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Latvian inflation is eroding competitiveness, economist says

Latvia's economy, the European Union's fastest growing, is losing competitiveness as higher wages and inflation hurts exporters including wood, drug and steel makers, said a top economist at the Stockholm School of Economics in Riga

The inflation rate rose to 7.1% in January, the highest in the 27-nation EU, and wages grew more than 20% on the year in the Q3. Latvia's $19 billion economy expanded a preliminary 11.9% in the Q4, pushing down unemployment and fueling higher salaries and inflation. Producer prices have also increased, making Latvian goods more expensive abroad. The country's biggest exporters include drugmaker AS Grindeks, and steelmaker AS Liepajas Metalurgs. „If this situation continues for another two years, competitiveness could be so seriously eroded that they may have to devalue,” said Morten Hansen, the director of the economics department at the university, in an interview today. „One should be concerned that the risks of a devaluation in the future exists.”

The current-account deficit soared to 24.2% of GDP in the Q3, the highest in the EU, as imports boomed, and borrowing soared. The deficit was 17.9% in the Q2. Consumer prices have increased by an average of more than 6% in the last three years. „Imports are almost twice as big as exports, and that's a good indication that there is an imbalance,” he said. „Lending can't go on with increases of close to 100% a year,” to finance consumption, he said. Construction costs rose an annual 25% in the Q4 of 2006, lead by wages, which grew by 41% on the year. „This high of inflation feeds the wage-inflation spiral,” Lija Strasuna an economist at AS Hansabanka, the country's biggest lender, said in an emailed note on February 8. Hansabanka estimates that inflation may be as high as 6.6% for 2007. (Bloomberg)