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Sunday 20.08.2017 | Name days: Bernhards, Boriss
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Economic Diary. Latvia is like Cyprus, but...

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More than half of interviewed Latvian residents are quite tolerant of smuggling of alcohol, tobacco products and fuel. There are more than 60% of “sympathizers” in Lithuania and one-third of respondents in Estonia. Such are the results of the survey carried out by Spinter Research in Baltic States following a request by the Lithuanian Free Market Institute.

How is contraband bad?

This original monitoring of consumer mood is being carried out for the second consecutive year. More than one thousand residents from every country participate in the survey. According to the latest results, 51% of the population are tolerant towards the contraband of alcoholic drinks, tobacco goods and fuel. This index was only 43% in February 2012. This index was 62% in Lithuania (61% one year ago). Estonia’s proportion of residents who sympathize smugglers reduced from 36% to 31% within a year.

Residents of all three Baltic countries explain their support for contraband by saying their ability to purchase legal products is gradually diminishing: prices tend to rise, while salaries tend to reduce. The price difference with neighbouring states adds to the negative situation. This is mostly due to high excise rates in the Baltics. Some respondents believe that the high proportion of the shadow economy is largely due to corrupt government, complexity of leading an honest business, low penalties and the inability of law enforcement institutions to apprehend violators.

More than 60% of respondents believe the most effective way to change the situation would be to reduce excise taxes. 40% of respondents believe the reduction of state supervision is the best solution. Less than one-fifth of respondents say border control is too tight. Unlike Lithuania and Estonia, Latvian respondents do not recommend the government to increase penalties.

We are already “accepted” by the Eurozone

Another surprise was brought this week by Ernst & Young (E&Y). In its latest report – Eurozone Economic Forecast – the agency stated that the reaction of the European Commission in response to Latvia’s request to join the Eurozone will most likely be positive: i.e., the authors of the report have practically accepted Latvia in the Eurozone already. According to them, Latvia continues to successfully recover after the economic crisis. According to the 2014-2017 outlook, Latvia’s GDP will be growing by 4 – 5.5% annually, which notably exceeds the increase planned for 2013. E&Y notes that Latvia’s successes look especially notable in the background of the average GDP index across the whole of the EU (recently reduced by 0.3%).

The report also states that Latvia has now completed all of the main criteria necessary for joining the Eurozone. The EC is likely to commend Latvia’s determination. According to Guntars Krols, a partner of the Latvian division of E&Y, this decision would serve as a signal to countries of Southern Europe that economic recipes do allow the meeting of planned results. This will also show the global community that the Eurozone is, in fact, stable and healthy enough to allow further expansion, Krols believes.

At the same time, it is noted in the Eurozone Economic Forecast that one of the main risks for Latvia in terms of joining the Eurozone would be the low support for the united European currency by Latvia’s residents. Latest surveys suggest that only one-third of Latvian residents support the joining of the Eurozone.

State institutions should pay for services on time

Meanwhile, Latvia’s parliament has been progressing a bill that is called to motivate state and municipal structures to be more responsible in regard to their obligations before suppliers from the private sector. Saeima’s Judicial Commission unanimously approved the review of a package of amendments to the Civil Law. This was requested by a special directive of the EU.

The bill, intended to increase payment discipline, divides all debtors in two categories – public institutions (all kinds of municipal and state institutions) and private subjects. The former are to be presented with stricter requirements. Particularly, amendments specify final payment terms for provided goods and services. All public structures (aside from medical institutions) are not exceed 30 days’ term. Given extenuating circumstances, this term can be extended for one more month.

Non-compliance with the set schedule of the contract will have the debtor pay a single-time penalty of 30 LVL starting from the first day of exceeding the payment term. Authors of the document from the Justice Ministry explain the necessity of a stricter approach with the fact that municipal and state institutions have stable sources of income. With that, unjustified non-compliance with contract terms creates losses for entrepreneurs.

Latvia is like Cyprus, but…

The hot topic today – the intention of Cyprus’ government to add taxes on bank deposits – gained an unexpected continuation in Latvia. According to experts, if money starts to flow from the island, Latvia’s credit institutions that service Russian businessmen could benefit from it. The total volume of deposits present in the country that is close to default, reaches nearly 70 billion EUR. More than a third of this amount belongs to non- residents, most of whom are Russians. These businessmen are now looking at Latvia as a possible alternative.

According to the president of the Latvian Commercial Banks Association Martins Bicevskis, our financial sector can strengthen its client base with high quality depositors who know what they want to do with their money. Chairman of the Finance and Capital Market Commission Kristaps Zakulis believes Latvia should be called Cyprus II. According to him, the island’s proportion of financial services in GDP is 40%, while that of Latvia is only 3 – 3.5%. Meanwhile, the volume of attracted deposits in Latvia reached 12.7 billion LVL at the end of 2012. Nearly half of this amount (48.9%) came from non-residents.

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  1. Ilmars says:

    What happened in Cyprus is going to happen in Latvia too. Small countries like Iceland , Ireland , Cyprus , and now Latvia , that try to be big financial centres inevitably crash .
    The “high quality depositors” are mostly Russian crooks and its justice to see to see them lose money in Cyprus and later in Latvia .

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