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Monday 18.06.2018 | Name days: Madis, Alberts

Economic Diary. Latvia Week 16 of 2012

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The main event of this week was discussion about the increasing retirement age in Latvia up to 65 years, which is directly related the economic wellbeing of our country.

The retirement age drama

A lot of people do not like this idea, specifically the people who are directly affected by the reform. Others – mainly left block politicians use it in populist goals. But no matter how much people argue over it, no matter how many arguments they come up with, a late retirement – is an economic necessity not only in Latvia. In most European countries people conclude their working career at the age of 65. In some countries women are given an exception, such as in Belgium, Italy and Great Britain: women there retire at the age of 60-62. Also, people of certain professions – police officers, seamen, miners, soldiers, firemen are eligible for benefits. There are countries where people are allowed to retire at the age of 60: for example in France, but only under the condition that a person’s insurance period is 40 years. In most European countries insurance period needs to be no less than 35 years.

Now, on the background of all these facts, Latvia’s complaints are somewhat laughable. First, because retirement age will reach 65 years in 2020, and it is planned be increased only starting from 2014. Second, the minimal insurance period is planned to be increased from 10 to 20 years. Even considering these limitations, compared with other countries, working in Latvia would seem like a resort. Examples are all around us – in 2012, Germany plans to increase retirement age up to 67 years. And the Prime Minister of Sweden proposed to increase retirement age up to 75 years. Of course this idea has met a considerable protest from the population, but who knows? Maybe in the next 20-30 years it will seem like a normal thing. Considering the fact that our life expectancy is increasing, as well as the quality of life, and some people will not be able to babysit their grandchildren keeping in mind the birth rates in Europe. So it seems there is nothing left to do other than work, work and work some more. Thereby benefiting the society.

Interesting mathematics

Continuing on the topic of benefits, it is worth remembering the fact that many Latvians left the country to earn some money abroad and most of them plan to stay there. And this means they fall under the European retirement policy. Also, as it turned out this week, around 10% of expenses of Latvian households are paid for using money transfers, made by relatives who are abroad. This data was shown in the recent SEB Bank survey. This figure, however, does not exceed 8% in our neighboring countries of Lithuania and Estonia. It would seem that help from abroad is what stimulates consumption rates in Latvia and rushes inflation, even though our wages, according to statistics, increased by 4.5% in the last quarter of last year, and consumption increased by 9%. It is undoubtedly good for goods and service traders. It is safe to say that the State treasury gains from such foreign income. The state does not receive any personal income tax, of course, but this money ends up in the treasure in the form of VAT, the base rate of which remains on the 22% mark, even though Prime Minister Valdis Dombrovskis claimed that this rate could be decreased to 21% this year.

Payment discipline improves

Some more good news – the number of deals with postponed payments increases in Latvia, and calculation time delays in 2011 were twice as less than the year before. Credit risk management company Creditreform Latvia presented this information in their review.

Not only official information, like GDP and foreign trade turnover, reports about the state of economy. In a way, payment discipline characterizes it even better, because it also shows the level of trust among companies. Judging by the Creditreform Latvia report, the 2011 data mostly show that our fair country is recovering from the crisis. Mainly due to the fact, that the share of contracts with prepayment decreased from 23.5% to 18.4%, compared with last year. Contract terms have also become friendlier. The number of contracts in which the client could hope to pay up after the realization of the goods, more than doubled, even though from a small base – from 1.5% to 3.3%. And, respectively, the average payment period increased from 25.3 to 29.7 days.

As the authors of this review note, construction industry had the fastest increase of the said index: in 2010 medium-term calculation inscribed in the contracts was 19.9 days, and in 2011, it reached 28.8 days. Interesting though, a completely opposite tendency was noted in the manufacturing industry: here time, allocated to making payments, decreased from 32 to 25.9 days.

Increasing the proportion of work with future payments in mind and the overall lengthening of the time given to complete the said work generally mean the increase of  trust of businessmen to each other And, as it is clear from the report, it generally pays off: the average number of delays decreased by 10.9 days in one year’s time. Specialists explain this partially with the fact that a proportion of weaker companies could not keep up with the competition during the crisis and left the game. Surviving companies, on the other hand, gained valuable experience and learned to minimize risks.

Cadastral value to be made fair

The concept of the State Land Service (SLS), according to which real-estate cadastral value will be set on the level of 85% of the market value in 2014, can also be considered a significant event. As the SLS Director General Elita Baklane-Ansberga admits, the current cadastral value does not reflect the real value and state of real-estate. This is partially due to the fact that right now it is determined by the market projections set for next year – this practice was introduced by the order of the former Prime Minister Ivars Godmanis, when the real-estate market began to collapse with the coming of the crisis. Now, according to the SLS, our economy has recovered and a more suitable system can be introduced, which is offered by the new concept, currently handed to the ministries for discussions.

The main proposed innovation revolves around the following. The basis of the cadastral value of different types of real-estate will be reviewed every two years, instead of every year, so that the cadastral value of the real structures would be equal to 85% of its market value on the moment the system becomes in force. The SLS was forced to do this every year because of the rapid price fall in 2009. And finally, a new cadastral evaluation criterion of commercial real-estate is planned to be introduced – the rent price.


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