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Economic Diary. Latvia Week 17 of 2012

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This pre-holiday week brought us several surprises, and the most important one – our country really does have people who are willing to report about their savings in the zero declarations.

The courageous four

Even though there are only four of them – but who knows? They might have followers. Nevertheless the State Revenue Service (SRS) has a reason for pride. Those first comers declared their income, received from the beginning of 1991 to the end of 2007, making up almost LVL 111.1 thousand. According to the Law of Initial Declaration, they will need to pay a Personal Income Tax from their savings by the rate of 15%, or LVL 16.6 thousand. So far only LVL 2.6 thousand are paid. Fiscals report that neither these four residents nor their followers (if any show up) will need to worry about not paying taxes in the past.

As they state in the SRS the general activity of the population in zero declarations has notably increased: if there were 250 people filling in declarations every week from the beginning of March, then almost 460 people filled in declarations last week. Even though Latvia’s population is well trained in using internet-banks and other ways of electronic payments and communications, of the 12 650 declarations received, 90% of them – are paper form. Nevertheless, the fiscals are happy that the majority of the country’s residents are well informed about the ongoing campaign. According to a questionnaire of Latvijas fakti social opinion research service in cooperation with SRS, only 17% of residents do not know anything about this campaign. While 62.7% are convinced that they do not need to reports about their savings.

Afghan transit

A serious fight is brewing for the so called backwards Afghan transit. Latvia is not the only one trying to get their hands on it. The cunning Lithuanians have already presented to their American friends their calculation, which prove, that putting this transit flow through Klaipeda will be the right decision. As part of the withdrawal of the main NATO forces contingent from Afghanistan around 130 thousand soldiers, 70 thousand vehicles and around 120 thousand cargo containers (as a comparison: during the whole of last year Klaipeda port transshipped 382 thousand containers, Riga port – 303 thousand). Right now Baltic States are fighting each other for these containers. Latvian Minister of Transport Aivis Ronis visited USA last week, where he discussed the perspectives of receiving this flow, and right now he is in Russia, because it seems that cargo going backwards will go through the Russian Ulyanovsk airport.

Eligijus Masiulis, Ronis’ Lithuanian counterpart, traveled to USA earlier – in January. He recently announced that our Southern neighbors have a very close relationship with U.S. Ministry of Defense logistics department: «We offered them our calculations and proposals, which prove that transporting cargo from Afghanistan through Klaipeda port is economically beneficial.»

Although, the cargo flow to Afghanistan has not yet run out as well. Regular flights from Riga to Afghanistan began in April. Two three Boeing-747 of the American cargo companies flies there every day – each one with 100 tons of cargo on board. The Ministry of Transport of Latvia hopes that this route could be exploited in servicing backwards transit as well.

Dombrovskis is always right?

Economists Association – 2010 presented a Latvian edition of the book, written by Prime Minister Valdis Dombrovskis and Swedish economist Anders Åslund «How Latvia came through the financial crisis» this week. The original edition was published by the Peter G. Peterson Institute for International Economics in Washington in summer last year. The main feature of the translated book, which is now only available electronically, is that it is supplemented with commentaries of Latvian experts. The book’s co-author and the main architect of the Latvian anti-crisis scenario Valdis Dombrovskis participated in the presentation. He is still convinced that the strategy, realized by his government, was correct and allowed the country to return to its economic growth without major losses (compared to other anti-crisis options).

«In the beginning of the crisis the following question was of key importance: «To devaluate the Lat or employ an internal devaluation?» The main argument of the supporters of the first option was that its realizations would support export and allow the country to exit the crisis faster. Now it is clear that the countries of the Central and Eastern Europe that preserved the fixed exchange rate (Latvia, Lithuania and Estonia), showed the fastest export increase in the region», – Valdis Dombrovskis claims.

The Prime Minister also noted that the Lat’s devaluation did not save the government from the necessity to reduce budget deficit: «Decreasing Lat’s exchange rate by 40%, as many economists proposed, would have notably reduced the population’s buying ability. In reality though, salaries in the public sector were decreased only by 25%, and social consequences were lower.» According to Dombrovskis, in the event of devaluation not only Parex Bank would have become a victim of the crisis, but other credit institutions as well.

Valdis Dombrovskis noted that the reality contradicted the fears that out country could have ended up in a deflationary spiral (the process during which price drops and weak internal demand provoke each other). In 2009, Latvia suffered a deflation of 1%. But then prices started climbing up again, and in 2011, inflation reached 4.4%. Inflation is the main threat to Latvia’s expected joining of the Eurozone in 2014, membership in which, as it turned out, will cost Latvia LVL 28 million per year. Dace Kalsone, Ministry of Finance representative, responsible for the introduction of Euro in Latvia, reports of this. And Latvia will be required to pay LVL 28 million every year for five years.

Unrealized potential

One thing remains unclear: if Latvia chose the right course, as Mr. Dombrovskis keeps saying and everything is so good, then why is there still a high proportion of shadow economy in Latvia? According to the research carried out by a group of experts led by the senior scientist Christian Ketels of the Institute for Strategy and Competitiveness at Harvard Business School on behalf of the State Office, this index is 38% of the GDP. And what is most depressing is the fact that this index was more or less the same in the beginning of 2000s. Does it really seem like nothing changes in Latvia? According to Mr. Ketels, they analyzed 100 different indicators in their research, most of which indicate that Latvia is «permanently incapable of realizing its true potential.»

Ref: 017.109.109.1291


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