## IMF Executive Board Concludes 2024 Article IV Consultation with the Republic of Latvia _IMF News, September 5, 2024_ ## Source details **Canonical URL:** [IMF Executive Board Concludes 2024 Article IV Consultation with the Republic of Latvia](https://www.imf.org/en/news/articles/2024/09/05/pr-24319-latvia-imf-executive-board-concludes-2024-article-iv-consultation) ## Other formats - [Markdown version](/en/news/articles/2024/09/05/pr-24319-latvia-imf-executive-board-concludes-2024-article-iv-consultation/index.md) - [Structured JSON version](/en/news/articles/2024/09/05/pr-24319-latvia-imf-executive-board-concludes-2024-article-iv-consultation/index.json) - [Bundle manifest](/en/news/articles/2024/09/05/pr-24319-latvia-imf-executive-board-concludes-2024-article-iv-consultation/bundle-manifest.json) ## Bibliographic details - Published: September 5, 2024 --- ### Overview and recent developments - 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: - The Latvian economy contracted with significant disinflation: growth contracted by 0.3 percent in 2023. - Headline inflation declined to 0.0 percent y/y in May 2024. - Core inflation stood at 3.1 percent in April 2024. - The financial sector has been resilient, though risks are elevated. - Fiscal performance in 2023 was stronger than expected, reflecting revenue buoyancy linked to inflation and expenditure under-execution. - The current account deficit narrowed to 4 percent of GDP in 2023 from 4.8 percent in 2022. - Russia’s war in Ukraine and related geoeconomic fragmentation are adding to structural challenges affecting investment, productivity, labor supply, and income convergence. ### Outlook and risks - Growth projections: - Real GDP growth is projected to increase to 1.7 and 2.4 percent in 2024 and 2025, respectively. - Growth in the medium-term is projected to continue at an average of around 2.5 percent, supported by public investment and reforms. - Inflation projections: - Headline inflation (annual average) is projected to decline to 2.0 percent in 2024. - Core inflation (annual average) is projected to slow to 3.3 percent in 2024, reflecting persistent services inflation. - Balance of risks: - Downside risks dominate, including risk to competitiveness associated with recent high wage growth, rising geopolitical tensions and deeper geoeconomic fragmentation, and weaker external demand. - Credit risks related to variable-rate loans and the potential for weaker-than-expected external demand are highlighted. - Over the medium term, delays in public investment and structural reforms could weigh on potential growth. ### Executive Board assessment and policy recommendations — fiscal - Recommended fiscal stance: - Staff recommends a less expansionary, neutral fiscal stance for 2024 and a tighter fiscal stance in 2025. - In 2025, the fiscal stance should be tighter to build buffers for future spending needs. - Policy options and structural fiscal measures suggested: - Reduce tax exemptions. - Raise revenue from property taxation. - Strengthen tax enforcement. - Improve investment spending efficiency and better target social support while protecting the most vulnerable. - Over the medium term, options for fiscal consolidation include: - Broadening the bases of corporate income tax (CIT) and personal income tax (PIT), including by reducing the shadow economy. - Broadening the base of property taxes. - Reducing tax exemptions and fossil fuel subsidies. - Rationalizing spending on goods and services. - Enhanced public investment management is warranted given scaling-up of public investment amid high uncertainty and cost overrun. - Staff welcomes healthcare reform aimed to generate efficiency gains, and welcomes government’s pension reform efforts; recommends linking the retirement age to life expectancy. - Latvia should swiftly implement the NRRP. ### Financial sector and macroprudential policy - Financial sector condition and guidance: - The banking sector remained well capitalized and liquid, with a low NPL ratio. - 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. - 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. - The new untargeted interest subsidy scheme for variable-interest-rate mortgages should not be renewed at its expiration in 2024. - The authorities should refrain from further initiatives to increase taxation on bank profits given their adverse impact on bank capital and financial stability. - Staff welcomes continued efforts to mitigate cybersecurity risk. - Macroprudential stance: - The current macroprudential policy stance is broadly appropriate. - The recent adjustment to the borrower-based measures for energy-efficient housing loans should be reconsidered. - Borrower-based macroprudential measures should be relaxed only when their presence is overly stringent from the financial stability perspective. ### Structural reforms, governance, and climate/energy transitions - Governance and AML/CFT: - 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. - Staff welcomes reforms to digitalize the procurement system and continued implementation of Latvia’s anti-corruption plan and national strategy. - Structural reform priorities: - Accelerate corporate reforms to boost investment and productivity by improving capital allocation and access to finance. - 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). - Streamline product and service market regulations to boost competition, innovation, and productivity; continue administrative procedures overhaul and digitalization. - Promote digital transformation to help reduce labor shortages and support productivity. - Green and energy transition: - More vigorous climate policy is needed; staff encourages expedited adoption of the climate law and the National Energy and Climate Plan (NECP). - Authorities should aim for a robust balance between fiscal support, carbon pricing or taxation, and norms while addressing distributional concerns. - Staff welcomes ongoing work on climate adaptation, enhancement of energy security, and boosting investment in clean energy and connection. ### Key statistics (selected indicators and projections) - 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. *Source: IMF Executive Board Concludes 2024 Article IV Consultation with the Republic of Latvia (Press Release No. 24/319).* --- ## References - [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/) - [http://www.IMF.org/external/np/sec/misc/qualifiers.htm](http://www.imf.org/external/np/sec/misc/qualifiers.htm) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2024/09/05/pr-24319-latvia-imf-executive-board-concludes-2024-article-iv-consultation_