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Latvia’s central bank says: trade deficit almost doubled in 2006

Latvia's current-account deficit in 2006 almost doubled to a massive 21.1% of GDP, up from 12.6% in 2005, the Bank of Latvia announced in a press release on Friday.

The deficit accelerated during the year, hitting a record-breaking 26.3% of GDP in the fourth quarter, it added. In 2006, especially in its last quarter, „the signals of overheating in Latvia's economy strengthened. The record-high GDP growth was mostly fuelled by an increase in domestic demand rather than that in the sectors producing export goods,” the release stated. As a result, „the annual increase in the exports of goods was fairly moderate at 13.3%, whereas imports expanded at a twice higher rate (of) 29.4%,” the statement added.

Latvia posted the EU's highest annual rate of economic growth last year, at 11.9%. Over the same period, foreign direct investment in the Baltic state jumped from 4.5% of GDP to 8.1%, the central bank pointed out. But the nation's foreign debt reached record levels as the foreign parents of Latvian banks continued to pour money into its booming consumer market. „We should be aware that without the above record-high borrowing peak Latvia's current account deficit would be closer to the 12% of GDP mark at present,” the press release said. „Therefore attention should be paid to the way the availability of funds from abroad will be affected by the awareness of Latvia's macroeconomic risks, (which have been) increasingly observed among the foreign financial experts,” it added.

In recent months, several international financial agencies have sounded warning bells over Latvia's red-hot growth. The rating agency Standard & Poor's in February downgraded Latvia's outlook from „stable” to „negative,” while Danish bank Danske warned that the risk of a further downgrade was „substantial.” On March 6, however, the Latvian government launched a long- awaited action plan aimed at combating inflation, which has now been above 6% for almost three years. The plan was welcomed by economists, who approved its ideas, though some questioned whether it was not too late. „A crucial role in reducing the macroeconomic imbalances in the future will be played by the action plan ... An accurate and coordinated implementation of the plan is of utmost importance,” the central bank's press release said. (