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Tuesday 22.05.2018 | Name days: Emīlija
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Economic Diary of Latvia. Although in the rich club, there is not time to relax

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUA long-standing event finally took place this week – the Council of the Organization for Economic Cooperation and Development approved Latvia to join the so-called rich countries club.

This provides an opportunity for more successful development of the country, as noted by Latvia’s Foreign Affairs Minister Edgars Rinkevics. Latvia’s joining of OECD has been one of the country’s main priorities for a long time.

As an OECD member state, Latvia will be able to use experience and knowledge of more developed countries and experts to help further develop all sectors of national economy and the general level of quality of life of the population. ‘Membership in the organization of some of the most economically developed countries is not an automatic guarantee for welfare,’ – believes Rinkevics.

Deputy Secretary General of the organization Douglas Frantz has noted that Latvia has managed to realize the necessary reforms for joining OECD in a very short period of time. Nevertheless, there is not time to relax. He emphasized that Latvia will join the organization with high standards, and this will open the way for unlimited possibilities to Latvia.

Frantz also commended Latvia for doing so much in such a small period of time, comparing it to sprinting. Latvia’s membership in OECD will help the organization itself to change, he said. At the same time, Frantz also mentioned that membership in OECD is only the beginning.

The next step after the decision of the OECD Council will be the signing of the official documents regarding Latvia’s joining of the organization, which will take place in Paris on 2 June. After the signing of the document and its ratification in the Saeima, Latvia will become a full member of OECD.

Business is emerging from the shadow

Another piece of good news that surfaced this week states that the proportion of grey economy in Latvia had declined by more than 1% in 2015 (in comparison with the previous year). In 2015, the index had declined to 21.3% of GDP, according to the Grey Economy Index study by SSE Riga. In 2014, the share of grey economy in Latvia was 23.5% of GDP. This index is calculated every year based on results of a survey of entrepreneurs.

44.4% of grey economy in Latvia is made up of unaccounted income, 34.9% – envelope wages and 20.7% – unregistered workers.

According to Economy Minister Arvils Aseradens, Latvia’s economy has changed and has reached a certain level of maturity with the recent decision to allow the country to join OECD.

Aseradens believes that is necessary to focus on two problems – insolvency process and grey economy. Speaking of grey economy, the minister expressed his satisfaction with the fact that entrepreneurs have become involved with solving problems related to grey economy.

Businessmen, in the form of Latvian Chamber for Commerce and Industry, Latvian Employers’ Confederation and Business Against Shadow Economy association, have prepared their own proposals to combat grey economy and its symptoms. Proposals include the refusal of application of excise tax on coffee, introduction of a monthly tax of EUR 286 on taxi transports, active combating of piracy and introduction of a receipt lottery – when consumers who submit receipts to the State Revenue Service to help authorities combat dishonest traders take part in a special lottery.

Entrepreneurs also propose developing a medium-term tax policy for the country and tie it to Latvia’s national development plan for 2014-2020. It is highly important to ensure stability and predictability of the country’s tax system, reduce the burden on labour force without increasing the administrative burden and review mandatory state social insurance fees.

Businessmen also propose introducing mandatory health insurance. Other related proposals include PIT reliefs for companies that re-invest their revenue, adopt a reverse order to VAT payment and cancel the tax on lightweight transports for taxi companies.

The new plan for combating grey economy will be presented on 10 June 2016.

Signs of stagnation

And although there are things Latvia can be proud of on a macro level, the actual situation with the country’s micro-economy is demonstrated well enough by the real estate market and consumer prices.

According to data from Balsts, Riga’s real estate market is not behind that of Vilnius and Tallinn.

The real estate market in Tallinn managed to recover after the crisis in a couple of years – the current price change in comparison with the highest point is only -9% at the moment. In Vilnius, the real estate market is developing more slowly – the price change in comparison with the highest point is currently -32.5%.

In Riga, the average price in comparison with the highest point is currently 58% lower. And although the number of purchase/sale deals in Riga has grown 26% since the beginning of 2016, compared with Tallinn and Vilnius, improvements are minimal and do not provide a clear enough picture for the future, as noted in Balsts.

The fact that deflation remains in Latvia is demonstrates that there still is a great degree of instability in the country. Although consumer prices have been growing for the third consecutive month in Latvia (0.4%), they remain below prices of 2015 (by 0.8%). It is likely that annual deflation will remain for the entirety of the first half of the year, according to Swedbank.

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