ECONOMY
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 supplied Latvia's main exports. The years of Soviet occupation tended to integrate Latvia's economy into the U.S.S.R. in order to serve that empire's large internal industrial needs. Since reestablishing its independence, Latvia has proceeded with market-oriented reforms. Its freely traded currency, the Lat, was introduced in 1993 and has held steady or appreciated against major world currencies. Before late 2007, Latvia's economic performance was among the best of the EU accession countries. Real per capita GDP had more than doubled compared to its 1995 level; the economy was expanding rapidly, with GDP growth hitting 12.2% in 2006. Recently, however, internal economic instability combined with adverse external factors has turned economic growth negative. Latvia’s GDP contracted by 4.6% in 2008, and continues to fall. Latvia registered some of the highest inflation rates in the EU in recent years which delayed prospects of introducing the Euro currency. Inflation remains relatively high but has been falling steadily as a result of the recession. In response to the worsening macroeconomic situation, in late December 2008 Latvia signed a 27-month Stand-by Arrangement with the IMF, the EC, and several other partners for an assistance package totaling approximately EUR 7.5 billion ($10.5 billion). The program is centered on restoring competitiveness through economic adjustment, fiscal prudence, and factor price deflation. At the same time, Latvia's current account deficit (ranging from 12.6% to 22.5% of GDP over the past 3 years), one of the key vulnerabilities of the Latvian economy, has improved considerably.
Independence forced Latvia into a precarious position regarding its energy supply. With the exception of peat and timber, Latvia had no significant domestic energy resources and received 93% of its imported energy from Soviet republics. Latvia has sought ways to diversify its energy sources and to increase energy conservation. In August 2001, the Kegums hydroelectric power plant was reopened, contributing to Latvia's ability to supply 25% of its energy that year. Furthermore, in June 2002 the European Investment Bank loaned Latvenergo, a state-owned energy supply group, 80 million Euros to modernize its generation and distribution of electricity and thermal energy. On May 6, 2009, Latvenergo opened the first reconstructed power unit of the Riga thermal power station No 2. The reconstructed power plant provides 600 megawatts (Mw) electrical and 1,123 Mw thermal capacity. The new power unit (420 Mw) has increased the power efficiency of the plant and is supposed to decrease Latvia’s power supply dependency by 30%. The expectations are that the new power unit will reduce the import of electricity by 1,400 gigawatt hours per year on average. Latvia is also looking to regional cooperation arrangements to diversify its energy supplies. With the other Baltic states, it plans to create an electricity network able to operate independently of its Russian counterpart. It is planning major infrastructure projects to provide energy supplies via Scandinavia, and it is working with Estonia, Lithuania and Poland to build a new nuclear power station in Ignalina, Lithuania.
Privatization in Latvia is effectively complete. All of the previously state-owned small and medium enterprises have been privatized, leaving in state hands the electric utility, the Latvian railway company, and the Latvian postal system, as well as state shares in several politically sensitive concerns. Despite the lack of transparency of the early stages of the privatization process and certain difficulties in privatization of some of the largest companies, Latvian privatization efforts have led to the development of a dynamic and prosperous private sector, which accounts for approximately 70% of the country's GDP.
In the last few years, Latvia has implemented many positive reforms in the business sphere (ranking 29th worldwide on the ease of doing business there, according to the World Bank Doing Business 2009 report). Most reforms deal with licensing, taxes, and business closures. In the 2005/2006 period, Latvia made it easier for businesses to comply with building requirements and reduced the number of licenses and permits required. In addition, Latvia launched an electronic tax filing system and improved the regulation of bankruptcy administrators in order to reduce corruption.
Foreign investment in Latvia remains high, as both Western and Eastern investors are trying to establish a foothold in the new EU member state as well as to take advantage of central location in the region and relatively cheap labor. Representing 3.8% of Latvia's total foreign direct investment (FDI), the U.S. FDI stock in Latvia stood at $440 million at the end of 2008, according to the Bank of Latvia's figures. In 2008, U.S. goods and services accounted for 1% of Latvia's total imports, while exports to the United States accounted for 1.6% of Latvia's total exports. Latvia has been a member of the World Trade Organization since 1999. Latvia and the United States have signed treaties on investment, trade, intellectual property protection, and avoidance of double taxation.
In the long term, Latvia’s return to economic growth will depend on comprehensive structural reforms, economic adjustment and improvements to the business environment, particularly the drive to reduce corruption and strengthen the rule of law, and on Latvia's ability to use the opportunities presented by EU membership.
GDP (2008 nominal): $31.540 billion.
Annual growth rate (2008): -4.6%.
Annual inflation rate (2008): 15.3%.
Unemployment rate (2008): 7.5%.
Per capita income (2007, PPP): $16,377.
Natural resources: Peat, limestone, dolomite, gypsum, timber.
Agriculture, hunting, and fishing (3.1% of 2008 GDP): Products--cattle, dairy foods, cereals, potatoes, timber. Land--2.43 million hectares, of which 71.7% is arable, 27.1% meadow and pasture, and 1.2% orchards.
Industry, including energy (13.8% of 2008 GDP): Types--metalworking, machinery and tools, light electrical equipment and fittings, textiles and footwear, technological instruments, construction materials, processed foods.
Services (74.2% of 2008 GDP): Types--retail and wholesale trade; real estate, renting, and business activities; transport, storage, and communication.
Major sectors of the economy (2008): Retail and wholesale trade (17.3% of 2008 GDP); real estate, renting, and business activities (15.8% of 2008 GDP); manufacturing (10.6% of 2008 GDP); transport, storage, and communication (10.8% of 2008 GDP); construction (8.9% of 2008 GDP); financial intermediation (6.3% of 2008 GDP).
Trade (2008 est.): Exports--$8.56 billion: wood, wood products 22.5%; basic metals, fabricated metal products 14.6%, machinery, equipment 11%; food products, beverages (incl. alcoholic), tobacco 7.8%; chemicals, chemical products 7.4%; textiles and textile products 6.7%. Major markets--Lithuania 15.8%, Estonia 14.4%, Russia 9.6%, Germany 8.7%, Sweden 7.7%, U.K. 6.9%. Imports--$14.53 billion: machinery and equipment 20.8%; motor vehicles 14.6%; mineral products 11.5%; basic metals and fabricated metal products 9.6%; chemicals and chemical products 8.1%; food products, beverages (incl. alcoholic), tobacco 6.1%; rubber and plastic products 4.8%; textiles and textile products 4.3%. Partners--Germany 15.2%, Lithuania 13.9%, Russia 8.4%, Estonia 8.1%, Poland 7%, Finland 5.1%, Sweden 4.9%.
