IMF Staff Concludes Visit to Latvia

IMF News, January 23, 2018

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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 analytical work ahead of the next annual Article IV consultation.
End-of-Mission press release date: January 23, 2018.
The statement reflects IMF staff views and does not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion.

Economy has gained momentum; growth likely exceeded 4.5 percent in 2017.
Drivers of the 2017 upswing:
- Rebound in investment due to recovery in business investment and faster EU funds absorption.
- Robust private consumption.
- Pick-up in exports supported by a favorable external environment.
Inflation and labor market:
- Average inflation has reached 2.9 percent.
- Unemployment continues to fall.
External and fiscal positions:
- Fiscal and current account deficits remain moderate.
- Public debt is low.

Medium-term outlook is positive.
Growth is expected to remain strong and gradually converge to its potential rate of 3 percent.
Policy priorities to manage risks:
- Maintain a prudent policy mix to avoid accumulation of imbalances.
- Prevent rapid wage growth from eroding competitiveness.

The financial system remains sound.
Banks are well capitalized and liquid.
Continued implementation of macroprudential regulations and vigilant supervision has helped preserve financial stability and is vital for Latvia’s ongoing role as a regional financial center.
Despite favorable macroeconomic conditions and low interest rates, credit growth remains subdued due to:
- Banks’ cautious supply of credit.
- Firms’ and households’ tepid demand for loans.
Subdued credit growth limits the banking system’s ability to provide more support to the economy.

The 2018 budget is in line with Latvia’s EU commitments.
Authorities have taken measures to partially compensate for loss of revenues from recent tax reform; these measures are welcomed as steps to maintain prudent fiscal policies and contain deficit growth.
Fiscal policy guidance:
- Avoid excessive pro-cyclicality, especially if revenues under the new tax code fall short of expectations.
- Craft spending policies to address social spending needs while managing public resources efficiently.

Use favorable economic conditions to advance reforms that enhance long-term sustainability:
- Foster labor supply and lower structural unemployment.
- Enhance productivity growth.
- Ensure efficient financial intermediation, including:
- Legal and insolvency reforms.
- Further increasing access to finance.
- Reduce the shadow economy.
Continue macroprudential regulation and vigilant supervision to preserve financial stability.

The IMF team thanked the Latvian authorities, the Bank of Latvia, and private-sector interlocutors for constructive and fruitful discussions.

IMF Staff Concludes Visit to Latvia — Press Release No. 18/10, January 23, 2018.