Scared Monkeys Discussion Forum

"We're working intensively with the Eurozone countries to ensure there is political support for Eurozone accession and so far things seem to be on track. We expect positive Ecofin [Economic and Financial Affairs Council] and European Council decisions, but those decisions still remain to be taken," he says.

Dombrovskis' work in turning Latvia's economy from a berserk basket case in 2009 into one that has the unique distinction of simultaneously recording the EU's highest growth rate (more than 5% in both 2011 and 2012 with 4% expected this year) and the lowest inflation (-0.4% in April) is certainly remarkable. So if things are all going so well, the obvious question is why risk entering the Eurozone maelstrom?

"We believe it will facilitate economic development in Latvia for several reasons," Dombrovskis says. "First, we will get lower interest rates for public lending and for the economy as a whole, and several ratings agencies have already said publicly that they will raise Latvia's credit ratings once we join the Eurozone. Second, we are a small and open economy and we do around 70% of our foreign trade in euros, so we would remove those currency conversion costs we are spending now. That burden on the economy would disappear."

"And we expect it to stimulate foreign investment – something we saw in Estonia where after they joined the Eurozone in 2011, non-financial sector investment doubled. We would expect to see something similar."

Latvia, which is totally dependent on gas supplies from Russia, aims to ensure that suppliers other than Gazprom can have an access to its pipeline system from next April, the country's economy minister said on Friday. Latvia has been the slowest of the three Baltic states to move forward with gas market liberalisation, trying to avoid confrontation with Gazprom, its sole gas supplier and 34 percent owner of its national gas company Latvijas Gaze.

This week, the country's economy ministry submitted draft amendments to ensure that alternative suppliers, including those of liquefied natural gas (LNG), will have free access to the transportation system. "We have to make sure that our gas system is ready for the third party access, for the eventuality of LNG (suppliers) requesting access to our system," Latvia's Economy Minister Daniels Pavluts told Reuters in a telephone interview.

So far, Latvia has no alternative supply routes, but neighbouring Lithuania is building a floating LNG import terminal and expects the first shipments in early 2015. The European Commission is also expected to decide whether a bigger, regional LNG terminal has to be build in Finland or Estonia, north of Latvia. Both Lithuania and Estonia keep gas at Latvia's Incukalns gas storage, one of the biggest in Europe, which also supplies gas to north-western Russia during winter time.

IMF Survey online: What is the outlook for Latvia’s economy? Are the problems in the euro area having an impact on growth prospects?

Aiyar: Latvia is doing remarkably well. It grew at about 5 percent in 2011; and although the final numbers are not in yet, we expect that growth will again exceed 5 percent in 2012. Our outlook for 2013 is for continued recovery, but at a somewhat slower pace.

More importantly, unemployment continues to fall rapidly, underpinned by strong job creation. The unemployment rate fell from over 16 percent in the first half of 2012 to 13½ percent in the third quarter. Inflation is low at 1.7 percent and is expected to decline further. All this suggests that problems in the euro area have not derailed Latvia’s progress.

RIGA - With well over 100,000 people in Latvia looking for work, business people and politicians of all stripes can still be heard complaining about a serious shortage of workers. Proposed solutions abound, some realistic, others not. There is even a growing chorus for large-scale immigration to bring in laborers. The combination of a growing economy and the much-publicized Latvian emigration wave may indeed be creating a situation where companies can’t find new employees. If so, this will negatively impact further growth prospects.

The recruitment expert adds that “skilled, motivated people already have jobs.”
“The labor market is not a bottleneck to growth… there is no labor shortage,” asserted Economic Analyst at DNB, Peteris Strautins, speaking at a Norwegian Chamber of Commerce in Latvia (NCCL) seminar on the future of the labor market in Latvia, in February...

...Considering the unemployed in Latvia, he notes that the boom years distorted the wage market such that now, many won’t work at the same job for the low Latvian pay levels. Menial jobs are difficult for employers to fill, as it’s easier for the Latvian to sit at home. He sees no change until the economy recovers further.

Labor tax reform is also needed, whereby the tax on earned income drops. This is heading in the right direction: for 2013 personal income tax is 24 percent and set to fall to 20 percent by 2015.