{
  "title": "IMF Executive Board Concludes 2024 Article IV Consultation with the Republic of Latvia",
  "publication": "IMF News, September 5, 2024",
  "sourceUrl": "https://www.imf.org/en/news/articles/2024/09/05/pr-24319-latvia-imf-executive-board-concludes-2024-article-iv-consultation",
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  "summary": "The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Latvia and endorsed the staff appraisal on a lapse-of-time basis without a meeting.",
  "publishDate": "2024-09-05",
  "sections": [
    {
      "heading": "Overview and recent developments",
      "content": "- The Executive Board concluded the Article IV consultation with the Republic of Latvia and endorsed the staff appraisal on a lapse-of-time basis without a meeting.\n- Recent dynamics:\n  - The Latvian economy contracted with significant disinflation: growth contracted by 0.3 percent in 2023.\n  - Headline inflation declined to 0.0 percent y/y in May 2024.\n  - Core inflation stood at 3.1 percent in April 2024.\n  - The financial sector has been resilient, though risks are elevated.\n  - Fiscal performance in 2023 was stronger than expected, reflecting revenue buoyancy linked to inflation and expenditure under-execution.\n  - The current account deficit narrowed to 4 percent of GDP in 2023 from 4.8 percent in 2022.\n  - Russia’s war in Ukraine and related geoeconomic fragmentation are adding to structural challenges affecting investment, productivity, labor supply, and income convergence."
    },
    {
      "heading": "Outlook and risks",
      "content": "- Growth projections:\n  - Real GDP growth is projected to increase to 1.7 and 2.4 percent in 2024 and 2025, respectively.\n  - Growth in the medium-term is projected to continue at an average of around 2.5 percent, supported by public investment and reforms.\n- Inflation projections:\n  - Headline inflation (annual average) is projected to decline to 2.0 percent in 2024.\n  - Core inflation (annual average) is projected to slow to 3.3 percent in 2024, reflecting persistent services inflation.\n- Balance of risks:\n  - Downside risks dominate, including risk to competitiveness associated with recent high wage growth, rising geopolitical tensions and deeper geoeconomic fragmentation, and weaker external demand.\n  - Credit risks related to variable-rate loans and the potential for weaker-than-expected external demand are highlighted.\n  - Over the medium term, delays in public investment and structural reforms could weigh on potential growth."
    },
    {
      "heading": "Executive Board assessment and policy recommendations — fiscal",
      "content": "- Recommended fiscal stance:\n  - Staff recommends a less expansionary, neutral fiscal stance for 2024 and a tighter fiscal stance in 2025.\n  - In 2025, the fiscal stance should be tighter to build buffers for future spending needs.\n- Policy options and structural fiscal measures suggested:\n  - Reduce tax exemptions.\n  - Raise revenue from property taxation.\n  - Strengthen tax enforcement.\n  - Improve investment spending efficiency and better target social support while protecting the most vulnerable.\n  - Over the medium term, options for fiscal consolidation include:\n    - Broadening the bases of corporate income tax (CIT) and personal income tax (PIT), including by reducing the shadow economy.\n    - Broadening the base of property taxes.\n    - Reducing tax exemptions and fossil fuel subsidies.\n    - Rationalizing spending on goods and services.\n  - Enhanced public investment management is warranted given scaling-up of public investment amid high uncertainty and cost overrun.\n  - Staff welcomes healthcare reform aimed to generate efficiency gains, and welcomes government’s pension reform efforts; recommends linking the retirement age to life expectancy.\n  - Latvia should swiftly implement the NRRP."
    },
    {
      "heading": "Financial sector and macroprudential policy",
      "content": "- Financial sector condition and guidance:\n  - The banking sector remained well capitalized and liquid, with a low NPL ratio.\n  - Continued monitoring of macrofinancial vulnerabilities and spillovers is warranted, including regular risk-based monitoring of banks’ asset quality and liquidity supported by tailored stress tests.\n  - Any households’ financial distress related to variable-interest-rate mortgage loans should be addressed through the consumer bankruptcy framework, supplemented by the social protection system for the most vulnerable.\n  - The new untargeted interest subsidy scheme for variable-interest-rate mortgages should not be renewed at its expiration in 2024.\n  - The authorities should refrain from further initiatives to increase taxation on bank profits given their adverse impact on bank capital and financial stability.\n  - Staff welcomes continued efforts to mitigate cybersecurity risk.\n- Macroprudential stance:\n  - The current macroprudential policy stance is broadly appropriate.\n  - The recent adjustment to the borrower-based measures for energy-efficient housing loans should be reconsidered.\n  - Borrower-based macroprudential measures should be relaxed only when their presence is overly stringent from the financial stability perspective."
    },
    {
      "heading": "Structural reforms, governance, and climate/energy transitions",
      "content": "- Governance and AML/CFT:\n  - Significant progress has been made in strengthening AML/CFT frameworks and governance reforms; staff commends authorities’ efforts and supports priorities to prepare for the 6th round of MONEYVAL evaluation.\n  - Staff welcomes reforms to digitalize the procurement system and continued implementation of Latvia’s anti-corruption plan and national strategy.\n- Structural reform priorities:\n  - Accelerate corporate reforms to boost investment and productivity by improving capital allocation and access to finance.\n  - Address aging population and skill mismatch by boosting high-skilled labor supply, promoting training, and internal labor mobility toward priority sectors (green and transition, digitalization, health).\n  - Streamline product and service market regulations to boost competition, innovation, and productivity; continue administrative procedures overhaul and digitalization.\n  - Promote digital transformation to help reduce labor shortages and support productivity.\n- Green and energy transition:\n  - More vigorous climate policy is needed; staff encourages expedited adoption of the climate law and the National Energy and Climate Plan (NECP).\n  - Authorities should aim for a robust balance between fiscal support, carbon pricing or taxation, and norms while addressing distributional concerns.\n  - Staff welcomes ongoing work on climate adaptation, enhancement of energy security, and boosting investment in clean energy and connection."
    },
    {
      "heading": "Key statistics (selected indicators and projections)",
      "content": "- Real GDP (percentage change): 2019: 0.6; 2020: -3.5; 2021: 6.7; 2022: 3.0; 2023: -0.3; 2024 (Proj.): 1.7; 2025 (Proj.): 2.4.\n- Private consumption (percentage change): 2019: 0.0; 2020: -4.3; 2021: 7.3; 2022: 7.2; 2023: -1.3; 2024 (Proj.): 2.3.\n- Gross fixed capital formation (percentage change): 2019: 1.5; 2020: -2.2; 2021: 8.2; 2022: 3.1; 2023: (table shows) 5.1; 2024 (Proj.): 2.6; 2025 (Proj.): 2.7.\n- Nominal GDP (billions of euros): 2019: 30.6; 2020: 30.1; 2021: 33.3; 2022: 38.4; 2023: 40.3; 2024 (Proj.): 42.4; 2025 (Proj.): 44.8.\n- GDP per capita (thousands of euros): 2019: 15.9; 2020: 15.8; 2021: 17.6; 2022: 20.5; 2023: 21.4; 2024 (Proj.): 22.5; 2025 (Proj.): 23.9.\n- Gross national saving (percent of GDP): 2019: 22.2; 2020: 24.3; 2021: 21.1; 2022: 20.3; 2023: 19.0; 2024 (Proj.): 19.1; 2025 (Proj.): 18.9.\n- Headline HICP inflation, period average: 2019: 0.1; 2020: 3.2; 2021: 9.1; 2022: 2.0.\n- Core HICP inflation, period average: 2019: 1.1; 2020: 11.3; 2021: 9.8; 2022: 3.3.\n- Unemployment rate (LFS; period average, percent): 2019: 6.3; 2020: 8.1; 2021: 7.6; 2022: 6.9; 2023: 6.5.\n- Nominal wage growth: 2019: 6.2; 2020: 11.7; 2021: 7.5; 2022: 11.9; 2023: 8.5.\n- Consolidated General Government — Total revenue (percent of GDP): 2019: 37.3; 2020: 37.7; 2021: 37.6; 2022: 37.2; 2023: 38.5; 2024 (Proj.): 38.6; 2025 (Proj.): 38.7.\n- Consolidated General Government — Total expenditure (percent of GDP): 2019: 41.4; 2020: 43.2; 2021: 40.9; 2022: 42.0; 2023: (table lists)  (see source table for full series).\n- General government gross debt (percent of GDP): 2019: 36.7; 2020: 42.7; 2021: 44.4; 2022: 41.8; 2023: 43.6; 2024 (Proj.): 44.7.\n- Current account balance (percent of GDP): 2019: -0.6; 2020: 2.9; 2021: -3.9; 2022: -4.8; 2023: -4.0.\n- Trade balance (goods) (percent of GDP): 2019: -8.6; 2020: -5.1; 2021: -8.3; 2022: -10.7; 2023: -9.3; 2024 (Proj.): -8.8.\n- Gross external debt (percent of GDP): 2019: 117.1; 2020: 122.1; 2021: 110.5; 2022: 102.3; 2023: 98.5; 2024 (Proj.): 94.9; 2025 (Proj.): 86.6.\n- U.S. dollar per euro (period average): 2019: 1.12; 2020: 1.14; 2021: 1.18; 2022: 1.05; 2023: 1.08.\n\nSource: IMF Executive Board Concludes 2024 Article IV Consultation with the Republic of Latvia (Press Release No. 24/319).\n\n---\n\n\n References\n\n- Republic of Latvia and the IMF\n- IMF Policy Advice -- A Factsheet\n- Press Releases\n- PRESS CENTER\n- http://www.IMF.org/external/np/sec/misc/qualifiers.htm\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2024/09/05/pr-24319-latvia-imf-executive-board-concludes-2024-article-iv-consultation"
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    "Published: September 5, 2024",
    "The Executive Board concluded the Article IV consultation with the Republic of Latvia and endorsed the staff appraisal on a lapse-of-time basis without a meeting.",
    "Recent dynamics:",
    "Growth projections:",
    "Inflation projections:",
    "Balance of risks:",
    "Recommended fiscal stance:",
    "Policy options and structural fiscal measures suggested:",
    "Financial sector condition and guidance:",
    "Macroprudential stance:",
    "Governance and AML/CFT:",
    "Structural reform priorities:",
    "Green and energy transition:",
    "Real GDP (percentage change): 2019: 0.6; 2020: -3.5; 2021: 6.7; 2022: 3.0; 2023: -0.3; 2024 (Proj.): 1.7; 2025 (Proj.): 2.4.",
    "Private consumption (percentage change): 2019: 0.0; 2020: -4.3; 2021: 7.3; 2022: 7.2; 2023: -1.3; 2024 (Proj.): 2.3.",
    "Gross fixed capital formation (percentage change): 2019: 1.5; 2020: -2.2; 2021: 8.2; 2022: 3.1; 2023: (table shows) 5.1; 2024 (Proj.): 2.6; 2025 (Proj.): 2.7.",
    "Nominal GDP (billions of euros): 2019: 30.6; 2020: 30.1; 2021: 33.3; 2022: 38.4; 2023: 40.3; 2024 (Proj.): 42.4; 2025 (Proj.): 44.8.",
    "GDP per capita (thousands of euros): 2019: 15.9; 2020: 15.8; 2021: 17.6; 2022: 20.5; 2023: 21.4; 2024 (Proj.): 22.5; 2025 (Proj.): 23.9.",
    "Gross national saving (percent of GDP): 2019: 22.2; 2020: 24.3; 2021: 21.1; 2022: 20.3; 2023: 19.0; 2024 (Proj.): 19.1; 2025 (Proj.): 18.9.",
    "Headline HICP inflation, period average: 2019: 0.1; 2020: 3.2; 2021: 9.1; 2022: 2.0.",
    "Core HICP inflation, period average: 2019: 1.1; 2020: 11.3; 2021: 9.8; 2022: 3.3.",
    "Unemployment rate (LFS; period average, percent): 2019: 6.3; 2020: 8.1; 2021: 7.6; 2022: 6.9; 2023: 6.5.",
    "Nominal wage growth: 2019: 6.2; 2020: 11.7; 2021: 7.5; 2022: 11.9; 2023: 8.5.",
    "Consolidated General Government — Total revenue (percent of GDP): 2019: 37.3; 2020: 37.7; 2021: 37.6; 2022: 37.2; 2023: 38.5; 2024 (Proj.): 38.6; 2025 (Proj.): 38.7.",
    "Consolidated General Government — Total expenditure (percent of GDP): 2019: 41.4; 2020: 43.2; 2021: 40.9; 2022: 42.0; 2023: (table lists)  (see source table for full series).",
    "General government gross debt (percent of GDP): 2019: 36.7; 2020: 42.7; 2021: 44.4; 2022: 41.8; 2023: 43.6; 2024 (Proj.): 44.7.",
    "Current account balance (percent of GDP): 2019: -0.6; 2020: 2.9; 2021: -3.9; 2022: -4.8; 2023: -4.0.",
    "Trade balance (goods) (percent of GDP): 2019: -8.6; 2020: -5.1; 2021: -8.3; 2022: -10.7; 2023: -9.3; 2024 (Proj.): -8.8.",
    "Gross external debt (percent of GDP): 2019: 117.1; 2020: 122.1; 2021: 110.5; 2022: 102.3; 2023: 98.5; 2024 (Proj.): 94.9; 2025 (Proj.): 86.6.",
    "U.S. dollar per euro (period average): 2019: 1.12; 2020: 1.14; 2021: 1.18; 2022: 1.05; 2023: 1.08.",
    "[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)",
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    "[PRESS CENTER](http://presscenter.imf.org/)",
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