EC gives positive evaluation on Latvia

RIGA - The European Commission has an overall positive opinion of Latvian politicians’ performance since the conclusion of the international aid program; however, the Commission is also seeing some complacency in the government’s move to its original goals, and criticizes tax reductions in Latvia, according to Latvia post-monitoring mission’s second report.

“The structural reforms are pushed forward, even though there are some delays in implementation, and the numerical budgetary targets are persistently overachieved due to a better economic situation and improvements in revenue collection,” says the Commission’s report. “Overall, the authorities seem to have taken the commitments seriously and the increased quality of policymaking of individual ministers and the Cabinet promises good reform and development prospects going forward.”

The report says that the Latvian government has made significant progress during the past year on important issues like implementing state owned asset management reform, reviewing active labor market and social policies, pursuing the fight against the grey economy, and initiating reforms in higher education and science.
Progress with reforms and positive macroeconomic developments led to an upgrade by two major rating agencies and successful international bond issuance in February and December 2012 which allowed Latvia to re-pay the entire International Monetary Fund’s loan significantly ahead of schedule, notes the Commission.
“The authorities’ strategy to fight the grey economy seems to start producing results, as evidenced by tax revenue above standard elasticities,” the Commission says in the report.

At the same time, better economic and budgetary results, coupled with the end of close surveillance, have led to some complacency, a relaxation of efforts and a lack of steadfastness of the authorities, resulting in several policy steps that go against commitments made in the last Memorandum of Understanding, warns the Commission.
This in particular concerns tax cuts decided in May which were not included in the Convergence Program submitted only shortly before, the announcement of the 3-year strategy to lower the personal income tax rate while postponing plans to raise personal income tax non-taxable thresholds to help the lower-paid, planned reductions and decentralization of financing of the guaranteed minimum income from 2013, and others, informs the Commission.
The Commission reminds that adoption of the Fiscal Discipline Law is necessary as an insurance against possible future policy mistakes. Latvia must also continue with the public administration reforms and consolidate the Competition Council, as well as improve the country’s Insolvency law.

A number of studies indicate that competitiveness in Latvia is improving, which is also attested by the country’s increasing exports. The Commission believes that Latvia’s current account deficit will remain modest, at about 3.5 percent of gross domestic product in 2014.

The Commission emphasizes the importance of structural reforms, reforms to education and science, as well as liberalization of the energy market. Latvia is also recommended to continue active legislative work regarding management of state-owned companies, public procurement and construction regulations.
The Commission also expects Latvia to present new solutions for reforming the social and labor market as per the World Bank’s recommendations. Also, restructuring of the Mortgage and Land Bank and creation of a single development authority has to continue.

In the Commission’s opinion, the extensive non-resident banking sector in Latvia is a risk to Latvia. Latvia should closely follow cash flows into the country, where the investments go, and the non-resident banks’ activity on the local market. The Latvian authorities must also do more in prevention and combating economic and financial crimes, money laundering and tax evasion, emphasizes the European Commission.

This is the last Commission’s report before the pending euro introduction in Latvia.