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Europe > Latvia, Republic of

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Cover IMF Working Papers
Competitiveness and Productivity in the Baltics: Common Shocks, Different Implications
Saioa Armendariz
,
Carlos de Resende
,
Alice Fan
,
Gianluigi Ferrucci
,
Bingjie Hu
,
Sadhna Naik
, and
Can Ugur
This paper examines competitiveness and productivity in the Baltics. Focusing on recent developments, it asks why Russia’s war in Ukraine led to a prolonged recession and strong decline in competitiveness in Estonia, while Latvia and Lithuania shielded their economies more effectively. The paper starts by documenting a deterioration in export performance across the region. Using a constant share decomposition, it finds that, unlike in Latvia and Lithuania, Estonia’s declining export share has been mainly linked to a reduction in the ‘intensive margin’—a sign of weakening external competitiveness and declining relative productivity. Multivariate filtering techniques and estimates of the real effective exchange rates based on historical productivity trends, consistent with Balassa-Samuelson, confirm that differences in long-term total factor productivity growth have affected external competitiveness. While Estonia’s post-GFC slowdown in productivity growth and real exchange rate appreciation have eroded its competitive edge, Latvia and Lithuania have shown greater resilience, aided by more balanced real effective exchange rates and, for Lithuania, stronger corporate balance sheets. A micro-econometric analysis further reveals that resource misallocation, particularly in the services sector, has been a key driver of declining productivity in the region. These findings underscore the need for targeted reforms to improve allocative efficiency, boost productivity, and restore competitiveness in the Baltic region.
Keywords:
Export shares; Competitiveness; Productivity; Baltics; export share; productivity in the Baltic; resource misallocation; productivity trend; TFP dynamics; TFP deceleration; Total factor productivity; Real effective exchange rates; Real exchange rates; Global
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
Republic of Latvia: Selected Issues
International Monetary Fund. European Dept.
This paper assesses recent developments in Latvia’s competitiveness and productivity in the context of Baltic economies. Latvia’s export market share has declined in recent years reflecting weakening external demand and the effects of EU trade sanctions, but only limited loss of competitiveness. Latvia faces weakening competitiveness. Latvia’s real effective exchange rate appreciation in recent years has been greater than that implied by its productivity trend, so the economy faces a narrowing competitiveness buffer. Latvia’s total factor productivity growth boost post-global financial crisis is unlikely to be sustained without structural reforms and efforts to increase capital investment. A decade-long weak investment, large infrastructure gaps, aging and emigration, and insufficient accumulation in skills weigh on Latvia’s productivity growth and competitiveness. These also pose risks that Lavia could be caught in a middle-income trap with low growth and slow convergence to euro area income level. Therefore, Latvia requires significantly higher investment for sustained convergence. In order to preserve Latvia’s competitiveness and build more resilience against future shocks, it is key to promote productivity growth via structural reforms and capital investment. Boosting productivity is also needed to meet challenges presented from Russia’s war in Ukraine and the ongoing transitions to sustain income convergence.
Keywords:
labor productivity growth; D. allocative efficiency; export share decline; D. Latvia's productivity growth; B. CSA Decomposition; Total factor productivity; Productivity; Labor productivity; Real effective exchange rates; Baltics; Europe
Cover IMF Staff Country Reports
Republic of Estonia: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper explains Estonia’s recent losses of export market shares. Estonia’s export market share has fallen sharply, signalling that exporters have difficulties to keep up with foreign competition. While the immediate cause of this decline can be traced back to an adverse combination of external shocks triggered by the war in Ukraine, signs of faltering export performance surfaced already in the aftermath of the global financial crisis, and thus predate recent shocks. Using a constant share decomposition, this paper shows that, unlike in Latvia and Lithuania, a significant portion of the decline in Estonia’s export share can be attributed to the ‘intensive margin’, i.e., a shrinking share of Estonia’s exports in the main destination markets—a sign of weakening external competitiveness and declining relative productivity. A few high-level policy implications can be drawn. Addressing the erosion of external competitiveness will require structural reforms aimed at enhancing productivity, removing impediment to a structural transformation of the economy toward more technologically intensive and higher value-added products and services, as well as efforts to ensure that real wage growth remains closely aligned with productivity growth. By addressing these underlying challenges, Estonia can restore external competitiveness and ensure continued convergence toward the income levels of EU most advanced economies and Nordic neighbors.
Keywords:
labor market liberalization; Within-Sector allocative efficiency; export market share; export share decline; TFP dynamics; Estonia's government spending; tax revenue-to-GDP ratio; Total factor productivity; Exports; Capital adequacy requirements; Productivity; Baltics; Global; Europe
Cover IMF Staff Country Reports
Republic of Latvia: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Latvia
International Monetary Fund. European Dept.
The 2023 Article IV Consultation highlights that Latvia is facing an inflation shock, slow growth, and geopolitical challenges. The government will have to continue to deal with the spillovers in the Baltic region from the Russian invasion of Ukraine and the impact of sanctions imposed on Russia and Belarus, the cost-of-living crisis, and energy security. These short-term concerns are adding to the long-term policy challenge of sustaining the income convergence process. Latvia’s income convergence has already been lagging the other Baltic countries. Amid high uncertainty, the balance of risks is tilted to the downside. The main risks stem from an escalation of the war and associated sanctions, which could result in renewed increases in energy prices, energy supply disruptions in Europe, and weaker external demand. Global financial conditions could further tighten, with spillovers to Latvian banks and domestic credit growth. The paper recommends that structural policies should facilitate the green transition, reduce skill shortages, and boost productivity.
Keywords:
income convergence; shock support measure; inflation shock; government finance statistics yearbook; inflation momentum; bank credit risk indicator; Inflation; Energy prices; Fiscal stance; Baltics; Europe
Cover IMF Staff Country Reports
Republic of Latvia: 2022 Article IV Consultation-Press Release and Staff Report
International Monetary Fund. European Dept.
The economy fared relatively well during the pandemic, but the war in Ukraine is another major shock. The key vulnerabilities are Latvia’s significant reliance on imported gas from Russia until recently, the impact of high international energy prices on inflation and economic activity, and refugee inflows. Thus far, almost 33,000 refugees have entered Latvia. Parliamentary elections later this year may put pressure on the government budget.
Keywords:
government finance statistics yearbook; green transition goal; financial asset; supply bottleneck; wage-price spiral; government finance statistics database; price pressure; World Bank-International Monetary Fund mission; General government operation; Energy prices; Inflation; Income; Baltics; Global
Cover IMF Staff Country Reports
Republic of Latvia: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper analyses the implications of global value chains (GVC) participation for Latvia’s competitiveness and exposure to risks. Using a structural model, it assesses Latvia’s competitiveness through different real effective exchange rate (REER) measures and examines the main factors behind differences in the measures. Based on this analysis, the paper suggests policy options to strengthen Latvia’s competitiveness. The paper also estimates the impact of an appreciation of the GVC related REER measure on value added export growth and real GDP growth, and finds sizable effects, suggesting that a rapid labor market tightening could lead to erosion in competitiveness and reduction in growth. Finally, trade tension induced tariff hikes may have significant cost for Latvia, especially in terms of value added produced in the country. Trade tension induced tariff hikes are likely to have moderate costs for Latvia in terms of value added produced in the country. In this regard, policies aimed at enhancing product sophistication or quality and export market diversification could mitigate Latvia’s exposure to trade shocks in GVCs.
Keywords:
ISCR; CR; firm; zombie firm; VA REER appreciation; REER index; firm gain; GVC participation; micro firm; value-added REER; Productivity; Anti-money laundering and combating the financing of terrorism (AML/CFT); Total factor productivity; Real effective exchange rates; Currencies; Global; Europe; Baltics; Western Europe; Asia and Pacific
Cover IMF Working Papers
The Re-Emerging Privilege of Euro Area Membership
Mr. Johannes Wiegand
When the euro was introduced in 1998, one objective was to create an alternative global reserve currency that would grant benefits to euro area countries similar to the U.S. dollar’s “exorbitant privliege”: i.e., a boost to the perceived quality of euro denominated assets that would increase demand for such assets and reduce euro area members’ funding costs. This paper uses risk perceptions as revelaed in investor surveys to extract a measure of privilege asscociated with euro membership, and traces its evolution over time. It finds that in the 2000s, euro area assets benefited indeed from a significant perceptions premium. While this premium disappeared in the wake of the euro crisis, it has recently returned, although at a reduced size. The paper also produces time-varying estimates of the weights that investors place on macro-economic fundmentals in their assessments of country risk. It finds that the weights of public debt, the current account and real growth increased considerably during the euro crisis, and that these shifts have remained in place even after the immediate financial stress subsided.
Keywords:
WP; euro; area membership; euro area; euro crisis; exorbitant privlege; investor perceptions; time dummy; investor perception; governance framework; Euro premium; euro adoption; area privilege; membership premium; Credit ratings; Unemployment rate; Currencies; Exchange rate arrangements; Europe
Cover IMF Working Papers
Conventional and Insidious Macroeconomic Balance-Sheet Crises
Mr. Bas B. Bakker
and
Mr. Leslie Lipschitz
This paper describes the anatomy of two types of balance-sheet macroeconomic crises. Conventional balance-sheet crises are triggered by external imbalances and balance sheet vulnerabilities. They typically occur after capital inflows have led to a substantial build up of foreign currency exposure. Insidious crises are triggered by internal imbalances and balance sheet vulnerabilities. They occur in high-growth economies when an initially equilibrating shift in relative prices and resources and credit in favor of the nontraded sector overshoots equilibrium. The paper argues that policymakers are now better able to forestall conventional crises, but they are much less capable of early detection and avoidance of insidious crises.
Keywords:
WP; asset; price; current account; deficit; exchange rate; interest rate; crises; balance sheets; business cycles; capital flows; construction boom; emerging market economy; foreign exchange; FX assets; capital account; Capital inflows; Financial statements; Return on investment; Current account deficits; Global
Cover How Emerging Europe Came Through the 2008/09 Crisis
How Emerging Europe Came Through the 2008/09 Crisis
An Account by the Staff of the IMF's European Department
Mr. Bas B. Bakker
and
Mr. Christoph A Klingen

Abstract

Emerging Europe was particularly hard hit by the global financial crisis, but a concerted effort by local policymakers and the international community staved off impending financial meltdown and laid the foundations for renewed convergence with western Europe. This book, written by staff of the IMF's European Department that worked on the region at the time, provides a unique account of events: the origins of the crisis and the precrisis policy setting; the crisis trigger and the scramble to avoid the worst; the stabilization and recovery; the remaining challenges; and the lessons for the future. Five regional chapters provide the analytics to put events into perspective. Dedicated chapters for all 19 countries of the region dig deeper into the idiosyncrasies of each economy and provide extensive economic data. A final chapter distills the lessons from the overall regional experience and the wide intraregional diversity. Taken together, they make this book an indispensible reference for economic scholars of the region and beyond.

Keywords:
BOOK; deficit; government; IMF staff calculation; crisis; exchange rate; percent of GDP; credit growth; foreign currency; banking system; Credit; Currencies; Exchange rates; Capital inflows; Global; Europe; Baltics; Western Europe; Eastern Europe; headline inflation; emerging Europe; Exchange rate arrangements