IMF Staff Concludes Visit to Latvia

January 23, 2018

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion.
  • Economy has gained momentum, and growth likely exceeded 4.5 percent in 2017; medium-term outlook is positive.
  • Favorable economic conditions provide opportunity for reforms to enhance public and financial sector efficiency and foster labor market inclusiveness and productivity growth.

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.

IMF Communications Department

PRESS OFFICER: Andreas Adriano

Phone: +1 202 623-7100Email: