Reining-in inflation tough task for Latvia's new government

Other News Materials 23 December 2007 08:00 (UTC +04:00)

( AFP ) - Latvia's new government will have its work cut out, reining in the Baltic EU member's soaring inflation rate, with experts predicting price increases are unlikely to ease until late next year.

Prime Minister Ivars Godmanis, who won a confidence vote in parliament Thursday, is well aware of the complex economic cocktail facing his country but is also confident it can be made right.

"I remember the time when inflation was not 12, 13 percent, but 1,000 percent. We survived during this time and what is more, we inadvertently moved from a communist system to capitalism," Godmanis told parliament recently.

"For the last two months we've been working extensively on an economic stabilisation plan," newly-installed Economy Minister Kaspars Gerhards told AFP.

The government wants to increase workforce participation, boost competition and cut red tape for entrepreneurs, he said.

"In terms of inflation, during the first half of the year we will unfortunately see the same indicators as this year. They will be high. But towards the second half of the year we expect stabilisation," he said.

Nevertheless, Gerhards said, Latvia remains vulnerable to global trends, and notably high energy and food prices.

Inflation in Latvia has been climbing inexorably for months. In November, it reached 13.7 percent over 12 months, the highest figure since late 1996, according to official data.

Rising prices have gone hand in hand with spiralling economic growth since Latvia joined the EU in 2004.

The Latvian economy grew by 11.9 percent in 2006, the fastest rate since independence from the crumbling Soviet Union in 1991 and the strongest growth rate in the EU.

Robust growth in Latvia is primarily fuelled by domestic demand, which is being boosted by rising wages caused by a labour shortage in the country of 2.3 million people. Money sent home by the tens of thousands of Latvians who have left to work in other EU member states, notably Britain and Ireland, also plays a significant role.

In the third quarter of this year, gross domestic product grew by 10.9 percent compared with the same period in 2006, keeping Latvia at the top of the EU table.

Latvia's economic situation has sparked regular warnings about overheating, although the government has said such forecasts are alarmist.

Analysts predict that inflation could easily hit 15.0 percent.

"The rise in cost of grain in the world markets has not exhausted itself, and there will also be a rise in Russian gas prices at the beginning of the year," Peteris Strautins, chief analyst at HansaBanka, told AFP.

However, in the second half of 2008 a government anti-inflation plan may begin to bear fruit, Strautins said.

The former Kalvitis government earlier this year introduced an inflation-busting plan which largely involves calming consumption with measures including restricting the issuance of personal loans and mortgages.

Easy credit has fuelled a property boom that has put real estate prices in Riga on a par with those of west European capitals, but the market has cooled over recent months.

"However, the baton of the inflation race has been handed over to other sectors of consumption, such as food and energy," Dainis Gaspuitis, an analyst at SEB Unibanka, told AFP.

"Inflation can be seen as a process of evening out of prices, but it cannot be left to drift," he said.

Latvia also has little room to use monetary policy to tackle inflation because the country's currency, the lat, is pegged to the euro, leaving most decision-making in the hands of the European Central Bank.

Godmanis's administration is a re-shuffled version of the centre-right coalition government of Aigars Kalvitis. The 41-year-old politician bowed out earlier this month after three years in power during which he faced criticism for his alleged authoritarian tendencies and slack handling of the economy.