“The period of cheap money is over.” The cost of public debt will increase significantly

The era of high interest rates we live in is increasingly restricting the government’s ability to spend money on various needs. It is expected that Latvia’s public debt expenses will increase significantly both next year and the year after.

“The period of cheap money is over” – this message has been heard several times recently when Finance Minister Arvils Asheraden (JV) talks about next year’s budget. This time too, it will be with a deficit, or, more simply, we will live beyond our means.

Last week, the Saeima supported the country’s main policy document in the first reading. The Minister of Finance informed from the podium that in the coming years, Latvia will refinance 5.5 billion euros in debt obligations. We live in a time of high interest rates, which in turn means more expensive borrowing – also for the country.

Arvil Asheraden

Minister of Finance

In the coming years, it is important to continue to maintain Latvia’s debt at a moderate level of sustainability, so that its growth rate is lower than the rate of economic growth and it is possible to refinance the debt under optimal conditions.

On the same day, the State Treasury informed that Latvia had borrowed 600 million euros in the international financial markets. The rate for this loan will not be barely above zero, as it was a few years ago, but almost 4%.

The Fiscal Discipline Council monitors that the government does not start handling the public finances too recklessly. It is noted there that the level of debt to GDP in Latvia is still one of the lowest in the European Union, but increasing it for everyday state spending would not be a brainchild.

Mārtiņš Āboliņš, a member of the Fiscal Discipline Council, points out that debt costs will prevent funds from being invested in other areas: “The fact that we have a low level of debt is a resource that allows us to react – whether to support households when, for example, the prices of energy resources rise, or to increase defense expenses, when you need it. If we increase the debt, at some point we may end up in a situation like in 2008, when there is a crisis, but the state budget is no longer able to help. This kind of insurance is said to be especially important for small countries, so it would even be desirable to start living with a smaller deficit and try to reduce the debt level.”

It has already been announced that in the next three years, Latvia has to refinance its debts in the amount of 5.5 billion euros. Taking into account that since the beginning of 2022, euro interest rates have significantly increased, which directly affects borrowing costs, debt service expenses will increase in the medium term, Ashraden informed.