Latvian healthcare disaster, part 4

"Recipe plus", the largest Latvian wholesaler of drugs, stops the supply of drugs to Stradins Clinical University Hospital, one of the two largest hospitals in Latvia, due to the hospital being 0.9 million lats (1.3 million euros) behind in payments.

Other hospitals are badly behind with their payments to suppliers and risk being cut off, as well. The healthcare budget cuts are making the system to fall apart.

Latvian healthcare disaster, part 3

According to this article (Latvian, Google translation), Riga 1st hospital will be only able to treat 10 emergency patients per day:

According to the 2009 plan of VOAVA (the Latvian government agency that
contracts with hospitals), there will be money for treating 16,000 patients.
Since 14,070 patients have already been treated until July 15, this means that,
in the 169 days until the end of the year, the hospital can treat 11.6 patients
per day.

The healthcare tragedy gets worse every day.

Latvian healthcare disaster, continued

Here are two more newspaper stories on the healthcare disaster that is unfolding in Latvia:

• "Possible solution: government pays for only two days in hospital": Latvian, Google translation.
• "Cardiovascular surgeons: government's attitude will condemn 2000 people a year to death or disability": Latvian, Google translation.

To summarize the two articles, the Latvian hospital funding has been cut by 57%. P. Stradins Clinical University Hospital, one of two main hospitals in the country, has its funding cut by 75%. Hospital's chairman of the board, Arnolds Atis Veinbergs, says:

With this funding, we can provide emergency care until the end of September
or early October.

All government-funded planned non-emergency care has been suspended. Patients with tumors can no longer get tests whether the tumors are cancerous (unless they pay the entire price of the test themselves). Patients with major cardiovascular problems (such as aortic aneurysms, which have 90% chance of death if the aneurysm ruptures) can no longer get scheduled surgery that would fix their problem. Cardiovascular surgeons estimate that this would lead to 100 more people dying from aortic aneurysms and 2000 more people dying from other cardiovascular problems that could have been treated.

The healthcare cuts are going to have an extremely heavy toll. Couldn't our government find anything else to cut?

Latvian healthcare disaster

After the most recent round of budget cuts, which removed 25% of the healthcare funding for the 2nd half of 2009, our healthcare system is rapidly falling apart.

The hospital funding has been cut even worse and currently stands at 43% of the 1st half-year level. 29 local hospitals have been closed in April 2009 or will be closed in September 2009.

And, even the hospitals, which are not closing, are admitting only two categories of patients: people who pay for full cost of treatments themselves or patients who are in life-threatening condition. If someone can't pay, they have to wait until their disease deteriorates to a life-threatening stage.

Welcome to hell.lv!

The worst of the cuts

It's 3 days since the last budget proposal is out. So far, most of the public anger has concentrated on the cuts in the retirement benefits (70% for working retirees, 10% for the rest). But there are far worse things in the proposal.

The budget for healthcare services (hospitals, doctors, etc.) is being cut by 42 million lats. If we look at the previous version of the budget, there were 336 mln lats for healthcare. About half of that has been spent in the first half-year - which means that there is about 168 mln left for the second half year. The amount that is being cut is 25% of the entire budget!

I don't know how our healthcare system will survive that. In many other parts of public sector (for example, education or public administration), the main costs are salaries and 25% cut means 25% (or slightly more) off from salaries. Healthcare has many non-salary costs: medical equipment (and, even if hospitals don't buy new equipment, they still have to pay off loans for the equipment bought in the "fat years" of 2005-2007), medicines, etc. Does one stop giving drugs to patients? Or does one cut salaries of doctors and nurses by 40-50-60% to achieve a 25% cut in total costs?

Healthcare Ministry official proposes higher payments from the patients themselves:

For example, if the medical investigation costs 50 lats (70 euros), the
patient pays half, the government pays half.

This also looks like a non-starter, since many people don't have 25 lats. If someone is earning the minimum salary, it takes them almost a week to earn 25 lats and there are so many other costs! Same about retirees (the average retirement benefit in Latvia is about 170 lats/month). And unemployed. And many other categories of people.

There was a previous increase in the patient co-payments in March and hospitals reported that many people started coming in only when their disease has progressed to an unbearable condition. What's next?

Complete craziness

Latvian government is having to choose between several ways to balance the budget, which all look equally crazy. The first proposal, on Monday:

• 20% cut in all public sector salaries (on top of earlier 15-35% cuts);
• VAT increase from 21% to 23%;
• introduction of progressive income tax, starting with income of 300 lats/month (430 euros/month!) which would be taxed at 29% (instead of current 23%) plus the social security tax;
• the income tax on incomes above 800 lats/month (1150 euros/month) would increase from 23% to 40% (also not including the social security tax);
• many smaller cuts and tax increases.

The second, yesterday:

• no tax increases, except for alcohol tax, but
• 40% cut in public sector salaries (on top of earlier 15-35% cuts);
• 10% cut in retirement benefits;
• many smaller cuts.

Either way, it's crazy. Crazy tax increases or crazy salary cuts.

And the craziest of all things. Either of those two proposals only brings Latvia to a budget deficit of 5-6% of GDP. Next year, more cuts or tax increases will be needed. Can a country run out of salaries to cut or taxes to increase?

Devaluation vs. salary cuts, part 1

In December 2008, Latvia, IMF and EU had the choice between devaluating lat or trying to pursue the "internal devaluation via salary cuts" strategy. The second option was chosen. A half-year has passed from that decision and we now have a substantial amount of evidence (both statistical and anecdotal) about the consequences of that decision. Latvian Statistical Office press release says:

Compared to the first quarter of 2008 growth of wages and salaries in
private sector in first three months of 2009 comprised 5.1% (from LVL 422 to LVL
444), but in public sector wages and salaries reduced by 1.4% (from LVL 520 to
LVL 512).

How is that possible? The private sector is in deep crisis, with GDP declining by 18% and the public sector salary budgets were cut by 15%. How does that all match up?

The explanation comes in the next paragraph:

It should be noted that number of employees for which wages and salaries
were calculated has decreased. Compared to the first quarter of previous
year the number of employees recalculated in full-time units,
which are used for the calculations of average monthly wages and salaries, in
the first quarter of this year reduced by 125.8 thsd or by
13.9%. Fund of wages and salaries during this period diminished by LVL
134.0 mln or by 10.9%, but compared to the fourth quarter of previous year – by
LVL 227.3 mln or by 17.2%.

We have indeed had massive cuts in both public and private sector but, often, they have been in the form of layoffs, rather than salary cuts. The public sector organizations were free to choose whether to cut salaries or people - and, often, they choose to cut people, rather than salaries. Same in the private sector.

With a 15% devaluation, we would have had everyone losing 15% of the salary. Now, we have 13.9% people losing all of their income. The unemployment rate approaching 20% (17.4%, by the latest Eurostat number, and rising). I now think the devaluation, with losses distributed more evenly across the society, would have been the less destructive option.

The same choice, devaluation vs. salary cuts is coming up again and it looks like the government/Bank of Latvia will make the same choice. Not enough economic destruction?

Latvian students protest education cuts

DPA has a story on Latvian student protests. A few quotes:

Outside Riga Technical University, tourists looked on bemused as woodwork students expertly fashioned bird boxes which they claimed was the only affordable housing available to them.

"The government is going to cut the budget for higher education again by 40 per cent on top of earlier cuts. At the beginning of this year there was a cut of about 34 per cent so today we are holding our first demonstration," Avots said.

40 per cent cut on top of an earlier 34 per cent cut - that means that higher education budget would now be cut by a total of 60%. In other words, only 40% of the budget would remaining. It's becoming quite crazy here, in Latvia.

The full DPA story is here.

Rimševics' decisions influenced by self-interest?

Last year, Ilmārs Rimšēvičs, the president of the Bank of Latvia, bought an apartment and land in Jūrmala for 750,000 Euros. He now owes 630,000 Euros to Hipotēku un Zemes Banka and the credit is in euros, rather than in lats.

Rimšēvičs would lose a lot if lat was devaluated. And he's also one of the most vocal opponents of devaluation. One can start wondering if Rimšēvičs' decision-making is affected by the effect that devaluation would have on his own finances...

Latvian tragedy

Saturday's Diena has a poignant article (in Latvian). Short summary in English:

A 21-year old Latvian suffering from chronic liver disease (primary sclerosing cholangitis) was waiting for a liver transplant. That would be the first liver transplant performed in Latvia.

The operation was planned for December 2008. Then postponed to March 2009. Then, due to the economic crisis and the healthcare budget cuts, postponed again. The patient was suggested to seek a treatment abroad. Which would cost 80000 Euros which the patient did not have.

Three weeks later, he committed suicide by jumping from a 6th floor window.

The budget cuts are taking their toll. Sometimes, it's a very heavy toll.

Here is the Google translation of the story to English. With some mistakes and untranslated words, but readable.

Humour during crisis

The coalition that governed Latvia until a few weeks ago has been an object of endless parodies and ridicule. Reuters has a good story about that called Nothing Special as Latvia penguins lampoon leaders.

Now, the most-ridiculed government in post-1990 Latvia is gone. (Well, partly gone... and partly part of the new government.) Will Dombrovskis do better?

Latvia has current account surplus in Jan 2009

According to Bank of Latvia, Latvia recorded a half-million lat (700,000 euro, 0.04% of GDP) current account surplus in January 2009. This was the first Latvian current account surplus since mid-1990s.

Here are the monthly current account numbers for the last half-year:

The change is quite stunning: from a deficit of almost 10% GDP in November 2008 to a slight surplus two months later. A change of this speed likely indicates a severe credit crunch: the flow of foreign money into Latvia has stopped or even reversed. (Since Latvia is receiving a sizable loan from IMF/EU, 0.04% surplus means that IMF/EU loan is balanced out by money outflows.)

Signs of crisis in everyday life

A Latvian college whose funding has been cut by 30-something % cuts off the hot water in the student dormitories:

Translation of the sign:

"Attention! From now on, hot water will be supplied only on Wednesdays from 15:00 to 23:00. Administration of [name of the institution]"

There are multiple reports of this happening in different places. And there are many more reports of heating turned off/down in classrooms and students sitting in classes in coats.

Correcting Cristoph Rosenberg

IMF's response to an article in The Economist:

"Latvia's International Monetary Fund (IMF) supported program does not entail large cuts to social spending," Christoph Rosenberg, mission chief for the IMF in Latvia, said in a letter to The Economist.

Although it is true that the fiscal consolidation planned by the Latvian government is indeed large, at around 7% of GDP, social spending, as well as capital spending co-financed by the European Union, is explicitly protected," the IMF representative said in the letter.

What Rosenberg says is half-true, half-false.

True part: social spending was indeed protected from cuts in the December 2008 version of the budget.

False part: the agreement between Latvia and IMF requests that Latvia keeps to 5% of GDP deficit even if the Latvian economy deteriorates further. The revenues of the Latvian budget have been falling rapidly and this means that our government may have to cut 700 mln lats (4-5% of GDP) more from the budget. The unofficial gossip is that there is a 20% cut in social security benefits coming, unless Latvia manages to convince IMF and EU to fund a bigger budget deficit.

Back to blogging

I let my blog fell dormant half a year ago, as I got increasingly busy with my job in Latvia.
Meanwhile, Latvian economy started deteriorating at an increasing speed, to the point that we are watched by the rest of the world as one of the forefronts of the financial crisis.

My work life is still very busy (response of a distant friend when I complained about that: "Consider yourself lucky that you HAVE a job!"). But I am starting to blog again, to describe what is happening in Latvia now.

English language writing about Latvia either focuses on the macroeconomic numbers or on the squabbles of Latvian politicians who keep fighting one another even as the country descends into crisis. What is missing in English language is a human perspective of the crisis, how it is affecting people in their everyday life.

Previously, I've written about numbers and about politicians a lot. I'll keep doing that but I'll also try to give the everyday perspective of the crisis.

Post-referendum notes

The Latvian referendum season is now over and the country is moving on to other exciting things... like over government trying to decide how to cut 1/5 of all programs in 2009 budget, while spending 2.5 mln lats (3.5 mln euro) on renovating president's residence. As usual, everyone is outraged but that doesn't change anything.

The conclusions from the pension referendum:

1. People don't always vote for more money. Before the referendum, I made a parallel with Hungary which had a referendum on fees for doctor visits and university education this spring and voted for free services, overwhelmingly. Latvia looked like the exact parallel: government saying "The government can't afford that" (higher pensions, in our case), opposition saying "Not it can". The difference was that there was more at stake. The Hungarian fees were quite symbolic, the Latvian pension increase more substantial. Both as a benefit to people and as a cost to state budget. Yet, Latvians did not show up for the referendum. Why?
   
2. The government stepped forward. As I described in my previous post, the government did come up with its own pension increase plan, which gave roughly 1/2-2/3 of the increase promised in the referendum proposal. The retirees deserved an increase and they got one, although a smaller one.
   
3. Quiet campaign. Unlike with the Constitutional referendum (where I got bombarded with "Dissolve the parliament" message from every billboard and TV ad), this campaign was much quieter. It felt as if many of opposition's parties had quietly agreed that increasing pensions more would indeed increase the already-growing-due-to-recession budget deficit by too much. Some of them stated "We support higher pensions" in one or two interviews but did not really attempt to campaign and make sure that people show up for the referendum. Even Stokenbergs' Society for (not so) different politics spent more than 100,000 lats to advertise for gathering signatures in favour of holding a referendum and less than 10,000 lats to advertise for the actual referendum. Did they disbelieve the proposal, as well?
4. Referendum fatigue. This is the third referendum in 1.5 years, with the previous two (security laws and Constitutional changes) having no result. There's some point at which people's attention starts to turn off. Latvia may beyond that point.

With referendums over, the Latvian politics looks like it used to be. The government is unpopular and so is the opposition. If they hoped for some political gains, they were wrong. Except for ethnically Russian parties, everyone else in the opposition is now at 2-3% range in opinion polls. More than 50% of Latvians are undecided or not going to vote, and that number has been slightly increasing in the last few months.

Latvian pensions referendum is failing

Today is the referendum on a major increase in Latvian retirement benefits. Here is part 1 and part 2 of the background on the referendum, that I wrote a few months ago.

As usual with Latvian referendums, people opposed to the referendum proposition are skipping the vote, to push the turnout below the legal threshold at which the referendum is valid. So, the result will be 95%-99% "yes" but the real question is the turnout.

For the law to pass, the turnout must be at least 1/2 of the turnout in the most recent parliamentary election. That means that we need 453,730 voters, which is 30.65% of all eligible voters, for the vote to count. According to the Central Election Committee, we have:

• a turnout of 0.59% in the first hour of voting (7am - 8am);
• a turnout of 9.50% in the first 5 hours (7am - noon).

If the distribution of turnout over the day is like in previous referendums, this is insufficient. The 7am-noon turnout was:

• 41.8% of the final turnout in the Constitutional referendum a few weeks ago;
• 40.7% of the final turnout in the security laws referendum of 2007;
• 37.7% of the final turnout in the parliamentary election of 2006;
  
• 43.8% of the final turnout in the referendum on Latvia joining EU in 2003.
  

Right now, we have a noon turnout that is 31% of the necessary one. Either we have a huge number of procrastinating voters (myself, I'm still thinking whether to vote "yes" or to skip the referendum for an effective "no" vote) or (more likely) the referendum is on its way to failing.

The next update on turnout is at 4pm. In previous referendums/elections, 4pm turnout was 69%-74% of the final one. 69% of the necessary 30.65% is 21.33%. If we are substantially below that at 4pm, we can be quite sure that the referendum has failed.

UPDATE (9:30pm): 8pm turnout numbers are out and, with only two hours left in voting (8pm-10pm), the turnout is 21%. It's now safe to say that the turnout is not going to jump to 30.65% in two hours. The referendum has failed.

UPDATE (3:00am): the turnout is 347044 or 23.45% of eligible voters. Everything has been counted, except for 4 voting places in Latvian embassies in America (due to time-zone difference), which should not affect the number much. Again, the referendum has failed and by a substantial amount. I will have a post-referendum post tomorrow.

Latvian GDP, Q2 2008

Flash estimate of Latvian statistics office shows that Latvian GDP grew 0.2% year-on-year in the 2nd quarter of 2008. This was slightly weaker than 0.4% predicted by a panel of 10 experts for Bloomberg and slightly better than what I expected (I thought we will see a negative number in Q2).

Since we are at a rapid turning point, quarterly data might show the trends better. Quarter-on-quarter, the economy grew 3.2%. However, the 1st quarter is economically slow every year and the 2nd quarter always shows big growth number compared to the 1st quarter.

Here is a rough seasonal adjustment:

• over last 5 years, the average quarter-on-quarter economic growth in Q2 has been 6.1%;
• throughout the year, the average quarter-on-quarter growth is 2.3%;
• thus, economic growth is by 6.1-2.3=3.8% faster in the 2nd quarter.

Subtracting that 3.8% from 3.2% growth rate gives a seasonally-adjusted growth of -0.6% compared to the previous quarter. It's better than -1.9% that we saw in the 1st quarter (using the same methodology). But Latvia is still, very clearly, in a recession.

If the trend continues, the Q3 will have a year-on-year GDP "growth" of around -3% and, for the entire year 2008, it will be around -1%.

Added to the blogroll

A photo blog by Arnis Balcus, a well known Latvian photographer.

Economic slowdown is starting to bite

One of strange things about Latvian economy was that, even as the economy started slowing down at the end of 2007, salaries continued to increase at 30-40%/year. It appears that this trend is now over. Our statistics office has not yet released the data on Latvian salaries in Q2 2008 but there is data from the tax office:

The graph above shows how the revenue from social security contributions is changing. Since Latvian social security contributions are a fixed % of person's salary (except for very high incomes), the average salary increase should be about the same. And increases have slowed down from about 40%/year to slightly less than 20%/year. The next graph shows the same data, adjusted for inflation (which has been steadily rising):
We are at a point when salaries are no longer increasing faster than inflation. And, given the trend, in a few months, they will be increasing substantially slower than the inflation. The economic slowdown is starting to affect almost everyone.

Also, at my work, I'm starting to get questions of the type "Do you have openings in your organization?". Just a year ago, it was organizations having to look for employees, not the other way around. Things are changing and labour market is getting tighter.

In short, the economy is starting to hurt and it will get worse. Given the scale of economic inbalances in Latvia'2007, this was inevitable. I'm only hoping that this recession lasts a year or two, not 5-7 years.