On 5 September 2024 the IMF issued a report following discussions with Latvia under Article IV of the IMF’s articles of agreement.

Following recovery from the pandemic, Latvia’s economic growth contracted by 0.3% in 2023, with tighter financial conditions and weak external demand. The Ukraine war added to structural challenges amid multiple transitions relating to climate change and energy. Also, Latvia faces challenges from an aging population and labour shortages. Private investment and productivity have been depressed by the economic consequences of the Ukraine war.

Latvia’s real GDP growth is projected to increase to 1.7% in 2024 and to 2.4% in 2025, helped by a recovery in private consumption, higher public investment, and stronger external demand. Medium-term growth is projected to continue at an average of around 2.5%, with support from public investment and reforms. There is however a risk to competitiveness from the recent high wage growth, geopolitical tensions and deeper geo-economic fragmentation.

A tighter fiscal stance is required to build buffers for future government spending. Possible policies to improve the position include reducing tax exemptions; raising revenue from property taxation; strengthening tax enforcement; and improving investment spending efficiency. A flexible fiscal policy is required to deal with the possible downside risks.

Structural fiscal measures are needed to deal with medium to long term spending pressures. In the medium term, fiscal consolidation could be supported by broadening the bases of corporate income tax and personal income tax, for example by reducing the shadow economy; broadening the base of property taxes; reducing tax exemptions and fossil fuel subsidies, and rationalizing spending on goods and services. The IMF report welcomes the pension reform efforts and recommends linking the retirement age to life expectancy.

By further accelerating corporate reforms and improving access to finance, Latvia could boost investment and productivity. Owing to the aging population and skill mismatch, Latvia should continue to look at reforms to improve the high-skilled labour supply, to further enhance investment in productivity. Training and internal labour mobility should aim to benefit priority sectors such as the green, digital and health sectors.

Climate policy should be strengthened; and adoption of the climate law and the National Energy and Climate Plan (NECP) should be accelerated. The government should aim for a balance between fiscal support, carbon pricing or taxation, and regulations. The report notes that Latvia should continue to enhance energy security, and boost investment in clean energy.