All About Latvia

RIGA – A proposal to cut the value-added tax for the tourism industry has been wobbling through the parliament. In spite of the objections by the party of Prime Minister Valdis Dombrovskis and contrary to the recommendations of the International Monetary Fund, the proposal was sent to the parliament for a vote. The opposition party, Latvia’s Way/Latvia’s First (LPP/LC) and the government heavyweight – though largely impotent – People’s Party (TP) laid their hands to move the proposal out of the committee, implying a closer cooperation between the two parties, representing the views of their respective founders.

Speaking to the press after the Monday coalition meeting, a high-ranking TP member Armands Vents Krauklis said that the lenders were not speaking in “a form of an ultimatum,” but that “through flowers” said that lowering VAT “would not be the best solution.” As conspiracy theories suggest, some Latvian officials expect an ultimatum from the international lenders because it is the only way to move forward.

The vote also raises questions about the stability of the government and the coalition’s commitment to the painful IMF-EU funded program, which foresees a combination of budget cuts and tax hikes in the amount of up 900 million lats. While it is a wide known fact that this current government is largely a marriage of convenience, it appears the People’s Party is playing for both teams. On one hand, it is one of the five parties in the coalition. On the other hand, it voted down against the prime minister in a crucial vote for the IMF-EU program to continue. It is no wonder that the Union of Farmers and Greens, aka the Green Peasants, had asked to meet Dombrovskis this afternoon to discuss the issue.

The supporters say that the move to cut the VAT from the current 21 percent to 10 percent for the tourism industry would stimulate the economy which is in the deepest recession since Latvia broke free from the Soviet Union almost 20 years ago. The estimates by the ministry of the economy show that cutting VAT would create 2,000 new work places, a drop in the bucket in the country where every fifth Latvian is officially unemployed. And it remains to be seen if the VAT cut would not affect the budget deficit.

It also raises questions: why tourism? What would prevent other industries, such as farming, dairy, food industries, to line up outside the parliament, demanding that the VAT be lowered for them also? Why not lower VAT for medicine? Education? Freelance journalists? Or why not lower the VAT across the board, assuming the government can raise revenue by taxing luxuries to bridge the yawning budget deficit down to 6 percent in 2011?

RIGA – When Valdis Dombrovskis walked out of the presidential palace last week, he looked as if he had a world on his shoulders.

“Are you going to celebrate with a glass of champagne,” one Latvian journalist asked Dombrovskis.

“I won’t be celebrating with a glass of champagne because there is no reason – I’m sorry – to celebrate,” he said. “The situation in the country is very serious.”

The 37-year-old center-right member of the European Parliament was charged to fix the economic mess known as Latvia. And the situation is indeed very serious. The economy will shrink to the 2005 levels by the end of this year; the unemployment will rise; the budget will have to be cut; people will continue on their way to poverty. And no one wants to lead the government at this time. Even Dombrovskis made appearances to his party comrades with a young grim face, as if thinking, “what have I done?”

Latvian President Valdis Zatlers tapped Dombrovskis, the ex-finance minister from the New Era Party to form the 15th government since Latvia regained independence in 1991.

Dombrovskis will continue coalition talks this week, which will revolve around who will get what ministry in the new government (Suddenly the image of the outgoing PM Ivars Godmanis as the minister of agriculture appeared in my mind). The Civil Union, the Green Farmers, the People’s Party, the Fatherlanders along with a two-member Society for Different Politics appear to be on board, giving the new coalition 67 votes in the 100-member parliament.

In a line of predecessors, Dombrovskis stands out. He is the youngest appointee to the post in the post-Soviet Latvia. He has a sense of reaching out to voters. He would become the first prime minister who even has had his own Web page.

The government must be formed as quickly as possible because the time is running out. We have one important date that is not too far off.

It’s March 31.

First, the parliament has to pass the austerity measures worth of 5 percent of gross domestic product, touching practically every sphere of the budget. That means teachers, doctors, and even government support for mothers will get some cuts. Dombrovskis mentioned the only untouchables – the pensions. That is a lot of painful cuts of the budgetary flesh to be made in a short period of time by the young government. It’s bound to be unpopular unless Dombrovskis will be able to explain it to the people: why those cuts and not others. The new government also has an incentive to cut the budget quickly. It’s the next installment of the IMF-led 7.5 billion euro loan.

Without the loan, Dombrovskis said, the country is on the verge of bankruptcy with enough money to fund the work of the government until the middle of April.

March 31 also marks the deadline for the president’s ultimatum. With the new government, one could already make a case that the president now has a leeway enforcing his deadline. Forming the new government takes time. Delaying on the ultimatum also buys time for the president to make sure the referendum on snap elections – if such was to happen – falls on the same day as the June 6 municipal and euro parliament elections.

But for now, all we could wish Valdis Dombrovskis is the best of luck (and not the Irish kind). We’ll be watching the relatively-young educated European forming a new government that could possibly regain the public trust even without the snap elections.