RIGA (Reuters) - Latvia’s public sector budget deficit last year fell to 1.2 percent of GDP, well below the European Union’s ceiling, showing the Baltic state is on track to adopt the euro next year.
The European Commission, the EU’s executive body, is assessing Latvia’s readiness to become the euro zone’s 18th member, for which the country must meet economic targets, including for budget deficits and debt levels.
The statistics office said in a statement on Friday that the public sector deficit had fallen from 3.6 percent of output in 2011. The limit for euro adoption is 3 percent of output.
Public debt also decreased in 2012, to 40.7 percent of gross domestic product from 41.9 percent a year earlier. The limit for prospective euro zone states is 60 percent of GDP.
“The trends of both fiscal indicators show that Latvia confidently fulfils the Maastricht criteria, which shows the country’s readiness to join the euro zone,” said a Finance Ministry spokeswoman.
Latvia underwent one of Europe’s toughest austerity programmes after a 2008-2009 crisis wiped a fifth off economic output. In a painful internal devaluation aimed at defending the lat currency’s peg to the euro, the centre-right government slashed public sector wages, cut spending and hiked taxes.
Those budget measures have fed through into several years of falling deficits, helping the country towards its goal of euro membership, for which it must also meet targets on inflation and interest rates and maintain a steady exchange rate to the euro.
Latvia says it meets the criteria, but needed the budget figures to confirm the fiscal targets had been achieved.
European Union finance ministers are expected to take a final decision in July on Latvia’s bid to join the euro in 2014.
Latvia pegged the lat to the single currency after joining the European Union in 2004, sticking with the peg even as turmoil after the 2008 financial crisis sent it to the EU and International Monetary Fund for a bailout.
It also stuck to the peg despite some economists saying a devaluation would have eased the downturn and could have spared the government painful wage cuts and tax hikes.
Like Cyprus, which was rescued in March under a controversial bailout deal that imposed losses on uninsured depositors in the island’s banks, Latvian banks have in the past held large deposits from Russians.
During Cyprus’s bailout, officials from the European Central Bank contacted Latvia to warn authorities against taking in Russian money fleeing Cyprus - or risk facing problems joining the euro zone next year, two sources familiar with the contacts told Reuters at the time.
Latvia’s central bank said on Thursday that it has not seen any big flows of Russian money.
Reporting by Aija Braslina; Editing by Patrick Lannin and Catherine Evans