Publication: Latvia's Macroeconomic Options in the Medium Term: Fiscal and Monetary Challenges of EU Membership
Date
2004-05
ISSN
Published
2004-05
Author(s)
Monga, Celestin
Abstract
Latvia's experience over the past
decade shows that economic growth and real convergence can
no longer be assumed to be exogenously driven processes
determined by given technological improvements and
relatively higher factor returns. Instead, it is an
endogenously driven process led by many variables, including
policy variables. European Union membership clearly brings
enormous economic benefits to Latvia. However, it also
brings important challenges on the macroeconomic front,
especially prior to the adoption of the euro. Substantial
progress has been made toward fiscal consolidation since the
mid-1990s but several risks remain. Given the facts that
domestic demand remains buoyant and that Latvia will have to
accommodate the expenditure commitments associated with NATO
and EU membership while simultaneously aiming to fulfill the
medium-term goal of a balanced budget, a more prudent fiscal
policy should be the main short-term policy objective. The
authorities should therefore reassess their current
medium-term budget framework and strengthen their fiscal
rules so that off-budget spending is eliminated and controls
over spending ministries and local government finances are
reinforced. They should also rethink any further tax
reductions until a clear strategy is designed for
compensating for projected losses in government revenues.
Monetary policy can contribute to sustainable growth and job
creation in Latvia in the medium and long term by providing
an environment for price stability. It will have to be
complemented by further microeconomic reforms and prudent
wage developments aligned with productivity growth.
Link to Data Set
Citation
“Monga, Celestin. 2004. Latvia's Macroeconomic Options in the Medium Term: Fiscal and Monetary Challenges of EU Membership. Policy Research Working Paper;No.3307. © World Bank, Washington, D.C.. http://hdl.handle.net/10986/14111 License: CC BY 3.0 IGO.”
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