05 June 2013

ECB publishes its Convergence Report 2013 assessing the economic and legal convergence of Latvia

The ECB's Convergence Report examines whether a high degree of sustainable economic convergence has been achieved in the country under review, and gauges compliance with the statutory requirements to be fulfilled by national central banks to become an integral part of the Eurosystem.

Latvia is within the reference values of the convergence criteria. Nevertheless the longer-term sustainability of its economic convergence is of concern. Joining a currency union entails foregoing monetary and exchange rate instruments and implies an increased importance of internal flexibility and resilience. In this respect, it is necessary for Latvia to continue along a path of comprehensive fiscal consolidation in line with the requirements of the Stability and Growth Pact. It is also important to lock in the competitiveness gains achieved in recent years by avoiding a renewed increase in unit labour cost growth. In addition, although Latvia's economic adjustment capacity has been strong, it needs to make progress in improving the quality of its institutions and governance. Moreover, it is crucial that a comprehensive policy toolkit is available to deal with risks to financial stability, including those stemming from the reliance of a significant part of the banking sector on non-resident deposits as a source of funding.

Looking ahead, maintaining low inflation rates in Latvia will be challenging in the medium term. The catching-up process is likely to drive up the inflation differential between Latvia and the euro area over the medium term. There are therefore concerns regarding the sustainability of inflation convergence.

Latvia is, at the time of finalisation of this report, subject to an EU Council decision on the existence of an excessive general government budget deficit, with a deadline for correcting the excessive deficit in 2012. In the reference year 2012 the general government budget balance showed a deficit of 1.2 per cent of GDP, i.e. well below the 3 per cent reference value. The general government gross debt-to-GDP ratio was 40.7 per cent, i.e. below the 60 per cent reference value. In 2013 the deficit ratio is forecast by the European Commission to be unchanged at 1.2 per cent and the government debt ratio is projected to increase to 43.2 per cent.

The Latvian lats has been participating in the exchange rate mechanism (ERM II) since 2 May 2005, with a fluctuation band of ±1 per cent as a unilateral commitment on the part of the Latvian authorities. Over the two-year reference period from 17 May 2011 to 16 May 2013, the lats has remained close to its central rate.

Full Convergence report

Full press release

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