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IMF Country Report No. 19/264

REPUBLIC OF LATVIA

2019 ARTICLE IV CONSULTATION—PRESS RELEASE; AND STAFF REPORT

August 2019

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2019 Article IV consultation with Republic of Latvia, the following documents have been released and are included in this package:

  • A Press Release.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on lapse-of-time basis following discussions that ended on June 28, 2019, with the officials of the Republic of Latvia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 22, 2019.

  • An Informational Annex prepared by the IMF staff.

The document listed below have been or will be separately released.

  • Selected Issues

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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© 2019 International Monetary Fund

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REPUBLIC OF LATVIA

STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION

July 22, 2019

Key Issues

Context. 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 favorable, but risks weigh on the downside due to a less supportive external environment.

Challenges. In the short term, the authorities need to address challenges posed by labor market tightness, the expected deceleration of EU investment funds, anemic credit growth, and lingering integrity and reputational risks in the financial sector. 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.

Staff views.

  • Structural reforms should aim to ease labor market constraints through measures reducing structural unemployment, increasing labor force participation, and stemming incentives for emigration. Increasing investment in new technologies, improving access to finance, and increasing FDI inflows could help raise productivity growth.

  • The planned fiscal stance is appropriate and provides space to face downside risks in the medium term. If such risks materialize, automatic stabilizers should be allowed to operate fully and fiscal space deployed, if necessary, through high-quality measures. The long-term fiscal policy mix should support productivity improvements and ensure space to accommodate demographic and social spending costs.

  • Strengthening the effectiveness of the AML/CFT framework, upgrading supervisory powers for bank resolution, as well as de-risking and consolidating the banking sector will be critical to mitigating reputational risks to the financial system and aligning bank activities with the financing needs of the real economy. Further reforms to the insolvency regime, combating the shadow economy, improving SMEs’ access to finance, and preemptively introducing tailored macroprudential measures would help revive credit growth and mitigate medium-term financial sector vulnerabilities.

Approved By

Philip Gerson (EUR) and Zuzana Murgasova (SPR)

Discussions were held in Frankfurt on June 14 and in Riga during June 17–28. The team comprised Iva Petrova (Head), Kodjovi Eklou, Karina Garcia, Andreas Jobst, and Yi Wu (all EUR), and Kathleen Kao (LEG). Ms. Skrivere (OED) also joined the discussions. Nhu Nguyen and Hannah Jung supported the mission from headquarters.

Contents

  • CONTEXT

  • RECENT ECONOMIC DEVELOPMENTS

  • OUTLOOK AND RISKS

  • POLICY DISCUSSIONS: PREPARING FOR THE SLOWDOWN

  • A. Macro-structural Policies: Raising Productivity

  • B. Fiscal Policy: Supporting Growth

  • C. Macro-Financial Policies: Restoring Confidence in the Financial System and Reviving Credit Growth

  • STAFF APPRAISAL

  • BOX

  • 1. Risk Assessment Matrix

  • FIGURES

  • 1. Real Sector

  • 2. Fiscal Developments

  • 3. Inflation

  • 4. Labor Market

  • 5. Balance of Payments

  • 6. Inequality and Poverty

  • 7. Banking Sector Developments

  • 8. Credit Growth Developments

  • 9. Macro-Financial Conditions

  • TABLES

  • 1. Selected Economic Indicators, 2015–20

  • 2. Macroeconomic Framework, 2015–24

  • 3. General Government Operations, 2015–24

  • 4. Medium-Term Balance of Payments, 2015–24

  • 5. Financial Soundness Indicators, 2014–18

  • ANNEXES

  • I. External Sector Assessment

  • II. External Debt Sustainability Assessment

  • III. Public Sector Debt Sustainability Analysis (DSA)

  • IV. Modeling the Impact of Domestic Risks to the Outlook

  • V. Estimating Potential Growth

  • VI. Further Investigation of Credit Constraints

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REPUBLIC OF LATVIA

STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX

July 22, 2019

Prepared By

European Department

Contents

  • FUND RELATIONS

  • STATISTICAL ISSUES

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Press Release No. 19/312

FOR IMMEDIATE RELEASE

August 7, 2019

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