IMF Concludes 2025 Article IV Consultation with Latvia, Citing Slowed Convergence and Fiscal Pressures

IMF Board Completes Latvia's Annual Economic Review

The International Monetary Fund (IMF) Executive Board officially concluded its 2025 Article IV Consultation for the Republic of Latvia on September 15, 2025. The annual review, a standard procedure for IMF member countries, assessed Latvia's economic health, policies, and future outlook.

The consultation's findings pointed to a concerning trend: Latvia's successful economic convergence to euro area income levels has slowed. The country's GDP per capita has fallen behind, a situation attributed to weak total factor productivity and limited capital deepening since the global financial crisis.

Mounting Fiscal Demands and Economic Performance

The IMF report underscored significant fiscal pressures facing the Latvian government. These demands arise from several critical sectors, including:

• Pensions
• Healthcare
• Defense
• Energy security
• Climate transition

These growing expenditures necessitate the preservation of fiscal space for potential future crises.

Economically, Latvia experienced a contraction of 0.4 percent in 2024, primarily driven by a decline in private investment. Public investment also contributed negatively, as the government faced challenges in maintaining the absorption of EU funds. While headline inflation saw a significant decline due to lower energy and food prices, strong nominal wage growth kept core inflation elevated. The IMF projects a rebound in real GDP growth to approximately 1 percent in 2025, largely supported by public investment.

Key Recommendations for Sustainable Growth

In response to these challenges, the IMF's Executive Board put forth several key recommendations for Latvia. Directors emphasized the importance of safeguarding macroeconomic stability and advancing structural reforms to reignite growth and accelerate income convergence with euro area peers.

The recommended fiscal strategy includes:

• Mobilizing additional revenues: This could involve strengthening tax compliance, rationalizing exemptions, and broadening the tax base by reducing the informal economy.
• Improving the efficiency of public spending and reprioritizing expenditures.
• Strengthening the defined contribution pillars of the pension system to ensure adequate retirement income.
• Accelerating fiscal reforms, including enhancing public investment management and the governance of state-owned enterprises.

Furthermore, the IMF advised reassessing the solidarity contribution on banks and continuing to monitor banks' exposure to the commercial real estate sector. Structural reforms targeting measures to promote investment and allocative efficiency were deemed crucial for reigniting growth, accelerating convergence, and increasing government revenue.