20230914-IMF-Republic_of_Latvia_2023_Article_IV_Consultation-Press_Release_Staff_Report_and_Statement_by_the_Executive_Director_for_the_Republic_of_Latvia_81页_1mb

IMF Article IV Consultation with the Republic of Latvia (September 2023)

Executive Summary

• Economic Context: Latvia faces inflation shocks, slow growth, and geopolitical challenges. Headline inflation decreased to 10.4% (2023 projection), while core inflation is expected to decline to 11% before easing further. Growth slowed to 0.9% in 2023 compared to 2.8% in 2022, driven by high inflation and external demand weakening.
• Key Risks: Escalation of the war, global financial tightening, and persistent inflation pose significant downside risks.
• Policy Recommendations: Staff recommends a tighter fiscal stance, better-targeted energy support, enhanced monetary policy, corporate reforms, and accelerated structural changes, including infrastructure investment and green transition measures.

Authorities' Response

• Authorities broadly concurred with the staff report but moderated some projections based on faster-than-expected growth and lower inflation in 2023.
• Agreed fiscal tightening is needed, with plans to use proceeds from phasing out COVID-19 and energy support measures for deficit reduction.

Staff Appraisal

• Context: Latvia faces high inflation driven by energy and food prices, slow growth exacerbated by global uncertainty, and geopolitical tensions affecting regional stability and trade.
• Outlook: Economic growth projected to slow in 2023 but rebound moderately thereafter; inflation is expected to remain elevated primarily due to supply-side pressures.
• Risks: High uncertainty from geopolitical escalations, sanctions, and global financial conditions. Domestic risks include wage pressure and potential output gaps.
• Policy Recommendations:
  • Fiscal Policy: Tighten stance in 2023 by reducing cash deficit and improving energy support targeting.
  • Monetary Policy: ECB adjustments may still lag behind Latvian needs; contingent liquidity measures may be needed.
  • Structural Policies: Accelerate reforms including green investment, wage moderation measures, and public financial management improvements.

Detailed Findings

Table: Summary of IMF Recommendations

These recommendations aim to address convergence challenges, mitigate economic vulnerabilities, and position Latvia for medium-term sustainable growth within the broader EU framework.