IMF praises 'rapid strides' in economy but warns of downside risks

Speaking in Riga Friday at the conclusion of a scheduled staff visit to assess Latvia's economy, the International Monetary Fund's mission chief Shekhar Aiyar praised several recent developments in the economy but also warned of some potential dangers.

"Latvia has made rapid strides since the economic crisis... but economic growth has slowed recently due to weak investment and an unfavorable external environment. Growth is 2014 is likely to be below 3 percent," Aiyar said.

On the key question of what effect the current turmoil in Ukraine might have on Latvia, Aiyar said so far the "direct impact" had been "relatively small."

However the conflict - together with the tepid nature of the euro area recovery - has likely dampened confidence and held back investment."

The IMF described the medium-term outlook as "favorable" provided external facors do not deteriorate and production resumes soon at the Liepajas Metalurgs steelworks - a measure which could be worth as much as 0.5% added to GDP.

However, "Risks are tilted to the downside," the IMF warned and urged the government to tackle several issues including judicial and educational reforms and infrastructure development while keeping a careful eye on the non-resident banking sector which "should continue to be subject to vigilant supervision."

In its most explicit piece of advice, the IMF urged the government to ditch recent amendments to insolvency laws that it fears will further restrict a lending market that has already ground to a virtual standstill.

Latvia is currently going through what might be called a credit-less recovery. Bank credit has already been negative for too long, in our view."

"The amendments may have the unintended consequence of raising down-payments and restricting credit to households, particularly low-income and young households," Aiyar said.

 

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Economy
Economy