RIGA, May 31 (Xinhua) -- In the absence of meaningful structural reforms, the medium-term potential growth rate of the Latvian economy would be limited, said Ben Kelmanson, head of the International Monetary Fund (IMF) mission in Latvia, on Wednesday.
He said that so-called "crisis scars" - such as elevated uncertainty, weak corporate balance sheets and tighter credit conditions for small and medium enterprises (SMEs), and high structural unemployment - have been common across many countries.
These, along with economic headwinds such as demographic challenges, are likely to mean that, in the absence of meaningful structural reforms, the underlying medium-term potential growth rate of the economy is around 3 percent per year, Kelmanson said.
At the same time, determined policy action could raise potential growth and support faster convergence. Policy actions could include the following: structural and institutional reforms to support productivity growth (including protection of property rights, legal and insolvency reforms, and increasing access to financial services); higher public investment in infrastructure and human capital; and active labor market policies aimed at lowering structural unemployment to help offset negative demographics.
Care will also be needed to avoid having wage increases outstrip productivity growth, he said.
Kelmanson also noted that Latvia's economic fundamentals are sound, though a continued prudent and balanced policy mix will be needed to maintain sustainable growth, and to preserve past competitiveness gains. Fight against shadow economy should also be continued, he said.
Following a growth deceleration last year, related to the slow absorption of EU funds and the associated investment contraction, growth is now accelerating, and is forecast to pick up to around 3.25 percent in 2017. It will be driven by a rebound in investment, continued solid private consumption, and support from net exports as the global economy expands, the IMF mission said.
Meanwhile, a prolonged slowdown in key trading partners, notably the euro area, would act as a drag on growth; geopolitical tensions, or financial market disruptions, could adversely affect the real and financial sectors; and failure of credit growth to be sustained, or of structural reforms to continue advancing, could undermine medium-term growth prospects.
Conversely, growth would be buoyed by a faster than anticipated pick up in investment, stronger consumption growth, or greater support from net exports, the IMF mission said in its report.
IMF believes that a balanced policy mix, ambitious reform efforts, and continued vigilant financial sector regulation and supervision are vital to mitigate risks and lay the groundwork for future growth.
Kelmanson noted that the banking system in Latvia remains well capitalized, liquid and profitable, and Latvia's protracted period of credit stagnation is over. In the sector serving domestic clients, balance sheet repair has continued and credit growth has finally resumed, although households still lag non-financial corporates.
Continued and sustainable credit growth will be needed to support investment and boost long term growth, he said.
