## IMF Staff Concludes Visit to Latvia

_IMF News, January 23, 2018_

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## Bibliographic details
- Published: January 23, 2018

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### Mission and context
- 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.

### Key economic findings
- 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.

### Risks and outlook
- 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.

### Financial sector assessment
- 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.

### Fiscal policy and the 2018 budget
- 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.

### Policy recommendations and reform priorities
- 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.

### Acknowledgments
- 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.*

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## References

- [Republic of Latvia and the IMF](http://www.imf.org/external/country/LVA/index.htm)
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_Source: https://www.imf.org/en/news/articles/2018/01/22/pr1810-imf-staff-concludes-visit-to-latvia_