Kazāks: Latvia must sort out energy sector to achieve economic growth

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Inflation is currently high in the euro area, with a negative impact on the economy. In Latvia, this is partly due to structural economic problems – lack of competition and inability to absorb global price increases through productivity, said Mārtiņš Kazāks, president of the Latvian central bank (Bank of Latvia), in an interview on Latvian Television December 19.

According to the Bank of Latvia's forecasts, GDP growth will be slower this year. "The beginning of the year wasn't as strong as it was originally announced. But the same thing remains: Latvia's economy will be in recession at the end of the year; we are already in recession, but the slowdown will be relatively short and shallow. Consequently, we are not predicting a deep decline in the economy at this point," said Kazāks.

Economic growth is expected again in the second half of 2023.

As the reason for slow economic growth, Kazāks pointed to inflation, which is leading to a decline in consumption because income is not following the price levels.

At the same time, he pointed out that the reason for inflation – high energy prices – is not going to go anywhere, although it will fluctuate. “And this is one of the main challenges for Latvia's economy – to clean up its energy sector in the near future, to ensure that energy is available and relatively cheap. This in turn has an impact on Latvia's competitiveness. [..] The energy sector is a lasting matter and will also affect all sectors of the economy,” said the head of the Bank of Latvia.

Kazaks pointed to a number of reasons for increased inflation in the Baltic States as less wealthy European countries. “The fact that we are poor also largely explains some of the higher inflation. For us, both energy and food in the basket of services and goods hold a larger share,” he said. “By cutting these links [with Russia] prices are rising more rapidly,” he added.

The President of the Bank of Latvia also warned that the longer inflation remains high, the higher the tendency for inflation to take root. Therefore, central banks are raising rates to mitigate high inflation expectations.

 

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