Republic of Latvia: Selected Issues
IMF Staff Country Reports, September 5, 2024
Source details
- Canonical URL
- Republic of Latvia: Selected Issues
Other formats
Bibliographic details
- Published: September 5, 2024
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9798400287817.002
Overview
- Assesses recent developments in Latvia’s competitiveness and productivity in the context of Baltic economies.
- Finds Latvia’s export market share has declined in recent years reflecting weakening external demand and the effects of EU trade sanctions, but only limited loss of competitiveness.
- Concludes that promoting productivity growth via structural reforms and capital investment is key to preserving competitiveness and building resilience against future shocks.
Key findings
- Latvia faces weakening competitiveness.
- Latvia’s real effective exchange rate appreciation in recent years has been greater than that implied by its productivity trend, leading to a narrowing competitiveness buffer.
- Latvia’s total factor productivity growth boost post-global financial crisis is unlikely to be sustained without structural reforms and efforts to increase capital investment.
- A decade-long weak investment, large infrastructure gaps, aging and emigration, and insufficient accumulation in skills weigh on Latvia’s productivity growth and competitiveness.
- These factors pose risks that Latvia could be caught in a middle-income trap with low growth and slow convergence to euro area income level.
- Boosting productivity is needed to meet challenges presented from Russia’s war in Ukraine and the ongoing transitions to sustain income convergence.
Risks and constraints
- Weak external demand and EU trade sanctions have contributed to declining export market share.
- Narrowing competitiveness buffer due to real effective exchange rate appreciation exceeding productivity-implied levels.
- Structural constraints: weak investment over a decade, large infrastructure gaps, demographic pressures (aging and emigration), and insufficient skills accumulation.
Policy recommendations
- Significantly higher investment is required for sustained convergence to euro area income levels.
- Promote productivity growth through structural reforms and increased capital investment to preserve competitiveness and build resilience against future shocks.
- Address infrastructure gaps, labor force aging and emigration, and skills accumulation as priorities to avoid a middle-income trap.
International Monetary Fund. Republic of Latvia: Selected Issues. September 5, 2024.
Content in this bundle
- Republic of Latvia: Selected Issues; IMF Country Report No. 24/285; August 2, 2024