Valainis: OECD conclusions and recommendations for the promotion of Latvian economic growth completely coincide with the government’s… – Economy, finance

Valainis: The conclusions and recommendations of the OECD for promoting the growth of Latvia’s economy completely coincide with the government’s policy. Due to the consequences of the pandemic and the war in Ukraine, a slowdown in economic growth has been observed in Latvia in recent years, similar to other countries, so Latvia is recommended to accelerate reforms, strengthen the quality of state finances and public services, as well as promote investments to ensure sustainable economic growth and improve the standard of living of the population.

At the same time Organizations for Economic Cooperation and Development (hereinafter OECD) experts have recognizedthat pdigitalization of public services in Latvia has significantly improved, as a result of which the administrative burden has significantly decreased. Psalmon fiscal space has provided strong support to households and businesses during the pandemic and energy crisis. On the other hand, the decrease in inflation due to lower energy and food prices and the increase in nominal wages will contribute to the growth of real income and private consumption in 2024 and 2025.

These are the main conclusions of the latest OECD economic report on Latvia, which was presented today, April 25, to representatives of ministries, social partners, academia, non-governmental organizations, foreign embassies, as well as other institutions, Latvia’s leading economists and entrepreneurs. The event for the presentation of the report was opened by Mathias Kormans, Secretary General of the OECD (Mathias Cormann) and the Minister of Economy of Latvia, Viktors Valainis.

“I am satisfied that the conclusions of the OECD report on the main obstacles and opportunities for Latvia’s competitiveness and growth completely coincide with the vision and policy of the Ministry of Economy and the government. Insufficient availability of finance for investments, imperfect competition in the banking sector, administrative burden, especially in construction, lack of qualified labor – these are all directions in which we have vigorously started work. I am sure that this work will be crowned with success and in the next few years Latvia will emerge as a growth leader in the Baltic region, ahead of our neighbors,” emphasizes Minister of Economy Viktors Valainis.

The OECD Economic Report is an independent, fact-based analysis of the development of Latvia’s economy and the progress of reform implementation, while the recommendations provided by OECD experts serve as a high-quality and good “handbook” for policy makers to ensure more sustainable growth of Latvia’s economy.

The recommendations of the 2024 OECD Economic Review are given on fiscal policy and tax system, state administration capacity and work quality, regional development, human capital development, incl. labor market and education policy, green transition, incl. energy and transport policy, policy for improving the institutional environment (combating shadow economy and corruption), as well as investment and lending policy.

In this year’s report, the OECD analyzed the topic of investment in depth, paying special attention to the issue of the availability of financing for investment. OECD experts have pointed out that since the global financial crisis, the dynamics of investment and lending in Latvia has been insufficient and in this respect Latvia lags behind the other Baltic states. OECD experts recommend significantly promoting investments to ensure faster economic growth. OECD researchers have concluded that the credit supply has decreased due to banks’ risk aversion, weak competition and underdeveloped capital market. On the other hand, the high level of the shadow economy, obstacles to competition and the lack of qualified labor have negatively affected business dynamics, innovations and investments, as well as hindered the redistribution of resources to more productive companies. Despite the increase in deposits and the high profitability of banks, banks are reluctant to issue loans. Therefore, in order to increase the opportunities for companies to attract non-bank financing, it is recommended to promote the development of the capital market as well. On the other hand, the promotion of innovations requires greater investments in human capital.

Along with the slowdown in economic growth, OECD experts recommend accelerating reforms in Latvia, which is essential for raising productivity and living standards. Russia’s war in Ukraine has driven up energy prices and disrupted trade and supply chains, weighing on economic growth. Underinvestment, lack of skilled labor and slow digital transformation since the global financial crisis have negatively affected potential growth and public sector capacity. At the same time, OECD experts have pointed out that the rate of economic growth in Latvia decreased even before the Covid-19 pandemic and the war in Ukraine. Consequently, the OECD states that the acceleration of structural reforms is essential for raising productivity and living standards.

The OECD also recommends strengthening the quality of public finances and public services in order to improve the standard of living of citizens. To finance rising spending on defense and health care and to reduce poverty among the elderly, the OECD suggests that tax revenues should be raised and spending efficiency and redistribution should be improved by shifting the tax burden from labor to other taxes on income, property and the environment, as high social security contributions, especially for low wage earners, does not motivate them to leave the shadow economy. Experts have also emphasized that further strengthening of tax compliance and the fight against corruption and money laundering can significantly reduce the shadow economy and expand the tax base. Shifting the tax burden to property taxes would also improve municipal finances, reduce gaps and reduce inequality. It would also be important to continue improving the human resources policy in Latvia in order to increase the quality of public administration. At the same time, OECD experts have recognized that the digitization of public services has significantly improved, as a result of which the administrative burden has significantly decreased. On the other hand, in order to reduce carbon emissions, it is recommended to reduce tax incentives for fossil fuels, to establish a Riga metropolitan transit authority with the aim of prioritizing investments in the public transport system and promoting coordination between municipalities, as well as promoting the renovation of multi-apartment buildings.

Such OECD reports are published every two years; The 2024 Economic Report on Latvia is already the fifth report (the first report was published in 2015). The OECD aims to assist governments by providing them with the best possible analysis, research, recommendations and solutions in almost every area of ​​economic policy.

The summary of the OECD Economic Report on Latvia in Latvian can be found on the website of the Ministry of Economy, while the 2024 OECD Economic Report on Latvia in full, its summary and presentation (in English) are published on the OECD website. Report presentation event, incl. expert discussions, the recording is available on the Youtube channel and Facebook account of the Ministry of Economy.

Ministry of Economics