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Wednesday 23.08.2017 | Name days: Valgudis, Ralfs, Vitālijs

Economist: stubborn exchange rate maintaining to result in stagnation

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RU, Janis Oslejs

Janis Oslejs

Stubborn holding of the exchange rate during the crisis results in huge unemployment and misery leading to extreme ideas, press freedom threats, irregularities and economic stagnation, points out the economist and Head of SIA Primekss Jānis Ošlejs (Oslejs) in such a way responding to the ex-Prime Minister and the European Parliament Deputy Ivars Godmanis’ statement that Latvia cannot implement controlled lat devaluation.

Godmanis expressed sharp criticism of the lat devaluation supporters, for instance, the economist Oslejs last week, in an interview to the newspaper Vesti Segodņa supplement Delovije Vesti, pointing out that these people have not been responsible for anything and adding that almost all controlled devaluation cases have failed, for example, in South Asia and many European countries.

Oslejs points out countries that are now facing financial difficulties, have often opted to devalue the currency. According to the International Monetary Fund (IMF) estimates, devaluation has occurred more than 140 times throughout the world since 1970. Oslejs considers Latvia has to devalue its currency as well; thus, gaining the possibility to perform cash emissions. He is convinced before devaluation Godmanis could have converted the euro loans in lats in accordance to law, while the resulting banks’ losses could be partly covered by the international lenders’ granted loan.

The former Prime Minister could have used the money gained by the devaluation to carry out structural reforms – to reduce the bureaucratic apparatus and increase investments in infrastructure. For instance, in the health care sector where small hospitals could have been closed, while investments could be placed in centralised hospitals. Similarly, financial resources for small hospitals restructuring in health care centres and medical tourism private clinics could have been allotted. Also the swollen state apparatus should have been reduced, increasing money for road construction and science. Poorly visited secondary schools should have been closed, investing in teachers remuneration and further education. Godmanis could have invested in risk capital funds for Latvia’s industrialization to create innovative, exporting companies. These would have been sustainable structural reforms boosting Latvia’s competitiveness. But currently there are no structural reforms – only cuts, because of insufficient funds for compensatory investments, the economist emphasizes.

Oslejs thinks Godmanis chose unusual crisis solving mechanism, not been carried out since 1930’s, with extraordinary risks – to maintain the lat rate flat.

The logic of exchange rate preservation requires low import. Import can be stopped by reducing the purchasing power. So Godmanis’ idea, to which IMF finally reluctantly agreed, was to cut wages, pensions and other social benefits in order to stabilize the budget and reduce purchasing power, boost domestic consumption taxes and cut government spending. Moreover, public investments in the infrastructure would be stopped, Oslejs considers, emphasizing the bizarre and irresponsible course set by Godmanis has resulted in Latvia in the deepest crisis in the world.

Oslejs appraises the Prime Minister Valdis Dombrovskis government’s skills to stabilize the economy efficiently; however, the continuation of the current Latvian economic course will lead to a hopelessly slow growth that is similar to stagnation. The only justification for such a policy is the hope for euro. Unfortunately, even Godmanis is forced to admit that Latvia will have too high inflation in 2014 due to the tax rise, consequently, the chances of joining the eurozone will be threatened. Moreover, the total debt level might exceed the one requested by the euro criteria. At the moment, economists in circles related to Brussels consider the eurozone entrance criteria will be changed, Oslejs says.

He indicates the eurozone needs serious reforms before taking on new member countries. I support the European integration, but not on completely economically incorrect foundations, and currently the euro is wrongly built, the economist asserts.

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