The Latvian Economy accepted to reach around 5 percent this year

The Latvian economy is now recovering from a severe downturn, with economic growth of 4½–5 percent expected this year, according to International Monetary Fund (IMF) and the European Commission (EC) statement released on December 8. However, growth is likely to slow sharply next year, owing to the deteriorating external environment. While consumer price inflation is likely to ease next year, efforts to promote a sustainable low-inflation environment are warranted. This year’s budget deficit should come in below target, despite significant unexpected costs associated with airBaltic. Labor market conditions have improved but long-term unemployment remains high, and skill losses and skill mismatches require particular attention. Poverty rates remain among the highest in the European Union (EU). Against this background, the mission teams have continuously stressed the need to retain a sufficient level of social safety net spending.

The Latvian government will aim at a 2012 budget deficit of 2.5 percent of GDP, with a view to meeting the general government deficit criterion for Euro adoption on a sustainable basis. Although the mission teams expressed doubts about some measures in the government’s budget proposal, such as further cuts in road maintenance and reduced safety net spending, the budget should be sufficient to achieve the fiscal target. As a contingency, the government stands ready to introduce additional measures during 2012 if these will be needed to meet the deficit criterion.

In the banking sector, the government submitted its final sales strategy for the Mortgage and Land Bank to the EC on 2 November with a view to launching the orderly sale of its commercial portfolio. This step provided for the release on 21 November of another €100 million for general government financing from the funds earmarked for banking sector support.