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Economic Diary. Latvia 7th week of 2012

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A lot of events occurred last week, which, in a long term perspective, could have a positive impact on the economy and business environment.

Keep your key under the doormat

The group if independent deputies, who left the Zatlers’ Party of Reforms last year, have presented an interesting legal initiative. The core of it – is essentially creating order in Latvia, similar to that in the United States of America. American mortgage borrowers can simply leave their homes and send the keys to the bank in an envelope: and there would be no legal actions against them afterwards. Latvians, on the other hand, can remain indebted to the credit institution even after the loss of their real estate.

«The principle of the stashed keys should have been introduced on the rise of the development of our banking branch. It would have disciplined both the banks and the borrowers. Clearly the lack of this kind of order has significantly stimulated the wave of uncontrolled credits. Right now, some banks offer this option, but it does not resolve the problem», – Deputy Viktor Valainis, one of the initiators of this idea, says.

However, the Latvian commercial banks association believes that the systematic introduction of the new approach hides many risks. «This condition will decrease the availability of credits, especially for young families. To protect themselves from additional risks the banks would have to perform the first credit payment, which is around 30%, and this can become a serious obstacle for potential borrowers», – Baiba Melnace ,the representative of the association, thinks. According to her, the introduction will extend the stagnation on the real-estate market and, in the end, will slow the restoration of the Latvian economy.

Dombrovskis’ ambitions

Last week, quite a courageous statement was voiced by the Prime-minister of Latvia Valdis Dombrovskis, by promising that Latvia could achieve a deficit-free budget in 2014. But, it will be considered as such only according to the method, used by the State office. If the international ESA 95 method, which is introduced in the EU, is used, then the deficit can only be avoided in 2015, Valdis Dombrovskis projects.

«The fiscal consolidation was complete after the approval of the 2012 budget. We do not plan to employ it in the future», – the Prime-minister claims. According to him, in the nearest future, the government will decrease the budget deficiency with the limitation of costs in full accordance with realistic performance capabilities of the State office.

The State budget approved by the Saeima for 2012 foresees a deficit no more than 2.5% of the GDP. The revenue of the consolidated State budget are estimated to be LVL 4.25 billion (+6% in comparison the plan for the last year), costs are estimated to be LVL -4.64 billion (minus 2.4%). In 2011, the State budget deficit, according to estimated data, was 4% of the GDP.

BNN had already reported that the first deficit free budget of Latvia was that of the mid 90s of the last century, and was talked about by Andris Skele, then the Prime-minister. But neither during his rule, nor after it, Latvia was unable to reach this goal. Maybe the current Ministry Cabinet will be more successful.

Tax debtors to be amnestied

One more notable event transpired on behalf of the Saeima deputies, who resumed their work on the Law of tax amnesty, still dormant since the previous Saeima. The document was given a more elegant title – the «Law of Tax support measures», but the principle remains the same: the normative act is supposed to help enterprises, which have debts for the budget since autumn 2010. Thanks to the Law, which is due to become in force in July 1st 2012, these companies can expect a full write-off of penalties and fines with a condition of returning the base sum of the debt to the budget.

The fresh editorial of the Law notably eases the procedure. To take part in the tax amnesty program, one needs simply to have a debt, active since September 1st 2010. After the return of the base sum the State Revenue Service will write off the penalties and 90% of the fine, if one was applied. «Entrepreneurs need to understand, that the fine could appear only after an audit: if the SRS found some kind of violations», – the representative of the Ministry of Finance Dace Avotina explains. And notes: debts formed after the aforementioned date, do not have anything to do with the program. The bar is set to help firms and other organizations to overcome tax squabbles, formed as a result of the 2009 crisis.

The State Revenue Service has estimated that around 110 thousand enterprises are eligible for amnesty, and the revenue for the budget from this program will be around LVL 15 million. The Ministry of Finance notes that enterprises who have made deals with the SRS to prolong the period for paying back crisis debts can also take part in the program. However, in the event of such company’s exclusion from the program because of the company’s incapability to follow their obligations, this agreement is not subject to renewal. The merchants will then need to negotiate with the SRS personally.

Doing Business in Latvia

It would be rude not to mention that the government of Latvia has approved a number of legal initiatives this week that should increase Latvia’s position in the World Bank Doing Business rating. These initiatives directed towards increasing the clarity of companies during the conflict of interests between owners and officials.

While commenting on the amendments to the Commercial Law the Chairman of the Board of the Latvian Chamber of Commerce and Industry Janis Endzins noted that they are improving the defense of interests of the minority business co-owners. Thanks to which, according to him, our country will be able to increase its position in the Doing Business rating. As the manager of this public organization of entrepreneurs, fairly noted, even though we outrank our neighbors (Latvia is on the 21st place, Estonia – 24th, Lithuania – 27th), based on a number of other positions we are clearly lagging behind them.

Notably, by the initiative of the Ministry of Justice the 136th article of the Law of Commerce will have the definition of the individuals, linked to the owner, member of the Board or Council of the commercial union. These can be considered to be relatives, spouse, relatives of the spouse, and commercial unions of which the relative or spouse is a co-founder of, or is a top-manager of. When making deals with the owners, members of the board or people linked to them, certain situations, in which the person caught in the conflict of interests is denied the right of vote. Also, the founder will not have the right of vote during procedures in which he/she is being relieved of the authorities or during forwarding complaints against him/her.

The manager of the Ministry of Justice department of commercial rights Baiba Lielkalne notes, that the amendments cover a number of innovations, which will protect the companies from negative consequences of the conflicts of interests.

The same goals are being sought for by the amendments to the Law of the Annual report. After they become in force, enterprises, whose stocks are being rated at the stock exchanges, when making deals with members of their Boards or Councils, the annual report should include the evaluation of these deals by an auditor. It is expected that this way the shareholders will have the opportunity to witness the clarity of such deals and their accordance to the interests of the company.

Palink is saved

And finally justice prevails in Latvia. The Senate of the Supreme Court has slowed the insolvency of Palink, declared in the beginning of January, the IKI and Cento trade network operator.

The Civil case department of the Senate of the Supreme Court of Latvia has made a decision, during an executive hearing, to start an appellate proceeding based on the protest of the Prosecutor’s general office’s, which challenged the decision of the Riga Kurzeme District Court, which declared Palink to be insolvent. This means that the administrator of the insolvency process will not be able to make any actions affecting the company.

The Civil case department of the Senate of the Supreme Court plans to review this case on March 7th of this year.

As BNN reported previously, the Palink Company was declared to be insolvent on January 5th 2012 based on the plea from Sergey Gushin, to whom the right to demand the payment for construction work from Palink was given by Landeks Company. The absurdity of the situation centered around the fact that the company was, in fact, quite solvent and did not have any outstanding debts to neither its partners nor the budget. The Court’s decision had a huge backlash. Foreign shareholders, diplomats and even Latvian politicians backed up the company.

Ref: 017.109.109.700


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