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INTERVIEW-Latvia's new PM stands firm on fiscal discipline, gas reforms

Aija Krutaine
Friday, 31 Jan 2014 | 11:02 AM ET

RIGA, Jan 31 (Reuters) - Latvia's new prime minister said on Friday she will stick with the tight fiscal policies that helped the country join the euro zone in January rather than loosen the purse strings ahead of elections this year.

Laimdota Straujuma, 62, who became the Baltic state's first female prime minister last week, also told Reuters she expects to remain on friendly terms with Russia despite a plan to open up the energy market, ending Gazprom's monopoly.

Pressure is rising on the government to increase spending after years of austerity that saw the economy shrink by a quarter before bouncing back in 2012, when it was the European Union's fastest growing economy.

But Straujuma said in an interview that her government was not planning to revise the budget approved by the previous cabinet, led by former Prime Minister Valdis Dombrovskis.

"We will stick to fiscal discipline. All parties have promised that budget won't be torn up ahead of two elections," Straujuma said.

Dombrovskis, 42, resigned in November, taking political responsibility for the collapse of a supermarket roof in the capital that killed 54 people.

General elections are due in October and the country will vote in elections for the European Parliament in May.

Latvia's finance ministry said on Friday the government's deficit would not exceed 1.3 percent of gross domestic product in 2013, while in the coming years the budget deficit was expected to fall to 0.9 percent.

Growth is forecast at over 4 percent this year, a similar pace to 2013.

Forced to take a rescue package from the International Monetary Fund in 2008 avoid a devaluation of the lat currency, Latvia became the 18th member of the euro zone on January 1.

The centre-right coalition government has also said it will push forward with gas market reforms, starting from April.

"We have to approve legislation by April this year which foresees the gas market fully opened in 2017," Straujuma said.

"Liberalisation means a decrease in (gas) prices. We might see alternative players in the gas market by 2017."

She said she hoped the change would not strain relations with Russia, from which Latvia became independent in 1991 following the Soviet Union's collapse. Moscow has protested against similar reforms in neighbouring Lithuania.

Russia's Gazprom owns 34 percent of Latvian gas utility Latvijas Gaze, which has exclusive rights to sell gas and operate the country's gas system, including one Europe's biggest underground gas storage facilities, Incukalns, until April 2017.

Germany's E.ON owns another 47.2 percent of Latvijas Gaze.

Straujuma said she hoped euro adoption will help attract investors, including for Liepajas Metalurgs, Latvia's biggest industrial plant and the only rolled steel maker in the Baltic, which filed for bankruptcy last year.

"I believe that Liepajas Metalurgs might resume production, and there are indications that there is interest from several investors to buy it."

The Latvian state is the plant's biggest creditor after repaying a 67 million euro loan guarantee to UniCredit bank.

Also for sale is state-owned Citadele bank, which emerged from the ruins of Parex bank, the country's second-biggest, which went bust in 2008, forcing Latvia to seek IMF aid.

Citadele must be sold by the end of this year under an agreement with the EU on state aid provision to the bank.

Straujuma said one of the main priorities for the government was to establish the causes of the supermarket collapse, which shook the nation of 2 million people.

"The Zolitude tragedy is, of course, our debt to society. Society wants to know what happened there," Straujuma said, referring to Riga suburb where the roof collapsed.

(Writing by Nerijus Adomaitis; Editing by Catherine Evans)

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