Latvia: Government in Minority As New Era Party Quits Coalition; Growth Continues at Breakneck Pace, Boosting Inflation and Widening Trade Deficit

Summary

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The four-party ruling coalition headed by Prime Minister Aigars Kalvitis came close to falling earlier this month when the New Era party withdrew its support, but the remaining three parties decided to carry on as a minority government. Q4 GDP surged 2.7% on the quarter, lifting overall 2005 growth to a record 10.2%. All demand components contributed, with consumer spending rising 11% and investment by 21%, and there was a positive contribution from the external sector. Early results for 2006 point to a continuation of rapid growth. February retail sales volumes were up by 15% on the year, industrial production rose 7% and business and consumer confidence remained near record levels. But the trade deficit widened again and the hoped-for decline in the current account deficit, from 12.5% of GDP in 2005, may not materialise. The annual inflation rate averaged 7.0% over the last twelve months and is unlikely to come down rapidly. Nominal wage costs were up by 17% on the year in Q4 last year, real estate prices have soared and construction costs rose by 13% in the year to Q1. Yet the government has failed to implement any restraining measures for fear of upsetting the electorate ahead of the October general elections. The central bank is again raising banks' reserve requirements, but this is unlikely to make any difference. The LVL remains tightly pegged to the EUR for now, but tough stabilisation measures may be inevitable after the elections to secure eurozone membership.

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Latvia: Government in Minority As New Era Party Quits Coalition; Growth Continues at Breakneck Pace, Boosting Inflation and Widening Trade Deficit

Government in minority after New Era quits coalition

As noted in previous briefings, politics in Latvia are tumultuous, fractious and scandal-ridden. The country's twelfth government since independence in 1991 was nearly brought down earlier this month when the New Era party quit the coalition, leaving Prime Minister Aigars Kalvitis's government i...

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