Latvia faces tough tasks in post-boom hangover

20th April 2009, Comments 0 comments

More than 10,000 teachers flooded central Riga in early April, protesting against impending wage cuts as the government scrambled to get a slice of the 7.5-billion-euro bailout it won from the International Monetary Fund and other lenders in December.

Riga -- As it wrestles with a snowballing economic crisis and tries to stick to the terms of an IMF bailout, the Latvia government is facing deep public anger over mismanagement during the Baltic state's boom years.

"Governments simply stuffed their pockets with money when the times were good," said Nina Bazhenova, an English teacher at a Riga school, expressing views that have driven thousands of people to join street protests.

"Their awful investments and plain stupidity led us to this," she told AFP.

More than 10,000 teachers flooded central Riga in early April, protesting against impending wage cuts as the government scrambled to get a slice of the 7.5-billion-euro bailout it won from the International Monetary Fund and other lenders in December.

Labour unions across the economy have threatened more protests.

Under the package, the Latvian government has to slash spending to try to bridge a yawning deficit. It has already made deep cuts that, along with those on the horizon, could mean spending 12 percent less than planned this year.

"It is very difficult to do and it is very unusual," said Morten Hansen, a professor at the Riga branch of the Stockholm School of Economics.

On April 2, the government announced it had missed out on a 200-million-euro tranche from the IMF. The lender acted after Riga failed to amend its budget in time -- leading to speculation that the bailout could unravel.

"This is a 'chase your shadow' case, since as you cut, so the economy contracts more, so the more you need to cut," economist Edward Hugh told AFP.

Centre-right Prime Minister Valdis Dombrovskis has warned that Riga could go bankrupt in June if it fails to receive the promised cash. He has so far been unable to persuade lenders to grant him some leeway.

Dombrovskis came to power in March, after his predecessor Ivars Godmanis quit following violent demonstrations in January and a rebellion within his coalition -- nothing unusual in a country that has had 15 governments since independence from the Soviet Union in 1991.

Although the economic crisis has swept across Europe, no other country in the European Union has seen such a heavy hangover after an economic party as Latvia.

The nation of just 2.3 million people, which joined the EU in 2004, enjoyed table-topping growth rates of 11.9 percent in 2006 and 10.2 percent in 2007 as rising wages, easy credit and a property boom stoked domestic consumption.

But it also notched up huge current-account deficits and faced double-digit inflation, falling into recession in 2008 as output slumped 4.6 percent. The government forecasts that the economy will shrink 13.0 percent this year.

Latvia's previous governments, notably that of centre-right politician Aigars Kalvitis who quit at the end of 2007, faced regular criticism for failing to heed warnings of overheating.

The policy tone was set in an August 2004 article by Ainars Slesers, then a government minister.

"One should quit warning about some kind of economic overheating. We ought to push the pedal to the metal," he wrote.

The pedal was slammed. From 2004 to 2007, nominal wages more than doubled while productivity slumped, helping drive up inflation, which in turn pushed up wages again.

Slesers also wrote that a "deficit-free budget is not an end in itself." Dombrovskis' predecessors failed to put aside boom-time funds for a rainy day.

Since 2004, the state has not run a single surplus, spending more than it takes in.

Finance ministry data showed a deficit of 1.0 percent of gross domestic product in 2004, 0.8 percent in 2005, 0.5 percent deficit in 2006 and 1.3 percent deficit in 2007.

When boom turned bust, the deficit spiralled to 3.2 percent in 2008.

Under the bailout, Riga pledged not to run a deficit more than 5.0 percent for 2009. Dombrovskis later failed to persuade lenders to allow 7.0 percent, but ratings agency Fitch has warned that it could balloon to 10.0 percent.

Einars Repse, who took over as finance minister last month, said he was "shocked" to discover that despite their alleged imprudence, his predecessors had failed to boost spending on the medical and education sectors and the police.

"That means something is indeed deeply wrong," he said.

With Latvians' trust in officials at its lowest ebb in years just as they are being asked to accept belt-tightening, tales of wasted money are grabbing headlines.

Last month the state auditor published a report on a bridge in Riga -- the nation's biggest infrastructure project since independence -- saying that at least 27 million lats (38 million euros, 51 million dollars) had been lost through shady tendering and double-dealing.

AFP/Expatica

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