The IMF singled out Latvia's 2001 economic performance as one of the best among the EU candidate countries.
In its annual assessment of Latvia's economy released in late January, the IMF said the country's economic performance in 2001 reflected its long-standing commitment to macroeconomic stability and the success of earlier structural reforms in creating a flexible and resilient market economy.
Latvia's gross domestic product growth in 2001 would be 7.4 percent, the Latvian Finance Ministry said earlier this month.
Good prospects
The IMF noted Latvia's strong medium-term growth prospects. To meet this potential, the government needs to tighten spending and continue structural reforms.
"The planned budget deficit of 2.45 percent of GDP for this year is too high, so spending should be decreased," said Adalbert Knobl, the IMF's senior representative in Estonia and Latvia.
IMF representatives from Washington are due soon to discuss macroeconomic policies with the Latvian government, he said.
"If MPs don't amend the budget and fall into a pre-election mood, adding all sorts of things like the construction of the multimillion National Library for example, the budget deficit forecast could be corrected after the first six months, as the situation now is better than expected," said Uldis Cerps, chairman of the state Finance and Capital Markets Supervisory Committee.
The IMF expects that domestic demand in 2002 will again underpin significant growth in the Latvian economy, though below the pace of 2001. But the slowdown in the global economy is likely to place additional stress on Latvia's external current account.
"In Latvia domestic demand is strong. This has lead to a widening of the country's current account deficit," said Knobl. "It's natural in transition economies, as domestic savings are too small to finance investment. Currently, the deficit is over 7 percent compared with 5 percent or less in some other transition economies. If it hits 10 percent, we'll worry more.
"You do need rapid growth, as the standard of living has to rise to bridge the gap with EU countries, but it should be on a sustained basis," he said.
The current account deficit fell to 7 percent of GDP in 2000, after reaching almost 10 percent during the Russian financial crisis in 1998-99.
Further reduction of the current account deficit in 2001 was halted due to the combination of continued strong growth in Latvia and a slowdown among Latvia's main trading partners.
Runner-up
Lithuania has been lagging slightly behind its Baltic neighbors but has started to gain speed. In its recent annual assessment, the IMF praised Lithuania for restoring confidence on its policy making in general, allowing favorable access to domestic and international capital markets.
Still, the IMF noted that Lithuania remains exposed to the risk of outside shocks, which highlights the importance of continuing with sound financial policies and structural reforms "aimed at creating conditions for sustained growth, foreign direct investment and enhanced competitiveness."
Lithuania has finally recovered from the Russian financial crisis and gained momentum last year. Recovery came much later than in Latvia and Estonia, as the country was hit harder, and its exports were further victimized by the strength of the U.S. dollar.
The markets appreciate the repeg of the litas to the euro as Lithuania's main export markets are in Europe, not in the United States, Knobl noted.
Real GDP in Lithuania is expected to grow by 4.5 percent for 2001, driven initially by strong export growth complimented by a recent gradual recovery of domestic demand. Increased credit to the private sector following stronger competition in the banking sector, lower interest rates and improvements in the business environment have helped fuel domestic spending.
Lithuania's external current account deficit is expected to narrow to 5.8 percent in 2001 from 6 percent in 2000, mostly due to rapid growth in exports.
The IMF also applauded Lithuania's ongoing tax reforms.
Global slowdown
Western Europe is facing a raft of economic difficulties, according to the IMF. Higher oil and food prices have pushed up inflation and squeezed real incomes.
The downturn in the technology sector is hurting industry, especially in Finland, Ireland, Sweden and Germany. The slowdown in the United States and Asia is felt more and more, the rate of unemployment has stopped falling and the terrorist attacks in the United States are undermining consumer confidence.
Estonia, praised as the top performer by the IMF in summer 2001, has been hit by the slowdown more than Latvia and Lithuania, due mostly to a slowdown in high-tech exports.
Slowdown is forecast in Latvia as well, with a relatively robust growth of 4 percent to 5 percent still predicted for this year. The effects would have been felt much earlier if "exports to the CIS had not risen rapidly last year," Knobl said.
"We expect the slowdown to end this year, but it is hard to predict when the low point will be reached in Europe and the United States," Knobl said.
NATO membership will also bring favorable economic effects. "Country risks important for investments in the Baltics will decrease considerably by NATO membership," Cerps noted. "This is important as we have to catch up with Western European, and we started the race from the very bottom."
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