15.11.2023.

Financing of the Economy 2023

  • Latvijas Banka
Illustrative photo EFR
Photo by: Latvijas Banka

The report "Financing of the Economy 2023" prepared by Latvijas Banka offers a detailed assessment of lending and other financing sources in Latvia and analyses factors which have limited access to financing in Latvia over the past 10–15 years.

Kārlis Vilerts, Head of the Research Division of Latvijas Banka and one of the authors of the report, points out that robust access to financing is an important part of a healthy economy as it supports investment activity and so also economic growth. Having a financial system that functions well is consequently a key criterion that must be met to strengthen a country's economic development in the long run.

Lending activity is now a third of what it was at the time of the global financial crisis relative to the size of Latvia's economy, as outstanding loans amounted to nearly 90% of gross domestic product (GDP) back in 2011, whereas they stood at a mere 27.1% of GDP in the second quarter of 2023. The decline in the level of over-indebtedness following the global financial crisis was initially justified, but lending remained weak even despite the financial situation of households, companies and the government improving significantly. The reasons for the prolonged and substantial decline in lending volumes can be found on both the demand and supply sides of financing.

The report identifies both supply and demand side factors that are inhibiting lending.

The most important conclusion is that the decline in lending activity in the corporate segment comes more from the access to financing being limited than from companies being unwilling or unable to borrow. That the decrease in lending activity has been observed simultaneously with an improvement in the financial situation of companies points to the availability of loans having deteriorated.

The financial situation of households, together with their ability to take on new debt has improved considerably, but this has not been reflected in a significant expansion of lending for housing. There was much less activity in the construction of new housing than in Lithuania and Estonia. The reasons for this lie in several structural flaws, such as bureaucratic obstacles to the construction process and the relatively high lending rates and limited availability of loans in the regions of Latvia away from the capital.

APA: Banka, L. (2023, 01. dec.). Financing of the Economy 2023. Taken from https://www.macroeconomics.lv/node/6177
MLA: Banka, Latvijas. "Financing of the Economy 2023" www.macroeconomics.lv. Tīmeklis. 01.12.2023. <https://www.macroeconomics.lv/node/6177>.
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