An International Monetary Fund (IMF) staff team led by Ben Kelmanson and
Iva Petrova (outgoing and incoming mission chief, respectively) visited
Latvia from January 22-28 to review recent macroeconomic developments and
start the analytical work ahead of the next annual review of the country’s
economy (the Article IV consultation). At the end of the visit, Ms. Petrova
issued the following statement:
“The economy has gained momentum amidst sound fundamentals. Following a
deceleration in 2016, growth surprised with a strong and broad-based
upswing in 2017 and likely exceeded 4.5 percent. The acceleration has been
driven by a rebound in investment due to recovery in business investment
and faster EU funds absorption, robust private consumption, and a pick-up
in exports supported by a favorable external environment. While average
inflation has reached 2.9 percent, the fiscal and current account deficits
remain moderate, public debt is low, and unemployment continues to fall.
“The medium-term outlook is positive, and risks must remain well-managed.
Growth is expected to remain strong, and gradually converge to its
potential rate of 3 percent. To ensure that the economy smoothly navigates
the cyclical upswing, maintaining a prudent policy mix will be key to avoid
the accumulation of imbalances and prevent rapid wage growth from eroding
competitiveness.
“The financial system remains sound. Banks are well capitalized and liquid.
Continued implementation of macro prudential regulations and vigilant
supervision has helped preserve financial stability, and is vital to ensure
Latvia’s ongoing role as a regional financial center. Nonetheless, despite
the favorable macroeconomic conditions and low interest rate environment,
credit growth remains subdued as banks’ cautious supply and firms’ and
households’ tepid demand for loans prevent the banking system from
providing more support to the economy.
“The 2018 budget is in line with Latvia’s EU commitments. Measures taken to
partially compensate for the loss of revenues resulting from the recent tax
reform are a welcome step by the authorities to maintain prudent fiscal
policies and contain the growth of the deficit. Going forward, fiscal
policy should avoid excessive pro-cyclicality, especially if revenues under
the new tax code fall short of expectations. Spending policies need to be
carefully crafted to address social spending needs while managing public
resources efficiently.
“Favorable economic conditions offer an opportunity for further reform. The
cyclical recovery is an opportune time to redouble reform efforts to
support sustainable long-term growth and mitigate the impact of coming
economic headwinds (e.g., demographic challenges). Structural and
institutional reforms should focus on fostering labor supply and lowering
structural unemployment, enhancing productivity growth and ensuring
efficient financial intermediation (including legal and insolvency reforms
and further increasing access to finance), and reducing the shadow
economy.”
The IMF team is grateful for the generous hospitality of the Latvian
authorities, and would like to thank all interlocutors in Government, the
Bank of Latvia, and the private sector, for constructive and fruitful
discussions.
