Bank of Latvia says economy is back on track

RIGA - Latvia's Central Statistical Office announced on March 28 that gross domestic product grew 6.6 percent last year to 2.95 billion lats ($4.63 billion), a marked improvement on 1999's 1.1 percent growth rate. Estonia and Lithuania are expected to announce improved GDP statistics shortly, but Lithuania's statistics will indicate only a tentative recovery from the effects of the Russian economic crisis of 1998.

The latest results prove Latvia's economy is recovering, said Zoja Medvedevskiha, deputy head of the Bank of Latvia's monetary policy department. "We knew there would be an across-the-board recovery. The year was not only good for services but also for manufacturing and exports."

She expressed confidence that growth would continue and rejected concerns about the size of Latvia's current account deficit, which the bank said was 6.8 percent of GDP in 2000, down from 9.6 percent in 1999.

Main growth areas were trade (up 9.6 percent), transport and communications (7.2 percent), real estate (13.6 percent), commercial services (7.8 percent) and manufacturing (5.7 percent).

The decline in exports to the Commonwealth of Independent States had been offset by sales to Western Europe and other countries, said Medvedevskiha. The CIS accounted for only 8.7 percent of exports, while European Union member states accounted for 64.6 percent of exports.

A possible decline in the European economy is not great cause for concern, said Medvedevskiha. "Slowdowns in individual countries can be offset with new export markets. We're exporting to a greater range of countries."

Latvia's manufacturing base has been slow to diversify beyond its core areas – food, wood, textiles and metal, she acknowledged. "But we're on the right track," she said. "Additional products are appearing and the amount of valued being added to products is increasing."

Politicians greeted news of the upturn warmly. "Latvia has great potential," said Dzintars Rasnacs, MP from the For Fatherland and Freedom party.

But further steps must be taken to encourage foreign investors, he said. Parliamentary approval for Latvia's revamped commercial law is a priority, he said, as are further measures to combat corruption. Membership of NATO is also essential, he said.

"Foreign investment is low. NATO membership is crucial for creating confidence."

Parliament again postponed passing the commercial law last week; this time until July 1.

Morten Hansen, economist at the Stockholm School of Economics and the Baltic states' Eurofaculty agreed that the figures were encouraging.

"This is quite a strong growth rate," he said. "I find it believable, although all countries have problems counting GDP. It indicates that Latvia has resumed the growth path of 1996 to 1998."

Latvia's current account deficit is unavoidable, said Medvedevs-kiha. "It's inevitable in a transitional economy. Much of the deficit is financed by foreign direct investment. Consumer goods only account for a quarter of imports. We have to import machinery and minerals because we lack energy resources. Most of our exports are based on imports, except for in the wood sector."

Hansen finds the deficit cause for concern however. "This is still a huge deficit. It's not a problem yet but it could be in two years."

Estonia's preliminary GDP results show a 6.4 percent growth in GDP, compared to a decline of 1.1 percent in 1998.

The improvement is due to a 50 percent increase in exports, according to Andrus Salyk, acting chief analyst at the Ministry of Finance.

"We now have a favorable economic climate," he said.

Like Medvedevskiha, Salyk said Estonia's 6.8 percent current account deficit is necessary to boost exports. Despite an increase from 5.8 percent in 1998 the deficit was lower than predicted by the International Monetary Fund, he said.

Preliminary statistics from Lithuania indicate a 2.9 percent increase in GDP, compared to a decline of 4.2 percent in 1999. This was "the first year of a small recovery," said Anna Stankaitiene, adviser to Prime Minister Rolandas Paksas on macroeconomic and fiscal issues. She said the government's priority now is to tackle the 12.6 percent unemployment rate, which has not fallen since the beginning of 2001. Under a new government program, a loan system for small businesses will be introduced as well as training programs for the unemployed.

"Reorienting our economy from Russia to the West has not been simple," said Stankaitiene.

Lithuania's current account deficit fell from 11.2 percent of GDP in 1999 to 6 percent in 2000, according to preliminary statistics.