{
  "title": "IMF Executive Board Concludes 2019 Article IV Consultation with the Republic of Latvia",
  "publication": "IMF News, August 7, 2019",
  "sourceUrl": "https://www.imf.org/en/news/articles/2019/08/06/pr19312-latvia-imf-executive-board-concludes-2019-article-iv-consultation-with-latvia",
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  "summary": "On August 6, 2019, the Executive Board of the International Monetary Fund concluded the Article IV consultation with the Republic of Latvia and considered and endorsed the staff appraisal without a meeting.",
  "publishDate": "2019-08-07",
  "sections": [
    {
      "heading": "Overview",
      "content": "- On August 6, 2019, the Executive Board of the International Monetary Fund concluded the Article IV consultation with the Republic of Latvia and considered and endorsed the staff appraisal without a meeting.\n- Press Release date: August 7, 2019. Press Officer: Meera Louis."
    },
    {
      "heading": "Macroeconomic performance and outlook",
      "content": "- Real GDP growth reached 4.8 percent in 2018, driven by private investment, a boom in EU-funded construction, and strong growth in IT and communications.\n- Growth is expected to decelerate in 2019 to just above 3 percent, with a medium-term projection to converge to 3 percent.\n- Wage growth accelerated to 5.7 percent in 2018 as the labor market tightened.\n- Unemployment declined to an all-time low rate of 7.4 percent (2018).\n- Core inflation slowed to 2 percent in 2018.\n- The current account swung into a deficit of 1 percent of GDP in 2018 as export volumes decelerated.\n- Total external debt declined significantly by 20 percentage points in 2018 due to a sharp decline in non-resident deposits."
    },
    {
      "heading": "Fiscal policy and public finances",
      "content": "- Fiscal policy was expansionary in 2018 despite revenue overperformance, driven by fast absorption of EU investment funds and a substantial increase in public sector wages.\n- The 2018 general government deficit reached 1 percent of GDP, implying a fiscal stimulus of about 0.4 percent of GDP.\n- Public debt remains on a downward path amid favorable financing conditions.\n- Policy guidance:\n  - Authorities’ planned fiscal stance that reverses past procyclicality is appropriate given expected deceleration.\n  - In the short run, avoid public sector wage increases not aligned with productivity.\n  - Carefully assess potential fiscal costs of new spending initiatives to preserve fiscal space.\n  - If negative shocks occur, allow automatic stabilizers to operate fully and consider temporary high-quality measures in the event of a severe downturn.\n  - Long-term fiscal policies should accommodate demographic and social spending costs and support productivity-boosting reforms.\n  - New stable revenue sources would be needed to adequately cover growing age-related demands on the budget.\n  - Focus capital spending on projects that can catalyze private investment and have high social impact.\n  - Address poverty and inequality by improving adequacy and targeting of existing social programs.\n  - Strengthen transparency and governance of local authorities and state-owned enterprises."
    },
    {
      "heading": "Financial system stability and reforms",
      "content": "- The financial system remains stable despite significant balance sheet restructuring of banks servicing foreign clients.\n- Banks remain well capitalized and liquid:\n  - Capital levels about 40 percent higher than the euro area average.\n  - Average liquidity coverage four times the regulatory minimum.\n- Credit dynamics:\n  - Total household credit declined by 5.4 percent (end-2018).\n  - Credit to non-financial corporations declined by 5.8 percent.\n  - Government-sponsored mortgage program contributed to a slight recovery of household credit by end-2018.\n- Financial integrity and supervisory recommendations:\n  - Authorities have signaled strong political commitment to restore the reputation of the financial system.\n  - Efforts to reduce exposure to risky banking operations, address MONEYVAL’s recommendations, and oversee BSFCs’ new business plans are welcome.\n  - Long-term reforms should focus on effectiveness of the AML/CFT regime by enhancing risk-based supervision, the quality and use of financial intelligence, preventive measures, investigation and prosecution, and coordination among relevant authorities.\n  - Upgrade supervisory powers for bank liquidation to include mandatory out-of-court administrative liquidation to reduce legal uncertainty and limit contingent liabilities, consistent with EU harmonization.\n  - To revive credit growth: complete ongoing insolvency reforms to lower lending costs; strengthen revenue administration to combat the shadow economy; oversee banks’ de-risking and business-model re-orientation toward the real economy to encourage consolidation and ease lending constraints; improve access to state loan guarantee programs to spur SME lending.\n  - New preemptive macroprudential measures should support sound lending standards and mitigate medium-term financial sector vulnerabilities amid persistently rising property prices."
    },
    {
      "heading": "Structural and labor market reforms",
      "content": "- Key structural challenges and recommended actions:\n  - Demographics: Latvia’s population continues to decline, straining the labor market and posing a long-term growth challenge.\n  - Labor market: Redouble efforts to ease labor market constraints by promoting better skill matching, reducing long-term unemployment, increasing labor participation of targeted groups, encouraging return of Latvian emigrants, and allowing entry of skilled immigrants.\n  - Productivity: Raise productivity growth to allow more rapid sustainable wage growth and help slow emigration.\n  - Access to finance and investment: Reforms to improve firms’ access to finance, encourage investment in research and development, and attract foreign direct investment.\n  - Governance: Strengthen transparency and governance of local authorities and state-owned enterprises to improve public resource use and prevent misuse."
    },
    {
      "heading": "Executive Board assessment (summarized)",
      "content": "- The Latvian economy is considerably more resilient since the global financial crisis; prospects remain favorable.\n- No significant economic imbalances identified; external and government debt are on declining paths; private sector balance sheets improving.\n- Inflation moderate and competitiveness held up.\n- The external position is assessed to be moderately stronger than implied by medium-term fundamentals and desirable policies.\n- Important risks: demographic decline, weaker external growth (especially in the euro area) and rising protectionism, and financial integrity risks (AML/CFT effectiveness and BSFCs)."
    },
    {
      "heading": "Selected economic indicators (2015–20)",
      "content": "- Real GDP (percent change):\n  - 2015: 3.0\n  - 2016: 2.1\n  - 2017: 4.6\n  - 2018: 4.8\n  - 2019: 3.2 (Projection)\n  - 2020: 3.1 (Projection)\n- Private consumption (percent change):\n  - 2015: 2.5\n  - 2016: 1.4\n  - 2017: 4.1\n  - 2018: 4.5\n  - 2019: 3.5 (Projection)\n- Gross fixed capital formation (percent change):\n  - 2015: -0.5\n  - 2016: -8.4\n  - 2017: 13.1\n  - 2018: 16.4\n- Exports of goods and services (percent change):\n  - 2015: 4.4\n  - 2016: 6.2\n  - 2017: 1.8\n  - 2018: 2.2\n  - 2019: 2.3 (Projection)\n- Nominal GDP (billions of euros):\n  - 2015: 24.3\n  - 2016: 25.0\n  - 2017: 27.0\n  - 2018: 29.5\n  - 2019: 31.4 (Projection)\n  - 2020: 33.1 (Projection)\n- GDP per capita (thousands of euros):\n  - 2015: 12.2\n  - 2016: 12.7\n  - 2017: 13.9\n  - 2018: 15.3\n  - 2019: 16.3 (Projection)\n  - 2020: 17.2 (Projection)\n- Gross national saving (percent of GDP):\n  - 2015: 21.8\n  - 2016: 22.3\n  - 2017: 22.9\n  - 2018: 23.2\n  - 2019: 23.0 (Projection)\n- Gross capital formation (percent of GDP):\n  - 2015: 22.2\n  - 2016: 20.7\n  - 2017: 24.2\n  - 2018: 24.4\n  - 2019: 24.7 (Projection)\n- HICP inflation (period average):\n  - 2015: 0.2\n  - 2016: 0.1\n  - 2017: 2.9\n  - 2018: 2.6\n  - 2019: 2.7 (Projection)\n- Unemployment rate (LFS; period average, percent) 1/:\n  - 2015: 9.9\n  - 2016: 9.6\n  - 2017: 8.7\n  - 2018: 7.4\n  - 2019: 6.7 (Projection)\n  - 2020: 6.9 (Projection)\n- Real gross wages (percent change):\n  - 2015: 6.6\n  - 2016: 4.9\n  - 2017: 5.7\n- Consolidated general government (percent of GDP):\n  - Total revenue:\n    - 2015: 36.2\n    - 2016: 35.6\n    - 2017: 36.9\n    - 2018: 35.7\n  - Total expenditure:\n    - 2015: 37.8\n    - 2016: 36.6\n    - 2017: 36.4\n    - 2018: 37.6\n  - Basic fiscal balance:\n    - 2015: -1.5\n    - 2016: -0.4\n    - 2017: -0.8\n    - 2018: -0.7\n  - ESA balance:\n    - 2015: -1.4\n    - 2016: -0.6\n    - 2017: -1.0\n  - General government gross debt:\n    - 2015: 36.8\n    - 2016: 40.3\n    - 2017: 40.0\n    - 2018: 35.9\n    - 2019: 34.4 (Projection)\n- Money and credit:\n  - Credit to private sector (annual percentage change):\n    - 2015: -2.3\n    - 2016: -5.6\n  - Broad money (annual percentage change):\n    - 2015: 7.5\n    - 2016: 5.8\n- Balance of payments:\n  - Current account balance (percent of GDP):\n    - 2015: 1.6\n    - 2016: 0.7\n    - 2017: -1.6\n  - Trade balance (percent of GDP):\n    - 2015: -9.0\n    - 2016: -7.5\n    - 2017: -8.5\n    - 2018: -8.7\n    - 2019: -8.6 (Projection)\n  - Gross external debt:\n    - 2015: 143.7\n    - 2016: 148.9\n    - 2017: 140.5\n    - 2018: 121.0\n    - 2019: 117.4 (Projection)\n    - 2020: 114.4 (Projection)\n  - Net external debt 2/:\n    - 2015: 30.7\n    - 2016: 29.2\n    - 2017: 25.5\n    - 2018: 21.2\n    - 2019: 23.7 (Projection)\n    - 2020: 22.7 (Projection)\n- Exchange rates:\n  - U.S. dollar per euro (period average):\n    - 2015: 1.11\n    - 2016: 1.13\n    - 2017: 1.18\n  - REER (period average; CPI based, 2005=100):\n    - 2015: 120.8\n    - 2016: 122.0\n    - 2017: 123.0\n    - 2018: 126.5\n  - Terms of trade (annual percentage change):\n    - 2015: 0.6\n    - 2016: 2.8\n    - 2017: 2.0\n\nIMF Press Release No. 19/312 — August 7, 2019.\n\n---\n\n\n References\n\n- https://www.imf.org/-/media/images/imf/bios/imfboard.jpg\n- The Executive Board\n- Republic of Latvia and the IMF\n- IMF Policy Advice -- A Factsheet\n- Press Releases\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2019/08/06/pr19312-latvia-imf-executive-board-concludes-2019-article-iv-consultation-with-latvia"
    }
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    "Published: August 7, 2019",
    "On August 6, 2019, the Executive Board of the International Monetary Fund concluded the Article IV consultation with the Republic of Latvia and considered and endorsed the staff appraisal without a meeting.",
    "Press Release date: August 7, 2019. Press Officer: Meera Louis.",
    "Real GDP growth reached 4.8 percent in 2018, driven by private investment, a boom in EU-funded construction, and strong growth in IT and communications.",
    "Growth is expected to decelerate in 2019 to just above 3 percent, with a medium-term projection to converge to 3 percent.",
    "Wage growth accelerated to 5.7 percent in 2018 as the labor market tightened.",
    "Unemployment declined to an all-time low rate of 7.4 percent (2018).",
    "Core inflation slowed to 2 percent in 2018.",
    "The current account swung into a deficit of 1 percent of GDP in 2018 as export volumes decelerated.",
    "Total external debt declined significantly by 20 percentage points in 2018 due to a sharp decline in non-resident deposits.",
    "Fiscal policy was expansionary in 2018 despite revenue overperformance, driven by fast absorption of EU investment funds and a substantial increase in public sector wages.",
    "The 2018 general government deficit reached 1 percent of GDP, implying a fiscal stimulus of about 0.4 percent of GDP.",
    "Public debt remains on a downward path amid favorable financing conditions.",
    "Policy guidance:",
    "The financial system remains stable despite significant balance sheet restructuring of banks servicing foreign clients.",
    "Banks remain well capitalized and liquid:",
    "Credit dynamics:",
    "Financial integrity and supervisory recommendations:",
    "Key structural challenges and recommended actions:",
    "The Latvian economy is considerably more resilient since the global financial crisis; prospects remain favorable.",
    "No significant economic imbalances identified; external and government debt are on declining paths; private sector balance sheets improving.",
    "Inflation moderate and competitiveness held up.",
    "The external position is assessed to be moderately stronger than implied by medium-term fundamentals and desirable policies.",
    "Important risks: demographic decline, weaker external growth (especially in the euro area) and rising protectionism, and financial integrity risks (AML/CFT effectiveness and BSFCs).",
    "Real GDP (percent change):",
    "Private consumption (percent change):",
    "Gross fixed capital formation (percent change):",
    "Exports of goods and services (percent change):",
    "Nominal GDP (billions of euros):",
    "GDP per capita (thousands of euros):",
    "Gross national saving (percent of GDP):",
    "Gross capital formation (percent of GDP):",
    "HICP inflation (period average):",
    "Unemployment rate (LFS; period average, percent) 1/:",
    "Real gross wages (percent change):",
    "Consolidated general government (percent of GDP):",
    "Money and credit:",
    "Balance of payments:",
    "Exchange rates:",
    "[https://www.imf.org/-/media/images/imf/bios/imfboard.jpg](https://www.imf.org/-/media/images/imf/bios/imfboard.jpg)",
    "[The Executive Board](https://www.imf.org/external/np/sec/memdir/eds.aspx)",
    "[Republic of Latvia and the IMF](http://www.imf.org/external/country/LVA/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Press Releases](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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