WASHINGTON: Latvia faces big economic challenges in its planned adoption of the euro, not the least of which is the eurozone crisis itself, the International Monetary Fund said on Tuesday.
The IMF also warned that the Baltic nation could be going too far in its ultra-austere fiscal policy, and could afford to loosen up while engaging in more structural reforms for the long run. "Reform fatigue is increasingly evident," the IMF said in a new assessment of the Latvian economy.
"The economy continues to recover, but the worsening global outlook is likely to hurt growth next year."
Projected growth of 4.5-5.0 percent this year could slow to 2.5 percent next year due to falling external demand, and "this could be optimistic if the euro area debt crisis were to worsen further," the Fund said.
It said the government's tough spending and wage cuts in 2009 and 2010 have succeeded in bringing down the deficit to an expected 4.0 percent of gross domestic product in 2011, compared to nearly 10 percent two years earlier.
But excessive tightening has left the country with a still-high 14.6 percent unemployment rate and more than one quarter of the population lives in severe poverty. The IMF praised the country's performance so far under its three-year 7.5-billion-euro ($10 billion) financial aid that ended in December.
But it questioned continued severe cuts by the government of Prime Minister Valdis Dombrovskis, without needed reforms to bring in more revenues, including tax increases.
"Many of the budget's measures, an across-the-board freeze in nominal wages, cuts in central and local government investment, cuts in road maintenance, are of questionable quality," it said. "Cuts in social safety net spending seem inadvisable given the increase in long-term unemployment," it added.
"While across-the-board cuts might be unavoidable early on in the program, now that the crisis is over the fiscal consolidation should have been based more on structural reforms."
It said lack of reforms could hurt the country's progress in joining the eurozone, the country has pegged its lats currency to the euro for several years with this goal in mind.
Without reforms, the IMF warned, the lats-euro exchange rate could become "misaligned," itself a problem in adopting the euro, currently shared by 17 countries.
Moreover, it added, the euro area debt crisis "raises important questions" about the goal of joining the euro. "Current uncertainty and tensions in the euro area could risk delays in Latvia's euro adoption," it said.
indiatimes.com
The IMF also warned that the Baltic nation could be going too far in its ultra-austere fiscal policy, and could afford to loosen up while engaging in more structural reforms for the long run. "Reform fatigue is increasingly evident," the IMF said in a new assessment of the Latvian economy.
"The economy continues to recover, but the worsening global outlook is likely to hurt growth next year."
Projected growth of 4.5-5.0 percent this year could slow to 2.5 percent next year due to falling external demand, and "this could be optimistic if the euro area debt crisis were to worsen further," the Fund said.
It said the government's tough spending and wage cuts in 2009 and 2010 have succeeded in bringing down the deficit to an expected 4.0 percent of gross domestic product in 2011, compared to nearly 10 percent two years earlier.
But excessive tightening has left the country with a still-high 14.6 percent unemployment rate and more than one quarter of the population lives in severe poverty. The IMF praised the country's performance so far under its three-year 7.5-billion-euro ($10 billion) financial aid that ended in December.
But it questioned continued severe cuts by the government of Prime Minister Valdis Dombrovskis, without needed reforms to bring in more revenues, including tax increases.
"Many of the budget's measures, an across-the-board freeze in nominal wages, cuts in central and local government investment, cuts in road maintenance, are of questionable quality," it said. "Cuts in social safety net spending seem inadvisable given the increase in long-term unemployment," it added.
"While across-the-board cuts might be unavoidable early on in the program, now that the crisis is over the fiscal consolidation should have been based more on structural reforms."
It said lack of reforms could hurt the country's progress in joining the eurozone, the country has pegged its lats currency to the euro for several years with this goal in mind.
Without reforms, the IMF warned, the lats-euro exchange rate could become "misaligned," itself a problem in adopting the euro, currently shared by 17 countries.
Moreover, it added, the euro area debt crisis "raises important questions" about the goal of joining the euro. "Current uncertainty and tensions in the euro area could risk delays in Latvia's euro adoption," it said.
indiatimes.com
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