Conference "The Sustainable Development of the Latvian Economy: Issues,
September 19, 2005
Opening Speech by the Minister of Finance of Latvia Oskars Spurdzins
Ladies and Gentlemen!
It is a great pleasure for me to make my remarks at a
moment when Latvia's economic development has reached unprecedented growth
rates. Today, sixteen months following Latvia's accession to the European Union,
it is obvious that our country, formerly a timid candidate, has become a "Tiger"
– not only in the context of the Baltic area, but on the scale of the European
Union. This fact is reflected in the sustained growth rate of gross domestic
product (GDP): 9.5% in the first half of 2005, as compared with the respective
period of 2004. It must be noted that GDP increased by 7.4% and by 11.6% (in the
first and second quarters of 2005, respectively), evidencing the highest GDP
growth since Latvia regained independence. We should be proud of that!
Thus a certain apex has been reached in the development of
the Latvian economy and our task is to maintain this situation as long as
possible. May our economic "tiger" never tire and have the strength to reach new
apexes! Thus the Bank of Latvia's invitation to try to assess for how long our
economy can develop at the current dynamic pace is most welcome. This issue is
also important for me as the Minister of Finance as sustainable development of
the Latvian economy will determine when our country reaches the average standard
of living common to the EU Member States. The Latvian public is eager to see
this objective attained, and it seems to have been one of the major arguments
for supporting Latvia's accession to the EU determined by the citizens' positive
vote in the referendum two years ago.
What is it that currently most impairs the growth rate of
the Latvian economy? An exhaustive one-word reply cannot be given to this
question as maintaining the high growth rates depends on a number of conditions.
Among them, further dynamics of inflation ratios is a significant factor.
As we all know, after a several year period of low
inflation the year 2003 was marked by a trend of more vigorous price rise,
increasing substantially during 2004. In August 2004, the 12-month inflation
rose as high as 7.8%, remaining the highest among the EU Member States for a
year and declining to 6.1% in August 2005.
However, it should be taken into account that a
comparatively high inflation is a side-effect of high GDP growth rates.
As regards Latvia's goal of introducing the euro in 2008,
I consider that we should give it up only if the attaining of this goal becomes
clearly impossible. I still believe that Latvia can reduce inflation at least by
half and inflation at around 3% would be only a logical outcome, given the
current buoyant economic growth. In any case, even if we join the euro zone a
year later, such mobilisation will be an efficient means for increasing our
In this respect, I am concerned about the large energy
price fluctuations worldwide and the fuel price dynamics. Under such
circumstances our intentions to curb the rise of inflation rapidly via
Government resolutions may very well come close to nil. It is a global problem
requiring a global solution, and Latvia should show initiative in trying to find
one, as the problem exerts a more or less substantial impact on each of the 25
EU Member States.
In this context, a problem specific to Latvia is an
utterly insufficient competition not only in energy supply, but also in many
other areas, resulting in monopolisation of the goods and services market, thus
diminishing producers' profit and increasing consumer costs throughout the
economy. The situation is most critical in the fuel market and food retail trade
and the consumer price rise in these segments exerts a substantial pressure on
Drafting the 2006 government budget, the Latvian
Government is planning for a budget deficit of no more than 1.5% of GDP next
year (0.18% less than was planned for 2005). I consider a further reduction in
government spending impossible for two reasons.
First, Latvia must not reduce the intensity of spending
the EU Structural Funds in 2006, which is the final
year in a three year cycle and should become the most intense period of spending
the EU Structural and Cohesion Funds, which has been undesirably sluggish. So
far only about 19% of the total Structural Fund financing for 2004–2006 and only
about 13% of the total Cohesion Fund financing have been spent. Latvia cannot
afford to lose these funds without investing them in the economy, therefore the
Ministry of Finance of the Republic of Latvia, the managing authority for the EU
Structural and Cohesion Funds, will strengthen monitoring and, if necessary,
initiate decisions on reallocation of funds from inefficient projects to those
capable of spending the EU Funds.
Second, the Government must not fail to compensate social
groups for the escalating price rise, and we must not, not even for a moment,
postpone the declared wage increase in several sectors, otherwise Latvian
schools will have to be opened not only in Ireland. Given the current
demographics, it simply must not happen and the Government should at least
endeavour to stop the "brain drain" of intellect and skilled workers from
In the capacity of the Minister of Finance, I would desire
a more vigorous rise in the central government budget rather than cutting down
Latvia's budget expenditure. I wish the same for every Latvian household and
business: to earn more rather than spend less and at the same time be very
realistic regarding one's financial capabilities, especially when assuming
The state's ability to increase revenue this year has been
evidenced by the fact that in the first eight months of 2005 the State Revenue
Service (SRS) has collected 365 million lats or 27.3% more than in the same
period last year.
I am convinced that the restructuring of SRS and aligning
of natural persons' income monitoring will result in the Treasury losing less
funds than has been the case.
However, I believe that incomparably greater opportunities
for increasing the state revenue and thereby contributing to the country's
welfare are provided by expanding the economic activity of Latvia's residents,
with increasingly more people starting an active business. Businesses pay taxes
and the more businesses we have the more taxes will be collected by the state
and thus its opportunities for solving urgent social problems will increase.
Currently we have three times fewer enterprises per 1 000 inhabitants in Latvia
than in Western European countries, thus there exists an enormous potential for
increasing our country's economic capacity.
Instead of the current boom of consumer credit, I would
rather see a boom of new business enterprises. Both the politicians and relevant
governmental institutions should ensure that Latvia attains the level of the
"old" EU Member States in this area as well.
As regards loan structure, I propose to evaluate the
opportunities for diverting the majority of loans to the production sector
rather than consumption. Also, an opportunity for allocating higher tax relief
on investment to promote the development of businesses rather than simply
"spending" one's earnings, should be evaluated.
I think that in the case of lending, loans for
profiteering from real estate should be scrutinised very carefully due to the
fact that price adjustments will be possibly made in selected real estate
segments and loan interest rate increases cannot be excluded in the long-term,
thus causing problems for the majority of households in Latvia.
This prospect can be avoided, if Latvia attains the demand
and supply balance at the macroeconomic level. The best way of accomplishing it
would be to expand production and exports. Although lately exports tend to grow
more rapidly than imports, the share of industry in total GDP growth remains
As I have already indicated, promotion of production and
exports is closely related to the reluctant establishing of new companies and
slow drawdown of the EU Structural Funds.
Apparently environment for starting business in Latvia is
not adequate for the majority of general public to change their employee status
to that of entrepreneurs.
The country should promote this environment in the near
future as well as ensure an opportunity for all future legal entities to acquire
the necessary business education. I am convinced that we will gain knowledge and
new ideas for the economic development also at the conference hosted today by
the Bank of Latvia. Therefore I wish its participants success in their work and
sustainable development to the Latvian economy!