Deficit to trigger higher rates

The high 177.5 million lat (282.1 million euro) deficit under Latvia's national budget for this year, already approved by the government, may trigger growth of loan rates on the market, Bank of Latvia's president told reporters.

Ilmars Rimsevics said that, following approval of a draft budget by the Cabinet, the state will need money and that financial institutions will be interested in buying government bonds, traditionally regarded safer financial instruments than corporate lending, hence less resources will be left for that purpose, which may trigger growth of loan rates.

Rimsevics cited a number of other negative factors caused by the federal budget deficit, including a possible reduction in Latvia's credit rating if the government fails to contain the deficit under 3 percent of gross domestic product.

"Then we will be among countries shown to others as example of how things should not be done," said Rimsevics, who previously called on the government to curb the budget deficit at 2 percent or 2.5 percent of GDP.

Fiscal deficit under this year's budget is planned at 3 percent of GDP, which is the maximum limit under the Maastricht criteria for countries of the European Monetary Union and which Latvia should observe to adopt the euro in the future.

This is the highest budget deficit level in Latvia since 1999, when the deficit exceeded 4 percent.

The government intends to cut the deficit in the future, gradually reducing it to 1.5 percent until 2007.

The deficit figure under this year's budget is set as the ceiling, and the government is committed to working toward a lower budget deficit.