RIGA - IMF directors praised Latvia's rapid economic development - currently the fastest in Europe - but warned that the country needed to tighten fiscal policy given its high level of inflation, also the highest in the EU25.
Kristaps Otersons, a spokesperson for the Bank of Latvia, told journalists that the IMF directors, after having heard a report on the Latvian economy, pointed out the risks that accompany a red-hot economy, such as inflation, a current account deficit and over-lending to consumers.
The IMF's board called on Latvia's government to adopt policies that would control those risks, particularly a tighter fiscal policy, Otersons said.
The board stressed that curbing inflation would be crucial in any country that wants to introduce the euro and retain its competitiveness. The directors also expect that robust economic growth would continue in 2005. However, they added, with growth remaining somewhat above potential and amid rising world energy prices, inflation would decline only marginally this year.
As Otersons explained, the IMF called on Latvia to adopt measures that would not increase consumer demand. The fund's directors stressed the need to rein in the high growth in consumer crediting to subdue demand.
In view of the pegged exchange rate, the directors said fiscal policy would be the primary tool for ensuring macro-economic stability. Also, the IMF said the government should avoid spending additional budget revenues and limit any supplementary budget.
