Washington, DC: On August 27, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Republic of Latvia.
Latvia experienced a relatively milder recession than most other European countries, contracting by 3.6 percent in 2020. While the pandemic has caused an unprecedented disruption to economic and social activity, the authorities responded with a sizable and broad-based policy response, thus mitigating its impact. These support measures have helped preserve jobs and provide liquidity to companies and income support to vulnerable groups, thereby averting a deeper recession. Fiscal balances deteriorated as a significant COVID-support package was deployed, pushing the overall deficit to 4.5 percent of GDP and public debt to 44 percent of GDP. The current account improved and reached 3 percent of GDP as domestic demand weakened.
A strong recovery is expected if mass vaccination gains momentum and containment measures are phased out. Output is projected to grow by 3.6 percent in 2021 and 5.2 percent in 2022, as stimulus and the EU-financed investment works through and vaccinations help control the spread of the virus. However, uncertainty around the baseline is unusually high with upside and downside surprises. Notably, a resurgence of new variants of the virus and a slow and/or uneven rollout of vaccines could pose significant downside risks to growth. At the same time, a ramping up of the vaccine rollout would allow activity to resume faster and help prevent long-term scarring.
Executive Board Assessment [2]
Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the sizable and broad-based policy response to cushion the socio-economic impact of the COVID-19 pandemic. The economic outlook appears favorable, reflecting a rebound in export demand, consumption, and EU-financed public investment. Nevertheless, pandemic-related risks and uncertainty remain high. Against this background, it will be important to maintain supportive policies in the near term while preserving financial stability and fostering structural transformation to achieve greener, smarter, and more inclusive growth.
Directors supported maintaining the accommodative fiscal policy stance at the current juncture. They stressed the need to ensure that fiscal support remains well-targeted and adjusted to the evolving conditions. Once the recovery is firmly secured, fiscal policy should aim to rebuild buffers and facilitate Latvia’s economic transformation, underpinned by fiscal rules. Directors noted that public investment plans focus appropriately on green and digital transformation, as well as social protection. Transparency and governance, especially in project selection and public procurement, are key to their efficiency.
Directors welcomed the resilience of the financial sector and the augmented macroprudential toolkit. They underscored the importance of risk-based supervision, focusing on exposures to COVID-sensitive sectors and small and medium enterprises, particularly as support measures are phased out. Addressing the corporate equity gap and further upgrading the insolvency regime remain important priorities to help reinvigorate corporate lending. Directors also highlighted the need to monitor banks’ asset quality and risks in the housing and construction sectors. They welcomed the progress in strengthening the AML/CFT framework and the authorities’ commitment to continue with further reforms.
Directors encouraged the authorities to press ahead with their reform agenda, making the most use of the European Union’s Resilience and Recovery Facility. They recommended targeting improvements in digital infrastructure, healthcare, social safety nets, and human capital. Achieving the ambitious climate mitigation objectives requires a combination of investment in green technology and taxation of polluting industries. Directors also saw a need to mitigate scarring in the labor market, including through proactive job creation policies and strengthened active labor market policies. They called for continued efforts to improve productivity and the business environment more broadly.
Table 1. Latvia: Selected Economic Indicators, 2017-22 | ||||||
2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |
Proj. | ||||||
National accounts | (Percentage change, unless otherwise indicated) | |||||
Real GDP | 3.3 | 4.0 | 2.0 | -3.6 | 3.6 | 5.2 |
Private consumption | 3.0 | 2.6 | 2.2 | -10.0 | 8.4 | 5.5 |
Public consumption | 3.4 | 1.6 | 2.6 | 2.6 | 3.5 | 4.2 |
Gross capital formation | 9.9 | 15.8 | 3.4 | 6.6 | 4.6 | 7.8 |
Gross fixed capital formation | 11.4 | 11.8 | 2.1 | 0.2 | 6.0 | 8.2 |
Exports of goods and services | 6.4 | 4.3 | 2.1 | -2.7 | 3.8 | 3.7 |
Imports of goods and services | 8.6 | 6.4 | 3.0 | -3.3 | 9.1 | 5.0 |
Nominal GDP (billions of euros) | 27.0 | 29.1 | 30.4 | 29.3 | 30.8 | 33.3 |
GDP per capita (thousands of euros) | 13.8 | 15.1 | 15.8 | 15.4 | 16.2 | 17.5 |
Savings and Investment | ||||||
Gross national saving (percent of GDP) | 23.4 | 23.5 | 21.7 | 25.8 | 24.3 | 23.7 |
Gross capital formation (percent of GDP) | 22.1 | 23.8 | 22.4 | 22.8 | 24.5 | 24.7 |
Private (percent of GDP) | 18.6 | 19.7 | 18.4 | 18.6 | 20.8 | 20.4 |
HICP Inflation | ||||||
Period average | 2.9 | 2.6 | 2.7 | 0.1 | 2.1 | 2.7 |
End-period | 2.2 | 2.5 | 2.1 | -0.5 | 4.0 | 2.6 |
Labor market | ||||||
Unemployment rate (LFS; period average, percent) | 8.7 | 7.4 | 6.3 | 8.1 | 7.7 | 7.2 |
Real gross wages | 4.6 | 5.8 | 4.4 | 6.0 | 4.8 | 3.7 |
Consolidated general government 1/ | (Percent of GDP, unless otherwise indicated) | |||||
Total revenue | 35.7 | 37.3 | 37.5 | 38.6 | 38.5 | 38.2 |
Total expenditure | 36.5 | 38.1 | 37.9 | 42.5 | 47.4 | 42.2 |
Basic fiscal balance | -0.8 | -0.7 | -0.4 | -3.9 | -8.9 | -4.0 |
ESA balance | -0.8 | -0.8 | -0.6 | -4.5 | -8.8 | -2.6 |
General government gross debt | 39.0 | 37.1 | 37.0 | 43.5 | 48.0 | 47.9 |
Money and credit | ||||||
Credit to private sector (annual percentage change) | -1.0 | -5.6 | -2.3 | -4.4 | … | … |
Broad money (annual percentage change) | 2.9 | 5.8 | 4.4 | -3.6 | … | … |
Balance of payments | ||||||
Current account balance | 1.3 | -0.3 | -0.6 | 3.0 | -0.2 | -1.0 |
Trade balance | -9.1 | -8.7 | -8.8 | -5.0 | -9.7 | -9.7 |
Gross external debt | 141.5 | 123.3 | 117.3 | 124.2 | 129.7 | 128.5 |
Net external debt 2/ | 22.1 | 20.6 | 18.9 | 14.3 | 13.0 | 12.7 |
Exchange rates | ||||||
U.S. dollar per euro (period average) | 1.13 | 1.18 | 1.12 | 1.14 | … | … |
REER (period average; CPI based, 2005=100) | 119.1 | 122.5 | 122.5 | 124.2 | … | … |
Terms of trade (annual percentage change) | 0.4 | 1.8 | 0.7 | 2.8 | -2.0 | 0.5 |
Sources: Latvian authorities; Eurostat; and IMF staff calculations. | ||||||
1/ National definition. Includes economy-wide EU grants in revenue and expenditure. | ||||||
2/ Gross external debt minus gross external assets. | ||||||
[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summing ups can be found here: https://www.IMF.org/external/np/sec/misc/qualifiers.htm .