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Bank of Latvia: low investment level delays Latvia’s potential growth

Uldis Rutkaste/flickr.com/Latvijas Banka.
The low investment level currently stifles Latvia’s potential growth, said head of Monetary Policy Office of the Bank of Latvia Uldis Rutkaste.

«In the so-called fat years, investment ratio to GDP was around 30%. That was too much, and part of it was counter-productive because it did not contribute production development in a long perspective. Now the ratio of investments to GDP is only 20%. Even in Eurozone as a whole, which is formed from very well-developed countries, investment levels exceed 20%. We should aim at investment level of 25%,» said Rutkaste.

He admits that some recovery is noticed in relation to investments. However, this recovery is mostly associated with either infrastructure financed by European funds or construction – new supermarkets, warehouses, office buildings, etc.

«However, if we look at investments in machineries or equipment, we will see very poor development. The total investment volume in this sector has dropped significantly. While in the past, investments in machineries accounted for a little more than 30% of all investments, now it is only 23%. This only shows that no major economic growth is expected in the future. Currently production output is close to all-time maximum in all industries. Existing machineries are overloaded and new machineries are not bought. This means that without changing anything, we cannot hope to secure large production volumes in the future,» said the head of the central bank’s Monetary Policy Office.

He allows that such a situation may be associated with experience left from crisis years, which means businessmen remain very cautious. Lending services continue developing slowly as well. Moreover, banks are afraid of the legal aspects of insolvency and concerns that it will not be possible to recover pledges within reasonable time periods and with reasonable costs.

«More research is required here, of course, but there is a general impression that there are problems with competition. There is no strong competitive breath on the domestic market that would force businessmen to develop. And it is not like there is any connection to legislation or any secret agreements among businessmen, either. But there is something of a post-crisis phenomenon present. It is simply that too many had gone bankrupt during the crisis, whereas the strongest businesses have become more stable. No one really threatens their market niches at the moment. They feel comfortable and do not think much about growth and investments in their future. This is because they do not see any strong competitors that could potentially undermine their positions. It would be best to consider the best ways to change the competition policy in order to bring it to a healthy level. It could push the economy towards future development,» said Rutkaste.


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