Minister Ivars Godmanis announced that he would freeze public sector wages though 2009, though he later agreed to further negotiations with trade unions on the issue (see story, Page 3).
The government also plans to cut jobs in the state administration by at least 5 percent and to reduce the expenditures of government institutions by 10 percent.
In an effort to provide a boost to the struggling economy, the central bank has announced that it will slash the reserve requirements for commercial banks as a bid to pump some 190 million lats back into the economy.
"It is [now] possible to loosen the hitherto tight monetary policy framework for the financial market, thereby stimulating the financial sector to attract long-term funding," central bank spokesman Martins Gravitis said in a press release.
The central bank decided to cut the reserve ratio for commercial bank liabilities with a maturity of over two years to 5 percent from 6 percent and for all other liabilities in the reserve base to 7 percent from 8 percent. The decision will take effect Oct. 24.
Gravitis said cutting the liability rates would enable banks to increase their lending capacity. Increased lending, in turn, would funnel more money into the economy and help spur growth.
"The minimum reserve ratio is one of the monetary policy instruments of the central bank: the higher the ratio, the higher the cost of funds to the banks, thus affecting the lending capacity of the banks," the press release said.
It was the second time this year that the central bank has slashed rates. In late April, the bank cut the minimum reserve requirement for bank liabilities with a maturity of over two years from 7 percent to 6 percent.