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. Last Updated: 07/27/2016

Economic Stability In Reach for Latvia

RIGA, Latvia -- Latvia's economy, left in poor shape after the collapse of the Soviet Union, is slowly finding its feet again and officials cautiously forecast growth of 2 or 3 percent next year.

"We have stabilized but this is not yet growth," Roberts Remess, senior analyst with Latvia'a Economics Ministry, said in an interview this week.

But he said existing data on the economy could be distorted because firms were under-reporting profits and output to avoid corporate taxes. "The figure may well be higher than we think," he added.

Last week Economics Minister Ojars Kehris, forecasting 2 or 3 percent growth in gross domestic product next year, said Latvia's economic performance was one of the best in post-communist Eastern Europe.

He said a strong currency, informally pegged to the Special Drawing Right, and high savings pointed to future growth. The SDR is an international reserve asset created by the International Monetary Fund which is based on a basket of currencies.

"Our economic reform programme is being realized properly, and with great success," Kehris said. "Due to the strength and stability of our currency, Latvia is now regarded as one of the most profitable countries for foreign investment."

Remess said it was not yet clear whether Latvia's future economic role would be as a supplier of goods and financial services or as an economy with a successful high-technology industrial sector.

"Basing our economy on intermediary services depends on continued price differences between Russia and the West," he said. "We don't know for how long this will be the case."

Latvia has moved much faster than most other former Soviet republics in bringing inflation under control and expects prices to rise 24 percent this year. The official target puts annual inflation at 6 percent next year.

The best that Russia can hope for is 7 percent a month by the year-end.

The Latvian central bank has kept monetary policy tight since independence in 1991. Domestic interest rates of up to 100 percent at commercial banks have led to an influx of convertible currency over the past two years.

Latvia is investing heavily in energy and transport although it still depends on Russia for energy. Remess said more could be invested if the government relaxed its policy of a balanced budget.

"We should not be afraid to run a small deficit," he said. "If we invest more in our infrastructure, more investment will be stimulated in turn."

But economic progress has not been without its cost.

Unemployment in Latvia is currently the highest in the Baltics, with an official rate of 6.6 percent. Economists say the real figure could be 9 percent.

Recent price rises of 12.4 percent for telecommunications and 8 percent for some private sector services have not yet filtered through to monthly inflation rates.

Month-on-month inflation was 1.1 percent in July, down from 2 percent in June. Prices have risen 39 percent since July last year.