This week, our country was praised for the achievements made in overcoming the crisis and the restoration of our economy, which is considered to be the fastest growing economy in the EU. It was not all praise and compliments though, some advised us not to raise our heads too high, not to give in to euphoria and better yet – to take a cold shower instead.
Everyone, shower – now!
The week began with astounding news: the GDP of Latvia increased by an unimaginable 6.8% in the first quarter of this year. And we have this going on while many of our EU neighbours announce the coming recession, while the European Commission projects a zero increase across the whole of EU and a negative one in Eurozone in 2012. Undoubtedly, politicians have had ample reason to immediately start talking about how Latvia is developing according to a much more positive scenario than previously anticipated.
It is a good thing that there was a mission of international creditors in Latvia the day the GDP progress was announced – there were some reasonable people, who cooled things down for us. European Commission representative Gabriele Judici reminded us: «People’s reasoning is changing. They quickly forget about the recent past and fall into a state of self-induced certainty. If we look at today’s statistics, we will see that the volume of economy has returned to the level of 2006. Firstly, it means that the crisis cost Latvia six years. Secondly, it is worth remembering that the situation six years ago is not that much different from what we have now. The country is once again on its feet – it can now responsibly take loans on finance markets. But it still needs to show that it can move towards its objective – the introduction of Euro – on its own. It is important to be vigilant». He also advised to «take a cold shower», to avoid another economy overheat.
Local experts were also careful in their assessments. Bank of Latvia economist Igor Kasyanov noted, that both current and next year – are the last in the seven year period of the EU structure fund funding programs. This is why the economy is being heated by European money. But in 2014 already this money flow could stop. This is why it is necessary to create a base for the future and actively realize investment projects using EU funds, Kasyanov believes. This includes road restoration, developing manufacturing and energy industry, as well as transit business.
SEB Bank economist Dainis Gashpuitis believes that our country’s economy continues to move forward mostly due to inertia. In order to cause another impulse Latvia needs to increase work efficiency and resolve employment issues. The head of the IMF mission Mark Griffiths put a full stop on this topic by announcing that the fund has increased the projection for the growth of Latvian economy for this year from 2% to 3.5%.
Euro by the book
Also, about the introduction of Euro Judici mentioned. One memorable event, related to this, occurred, thereby demonstrating that the government is tending to this issue responsibly. It became known that the Latvian government are looking at the possibility to make a special agreement with businessmen, to avoid an unreasonable price increase after the introduction of Euro. Estonia, despite having a similar agreement with most of their traders, endured the highest inflation in the EU in the year of Euro introduction – 5.1%. In order to avoid a similar turn of events, Latvia could launch a special campaign to ensure a «by the book» transfer to Euro in 2014, claims the head of the Latvian Euro project Dace Kalsone. According to her, right now they are reviewing the experience of other countries, which recently joined the Eurozone – Slovakia and Estonia. If we look at the experience of the countries, which joined the Eurozone in the beginning of the 2000s – Germany and Finland, prices there increased by 20-30% after the introduction of Euro. So it seems Latvia has a lot to think about.
Respectively, in the end of last week, Prime Minister Valdis Dombrovskis admitted that if we do not join the Eurozone, as planned, in 2014 it will not cause a catastrophe: «We are not there right now, and still have the most rapidly growing economy in the European Union. We can live without Euro.»
Let there be Debt Heaven
So, why don’t we live without Euro while the situation in the Eurozone sorts itself out, and our country finally get back on its feet? Especially when the restoration of our economy has already made a debut in the tax policy. The government finally approved the bill to lower VAT rate on July 1 from 22% to 21%. It is expected that this step (if the agreement with traders about the proportional lowering of prices is reached) would allow limiting the average year inflation by one half of a percentage point, as well as increase Latvia’s competitiveness in the region (mainly in terms of service providing).
It was also decided to lower Personal Income Tax from the current 25% to 24% in 2013, then lower it down to 22% in 2014, and down to 20% in 2015. The tax-free allowance is to be increased from 45 to 60 LVL in July next year. During the next two years it will be increased by 20 more LVL. These changes are called to balance out the labour costs in Latvia with those in Lithuania and Estonia. As the Ministry of Finance noted, these steps should positively reflect on the investment attractiveness of our country, improve the situation with poverty, unemployment and shadow economy.
Hijackers prefer economy cars
How in the world does poverty, unemployment and shadow economy levels are still high and successfully co-exist with the high increase of GDP – is still a mystery. One can only hope that no one intentionally manipulates statistical data in Latvia (as it was at the time in Greece), to make things “look good” before entering the Eurozone. And one fact should be voiced in this regard, a fact that seems to reflect the situation in our economy in greater detail than any statistical data about GDP.
The BTA insurance company reports: hijackers mostly prefer economy cars, a fact which is undoubtedly related to price increase for oil products. As the data from the company states, more than a half of this year’s hijacking incidents (57%), when KASKO insurance policy owners turned to their provider because of their cars being stolen, were related to the theft of economy cars. Criminals seem to favor vehicles with petrol engines with the volume of 1.6 – 2 litres and diesel engines with a volume of 2 – 2.2 litres. State police statistical data confirms the information from BTA: while several years ago hijackers mostly targeted expensive vehicles (off-roads for instance), now they mostly operate in the medium class segment.