Latvia continues to rebound vigorously from the deep downturn in 2008–2009, despite recession in the euro area, states a Public Information Notice released by the International Monetary Fund (IMF), informed BC the Latvian Institute.
The Public Information Notice goes on to add that Latvia’s banking system returned to profitability in 2011 and is well capitalized.
The country is well-positioned to meet all the Maastricht criteria in 2013. Joining the euro would remove residual currency risk, adding stability to the Latvian economy.
IMF believes the economy continues to recover strongly, inflation has fallen sharply, and the current account deficit is modest. While the medium-term economic outlook is favourable, risks are tilted to the downside because of the uncertain external environment. Directors emphasized the need for continued strong policies to safeguard financial stability, tackle persistently high structural unemployment, and strengthen potential growth.
Directors commended the authorities’ remarkable fiscal adjustment and welcomed that the 2013 budget appropriately consolidates the fiscal gains, holding the budget deficit well below the Maastricht criterion. Directors agreed that structural fiscal reforms, including timely passage and effective implementation of the Fiscal Discipline Law, will be crucial to strengthening fiscal sustainability.
The Directors also agreed that the case of Latvia shows the importance of adequately accounting for real-financial linkages in estimating the impact of financial stress on real activity and in program design.
In its latest report, the International Monetary Fund lauds Latvia's strong economic recovery and early repayment of the entire loan. Latvia’s early repayment of all outstanding obligations to the IMF following the successful international bond issuance reflects renewed confidence in the economy and the authorities’ policies, points out the IMF.
The Fund urges the authorities to keep the lowering of the Guaranteed Minimum Benefit and the decentralization of its financing under close review to ensure that the system continues to provide adequate support to the most vulnerable and avoids deepening regional disparities. While some IMF directors see merit in the planned cuts to the personal income tax in order to improve work incentives, others urge caution given concerns about equity and fiscal space, and highlight the need for compensatory measures.
The Fund welcomes the authorities’ strong commitment to euro adoption and commends the progress towards meeting the Maastricht criteria. It notes, however, that continued strong implementation of structural reforms will be necessary to address high structural unemployment and enhance competitiveness.
According to the report, priorities for action are reforms to the judicial system, the governance structure and transparency of state-owned enterprises, and the quality of higher and vocational education
