RIGA - Bank of Latvia President Ilmars Rimsevics has said that a devaluation of the lat is not an option and would be counter-productive in turning the country's ailing economy around.
"I think devaluation is absolutely a mistake. Maybe we haven't been vocal enough about why it is not a solution. It would ignite inflation, foreign debt and people would find themselves unable to repay loans," Rimsevics said.
"If exports did go up, it would only be by a small margin and not enough to save the Latvian economy," he said.
Rimsevics' defense of the lat came on the heels of comments from two prominent U.S. economists 's Senior Currency Strategist at Brown Brothers Harriman & Co. Win Thin and Nouriel Roubini, who is widely credited with predicting the U.S. economic crisis 's that a devaluation of Baltic currencies may be inevitable.
The head of the Bank of Latvia made the comments at an outlook seminar organized by the American Chamber of Commerce, where he debated Latvia's options in getting out of the economic crisis with noted economist Andris Strazds and a number of other international and local experts.
Strazds said that while the Plan B of devaluation may seem like an easy option and could have a positive effect on exports, many corporate borrowers 's 80 percent of whom took money out in euros 's would have negative equity immediately following devaluation.
"All resources should be directed at implementation of Plan A. This means restoring competition, and realizing wage cuts," said Strazds.
The economist also said that the country needed to find a safe way to transition economic growth away from heavy lending and easy credit.
"After excessive borrowing, the economy is in need of deleveraging," continued Strazds.
"The best that the government and the Central Bank can aim at is gradual reduction in loan volume and prevention of collapse in lending," said Strazds. He said equity will play a bigger role in coming years.
The average GDP growth after joining the EU was 10.5 percent. This was fueled by massive capital inflows resulting in excessive demand, which led to high GDP growth as well as high inflation.
Latvia, however, has now gone from the fastest growing economy in the EU to the fastest falling. In response to the plummeting economy, the International Monetary Fund has recently approved a 7.5 billion euro loan to the crisis-struck nation.
Some parallels have been drawn between the situation in the early 1990s and the situation today. The IMF gave Latvia a loan and approved an economic stimulus program as well as a program in government restructuring.
Rimsevics said that this time, the situation with the IMF was different.
"This time they said they had a nice flight. When the government asked them what we should do, the chief of the mission said you have to tell us what to do to get out of the situation this time, then we can supply the money," he said.
Rimsevics also noted that this time around, the negotiations and plans only took one weekend to iron out as opposed to several months.
Both Rimsevics and Strazds stressed that euro adoption in 2012 is also of the most importance, though the requirements should be met regardless of the euro criteria.
"We should attain a lean public sector and a balanced budget, the euro is not a goal in itself but a sort of nice bonus," said Strazds.
