"Latvia’s economic fundamentals remain broadly sound, with a low and declining debt burden and prudent fiscal and current account deficits. Growth is projected to decelerate to just above 3 percent in 2019, amid a less supportive external environment. A tight labor market and adverse demographic trends create capacity constraints and will limit long-term growth without reforms," the IMF said.
It advised that efforts should continue to focus on measures that ease labor market constraints, increase productivity, and support investment growth. The long-term policy mix should also aim to ensure space to accommodate demographic and social spending costs, the IMF said.
Growth is projected to slow from 4.8 percent in 2018 to just above 3 percent in 2019 as a less supportive external environment weakens export growth and reduced pace of EU funds absorption and wage growth moderates domestic demand. Over the medium term, growth is projected "to converge to a still robust rate of 3 percent."
"Improving the effectiveness of the anti-money laundering regime, upgrading supervisory powers in bank liquidation, and de-risking the banking sector while ensuring efficient and inclusive financial intermediation will be critical to preserving financial sector stability and supporting growth," it added.
"The financial system still confronts reputational risks. The 2018 assessment by MONEYVAL raised concerns about Latvia’s anti-money laundering and combating of terrorism (AML/CFT) regime. Failure to strengthen the effectiveness of the AML/CFT regime and refocus banks servicing foreign clients towards a viable business model could significantly undermine the stability of the financial system and its capacity to support investment and GDP growth," the international lender warned.
You can read more about Latvia's ongoing financial sector reforms in the latest Financial Sector Update.