RIGA - The Cabinet of Ministers on Tuesday approved Latvia's Stability Program 2022-2025, drafted by the Finance Ministry.
Latvia's Stability Program is one of the elements in the process of drawing up Latvia's annual and medium-term budget bills. The program comprises macroeconomic forecasts for 2022, 2023, 2024 and 2025, fiscal forecasts and general government budget targets.
The Stability Program includes two scenarios - the February scenario developed prior to the Russian invasion of Ukraine, and the updated March scenario taking to consideration an impact of the war.
Finance Minister Janis Reirs (New Unity) said that the Stability Program is a snapshot of the current situation, or the fiscal framework for the period 2023-2025. Decisions on filling the fiscal space will be taken while working on Latvia's 2023 budget.
Reirs indicated that if needed, Latvia will be able to fiscally respond to the situation in 2023, energy sector challenges and a return of Covid-19. The fiscal strategy also enables the government to swiftly decide on additional allocations and investments in defense and internal security.
After contracting by 3.8 percent due to the Covid-19 crisis in 2020, the Latvian economy rapidly recovered in 2021 and expanded by 4.8 percent. According to the Finance Ministry, state support aimed at mitigating the impact from the pandemic was EUR 1.3 billion, or 4.3 percent of GDP, in 2020, and EUR 2.3 billion, or 6.9 percent of GDP in 2021, ensuring significant support to businesses and the working population.
Thanks to the state support and businesses' ability to adapt to the crisis situation, the size of the Latvian economy returned to the pre-crisis level in the second quarter of last year.
According to the March scenario, the Latvian economy will grow by 2.1 percent this year and 2.5 percent next year, which compared to the February scenario is a reduction by 1.9 and 1.4 percentage points, respectively. Latvia's GDP is expected to grow by 3.3 percent in 2024 and by 3.4 percent in 2025.
The March scenario also projects Latvia's annual inflation to rise to 8.5 percent in 2022, primarily on account of increased energy and food prices. Consumer prices are likely to keep climbing also in other categories of goods and services.
Russia's aggression and a possible escalation of the war in Ukraine, as well as sanctions on Russia, especially on Russian energy, might push prices further up in Europe, the Finance Ministry warns.
According to the Finance Ministry's assessment, Latvia's general government deficit in 2021 was 7.2 percent of GDP, which is by 2.1 percentage points less than forecast in the fall of 2021. Latvia's general government deficit is expected to decrease to 6.5 percent of GDP this year, to 2.4 percent of GDP in 2023, to 1.8 percent of GDP in 2024 and to 0.9 percent of GDP in 2025.
According to the fiscal strategy, Latvia's general government structural deficit should gradually decrease by 0.5 to 1 percent of GDP annually. The government measures introduced to offset the impact from the Covid-19 crisis and rising energy prices, as well as increased investments in defense and internal security are considered one-time measures and therefore do not feature in the structural budget balance.
The growth of Latvia's defense budget to 2.5 percent of GDP by 2025 has been included in the Stability Program's unchanging policy scenario.
EU member states are required to draw up their Stability or Convergence Programs each year and submit them to the European Commission by the end of April. The programs are needed to ensure stricter budgetary discipline by supervising and coordinating budget policies in the eurozone and the EU.