Well, there is still effectively no word from the IMF. But The EC did today release an addendum to its memorandum of understanding with Latvia identifying a number of economic and fiscal policy measures it wants the country to enact before it receives next chunk of funding. The document, which is a pretty rough-and-ready PDF photocopy, can be found here. Reading the document, one thing seems certain: the upcoming tranche of 1.2 billion euros will not now be sufficient to cover the budget deficit for 2009, since the EC requires half of the money to be set aside for the financial sector – which prompts the question, is the nationalized Parex bank really as healthy as the government and the bank’s leadership have previously said it was?
Other items of interest in the document are the proposal to raise VAT in 2010 from 21% to 23% if other forms of revenue raising cannot be identified. The impact on already very hard pressed retail sales is not too hard to imagine. The introduction of a residential real estate tax is also proposed with local authorities being empowered to increase the real estate tax to 3% of cadastral values. If implemented, this will do only one thing: further reduce Latvian real estate values which are already down 50% from their peak, and on whose bottoming-out any hope of ultimate recovery depends.
Which is another way of saying that in macro economic terms the document leaves rather a lot to be desired, and essentially it is hard to find any item which is actually going to stimulate rather than flatten a recovery.
Also worthy of note is the requirement that Latvia now has to closely coordinate policy with the EU and the IMF.
“All significant Cabinet decisions or other decisions with a fiscal impact, including on social security or any guarantee scheme, shall be announced and undertaken only after discussions with the EC and the IMF,”
The document also stipulates that the government will have to report every month on all key aspects of spending and revenue, including providing a breakdown for each ministry as well as for local governments. These performance criteria, given the now near total dependence of the country on external support – de facto, as a sovereign state Latvia has effectively ceased (at least temporarily) to exist, some 19 years or so after its foundation – are not surprising in and of themselves, but it could have been hope that the country would have been better served in terms of the kind of advice which is being offered. The document repeated that Latvia should aim to reach a budget deficit of 10 percent of gross domestic product (GDP) this year, 8.5 percent in 2010, 6 percent in 2011 and 3 percent in 2012, numbers which, if my back of the envelope calculations are not totally awry mean that Latvia’s debt to GDP will be outside the EU 60% limit by the time the deficit comes down under 3%, depending on GDP performance in 2010 and 2011. In any event it will be touch and go. So you enter by one door, only to leave by the other.
Just want to say thank you for keeping us so-well informed about the rather tragic economic fate of Latvia. Let’s indeed hope for better external advice in the future for Latvia.
Dear Edward,
total control is not something unknown in Latvia, we were controlled 1940-1990, and in reality the Soviet control now seems much more sane as the present total chaos where Angela wants a different toy as Nicola, and everything is becoming totally darned for smaller brothers.
The memories of predictability and clarity of Soviet times will play an enormous role for next parliamentary elections in Latvia scheduled regularily for the Fall 2010. For EP elections most voices already were gained by the former Communist leader of Latvia Alfreds Rubiks.
The advanced Soviet regime was somewhere depressive and too predictable and therefore boring, however, it was a paradise compared with the hell going on now in Latvia.
There are rumours that a national catastrophe-state of emergency can be amended by the parliament to cancel the next regular general elections in 2010. Let’s see.
Hi govs,
“total control is not something unknown in Latvia, we were controlled 1940-1990,”
Well, all this talk about how people survived in the “good old days” of the USSR does highlight one of the greatest dangers in the current crisis, namely that a huge chunk of the economy simply gets driven underground.
Since national solidarity to say yes to almost everything the EU officials (who are doling out the money, after all) ask must be at an alltime high, while national determination to act on that having said yes hits an alltime low, we should all easily be able to imagine how just all this will pan out.
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That happens already, retail trade and SMEs are rapidly moving underground.
However, there is one more serious risk. It is absolutely not guaranteed that EU and IMF will have a real counterpart to deal with in the nearest future. Because the present government is becoming more and more impotent, the political parties are segregated and are running away from responsibility.
A more powerful layer is that of higher state officials, however, the political layer is acting more and more against them.
Early elections can lead to a total chaos, its not a solution.
So it can be very real perspective that EU and IMF will have to talk with subjects having unclear mandate.
One interesting point in the amendment is the asked statistics about loans converted from EUR to LVL. This seems as a path towards an exit strategy.
Dear Govs,
Please stop spreading incorrect information about Latvia!
In EP elections most votes were gained by liberal nationalist Sandra Kalniete, not communist Rubiks.
As for Soviet times comparison to nowadays, the Soviet days are still a league off in terms of living conditions, not to mention freedom of speech and movement – if you don’t like life in Latvia at the moment you are welcome to go to Ireland and live there for some time – wasn’t an option in Soviet times!
Incidentally Dave,
“Let’s indeed hope for better external advice in the future for Latvia.”
In the interest of fairness and balance, and while noting that Latvia has not been receiving the soundest of advice even within the terms of reference of maintaining the peg, we should never forget that it is the Latvian’s own representatives who have been the most proactive here.
Valdis Dombrovskis is former MEP, former Finance Minister and former employee of the Bank of Latvia (BoL). The current Finance Minister, Einars Repse, is former governor of BoL. At the head of economic policy there are thus a trio of current or former BoL people – Rimsevics (the current governor), Dombrovskis and Repse. This helps to some extent to explain why the fixed exchange rate is a mantra written in stone. In Latvia, the problem is not the “Treasury View”, but the central bank one.
In news it jus appeared, that owners of the Parex bank, since the bailout each took out every month more than 200k $
I cant believe whats going on, there will be a movie in 2042 , The Tradegy of Latvia, The fastest Growing Country goes Bust by couple Assholes, who are gays and are in Love with Mr President of Russia, Ouh actually he is Ex President, but you can sometimes it forget.
Janis, in 1991, Latvians were having babies. They’ve stopped, as Ed has shown.
And going to Ireland won’t help, ’cause their economy is imploding too.
The impact of BoL is, of course, high, however, there is an immanent incompleteness in Latvian legislation. As the Law of BoL evolved relatively lately and the final phase happenend in a period of relative stability, the independence of BoL is incomplete. Despite the fact that governor of the BoL can not be dismissed, except he dies or becomes insane (is he?), the Law of BoL itself can be changed with a simple majority, as it proved 1 month ago when profit of BoL was channelised to state budget. (Trichet was very nervous about this simplicity).
So moving the currency board out of the BoL is not a big problem. Of course, in the new memorandum every decision of Latvian government and parliament must be approved by IMF and EU (so exteme a control did not exist even in the USSR).
However, why should it be valid for the next parliament? The Latvian constitution does not provide for external higher powers to revise parliamentary decisions.
Poor country. It trusted indeed that EU will bring the brighter future.
Little Latvians knew, that the only reason of foreign “investments” is to take out the property, land, houses from Latvians and to enslave the entire population with debts for several more generations ahead.
First, scandinavian banks landed the money for Latvians to acquire the property, quite soon overheating the economy, now the banks are saying – your property costs nothing, give us additional cover with other property, otherwise your property is taken off AND you still owe us!
Not everyone took the loan, but those who were wise enough not to sign up – they still will be paying by their taxes the rest of their lives to cover IMF and EC loans. And where do those loans go ? – to “stabilize” scandinavian banks! (not to stimulate production and technology which is the only way out from current situation). So banks have their money back from IMF/EC AND hold all the Latvian property.
Obviously, this is what it all about.
Maybe my point of view is extreme, but i’m sure a lot of Latvians now share it.
Looks like Europe need no competitors, Europe need christian dishwashers who will be happy to slave for 500 EUR per month.
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