Growth boosts Riga’s EU hopes

Date: 04/03/1999

By Simon Taylor

Latvia's economy looks set to continue growing at a healthy rate over the next five years, strengthening the country's bid for membership of the European Union.

According to a recent agreement on medium-term economic priorities between Riga and the European Commission, Latvia's growth rate should increase to more than 6% by 2003 compared with current levels of around 4%.

The joint plan, which was signed in Riga by Latvia's Finance Minister Ivars Godmanis last month, sets out the kind of economic performance the country is expected to deliver provided it maintains the pace of reforms required in the run-up to EU membership.

Latvia is hoping that it will be invited to join the six applicant countries already negotiating terms of entry into the Union by the end of this year.

Strong economic fundamentals would help to convince Union governments that Latvia would be capable of withstanding the competitive pressures of becoming an EU member.

In the joint plan, the Latvian economy is predicted to grow steadily over the next five years, although the effects of the crisis in Russia are expected to cut growth in 1999. Latvia is currently reorientating its exports towards western European markets.

The Commission expects that much of the predicted growth will come from an increase in exports, especially if the modernisation of Latvia's industry allows the country to shift away from low-value products such as timber and towards more sophisticated goods.

Latvia should also be able to keep a lid on inflation, although the rate is likely to remain higher than in most industrialised countries, at around 4% for the next five years.

One area of concern, however, is the country's large current account deficit, which currently stands at 10% of gross domestic product. Although Latvian finances are being buoyed by high levels of foreign investment, which topped €1 billion by the end of 1997, the plan warns that Riga could face problems funding the deficit if foreign investors withdraw funds or if the country faces external economic problems such as a slump in demand in surrounding markets.

But some financial analysts have cast doubts on some of the Commission's forecasts.

Per Hedfors, senior economist at SEB Merchant Banking in Stockholm, questions whether Latvia's economy will grow by 4% this year and 5% in 2000 as predicted in the plan.

"The growth figures for 1999 and 2000 are on the high side," he said, pointing out that the country would still be affected by the Russian crisis, especially in the transit sector, where Latvia makes a great deal of money from handling Russian goods as they are transported to markets further west.

Latvia is only the third of the ten countries applying for membership of the EU to have agreed a medium-term economic plan with the Commission. Bulgaria, Hungary, the Czech Republic and Estonia are expected to finalise theirs by the end of this year.