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Economy of Latvia

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Economy of Latvia
Riga, Old town
CurrencyEuro (EUR)[1]
Calendar year
Trade organisations
EU and WTO
Statistics
GDPIncrease$48 billion (PPP, 2014 est.)[2]
GDP rank97th (nominal) / 105th (PPP)
GDP growth
Increase4.6% (Real, 2013 est.)
GDP per capita
Increase$13,729 (nominal, 2015 est.) Increase$25,195 (PPP, 2015 est.)
GDP by sector
agriculture: 4.4%; industry: 26.3%; services: 69.3% (2012 est.)
Decrease0,6% (CPI, 2014)
35.2 (2013)
Labour force
0.9 million(2014)
Labour force by occupation
agriculture: 8.8%; industry: 24.0%; services: 67.2% (2010 est.)
UnemploymentIncrease9.1% (February 2015)
Average gross salary
€11,000/$12,000 , yearly (2015)[3]
€8,000/$9,000 , yearly (2015)[4]
Main industries
processed foods, processed wood products, textiles, processed metals, pharmaceuticals, railroad cars, synthetic fibers, electronics
External
ExportsIncrease $ 13.4 billion (2014 est.) [5]
Export goods
foodstuffs, wood and wood products, metals, machinery and equipment, textiles
Main export partners
 Lithuania 17.7%
 Russia 14.7%
 Estonia 11.2%
 Germany 6.6%
 Poland 6.2%
 Sweden 5.1%
 UK 4.7% (2014 est.)[6]
ImportsIncrease$16.7 billion (2014 est.) [7]
Import goods
machinery and equipment, consumer goods, chemicals, fuels, vehicles
Main import partners
 Lithuania 17%
 Germany 11.7%
 Poland 10.9%
 Estonia 7.7%
 Russia 7.7%
 Finland 5.8%
 Italy 4.1% (2014 est.)[8]
FDI stock
Increase$13 billion (31 December 2012 est.)
Decrease$35 billion (31 December 2012 est.)
Public finances
Decrease35.0% of GDP (2015 est.)
Revenues€7.3 billion(2015 est.)
Expenses€7.5 billion(2015 est.)
Economic aidrecipient: $0.1 billion (1995)
$9 billion (April 2011)[11]
All values, unless otherwise stated, are in US dollars.


The economy of Latvia is an open economy in Northern Europe and is part of the European Union's (EU) single market. Latvia is a member of the World Trade Organization (WTO) since 1999,[12] a member of the European Union since 2004, and of the Eurozone since 2014. Latvia is ranked the 21st in the world by the Ease of Doing Business Index prepared by the World Bank Group,[13] According to the Human Development Report 2011, Latvia belongs to the group of very high human development countries.[14] 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.

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,[15] 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%[16] and thus Latvia again was among the fastest growing economies in the European Union. The IMF/EU program successfully concluded in December 2011.[17]

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. On 1 July 2016 Latvia became a full member of the OECD.[18]

Economic history

Real GDP growth in Latvia 1996–2006.

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 center. 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 1991–93, the economy steadied in late 1994, led by 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.[citation needed]

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%.[19] Recovery in light industry and Riga's emergence as a regional financial and commercial center 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: 2008-2009 Latvian financial crisis and Baltic states housing bubble

The Financial Crisis of 2008 severely disrupted the Latvian economy, primarily as a result of the easy credit bubble that began building up during 2004. The bubble burst lead to a rapidly weakening economy, resulting in a budget, wage and unemployment crisis.[20] 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%.[21] By 2009 unemployment rose to 23% and was the highest in the EU.[22]

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

"The most acute 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 " [23]

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.[24] 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.[25]

Economic recovery 2010–2012

The economic situation has since 2010 improved,[26] and by 2012 Latvia was described as a success by IMF managing director Christine Lagarde[27] showing strong growth forecasts. The Latvian economy grew by 5.5% in 2011[28] and by 5.6% in 2012 reaching the highest rate of growth in Europe.[29] Unemployment, however, remains high, and GDP remains below the pre-crisis level.[30]

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 utilities 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.

Energy

With Lithuania, Poland, and Estonia, Latvia is considering participating in the Visaginas Nuclear Power Plant in Lithuania to replace the Ignalina Nuclear Power Plant.[31]

Statistics

Household income or consumption by percentage share:
lowest 10%: 2.9%
highest 10%: 25.9% (1998)

Industries: synthetic fibers, agricultural machinery, fertilizers, radios, electronics, pharmaceuticals, processed foods, textiles, timber; note – dependent on imports for energy and raw materials

Industrial production growth rate: 8.5% (2004 est.)

Electricity – production: 4,547 GWh (2002)

Electricity – production by source:
fossil fuel: 29.1%
hydro: 70.9%
nuclear: 0%
other: 0% (2001)

Electricity – consumption: 5,829 GWh (2002)

Electricity – exports: 1,100 GWh (2002)

Electricity – imports: 2,700 GWh (2002)

Agriculture – products: grain, potatoes, vegetables; beef, milk, eggs; fish

Foreign direct investments in Latvia: Lursoft statistics on remaining amount of investments at the end of each year. [1]

Packet of 20 cigarettes: On Average 3.00 – 4.00 EUR.

See also

References

  1. ^ Before 2014: Latvian Lats.
  2. ^ http://www.imf.org/external/pubs/ft/weo/2015/02/weodata/weorept.aspx?pr.x=77&pr.y=20&sy=2013&ey=2020&scsm=1&ssd=1&sort=country&ds=.&br=1&c=122%2C941%2C124%2C946%2C423%2C137%2C939%2C181%2C172%2C138%2C132%2C182%2C134%2C936%2C174%2C961%2C178%2C184%2C136&s=PPPGDP&grp=0&a=
  3. ^ http://data.csb.gov.lv/pxweb/lv/Sociala/Sociala__isterm__dsamaksa/?tablelist=true
  4. ^ http://data.csb.gov.lv/pxweb/lv/Sociala/Sociala__isterm__dsamaksa/?tablelist=true
  5. ^ "Exports of Latvia". CIA World Factbook. 2014. Retrieved 14 January 2015.
  6. ^ "Export Partners of Latvia". CIA World Factbook. 2014. Retrieved 14 January 2015.
  7. ^ "Imports of Latvia". CIA World Factbook. 2014. Retrieved 14 January 2015.
  8. ^ "Import Partners of Latvia". CIA World Factbook. 2014. Retrieved 14 January 2015.
  9. ^ "Sovereigns rating list". Standard & Poor's. Retrieved 4 June 2014.
  10. ^ 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.
  11. ^ "International Reserves and Foreign Currency Liquidity – LATVIA". International Monetary Fund. 20 May 2011. Retrieved 31 May 2011.
  12. ^ "Members and Observers".
  13. ^ "Rankings – Doing Business – The World Bank Group". Doing Business. Retrieved 6 September 2012.
  14. ^ Human Development Index and its components Retrieved 2012-09-06
  15. ^ The CIA World Factbook Latvia – CIA – The World Factbook Retrieved 2012-09-06
  16. ^ "GDP of Latvia increased by 5.5% in 2011". The Baltic Course. 9 March 2012. Retrieved 24 March 2012.
  17. ^ Latvia and the Baltics—a Story of Recovery by Christine Lagarde managing director, International Monetary Fund Riga, 5 June 2012
  18. ^ "Latvia becomes full-fledged OECD member". LETA. 1 July 2016. Retrieved 4 July 2016.
  19. ^ Ruta Aidis, Friederike Welter: The Cutting Edge: Innovation and Entrepreneurship in New Europe, Edward Elgar Publishing, 2008, p. 32
  20. ^ Damien, McGuinness (4 February 2010). "In Pictures: Latvia economy reels in recession". BBC.
  21. ^ "Latvia". CIA. Retrieved 15 December 2008.
  22. ^ "Robin Hood hacker exposes bankers". BBC News. 24 February 2010. Retrieved 1 May 2010.
  23. ^ Krugman, Paul (15 December 2008). "European Crass Warfare". New York Times. Retrieved 15 December 2008.
  24. ^ Evans-Pritchard, Ambrose (10 August 2009). "S&P downgrades Baltic states' debt ratings The sovereign debt of Latvia and Estonia have been downgraded as the brutal slump plays havoc with public finances and tests commitment to euro currency pegs across the Baltic states". The Daily Telegraph. London. Retrieved 1 May 2010. {{cite news}}: horizontal tab character in |title= at position 44 (help)
  25. ^ Baltic Business News, 8 February 2010
  26. ^ Moody's: Latvian economy is stabilizing Baltic Business News, Retrieved on 3 September 2012
  27. ^ Those who change will endure – IMF managing director LETA Retrieved on 5 June 2012
  28. ^ Danske Bank: we expect Latvian GDP to grow by 2.0% y/y in 2012 Retrieved on 3 September 2012
  29. ^ GDP growth in Latvia, at 5.6%, the fastest in Europe; growth to moderate this year
  30. ^ http://www.multpl.com/latvia-real-gdp
  31. ^ "Visaginas recognised with nuclear site name". World Nuclear News. 30 July 2008. Archived from the original on 22 May 2013. Retrieved 31 July 2008. {{cite news}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help)
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