The high inflation in Latvia is determined by not only external factors, but the existing structural problems of the economy as well, said governor of the Bank of Latvia Mārtiņš Kazāks in an interview to LTV programme Rīta Panorāma on Monday, the 19th of December.
«There are not only the external shock problems, but also the structural problems with Latvia’s economy – lack of competition in certain sectors, as well as the ability of companies to compensate global price rises through productivity,» he said.
The governor of the Bank of Latvia stressed that high inflation also comes from the fact that in Latvian residents’ goods and services basket energy and food take up a larger space when compared to other EU member states.
«The fact that we are poor explains part of the higher than normal inflation. Both energy and housing heating take up a lot of space in the goods and services basket.»
«These are two sectors in which we see the biggest price growth in the world. We have a proportionally higher price rise because we spend more money. However, this is not the only factor – there are several of them,» said Kazāks.
He added that the prices of energy resources in Latvia have increased far more rapidly when compared with other EU member states. This can be explained with higher dependence on Russia. However, the price rise on world markets get to consumer prices faster through regulated prices.
«The price rise on world markets reach consumer prices very quickly through regulated prices. It happens more slowly in other countries.»
«It is a good question – why is this happening to us? What happens with these prices reaching consumer prices? Why does it happen so quickly? There are definitely things that should be studied, specifically how we can limit them,» said Kazāks.
He also said businesses in Latvia are smaller. This means they are unable to compensate the global price rise and distribute this increase to consumers, whereas larger companies are able to do it.
«The question is about competition. We can see that corporate profit margins did not diminish in many cases this autumn despite the very high price surge for raw materials. This means the price rise of these raw materials can be handed to consumers relatively easily. This may indicate that competition is insufficient,» said Kazāks.
At the same time, he reminded that the Bank of Latvia does not expect a deep decline soon. This means economic slowdown will be relatively brief and shallow.
«There is already a slowdown. It will continue at the turn of the year. In the first quarter it will remain in the negative. The second quarter will be in the zero or slightly in the negative, whereas in the second half of the year the economy should start growing,» said Kazāks, adding that inflation is the main reason why the economy has slowed down. The economy cannot grow for long with such a high inflation, because consumption slows down.
Also read: Ministry of Finance downgrades Latvia’s economic growth outlook