Lending activity in Latvia has shrunk more than three times, Bank of Latvia reports

Lending activity relative to the size of the economy in Latvia has gone down more than three times after the global financial crisis, according to representatives of the Bank of Latvia with reference to the Financial Availability Report 2023.
The report mentions that in 2011 the volume of issued loans was close to 90% of GDP. In Q2 2023 it was only 27.1% of GDP.
Although initially the drop of excessive lending was justified after the global financial crisis, lending remained weak after the end of the crisis,

despite the significant improvement of the financial situation of households, businesses and the state itself.

The cause of the lasting and significant drop of lending volumes can be found in both supply and demand for financing, the report mentioned.
The Bank of Latvia prepared Financial Availability Report 2023. In it the central bank analyses the lending and financing sources situation in Latvia, as well as factors that have limited financing availability in Latvia in the past 10-15 years.
One of the authors of the report, Bank of Latvia Office for Research Kārlis Vilerts, notes that stable access to funding is a vital part of a health national economy, which balances investment activity and promotes economic growth. This is why a well-functioning financial system is one of the elements that strengthens the country’s economy in a long-term perspective.
The report also mentions both supply and demand factors that impede lending. It is also concluded that a declining lending activity in the business segment is largely related to limited availability of funding, not the ability and will of businesses to borrow money. The fact that the improvement of the financial situation of businesses is accompanied by a drop in lending activity, indicates a deterioration in the availability of lending.
The financial situation of households in Latvia and their ability to borrow has improved a great deal. However, it is not directly reflected in housing lending activity.

The construction activity of new households is well below that of Lithuania and Estonia.

The cause can be found in multiple structural flaws – bureaucratic obstacles in the way of construction projects, as well as the high lending interest rates and lending unavailability in regions.
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