Economy of Latvia

The economy of Latvia is an open economy in Europe and is part of the European Single Market. Latvia is a member of the World Trade Organization (WTO) since 1999,[20] a member of the European Union since 2004, a member of the Eurozone since 2014 and a member of the OECD since 2016.[21] Latvia is ranked the 14th in the world by the Ease of Doing Business Index prepared by the World Bank Group.[22] According to the Human Development Report 2011, Latvia belongs to the group of very high human development countries.[23] Due to its geographical location, transit services are highly developed, along with timber and wood processing, agriculture and food products, and manufacturing of machinery and electronic devices.

Economy of Latvia
Riga with its Central Market in the view
CurrencyEuro (EUR, €)
Calendar year
Trade organisations
EU, OECD and WTO
Country group
Statistics
PopulationDecrease 1,837,780 (20 November 2022)[3]
GDP
  • Increase $40 billion (nominal, 2022 est.)[4]
  • Increase 70 billion (PPP, 2022 est.)[4]
GDP rank
GDP growth
  • 4.3% (2018)
  • 2.2% (2019)
  • −3.6% (2020)
  • 5.2% (2021e)[4]
GDP per capita
  • Increase $25,100 (nominal, 2023 est.)[4]
  • Increase $37,300 (PPP, 2022 est.)[4]
GDP per capita rank
GDP by sector
  • 0.6% (2020 est.)[4]
  • 2.7% (2019)[4]
  • 2.6% (2018)[4]
Population below poverty line
  • 25.5% (2015)[5]
  • Positive decrease 27.3% at risk of poverty or social exclusion (AROPE, 2019)[6]
Positive decrease 35.2 medium (2019, Eurostat)[7]
Labour force
  • Decrease 974,318 (2019)[10]
  • Increase 76.8% employment rate (Target: 73%; 2018)[11]
Labour force by occupation
Unemployment
  • Positive decrease 8.8% (August 2020)[12]
  • Positive decrease 17.6% youth unemployment (15 to 24 year-olds; July 2020)[13]
Average gross salary
€1,525 monthly (August, 2023)
€1,114 monthly (August, 2023)
Main industries
processed foods, processed wood products, textiles, processed metals, pharmaceuticals, railroad cars, synthetic fibers, electronics
External
ExportsIncrease $12.84 billion (2017 est.)[5]
Export goods
foodstuffs, wood and wood products, metals, machinery and equipment, textiles
Main export partners
ImportsIncrease $15.79 billion (2017 est.)[5]
Import goods
machinery and equipment, consumer goods, chemicals, fuels, vehicles
Main import partners
FDI stock
  • Increase $18.84 billion (31 December 2017 est.)[5]
  • Increase Abroad: $3.402 billion (31 December 2017 est.)[5]
Decrease −$231 million (2017 est.)[5]
Negative increase $40.02 billion (31 March 2016 est.)[5]
Public finances
  • Positive decrease 36.9% of GDP (2019)[14]
  • Increase €11.245 billion (2019)[14]
  • €63 million deficit (2019)[14]
  • −0.2% of GDP (2019)[14]
Revenues38.7% of GDP (2019)[14]
Expenses38.9% of GDP (2019)[14]
Economic aidrecipient: $0.1 billion (1995)
Increase $4.614 billion (31 December 2017 est.)[5]

All values, unless otherwise stated, are in US dollars.

Latvia's economy has had rapid GDP growth of more than 10% per year during 2006–07, but entered a severe recession in 2009 as a result of an unsustainable current account deficit, collapse of the real estate market, and large debt exposure amid the softening world economy. Triggered by the collapse of Parex Bank, the second largest bank, GDP decreased by almost 18% in 2009,[24] and the European Union, the International Monetary Fund, and other international donors provided substantial financial assistance to Latvia as part of an agreement to defend the currency's peg to the euro in exchange for the government's commitment to stringent austerity measures. In 2011 Latvia achieved GDP growth by 5.5%[25] and thus Latvia again was among the fastest growing economies in the European Union. The IMF/EU program successfully concluded in December 2011.[26]

Privatization is mostly complete, except for some of the large state-owned utilities. Export growth contributed to the economic recovery, however, the bulk of the country's economic activity is in the services sector.

Economic history

For centuries under Hanseatic and German influence and then during its inter-war independence, Latvia used its geographic location as an important east–west commercial and trading centre. Industry served local markets, while timber, paper and agricultural products were Latvia's main exports. Conversely, years in the Russian Empire and the Soviet Union tended to integrate Latvia's economy with their markets and also serve those countries' large internal industrial needs.

After reestablishing its independence, Latvia proceeded with market-oriented reforms, albeit at a measured pace. Its freely traded currency, the lat, was introduced in 1993 and held steady, or appreciated, against major world currencies. Inflation was reduced from 958.6% in 1992 to 25% by 1995 and 1.4% by 2002.

After contracting substantially between 1991 and 1995, the economy steadied in late 1994, led by a recovery in light industry and a boom in commerce and finance. This recovery was interrupted twice, first by a banking crisis and the bankruptcy of Banka Baltija, Latvia's largest bank, in 1995 and second by a severe crisis in the financial system of neighbouring Russia in 1998. After 2000, Latvian GDP grew by 6–8% a year for 4 consecutive years. Latvia's state budget was balanced in 1997 but the 1998 Russian financial crisis resulted in large deficits, which were reduced from 4% of GDP in 1999 to 1.8% in 2003. These deficits were smaller than in most of the other countries joining the European Union in 2004.

Until the middle of 2008, Latvia had the fastest developing economy in Europe. In 2003, GDP growth was 7.5% and inflation was 2.9%. The centrally planned system of the Soviet period was replaced with a structure based on free-market principles. In 2005, private sector share in GDP was 70%.[27] Recovery in light industry and Riga's emergence as a regional financial and commercial centre offset shrinkage of the state-owned industrial sector and agriculture. The official unemployment figure was held steady in the 7%–10% range.

Economic contraction in 2008–2010
Main articles: 2008 Latvian financial crisis and Baltic states housing bubble

The financial crisis of 2007–2008 severely disrupted the Latvian economy, primarily as a result of the easy credit bubble that began building up during 2004. The bubble burst leading to a rapidly weakening economy, resulting in a budget, wage and unemployment crisis.[28] Latvia had the worst economic performance in 2009, with annual growth rate averaging −18%.

The Latvian economy entered a phase of fiscal contraction during the second half of 2008 after an extended period of credit-based speculation and unrealistic inflation of real estate values. The national account deficit for 2007, for example, represented more than 22% of the GDP for the year while inflation was running at 10%.[29] By 2009 unemployment rose to 23% and was the highest in the EU.[30]

Paul Krugman, the Nobel Laureate in economics for 2008, wrote in his New York Times Op-Ed column for 15 December 2008:

"The acutest problems are on Europe's periphery, where many smaller economies are experiencing crises strongly reminiscent of past crises in Latin America and Asia: Latvia is the new Argentina".[31]

By August 2009, Latvia's GDP had fallen by 20% year on year, with Standard & Poor's predicting a further 16% contraction to come. The International Monetary Fund suggested a devaluation of Latvia's currency, but the European Union objected to this, on the grounds that the majority of Latvia's debt was denominated in foreign currencies.[32] Financial economist Michael Hudson has advocated for redenominating foreign currency liabilities in Latvian lats before devaluing.

However, by 2010 there were indications that Latvia's policy of internal devaluation was successful.[33]

Economic recovery 2010–2012

The economic situation has since 2010 improved,[34] and by 2012 Latvia was described as a success by IMF managing director Christine Lagarde[35] showing strong growth forecasts. The Latvian economy grew by 5.5% in 2011[36] and by 5.6% in 2012 reaching the highest rate of growth in Europe.[37] The GDP surpassed the pre-crisis level in 2018.[38]

Economic issues 2022-23

The Russian invasion of Ukraine in February 2022 caused some economic problems in Latvia. Real GDP growth slowed to 2.8 percent in 2022 from 4.3 percent in 2021. Russia was a major trade partner and EU sanctions impacted this. Dramatic rises in the cost of energy, the need to seek alternative sources of gas and oil as well as logistics issues resulted in inflation averaging 17.2% in 2022 before falling back to single digits in 2023.[39]

Privatisation

Privatisation in Latvia is almost complete. Virtually all of the previously state-owned small and medium companies have been privatized, leaving only a small number of politically sensitive large state companies. In particular, the country's main energy and utility company, Latvenergo remains state-owned and there are no plans to privatize it. The government also holds minority shares in Ventspils Nafta oil transit company and the country's main telecom company Lattelecom but it plans to relinquish its shares in the near future.

Foreign investment in Latvia is still modest compared with the levels in north-central Europe. A law expanding the scope for selling land, including land sales to foreigners, was passed in 1997. Representing 10.2% of Latvia's total foreign direct investment, American companies invested $127 million in 1999. In the same year, the United States exported $58.2 million of goods and services to Latvia and imported $87.9 million. Eager to join Western economic institutions like the World Trade Organization, OECD, and the European Union, Latvia signed a Europe Agreement with the EU in 1995 with a 4-year transition period. Latvia and the United States have signed treaties on investment, trade, and intellectual property protection and avoidance of double taxation.

Employment
Employed-unemployed in Latvia in workforce 15–74 years old (thousand people) 1996-2017 and chain-linked GDP reference year 2010 (bln EUR) Data: Statistics Latvia
  0510-0593
  0594-0676
  0677-0759
  0760-0842
  0843-0925
  0926-1008
  1009-1091
  1092-1170
Average monthly gross wages in cities under state jurisdiction and counties (in euro) 2017. Excluding private sector enterprises with number of employees < 50. Data: Central Statistical Bureau of Latvia

Average wages are higher in Riga and Ventspils and their surroundings, with inland border regions lagging behind, mainly the region of Latgale.

Sectors

Agriculture
Main article: Agriculture in Latvia

Latvia produced in 2018:

  • 1.4 million tons of wheat;
  • 426 thousand tons of potato;
  • 306 thousand tons of barley;
  • 229 thousand tons of rapeseed;
  • 188 thousand tons of oat;
  • 81 thousand tons of rye;
  • 80 thousand tons of bean;

In addition to smaller productions of other agricultural products.[40]

Manufacturing

Services
Main article: Tourism in Latvia

In 2022, the sector with the highest number of companies registered in Latvia is Services with 71,692 companies followed by Retail Trade and Finance, Insurance, and Real Estate with 15,300 and 10,287 companies respectively.[41]

Infrastructure

Energy
Main article: Energy in Latvia
Pļaviņas Hydroelectric Power Station
Real GPD per capita development of Estonia, Latvia and Lithuania

Most of Latvian electricity is produced with Hydroelectricity. The largest hydroelectric power stations are Pļaviņas Hydroelectric Power Station, Riga Hydroelectric Power Plant and Ķegums Hydroelectric Power Station.

In 2017 about 4381 GWh were produced in hydro power and 150 GWh in wind power. There are plans to increase Wind electricity production under the 2021-2030 energy plan.

Latvia used to import 100% of its natural gas from Russia,[42] until it's import was banned in January 2023.

Transport
Main article: Transport in Latvia

Key ports are located in Riga (Freeport of Riga and Riga Passenger Terminal), Ventspils (Free port of Ventspils), and Liepāja (Port of Liepāja). Most transit traffic uses these and half the cargo is crude oil and oil products.

Latvian Railways is the main state-owned railway company in Latvia. Its daughter companies both carry out passengers services as well as carry a large quantity of freight cargo, and freight trains operate over the whole current passenger network, and a number of lines currently closed to passenger services.

Riga International Airport is the only major airport in Latvia, carrying around 5 million passengers annually. It is the largest airport in the Baltic states and has direct flights to over 80 destinations in 30 countries. It is also the main hub of airBaltic.

See also

References
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  2. "World Bank Country and Lending Groups". datahelpdesk.worldbank.org. World Bank. Retrieved 29 September 2019.
  3. "Population on 1 January". www.worldometers.info. Retrieved 13 July 2020.
  4. "World Economic Outlook Database, April 2022". IMF.org. International Monetary Fund. April 2022. Retrieved 19 April 2022.
  5. "CIA World Factbook". CIA.gov. Central Intelligence Agency. Retrieved 19 January 2019.
  6. "People at risk of poverty or social exclusion". ec.europa.eu. Eurostat. Retrieved 5 March 2020.
  7. "Gini coefficient of equivalised disposable income – EU-SILC survey". ec.europa.eu. Eurostat. Retrieved 5 March 2020.
  8. "Human Development Index (HDI)". hdr.undp.org. HDRO (Human Development Report Office) United Nations Development Programme. Retrieved 12 October 2022.
  9. "Inequality-adjusted HDI (IHDI)". hdr.undp.org. UNDP. Retrieved 12 October 2022.
  10. "Labor force, total – Latvia". data.worldbank.org. World Bank. Retrieved 1 November 2019.
  11. "Employment rate by sex, age group 20-64". ec.europa.eu/eurostat. Eurostat. Retrieved 18 June 2019.
  12. "Unemployment by sex and age – monthly average". appsso.eurostat.ec.europa.eu. Eurostat. Retrieved 4 October 2020.
  13. "Unemployment rate by age group". data.oecd.org. OECD. Retrieved 8 September 2020.
  14. "Euro area and EU27 government deficit both at 0.6% of GDP" (PDF). ec.europa.eu/eurostat. Eurostat. Retrieved 28 April 2020.
  15. "Sovereigns rating list". Standard & Poor's. Retrieved 4 June 2014.
  16. Rogers, Simon; Sedghi, Ami (15 April 2011). "How Fitch, Moody's and S&P rate each country's credit rating". The Guardian. London. Retrieved 31 May 2011.
  17. "Rating Action: Moody's upgrades Latvia's government bond ratings to A3; stable outlook". Moody's. 2015. Retrieved 27 February 2017.
  18. "Fitch Affirms Latvia at 'A-'; Outlook Stable". Fitch. 2016. Retrieved 27 February 2017.
  19. "Scope affirms Latvia's credit ratings at A- and revises the Outlook to Stable from Positive". Scope Ratings. 2023. Retrieved 29 April 2023.
  20. "Members and Observers".
  21. "Latvia becomes full-fledged OECD member". LETA. 1 July 2016. Retrieved 4 July 2016.
  22. "Rankings – Doing Business – The World Bank Group". Doing Business. Retrieved 6 September 2012.
  23. Human Development Index and its components Retrieved 2012-09-06
  24. The CIA World Factbook Latvia – CIA – The World Factbook Retrieved 2012-09-06
  25. "GDP of Latvia increased by 5.5% in 2011". The Baltic Course. 9 March 2012. Retrieved 24 March 2012.
  26. Latvia and the Baltics—a Story of Recovery by Christine Lagarde managing director, International Monetary Fund Riga, 5 June 2012
  27. Ruta Aidis, Friederike Welter: The Cutting Edge: Innovation and Entrepreneurship in New Europe, Edward Elgar Publishing, 2008, p. 32
  28. Damien, McGuinness (4 February 2010). "In Pictures: Latvia economy reels in recession". BBC.
  29. "Latvia". CIA. Retrieved 15 December 2008.
  30. "Robin Hood hacker exposes bankers". BBC News. 24 February 2010. Retrieved 1 May 2010.
  31. Krugman, Paul (15 December 2008). "European Crass Warfare". The New York Times. Retrieved 15 December 2008.
  32. Evans-Pritchard, Ambrose (10 August 2009). "S&P downgrades Baltic states' debt ratings". The Daily Telegraph. London. Archived from the original on 13 August 2009.
  33. Baltic Business News, 8 February 2010
  34. Moody's: Latvian economy is stabilizing Baltic Business News, Retrieved on 3 September 2012
  35. Those who change will endure – IMF managing director LETA Retrieved on 5 June 2012
  36. Danske Bank: we expect Latvian GDP to grow by 2.0% y/y in 2012 Retrieved on 3 September 2012
  37. GDP growth in Latvia, at 5.6%, the fastest in Europe; growth to moderate this year Archived 22 October 2013 at the Wayback Machine
  38. "GDP (constant 2015 US$) – Latvia | Data". data.worldbank.org. Retrieved 1 December 2021.
  39. "Republic of Latvia: Staff Concluding Statement of the 2023 Article IV Mission". 13 June 2023.
  40. Latvia production in 2018, by FAO
  41. "Industry Breakdown of Companies in Latvia". HitHorizons.
  42. "Europe's Declining Gas Demand: Trends and Facts about European Gas Consumption – June 2015". (PDF). p.9. E3G. Source: Eurostat, Eurogas, E3G.
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