Turning the tide

Latvia has announced that its economy is gradually beginning to recover after suffering the worst recession in the EU in 2009. The Baltic state, which has the highest unemployment rate in the European Union, has had to slash wages and spending in the public sector, as well as hike taxes.

On Wednesday, Prime Minister Valdis Dombrovskis said in a radio interview that the country needed to bring the deficit down from 8.5 percent of gross domestic product (GDP) to 6 percent by next year. Reducing the gap between government spending and revenues is one of the terms of a 7.5 billion euro ($9.5 billion) bailout package from the International Monetary Fund and the EU.

However, Dombrovskis said spending cuts for 2011 will be less than originally planned.

"After the finance ministry drafts its forecasts, we will know the precise cut," said Dombrovskis. "I expect it to be considerably less than 500 million lats (707 million euros)."

Dombrovskis said he expected the government would need to trim approximately 353 million euros. His government has already implemented a series of cuts to state administration, social security, education and healthcare in order to reduce spending.

Simultaneously, Latvia has increased value added tax rates and introduced new taxes to raise its revenue.

Weathering the storm

Although Latvia's unemployment rate has slightly lowered in the past few months, it is still high at 16 percent. The economy also contracted by about 18 percent last year, making it the deepest recession within the EU.

Despite this, the public mood among Latvians has improved, as they are being praised for their ability to endure dramatic austerity measures. Pauls Raudseps, an economic commentator at news magazine “Ir”, told Deutsche Welle he believes Latvia's economy has already hit its lowest point and can only get better from now on.

"When the crisis first hit it was a very, very bleak and depressing time," said Raudseps. "But I think over the last six or eight months people have realized – OK, this is the situation we are in, we have to deal with it, and people are opening up new restaurants, new businesses."

Many in Latvia's business community also say the economic situation has stabilized. Companies have managed to develop better export potential and have reduced inefficiencies during the crisis.

Issues ahead

Latvia hopes to bring its deficit down even further to 3 percent so that it can meet the criteria to join the eurozone in 2014. Such a move would attract foreign investment, and the government says adopting the euro would provide protection in future economic crises.

But Latvia's means of reducing the deficit are not popular with everyone. Dainis Gaspuitis, an economist at SEB Bank, says Latvian exports have to be the prime mover of the economy.

"It's clear that domestic consumption will not boom as much as it did over the last few years," said Gaspuitis. "That happened because consumption relied on cheap money. It would be wrong to expect that great investments will continue to pour in just like before."

Dombrovski's center-right government is under pressure from the opposition to present the 2011 budget before Latvia's general election in October.

Author: Gederts Gelzis (mk)
Editor: Rob Turner