IMF bullish on Baltic economies

  • 2004-04-29
  • Baltic News Service
RIGA - The latest world economy report by the International Monetary Fund states that the three Baltic states are expected to retain the highest rate of GDP growth among the 10 new EU members, though fund experts claim the high current account deficits in all three countries is cause for concern.

The IMF has not adjusted its forecasts and expects Lithuania to maintain its lead as the fastest-growing Baltic economy with a 6.7 percent expansion of GDP this year, while Latvia is expected to post a 6 percent rise in GDP for both this year and 2005, and Estonia's economy will expand 5.5 percent in 2004 and another 5 percent next year. Lithuania's economy is expected to grow 6.3 percent in 2005.
The IMF report states that domestic demand has continued to boost the Baltic economies, but a rapidly growing current account deficit remains the biggest concern, although direct foreign investments, which previously caused the biggest part of the deficit, are falling.
At the same time the current account deficits in the three states are expected to be among the highest of the 10 new EU members. For Latvia the deficit is expected to be 9.9 percent of GDP this year and 8.1 percent next year; in Lithuania the figure is expected to be 6.7 percent for both this year and next; while for Estonia the problem is by far the most acute, and this year the country could see a current account deficit of 11 percent, followed by 7.5 percent next year.
IMF experts report that the fiscal policies for all three Baltic states remain stable, and state debts are low. The fund also sees no worry in inflationary threats - despite fears expressed by many in Latvia - and claims that a price rise is not a significant problem. The IMF does not expect annual inflation to exceed 3 percent either this year or next year.
Meanwhile, fund experts have urged Latvia's Finance Ministry to consider reducing this year's planned budget deficit from 2 percent to 1 percent of GDP.
Finance Minister Oskars Spurdzins confirmed on April 22 after meeting an IMF mission in Latvia that the IMF was urging for a further reduction of the budget deficit since it is concerned that the fast pace of business development could gradually slow down and that monetary policies may no longer be able to control the process. Thus fiscal instruments should be considered, fund experts said.
Spurdzins stressed that this does not mean Latvia will necessarily follow the recommendations.
Economy Minister Juris Lujans has urged the budget deficit be considered in context with other factors affecting the development of the economy. He said that a budget deficit was permissible for developing countries, as budgetary funds are being used for investments and promoting development. Lujans said that last year's deficit could also have been a bit larger, as all indicators noted that the country would develop and that funds used to cover the deficit would have been more useful as investments.
In 2003 Latvia planned a budget deficit of 3 percent of GDP but closed the year with a deficit of 1.8 percent.
Nevertheless, Lujans admitted that this year's GDP growth rate could exceed top forecasts, and thus a deficit could in this case cause the economy to overheat.
The Bank of Latvia for its part has also urged the government to amend this year's budget deficit to no more than 1 percent of GDP, explaining that the planned deficit of 2 percent this year was too high.