The visit concluded that following continued strong fiscal performance last year, the fiscal stance for 2013 remains appropriate, as does adherence to the new fiscal framework.
Latvia’s 2012 headline fiscal outturn was better than previously expected. Adjusting for the economic cycle, Latvia met its Medium-Term Objective (MTO) under the Stability and Growth Pact, namely a structural fiscal deficit of 0.5 per cent of GDP. Budget implementation in 2013 is on track. But over the medium term, Latvia will likely face fiscal headwinds from several factors, such as a gradual reduction in pay-out ratios from state-owned enterprises, restored indexation of pensions, and government guarantees on a loan to the troubled steelmaker. As a result, compensatory measures—including reconsideration of planned further cuts to the personal income tax—may be needed to keep fiscal performance in line with the recently approved Fiscal Discipline Law.
Recent regulatory and supervisory measures will help to contain risks from the rise in non-resident deposits (NRDs), though continued vigilance is warranted. Macro-economic risks associated with a large NRD sector include the potential drain on international reserves in the event of outflows, and contingent fiscal liabilities owing to sovereign backing for the deposit guarantee scheme. The tightening of liquidity requirements for NRD-specialised banks since February 2013 is appropriate, and complements already higher minimum capital requirements imposed on these banks. The growth rate of NRDs in Latvian banks has moderated since mid-2012.
Full press release
© International Monetary Fund
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