IMF hails growth of Republic of Latvia

On August 27, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Republic of Latvia.

Latvia experienced a relatively milder recession than most other European countries, contracting by 3.6 percent in 2020. While the pandemic has caused an unprecedented disruption to economic and social activity, the authorities responded with a sizable and broadbased policy response, thus mitigating its impact. These support measures have helped preserve jobs and provide liquidity to companies and income support to vulnerable groups, thereby averting a deeper recession. Fiscal balances deteriorated as a significant COVIDsupport package was deployed, pushing the overall deficit to 4.5 percent of GDP and public debt to 44 percent of GDP. The current account improved and reached 3 percent of GDP as domestic demand weakened.

A strong recovery is expected if mass vaccination gains momentum and containment measures are phased out. Output is projected to grow by 3.6 percent in 2021 and 5.2 percent in 2022, as stimulus and the EUfinanced investment works through and vaccinations help control the spread of the virus. However, uncertainty around the baseline is unusually high with upside and downside surprises. Notably, a resurgence of new variants of the virus and a slow and/or uneven rollout of vaccines could pose significant downside risks to growth.

At the same time, a ramping up of the vaccine rollout would allow activity to resume faster and help prevent long-term scarring.

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the sizable and broadbased policy response to cushion the socioeconomic impact of the COVID-19 pandemic. The economic outlook appears favorable, reflecting a rebound in export demand, consumption, and EU-financed public investment. Nevertheless, pandemic-related risks and uncertainty remain high. Against this background, it will be important to maintain supportive policies in the near term while preserving financial stability and fostering structural transformation to achieve greener, smarter, and more inclusive growth.

Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. Directors supported maintaining the accommodative fiscal policy stance at the current juncture. They stressed the need to ensure that fiscal support remains well-targeted and adjusted to the evolving conditions.

Once the recovery is firmly secured, fiscal policy should aim to rebuild buffers and facilitate Latvia's economic transformation, underpinned by fiscal rules.