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Monday 19.03.2018 | Name days: Jāzeps

Economic Diary. Halfway to Eurozone

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A truly historic event took place this week: the Latvian government decided to turn to the European Commission and the European Central Bank with a request to provide a convergence report. This marks the beginning of our country’s evaluation process.

Day “E” draws ever closer

Finance Minister Andris Vilks personally submitted this historic request to European Commissioner Olli Ren in Brussels. A second copy will be forwarded to the European Central Bank through Latvia’s diplomatic channels in the EU. According to the Finance Ministry, the convergence reports will be finished by the beginning of June.

And even though the documents still has along road to go, and the final decision will be made no sooner than July, Prime Minister Valdis Dombrovskis believes the possibility of a positive outcome is very high. “Commitment in overcoming the crisis, creation of stable bases for long-term development – all this offers actual possibilities to adopt Euro in 2014,” – he claims.

We need good marks

Finance Minister Andris Vilks believes the day he and the PM signed the tiresome agreement (March 4, 2013) will be remembered in decades hence, because the decision made on an emergency meeting provides a strong positive kick-off point for economy. According to him, Latvia’s credit ratings could experience a serious leap in the second half of 2013 if the EU decides to accept Latvia in Eurozone.

Estonia is a good example of this. After adopting Euro in 2011, the country’s ratings increased by two positions. Latvia is likely to experience something similar, says the minister.

A sad holiday

And here it is – the irony of fate. This week, Latvia’s national currency cancelled its 20th anniversary. March 5, 1993: the first 5 LVL banknotes are released into circulation. They were first called “Repshiks”, because they carried the signature of then the head of the Bank of Latvia Einars Repse. “Repshiks” became the only official payment method on July 20, 1992, effectively replacing the Soviet rouble.

Lat was anchored to Euro on January 1, 2005 (1 EUR = 0.702804 LVL). According to the initial plan, Latvia should have adopted Euro in 2008. The schedule was cancelled under the pressure of the country’s overheated economy: Latvia failed to complete of the five Maastricht criteria – inflation.

Seek experience in Singapore

While the PM and Finance Minister were preparing the road leading to Eurozone, Economy Minister Daniels Pavluts travelled to Singapore with an official visit. The goal of this trip was to learn the country’s experience in executing industrial policy and developing the country’s business environment.

In the end of the ’50s, Singapore was a small, poor country. It even had to import fresh water and construction sand. However, during the 50 years that followed, the former British colony managed to transform form a third world country into one of the leading and blooming economic centres in the world, becoming the financial and trading centre for south-east Asia in the process. According to the data from Singapore’s Central Bank, the country’s GDP reached $270.02 billion in 2011.

In other words – we can learn much from this country. It has unique experience in developing industrial production and attracting foreign investments. On top of that, Singapore’s state management system is similar to that currently being developed by the Latvian Economy Ministry.

Two gears

All this is more than important in the light of the recent research of Citadele Index. According to Citadele, Latvia’s national economy has two development gears. Authors of the research note that our businessmen have been mostly optimistic in the last four quarters. This, however, is an achievement of exporters; other businessmen have not been too successful lately.

Even though the mood index remained above 50 points in Q4 of 2012 (optimism/pessimism index) and was 51.96 points, analysts are worried about the significant gap in opinions of export and non-export industries. The mood index of the first group reached 55.52 points in December 2012, while that of the second group reduced by 1.32 points – to 50.9, coming ever closer to the border of despair.

Experts say: the source of this difference lies within the industries goods and services markets. While the potential of foreign market is unlimited, domestic demand faces a small population (which has a tendency to reduce), and its low purchasing power. Therefore, an enterprise that hopes to grow should think about expanding its market and seek new niches.


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