Macroeconomic conditions are broadly favorable: the output gap is almost closed; the fiscal and current account deficits are at sustainable levels; and unemployment continues to fall. Nevertheless, GDP growth has slowed recently, hampered by a weak external environment, diminishing productivity gains, and delays in EU funds absorption. Credit growth remains elusive, wage pressures have surfaced, and the gray economy remains pervasive.

Abstract

Macroeconomic conditions are broadly favorable: the output gap is almost closed; the fiscal and current account deficits are at sustainable levels; and unemployment continues to fall. Nevertheless, GDP growth has slowed recently, hampered by a weak external environment, diminishing productivity gains, and delays in EU funds absorption. Credit growth remains elusive, wage pressures have surfaced, and the gray economy remains pervasive.

1. This statement provides information that has become available since the Staff Report was circulated to the Executive Board on May 18, 2016. The information does not alter the thrust of the staff appraisal.

2. Q1 GDP data confirm the economy is slowing, broadly in line with staff estimates. 2016Q1 GDP growth in Latvia came in at 2.1 percent year on year, stronger than the flash estimate of 1.8, and broadly in line with staff estimates. While representing a deceleration from the 2.7 percent year on year growth in the last quarter of 2015, on a quarter on quarter seasonally adjusted basis GDP increased by 0.1 percent in 2016Q1 after decreasing by 0.4 percent in 2015Q4. Annual GDP growth remained driven by private consumption growth of 3.7 percent, with government consumption rising 2.2 percent. The slowdown primarily reflects a 16.4 percent decline in gross fixed capital formation. Imports rose 4.6 percent, supported by higher consumption, while exports fell by 2.9 percent due to weakness in key trade partners.

3. Amendments to the Credit Institutions Law were passed by Parliament. The amendments, passed on June 2, strengthen the AML/CFT framework, providing for bigger fines in the event of breaches of anti-money laundering or combatting terrorist financing requirements.

4. Prime Minister Kučinskis signed the Agreement on Accession of Latvia to the Organisation for Economic Cooperation and Development (OECD) on June 2. Following ratification of the agreement by Parliament, which is expected in mid-June, Latvia will become the 35th member of the organization.