Republic of Latvia: 2024 Article IV Consultation-Press Release; and Staff Report

The Latvian economy contracted with significant disinflation against the backdrop of geopolitical headwinds. Persistent services inflation, driven by strong nominal wage growth amid tight labor markets, keeps core inflation elevated. Productivity growth has failed to match real wage increases, weighing on competitiveness. The economic consequences of Russia’s war in Ukraine continue to depress private investment and productivity, thus compromising further Latvia’s lagging income convergence. The government needs to address long-term spending pressures related to its priorities and multiple transitions around climate change and energy, aging and skilled labor shortages, and rising defense costs. The coalition’s priorities include managing the fallout from the war in Ukraine, ensuring energy independence, addressing social issues, and pursuing tax reform.