'Internal Devaluation' keeps lid on spending

  • 2009-11-12
  • Staff and wire reports
RIGA - Third quarter GDP numbers for Latvia show the economy crumbled 18.4 percent compared to the same period last year, the biggest decline in the European Union, reports Bloomberg. The government's commitment to maintaining the national currency peg to the euro is forcing businesses and state enterprises to continue with cut jobs and wage reductions, the 'internal devaluation,' to stay alive.

The contraction compares with an 18.7 percent plunge in the second quarter, year-on-year. The largest decreases were observed in retail trade, with activity off 32 percent, manufacturing down by 17 percent and public administration off by 16 percent, reported LETA.
Latvia's economic performance, the fastest growing in the EU in 2006, has forced the government to turn to the IMF and EU for bailout loans for support, as credit and investment has disappeared.
Political brinkmanship by Latvian lawmakers during the budget negotiation process also hampered the smooth transfer of the ongoing 7.5 billion euro bail-out loan, and has triggered repeated speculation that the authorities may abandon their commitment to the pre-euro exchange rate mechanism and devalue the lats.

The country's economic progress threatens to slow a banking recovery in Sweden, where Swedbank and SEB are the two biggest lenders in the Baltic countries of Latvia, Lithuania and Estonia. Swedbank reported a 327 million euro net loss in the third quarter, after loan losses soared to 606 million euros. Swedbank's Baltic group impaired loans made up 71 percent of the total at the end of September, reported the bank's interim report.

Prime Minister Valdis Dombrovskis's administration is cutting budget spending, including closing some schools and hospitals, to rein in the budget to meet the agreements made in order to receive the bailout money. Latvia has also pledged to reduce maternity benefits, cut salaries and pensions and raise some taxes to satisfy EU and IMF demands.
Central bank Governor Ilmars Rimsevics said the economy may contract between 17 percent and 17.5 percent this year, and may contract a further 2 to 2.5 percent next year, before returning to growth in 2011. The output slump also resulted in the first annual consumer price decline since records began in 1993.

The final third quarter GDP report will be released on Dec. 9. Neighboring Lithuania's GDP contracted a preliminary 14.3 percent in the third quarter. Estonia reports on Nov. 13.
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