Latvian finances sector argues against state president’s recent harshness

Finance Latvia Association (FNA), which represents the interests of commercial banks in Latvia, has released a statement. In it, the association’s chief Sanita Bajāre criticises the idea from certain politicians to introduce an additional tax for credit institutions – the “experiment” that could dampen investments and business activity in general.
This is the sector’s sharp, but at the same time cautious, response to Latvian President Edgars Rinkēvičs’ previously voiced unexpected and very harsh criticisms of the industry. The president invited the Bank of Latvia to ensure local banks provide lending to local companies more actively.
The president is not mentioned by name in FNA’s statement, but it was him who suggested adding a “solidarity tax” for banks in his recent interview to LTV Rīta Panorāma.
FNA board chairperson said the existing government’s declaration lists numerous valuable commitments in the field of economic and financial policy. One of the sub-sections in the declaration is called “The best business environment in Baltic States” and suggests implementing “improvements to the business environment that would help attract exporting companies”. In regards to taxes – this sub-section also suggests adopting a “transparent tax policy”, as well as a policy that “would promote the financial sector’s competitiveness and digital development through support of the national economy’s growth”.
Bajāre stresses: “These are all vitally necessary things to help raise Latvia’s competitiveness and residents’ quality of life. The idea from certain politicians about the adoption of a special tax for a single – financial – sector

would be a step in the opposite direction.

It weaken the already weak business environment even more, as well as scare away investors and lower growth of the national economy.”
Here it is necessary to mention that in the beginning of June politicians had a discussion of the rapid drop of Latvia’s competitiveness, which was detailed in a study by the International Institute for Management Development (IMD) World Competitiveness Center. In 2022 Latvia was 35th among 64 surveyed countries. This year, however, Latvia dropped to 51st spot on this list, far below Estonia (26th) and Lithuania (32nd). “Of course, each study uses more or less subjective factors that can potentially influence results. However, the fact that Latvia’s economic policy stagnates is confirmed by other assessments,” says the head of FNA.
For example, according to a study by Economist Intelligence Unity, Latvia is among the countries in which there has been a significant drop of the business environment evaluation index. Latvia’s score has dropped by six spots – mostly because of the worsening of the situation on the labour market: emigration of emerging specialists and shortage of skills of existing workers are mentioned as the main reasons for this.
Bajāre also reminds that the Foreign Investors Council just recently published an investment environment index, which affirms: according to investments, the environment has not improved, it has become worse. “Investors believe

the country is in moderate chaos,

and it is unknown which way the ship is headed,” said Stockholm School of Economics Professor Arnis Sauka, commenting on results of the index.
Tax policy – transparent and business-promoting – is one of the strongest tools available to the government, said Bajāre. Investors evaluate tax rates and their application by comparing different economies to their development. Taxes can weaken even local businessmen’s plans to create businesses and vise versa – motivate them to start a business.
This is why experiments involving taxes tend to cost a lot, warns the banking sector’s lobbyist. “The idea for so-called super profit tax for banks would mean investors will not be able to rely on transparency, predictability and a tax policy appropriate to the government’s declaration. There are risks of losing existing investments (due to outflow of capital) and the difficulty of attracting new capital increasing as a result.”
Secondly, according to Bajāre, businesses working in the country may refrain from making investments because in the event of a tax on super profits they would have to pay the majority of their profits away in taxes. Additionally, businesses would not be interested in making money in tush a policy. It is better to operate at zero actual profits or with small losses as long as it does not attracts attention from politicians and as long as they don’t start thinking about additional taxes. According to her, it is clear this king of thinking leads to higher unemployment (due to businesses failing to develop), lower business activity, lower revenue for the state and worse quality of life in the long-term.
These factors were mentioned by the European Central Bank (ECB), reminds the head of FNA. ECB was rather critical of Lithuania’s decision to adopt a tax on bank’s super profits. Consequences from this decision will come after some time, ECB said. It would make banks less capable of withstanding economic shocks and may create obstacles for attraction of new investments, reducing lending opportunities for the economy and slowing the country’s economic growth in general.
Bajāre concluded the statement indirectly addressed to the country’s president the following way:
“Capital has no borders – it flows to economies where it is possible to earn money the easiest and taxes are the friendliest. This means that by adopting an additional tax for banks, they will turn away towards other markets and finance businesses in Estonia, for example, which would cause Latvia to fall behind its neighbours even more.
Here we agree with Governor of the Bank of Latvia Mārtiņšš Kazāks, who said we would benefit a lot more from lower interest rates, lower commissions and higher deposit rates, which is something commercial banks are already doing by actively reviewing loan commissions and raising deposit rates together with each of ECB’s decision to raise the base interest rate.
This is not compatible with the introduction of a new tax for banks, which would create the opposite effect and cause a short-term need to continue financing at the expense of the country’s development and people’s welfare.”
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