The Latvian economy has become considerably more resilient since the global financial crisis, and economic prospects remain favourable, the International Monetary Fund (IMF) has said.
In its latest assessment of Latvia, the fund found no significant economic imbalances, external and government debt are on declining paths, and private sector balance sheets continue to improve. Inflation has been moderate, and competitiveness has held up. The external position is assessed to be moderately stronger than implied by medium-term fundamentals and desirable policies. Growth has been strong, with real GDP growth reaching 4.8 per cent in 2018, led by a pick-up of private investment along with a boom in EU-funded construction and strong growth in IT and communications, and while it is projected to decelerate in the medium term, it is expected to converge to a still robust rate of three per cent.
“However,” notes the assessment, “important challenges and risks may test the economy’s resilience. First, Latvia’s population continues to decline, which strains the labour market and poses a long-term growth challenge. Second, weaker than expected external growth, especially in the euro area, and rising protectionism could significantly weigh on exports. Third, the financial system still confronts financial integrity risks. Failure to strengthen the effectiveness of the AML/CFT regime and refocus BSFCs could undermine the stability of the financial system and its ability to support the economy.”
The IMF recommends long-term reforms to focus on the effectiveness of the AML/CFT regime by enhancing risk-based supervision, the quality and use of financial intelligence, the application of preventive measures, investigation and prosecution, and coordination among relevant national and regional authorities.
The fund also concludes that the financial system needs to become more supportive of the domestic economy.