IMF says 3 percent growth expected in medium term

The International Monetary Fund (IMF) on May 31 gave a cautiously optimistic assessment of Latvia's economic outlook, while warning that several downside risks remain. 

A release at the end of the IMF's latest Article 4 Mission (a regular inspection of the economies of IMF member states) said: "Macroeconomic conditions remain broadly sound. Fiscal and current accounts are at prudent levels, public debt is low, and unemployment continues to fall."

"The economy is gaining momentum. Following a growth deceleration last year, related to the slow absorption of EU funds and the associated investment contraction, growth is now accelerating, and is forecast to pick up to around 3¼ percent in 2017. This pick up will be driven by a rebound in investment, continued solid private consumption, and support from net exports as the global economy expands," the IMF said.

A prolonged slowdown in key trading partners, notably the Euro Area, would act as a drag on growth; geopolitical tensions, or financial market disruptions, could adversely affect the real and financial sectors; and failure of credit growth to be sustained, or of structural reforms to continue advancing, could undermine medium-term growth prospects, the international lender warned.

"Continued sound policy making is vital," and "ambitious reform efforts, and continued vigilant financial sector regulation and supervision are vital to mitigate risks and lay the groundwork for future growth," the IMF concluded.

This was immediately picked up by Finance Minister Dana Reizniece-Ozola as justification for her pending tax reform program, amongst other planned reforms.

 


However, the IMF's full advice was that "The Tax Policy Guidelines offer an important opportunity, but the final policy package needs to be clarified, and implemented prudently. While the final details of the “tax strategy” are still to be determined, the stated goals are welcome: namely to support growth, increase equity, and boost revenues. There are three key challenges to ensure that these can be achieved: i) finalizing plans swiftly to reduce uncertainty for households and firms, ii) carefully managing the macro impact to avoid procyclical policy and undermining future competitiveness, and iii) sustainably boosting the revenue share to ensure robust public finances even after EU funds diminish."

The underlying medium-term potential growth rate of the economy is around 3 percent per year, though this could be accelerated if reforms prove effective, the IMF said.

In the financial sector, "continued vigilant supervision" will be required to help Latvia shed its image as a money-laundering haven, with the IMF saying: "Continued vigilant supervision is needed to mitigate real and reputational risks, as is close monitoring of regional financial interconnectedness."

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