Central Bank: economy to nosedive next year

Central bank spokesman Martins Gravitis told the Baltic News Service that although the Bank of Latvia expects Latvia's GDP to contract by 4 percent in 2009, and the government has agreed with the International Monetary Fund to reckon with a 5 percent GDP drop, the discrepancy in these forecasts is relatively small.

The Bank of Latvia representative admitted that Latviacould not afford to increase its budget deficit further to obtain additional funding to stimulate the economy. The government, Gravitis said, must think how to finance the budget deficit. Increasing the budget deficit further would only expand the external debt and foster imports, thus postponing the solution of economic issues.

Peteris Strautins, a senior social economics expert with Swedbank, said that that the prognosis of the 5 percent GDP drop was realistic, but called the government's approach to the budget deficit very tough.

"In line with all textbook theories, the government in this situation should let the budget deficit grow in order to stabilize the situation," Strautins said, adding that it is necessary now to stimulate consumption. The expert presumed that the present tight approach to the budget deficit might be attributed to the government's efforts to speed up euro adoption and therefore bring the budget deficit in line with the Maastrichtcriteria.

Strautins also pointed out that the government would not increase budget revenues by raising some taxes but that the measure could help ease the drop in revenues.

Prime Minister Ivars Godmanis told journalists Thursday that his government was going to base amendments to the 2009 budget, due to be made in March, on a forecast that the economy will shrink by 5 percent in 2009, and the budget deficit will thus be revised to 3 percent of GDP with a prospect of reducing it to 2.5 percent of GDO by the year's end.

He said that these were the economic growth indicators that Latviawas discussing with the International Monetary Fund (IMF).