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Europe > Latvia, Republic of

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Cover IMF Staff Country Reports
Republic of Latvia: 2024 Article IV Consultation-Press Release; and Staff Report
International Monetary Fund. European Dept.
The 2024 Article IV Consultation highlights that the Latvian economy contracted with significant disinflation. Amid high uncertainty, growth is projected to rebound, but risks are tilted to the downside. Considering the improving outlook, the IMF Staff recommends a less expansionary, neutral fiscal stance for 2024 and a tighter fiscal stance in 2025. Although Latvia has some fiscal space, structural fiscal measures are needed to provide buffers for medium to long term spending pressures. Although the financial sector has so far been resilient, continued monitoring of macrofinancial vulnerabilities and spillovers is warranted. While the current macroprudential policy stance is broadly appropriate, the recent adjustment to the borrower-based measures for energy-efficient housing loans should be reconsidered. The overall policy stance strikes the right balance between maintaining financial stability and the need to extend credit to the economy. However, borrower-based macroprudential measures should be relaxed only when their presence is overly stringent from the financial stability perspective.
Keywords:
World Bank-International Monetary Fund mission; IMF-World Bank mission; audit committee charter; executive board assessment; anti-corruption plan; Labor markets; Productivity; Fiscal stance; Inflation; Baltics
Cover IMF Staff Country Reports
Kingdom of the Netherlands–The Netherlands: 2024 Article IV Consultation-Press Release; and Staff Report
International Monetary Fund. European Dept.
The 2024 Article IV Consultation discusses that the economy has cooled, but signs of overheating remain in The Netherlands. After two years of strong recovery, growth decelerated in 2023, reflecting the energy shock, tighter financial conditions, and a slowdown in key trading partners, particularly Germany. Core inflation remains elevated, reflecting a tight labor market, robust wage growth, and healthy profit margins. Growth is expected to gradually regain momentum in 2024, driven by higher private consumption and external demand. High interest rates will weigh on business and residential investment. For 2024, given the high cost of underestimating inflation persistence, a non-expansionary stance is warranted; adjustment measures should be identified. Medium-term fiscal challenges call for structural reforms to stabilize debt. Climate mitigation strategies need to tackle implicit fuel subsidies, striking the right balance among regulation, pricing/feebates, and subsidies, while addressing distributional concerns and ensuring policy predictability.
Keywords:
government Finance statistics yearbook; IMF staff calculation; core inflation persistence; EMU aggregate; consultation cycle; Labor markets; Inflation; Labor shortages; Fiscal stance; Europe
Cover IMF Working Papers
High Inflation in the Baltics: Disentangling Inflation Dynamics and Its Impact on Competitiveness
Alice Fan
,
Bingjie Hu
,
Sadhna Naik
,
Neree C.G.M. Noumon
, and
Keyra Primus
This paper identifies and quantifies the drivers of inflation dynamics in the three Baltic economies and assesses the effectiveness of fiscal policy in fighting inflation. It also analyzes the macroeconomic impact of inflation on competitiveness by focusing on the relationship between wages and productivity in the tradeable sector. The results reveal that inflation in the Baltics is largely driven by global factors, but domestic demand matters as well, suggesting that fiscal policy can play a role in containing inflation. Also, there is robust evidence of a long-run (cointegration) relationship between (real) wages in the tradeable (manufacturing) sector and productivity in the Baltics with short-term deviations self-correcting in Estonia and Lithuania only.
Keywords:
Inflation Dynamics; Competitiveness; Baltics; labor productivity Wage-Productivity nexus; food inflation; inflation in the Baltic; energy inflation; Wage-Productivity growth nexus; Inflation; Wages; Productivity; Labor markets; Fiscal stance; Global
Cover IMF Staff Country Reports
Republic of Latvia: 2019 Article IV Consultation-Press Release; and Staff Report
International Monetary Fund. European Dept.
This 2019 Article IV Consultation with Republic of Latvia highlights that the economy continued to expand rapidly in 2018, as growth surprised with a strong construction-driven upswing. Fiscal and current account deficits are at manageable levels, as is the public debt. The financial system remains stable, despite a significant balance sheet restructuring of banks servicing foreign clients. The growth outlook is favourable; however, risks weigh on the downside due to a less supportive external environment. The financial system remains stable despite a significant balance sheet restructuring of banks servicing foreign clients. Banks remains well capitalized and liquid, with capital levels about 40 percent higher than the euro area average and average liquidity coverage four times the regulatory minimum. Higher productivity and investment growth are needed to offset the impact of Latvia’s exceptionally unfavorable demographic trends and achieve robust long-term growth and rapid income convergence.
Keywords:
ISCR; CR; debt; lat; firm; World Bank-International Monetary Fund mission; Latvia; SDR; IMF staff estimate; fiscal policy; support productivity-boosting reform; labor market; SME lending; lending constraint; core inflation; Anti-money laundering and combating the financing of terrorism (AML/CFT); Credit; Productivity; Global
Cover IMF Staff Country Reports
Republic of Latvia: 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Latvia
International Monetary Fund. European Dept.
This 2018 Article IV Consultation highlights that Latvia’s government revenues overperformed in 2017, buoyed by strong economic activity and wage growth. Nonetheless, the 2017 general government structural balance recorded a deficit of 0.8 percent of GDP, which resulted in a positive fiscal impulse rendering fiscal policy procyclical. Despite the suspension of activities of Latvia’s third largest bank on money laundering concerns, the banking system remains well capitalized and liquid, with capital-to-risk-weighted assets of 22.4 percent and liquid assets exceeding 80 percent of short-term liabilities at end-March 2018. Deleveraging of both households and nonfinancial corporations continued, with household debt to income now at half of its pre-crisis levels.
Keywords:
ISCR; CR; Latvia; GDP; debt; provision; authority; EU funds inflow; support labor market participation; World Bank-International Monetary Fund mission; income convergence process; labor force; cost competitiveness; IMF staff calculation; authorities' effort; Labor markets; Anti-money laundering and combating the financing of terrorism (AML/CFT); Wages; Global
Cover IMF Staff Country Reports
Republic of Latvia: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper analyzes labor market challenges in Latvia. In the boom period leading up to the global financial crisis, the economy experienced widespread labor shortages and soaring wage growth. The bursting of the bubble led to a deep recession, high unemployment, and a sharp contraction in wages. With the economy now in its eighth year of recovery, Latvia is once again experiencing a tightening labor market—a situation exacerbated by unfavorable demographic trends. Latvia’s future prosperity will depend critically on whether it is able to address its labor market challenges. Employment protection legislation (EPL) is relatively restrictive. EPL refers to the procedures and costs associated with hiring and dismissing workers. Theory suggests that overly restrictive EPL reduces both job creation and job destruction and may slow productivity growth by raising labor adjustment costs for firms. Latvia’s tightening labor market calls for reforms that make the most of the country’s human resources. Reforms should aim to tackle barriers to employment, encourage more labor market participation, help Latvia’s citizens build new skills, and stem the decline in the working-age population.
Keywords:
ISCR; CR; wage; Latvia; worker; minimum wage; wage growth; wage inequality; envelope wage; wage adjustment; wage setting; Aging; Wages; Labor markets; Western Europe; Europe
Cover Staff Discussion Notes
Emigration and Its Economic Impact on Eastern Europe
Mr. Ruben V Atoyan
,
Lone Engbo Christiansen
,
Allan Dizioli
,
Mr. Christian H Ebeke
,
Mr. Nadeem Ilahi
,
Ms. Anna Ilyina
,
Mr. Gil Mehrez
,
Mr. Haonan Qu
,
Ms. Faezeh Raei
,
Ms. Alaina P Rhee
, and
Ms. Daria V Zakharova
This paper analyses the impact of large and persistent emigration from Eastern European countries over the past 25 years on these countries’ growth and income convergence to advanced Europe. While emigration has likely benefited migrants themselves, the receiving countries and the EU as a whole, its impact on sending countries’ economies has been largely negative. The analysis suggests that labor outflows, particularly of skilled workers, lowered productivity growth, pushed up wages, and slowed growth and income convergence. At the same time, while remittance inflows supported financial deepening, consumption and investment in some countries, they also reduced incentives to work and led to exchange rate appreciations, eroding competiveness. The departure of the young also added to the fiscal pressures of already aging populations in Eastern Europe. The paper concludes with policy recommendations for sending countries to mitigate the negative impact of emigration on their economies, and the EU-wide initiatives that could support these efforts.
Keywords:
SDN; CESEE country; CESEE emigration; labor force; CESEE emigrant; migration flow; Emigration; remittances; growth; convergence; Eastern Europe; EU migration scenario; remittance inflow; Migration; Income; Labor force participation; Baltics; Western Europe; Europe; EU policy scenario; UN migration scenario; income convergence; impact of emigration; emigration from CESEE; Skilled labor
Cover IMF Staff Country Reports
Republic of Estonia: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper analyzes income convergence and medium-term growth potential for Estonia. Estonia’s potential growth is projected to average some 3 percent over the next five years and 2.75 percent over the next two decades, implying continued income convergence with European Union levels, albeit at only half its historical pace. A number of policy enhancements could lift growth above this central projection. These include a greater operational policy focus on raising productivity growth, scaling up a number of envisaged pro-growth programs, supporting the upgrading of traditional industries as a second leg of innovation policy, and fully restoring Estonia’s high investment.
Keywords:
ISCR; CR; TFP growth; labor force; potential GDP; structural unemployment; capital stock; unemployment rate; Total factor productivity; Aging; Productivity; Western Europe; Europe; Central and Eastern Europe; Global; growth record; FDI inflow; R&D expenditure; staff team of the International Monetary Fund; qualification mismatch; Labor force participation
Cover IMF Working Papers
Unemployment and Structural Unemployment in the Baltics
Mr. Christian H Ebeke
and
Greetje Everaert
While the unemployment rate in the Baltics has fallen sharply from its crisis-peaks, it remains close to double digits. This paper estimates the structural component of the jobless rate in the three Baltic countries and analyzes its causes. Our main findings are that the current still elevated levels of unemployment mostly reflect structural factors. We then turn to why structural unemployment is so high. This paper points to skill mismatches, high tax wedges, and unemployment and inactivity traps as potential causes.
Keywords:
WP; Unemployment; Structural Unemployment; Baltics; Estonia; Latvia; Lithuania; NAIRU estimate; NAIRU unemployment; unemployment gap; core CPI; internal migration; crisis dummy; structural unemployment rate estimate; Unemployment rate; Labor taxes; Labor markets
Cover IMF Staff Country Reports
Republic of Latvia: Staff Report for the 2014 Article IV Consultation
International Monetary Fund. European Dept.
Latvia entered the euro area in January 2014 with the fastest rate of growth in Europe. The 2014 Article IV Consultation highlights that a slowdown in investment and exports was partly compensated by robust consumption demand, supported by rising real wages, bringing GDP growth in 2013 to 4.1 percent. Strong job creation reduced the unemployment rate to 11.3 percent by end-2013, close to its structural level. Consumer price inflation fell to an average of about zero in 2013, mainly owing to weakening energy prices. The 2013 general government deficit outturn of 1.0 percent of GDP was below the target of 1.4 percent.
Keywords:
ISCR; CR; euro; Latvia; structural unemployment; balance of payments; deficit; GDP; requirement; non-resident deposits; sovereign bond bond issue; NRD banks' capital adequacy ratio; financial asset; consumer price inflation; Labor markets; Credit; Real wages; Baltics; Europe