RIGA - The economic crisis in the Baltics, the region which suffered the European Union’s worst recessions last year, is easing and the growth prospects are looking up, the International Monetary Fund said on Aug. 26, reports Reuters. The pace of expansion will depend on how quickly the trio of states, which are still feeling the effects of a painful fiscal adjustment, can develop their export sectors and further improve their competitiveness, a senior IMF official said.
The Baltics suffered badly in the aftermath of the global financial crisis, leaving Nordic banks including Swedbank and SEB nursing steep losses on their loans to the region.
“The Baltic countries have turned the corner... have bottomed out,” Mark Allen, senior IMF resident representative for Central and Eastern Europe, told a conference. “Growth prospects will depend on how well these countries can shift to a more export-oriented model,” he said at the Baltic mergers and acquisitions and private equity forum.
The future would be challenging as households were in a difficult position due to unemployment and deleveraging activity, and the corporate sector also faced problems. “There is a further fiscal adjustment going on and there is going to be a shortage of bank capital,” Allen said.
He said Latvia, Estonia and Lithuania should make sure wages do not rise faster than productivity, that business is not taxed excessively, that public finances are kept tight and that prices do not rise faster at home than abroad.
All three nations declined to devalue their currencies in the face of the recession, which would have boosted competitiveness of their exports. Instead, they carried out the so-called ‘internal devaluation,’ whereby they cut wages and spending in austerity packages to achieve the same end.
Latvia also had to agree to a 7.5 billion euro bailout loan package, led by the International Monetary Fund and the European Commission, after the government stepped in to rescue the collapsed Parex bank.