Latvia’s long-term growth threatened by population decline

9 Aug 19

A decline in Latvia’s population could pose a barrier to long-term growth for the country, according to the IMF.

Latvia’s economy grew by 4.8% in 2018, up on the 4.6% the year before and 2.1% in 2016, the Washington-based fund noted, in a report out on Wednesday.

But it also noted the working age of the population in the eastern European country is expected to decline by about 31% in the next 30 years.

This implied “an average reduction in annual average potential growth of 1.25 percentage points”, the IMF stated, in the country’s annual ‘article IV consultation’.

“Latvia’s population continues to decline, which strains the labour market and poses a long-term growth challenge,” the economic report concluded.

Although it also noted that Latvia’s economy had become “considerably more resilient since the global financial crisis, and economic prospects remain favourable”, despite the country suffering “weaker than expected external growth, especially in the euro area”.

The IMF also highlighted Latvia’s external and government debt were going down. Gross external debt in 2017 was 140.5% of GDP in 2017 and 121.0% in 2018.

Private sector balance sheets continued to improve in the country and inflation had been moderate, the article IV report stated.

The IMF executive board suggested Latvia should “focus capital spending on projects that have the potential to catalyse private investment and have high social impact” and improve the use of public resources and reduce corruption by “strengthening the transparency and governance of local authorities”.

“The financial system needs to become more supportive of the domestic economy,” it added whilst noting the authorities in the country had “signalled strong political commitment at the highest level to restore the reputation of the financial system”.

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