ilmars rimsevics : structural reforms to pave the way to prosperity in the future speech by mr ilmars rimsevics, governor of the bank of latvia, at the baltic economic forum 2010, riga, 23 september 2010. * * * ladies and gentlemen! i think only very few would have missed out that the baltics have attracted a lot of international attention during the recent years. i would even venture to say that the three small countries located by the baltic sea – and latvia above all – have stretched out their boundaries considerably to occupy an increasingly large part of the globe : they have suddenly become more noticeable than ever before. obviously there must be something unique about these countries that has made them stand out during the recent crisis. it might be the flexibility of the baltic tigers : they have shown themselves capable of making great leaps in both directions – forward and backward. the real uniqueness obviously lies in the way the economies have adjusted to the crisis and the magnitude of the economic swings they have experienced. just a few short years ago we were amongst the strongest performers in the entire world and clearly the fastest growing economies within the eu. with latvia leading the race, its gdp grew in the double digits on average for four consecutive years after the eu accession. other baltic neighbours followed suite. blown up by the massive inflows of foreign funds and breathtaking lending growth, by the expansionary fiscal policy and remittances or repatriated wages – domestic demand ballooned bringing along an accelerating inflation and a widening current account deficit. latvia was unique in recording a current account deficit as high as 27 % of gdp during the peak quarters, and stunned the world by sustaining it above 20 % for two years in a row. inflation peaked at 18 %, and real estate prices more than doubled in just a few years. similar, but somewhat less extreme developments were observed in lithuania and estonia, with both inflation and current account deficits staying in the double digits during the boom years. the booming economies rewarded their citizens with generous income flows. labour markets soon became caught in a vice between massive demand pressures and limited supply of workers that was significantly constrained by labour outflows after the eu accession. this gave the rise to uncontrolled wage developments that by far outstripped productivity. conventional wisdom told us this was leading to dead end. however, the temptation to reach the prosperity of western europe overnight prevailed, and the vicious circle of wages and prices kept tightening. economies kept going

it helps to improve economic growth. while the primary responsibility for avoiding the build - up of unsustainable debt lies with the borrower, creditors also have a role to play in encouraging greater transparency. irresponsible borrowing ultimately contributes to unsustainable debt burdens. in closing, i wish to reiterate that public debt has an important role to play in financing development, particularly in augmenting government budgets. however, it should be clear that debt is not a replacement for domestic revenue mobilisation. meanwhile, debt levels have to remain sustainable so as to not undermine market confidence. to ensure that debt plays a meaningful role, it must be utilised for revenue generating activities that increase the productive capacity of the economy. countries in the region could benefit from the slower - than - expected monetary policy normalisation in major economies to build additional buffers, preferably aimed at increasing fiscal space and setting development priorities on course. the international community is eager to help. early in may, the g20 called a high - level conference on 4 mustapha s. and prizzon a., “ africa ’ s rising debt – how to avoid a new crisis ”, october 2018 5 in madagascar, for instance, large subsidies and transfers to troubled state - owned enterprises ( soes ) such as the electricity utility jirama and air madagascar to cover debt obligations have increased government liabilities. the imf, in its 2018 article iv assessment, highlighted that unexpected losses at soes or delayed reforms in public spending could crowd out pro - growth priority spending in madagascar. in ghana, the government also faces significant contingent liabilities from the energy soes, which continue to face challenges. page 3 of 4 sustainable debt for sustainable growth ( the paris forum ). the key objective is to assist countries with debt management capacity and improve debt transparency. the key conclusion of the paris forum was not to say that countries should borrow less but that they should be assisted to “ borrow smarter ”, by ensuring that borrowers are equipped with expertise to understand their real needs, to secure good terms and to effectively manage their debt, while holding creditors to higher standards on transparency and sustainability. i also want to take this opportunity to congratulate the aerc for continuing to have a policy - oriented research programme that remains relevant for policy makers. today ’ s programme is filled with the right mix of policy practitioners and academics to give us for food for thought. thank you page 4 of 4