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Economic Overview

For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.

Since its independence, Latvia has implemented market-oriented reforms. The country's economy has performed well due to steady growth in domestic consumption and the contribution of foreign investment. As a member of the EU since 2004 (and of the Eurozone since 2014), it has benefited from substantial European funding. The growth rate has been positive since 2011 and was among the highest in the EU countries. Following the economic downturn caused by the outbreak of the COVID-19 pandemic, the country’s GDP rebounded strongly in 2021 (+4.5%) thanks to sizeable government support measures and solid export performance coupled with higher levels of private consumption. The latter should be the main growth driver over the forecast horizon, supported by strong wage growth and extra savings accumulated in recent years. Overall, real GDP growth this year is forecast at 5.2%, whereas it should marginally slow to 4% in 2023 (IMF).

Latvia's macroeconomic indicators are generally positive, as the country pursued tax and labour reforms in accordance with its stability programme for the period 2018-21. Temporary stimulus measures taken to offset the effects of the COVID-19 crisis (estimated at around 5% of GDP) caused an increase in the budget deficit, which stood at 7.8% in 2021 (from a level of 1.8% before the pandemic). In 2022, the deficit is projected to decrease to 2% of GDP as per the IMF forecast (4.2% according to the EU Commission), with a further reduction in 2023 (1%). The government debt-to-GDP ratio increased from a pre-pandemic level of 37% to 47.6% in 2021 (IMF estimates) and is expected to follow a downward trend in the short term (47.1% and 44.9% in 2022 and 2023, respectively. The EU RRF grants are set to gradually increase from 0.1% of GDP in 2021 to 0.8% of GDP in 2023 (when the total EU fund inflows are expected to peak at 3.3% of GDP). Driven by rapid energy price increases, inflation reached 2.6% last year. The spike in energy prices in the second half of 2021 is set to carry over to 2022, translating into a 3.6% growth in inflation.

Supported by short-time work schemes and wage subsidies, unemployment stood at 7.7% in 2021. The pick-up in investment activity in the second half of the year should bring down unemployment to a level of around 7% over the forecast horizon. the Latvian economy is negatively impacted by a demographic challenge: The country has one of the lowest population growth rates in the EU (-0.6% in 2020 - World Bank, latest data available), with birth numbers declining continuously. Moreover, Latvia has to face a strong emigration of skilled youth. The latest data published by the Central Statistical Bureau (CSB) show that 23.4 % of the country’s population were at risk of poverty in 2020, 1.8 percentage points more than one year earlier.

 
Main Indicators 201920202021 (e)2022 (e)2023 (e)
GDP (billions USD) 34.0633.48e37.2040.8343.87
GDP (Constant Prices, Annual % Change) 2.0-3.6e4.55.24.0
GDP per Capita (USD) 17,739e17,549e19,53921,48923,135
General Government Balance (in % of GDP) -1.8-3.2e-7.8-2.0-1.0
General Government Gross Debt (in % of GDP) 37.043.5e47.647.144.9
Inflation Rate (%) 2.70.12.63.02.2
Unemployment Rate (% of the Labour Force) 6.38.17.77.27.1
Current Account (billions USD) -0.220.99-0.38-0.47-0.69
Current Account (in % of GDP) -0.63.0-1.0-1.1-1.6

Source: IMF – World Economic Outlook Database , October 2021

Note: (e) Estimated Data

Country Risk

See the country risk analysis provided by La Coface.

 

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Main Sectors of Industry

The agricultural sector contributes 3.8% of GDP and employs 7.3% of the active population (World Bank, latest data available). It is dominated by cattle breeding and dairy farming, in addition to the production of grain cereals (barley, wheat, rye and oats), sugar beets, potatoes and vegetables. Fishing and forestry are also important components of the primary sector. Apart from timber, which is largely exported, Latvia has almost no natural resources. The country has to import all its energy products, mainly from Russia. Almost 30% of Latvia’s territory is destined for agricultural use. Since the early 90s, the structure of land management changed significantly, with the liquidation of collective farms in favour of household farms and – to a greater extent - of private farms, which currently dominate the country’s rural sector. According to the latest figures from the EU Commission, total agricultural output rose 3.1% in 2020.

The industrial sector contributes to 19.2% of the GDP and employs almost one-fourth of the active workforce (23.7%). The construction, metallurgy, industrial food-processing, and mechanical engineering sectors are booming. Latvia is well-known as an important producer of railway equipment, radios, refrigerators, medicines, timber and steel by-products. The manufacturing sector is estimated to account for 10.8% of total GDP. Data by the Central Statistical Bureau (CSB) show that in 2021 industrial production output at constant prices rose by 6.5% (manufacturing increased by 7.3%, mining and quarrying by 4.7%, and electricity and gas supply by 2.9 %).

The Latvian economy is driven by the services sector which contributes 64% of GDP and employs 69% of the active population. Thanks to its attractive fiscal regulation, Latvia has developed a large financial services sector. Transportation and ICT are also important activities for the country’s economy (with more than 6,900 companies operating in the latter sector). Transportation, in particular, contributes 7.3% of GDP and employs more than 8% of the workforce. The banking sector comprises 16 banks, including 13 credit institutions registered in Latvia, and three branches of European institutions (European Banking Federation).

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 7.3 23.7 69.0
Value Added (in % of GDP) 3.8 19.2 64.0
Value Added (Annual % Change) 1.8 0.1 -4.8

Source: World Bank - Latest available data.

 
Monetary Indicators 20162017201820192020
Euro (EUR) - Average Annual Exchange Rate For 1 USD 0.940.890.850.890.88

Source: World Bank - Latest available data.

 

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Foreign Trade

The Latvian market is open and competitive, with foreign trade representing 119.4% of GDP in 2020 (World Bank, latest data available). According to the Central Statistical Bureau of Latvia, in the same year exports were comprised mostly of machinery and mechanical appliances (18.9%), wood and related articles (16.5%), prepared foodstuff (9.2%), vegetables (8.8%), and base metals (8.2%). Imports were led by machinery and mechanical appliances (22.5%), chemical products (10.7%), prepared foodstuff (9.6%), and vehicles (9.1%).

With its 530 km-long Baltic coastline on the west, Latvia is bordered by Belarus and Russia to the east, by Estonia to the north and by Lithuania to the south. This geographical position allows the country to function as a bridge between the two major economic areas of the EU and the CIS. At the same time, it also makes the country vulnerable to the external context, as shown during the Russia-Ukraine crisis and the following sanctions towards the Russian Federation. As a result, the volume of trade with Russia now accounts for less than 10% of the total while the EU has the lion share with nearly 70%. In the meantime, the country is also seeking new opportunities beyond Europe, with China and several countries in Central Asia. For 2020, the main partner countries were Lithuania (16.3%), Estonia (11.7%), Russia (8.5%) and Germany (7.2%). The EU is the main origin of the country’s imports (mostly from Lithuania, Germany and Poland, at 17.9%, 10.4% and 10.2%, respectively), with the main non-EU partners being Russia (6.1%) and China (4.2%).

The country has a structural trade deficit (notably due to its energy imports), which stood at 1.2% of GDP in 2020 (World Bank). In the same year, Latvia exported USD 16.2 billion worth of goods, importing USD 18.3 billion (+3.1% and -3.1 year-on-year respectively). Trade in services recorded a surplus, with exports standing at USD 4.9 billion (-19.6% y-o-y) against USD 2.9 billion of imports (-16.6%). Preliminary figures from the National Statistical Office show that in the first ten months of 2021 foreign trade turnover of Latvia at current prices reached EUR 29.35 billion –26% more than in the corresponding period of 2020. The exports value stood at EUR 13.3 billion (+ 22.2%), whereas the imports value comprised EUR 16.05 billion (+29.3 %).

 
Foreign Trade Values 20162017201820192020
Imports of Goods (million USD) 14,26917,03319,68118,95918,363
Exports of Goods (million USD) 12,10114,12616,16615,70516,201
Imports of Services (million USD) 2,6182,9593,5503,5272,940
Exports of Services (million USD) 4,6965,5576,2466,2114,989

Source: World Trade Organisation (WTO) ; Latest available data

Foreign Trade Indicators 20162017201820192020
Foreign Trade (in % of GDP) 118.9123.9123.6121.3119.4
Trade Balance (million USD) -2,283-2,770-2,993-2,994-1,677
Trade Balance (Including Service) (million USD) 93-199-264-286389
Imports of Goods and Services (Annual % Change) 3.68.66.43.0-3.3
Exports of Goods and Services (Annual % Change) 4.06.44.32.1-2.7
Imports of Goods and Services (in % of GDP) 59.362.362.261.159.1
Exports of Goods and Services (in % of GDP) 59.661.661.460.260.3

Source: World Bank ; Latest available data

Foreign Trade Forecasts 20212022 (e)2023 (e)2024 (e)2025 (e)
Volume of exports of goods and services (Annual % change) 4.53.92.72.42.3
Volume of imports of goods and services (Annual % change) 10.64.33.82.72.2

Source: IMF, World Economic Outlook ; Latest available data

Note: (e) Estimated Data

 
International Economic Cooperation
Latvia is a member of the United Nations, the Council of Europe, the Organization for Security and Cooperation in Europe, the World Trade Organization, the Council of the Baltic Sea States and the European Bank for Reconstruction and Development. It has contributed to NATO peacekeeping missions and is taking part at the present time in the international missions to Afghanistan and Irak.
 

Main Partner Countries

Main Customers
(% of Exports)
2020
Lithuania 16.4%
Estonia 11.7%
Russia 8.4%
Germany 7.2%
United Kingdom 5.7%
See More Countries 50.6%
Main Suppliers
(% of Imports)
2020
Lithuania 18.0%
Germany 10.4%
Poland 10.2%
Estonia 8.5%
Russia 6.2%
See More Countries 46.7%

Source: Comtrade, Latest Available Data

 

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Political Outline

Current Political Leaders
President: Egils LEVITS (since 8 July 2019)
Prime Minister: Krisjanis KARINS (since 23 January 2019)
Next Election Dates
Presidential: 2023
Parliamentary: October 2022
Main Political Parties
Latvia has a multi-party system, where no one party has a chance of gaining power alone, and parties must work with each other to form coalition governments. The major parties in the country are:

- "Harmony" (SDPS): centre-left, promotes closer ties with Russia
- Humane Latvia (PCL): right-wing, populism
- New Conservative Party (JKP): conservatism
- Development/For! (AP!): centre, social liberalism
- National Alliance of "All for Latvia!" - "For Fatherland and Freedom/LNNK" (NA): right-wing
- Unity (V): centre-right, liberal conservatism, pro-Europe
- Union of Farmers and Greens (ZZS): centre
- Latvian Russian Union (LKS): left-wing, russian minority politics. It did not get any seat in the last elections, but it is represented in the EU parliament.
Executive Power
The President is the head of state and is elected by the parliament in a separate election for a four-year term. The President is the commander-in-chief of the armed forces. He appoints the Prime Minister as head of the government who, in turn, has to receive a vote of confidence from the parliament and serves a four year term. The Prime Minister enjoys the executive powers which include implementation of the law in the country and running the day-to-day affairs. The Council of Ministers is nominated by the Prime Minister and appointed by the parliament.
Legislative Power
The legislature in Latvia is unicameral. The Parliament consists of 100 seats; its members are elected by direct popular vote to serve four-year terms. The parliament is called Saeima.

The executive branch of the government is directly or indirectly dependent on the support of the parliament, often expressed through a vote of confidence. Legislative power is vested in both the government and the parliament. The government does not have the power to dissolve the parliament. The people of Latvia enjoy considerable political rights.

 

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COVID-19 Country Response

COVID-19 epidemic evolution

To find out about the latest status of the COVID-19 pandemic evolution and the most up-to-date statistics on the COVID-19 disease in Latvia, please visit the official portal Covid19.gov.lv (in Latvian and Russian). Further information can be found on the website of the Ministry of Health (in Latvian).
For the international outlook you can consult the latest
situation reports published by the World Health Organisation as well as the global daily statistics on the coronavirus pandemic evolution including data on confirmed cases and deaths by country.

Sanitary measures

To find out about the latest public health situation in Latvia and the current sanitary measures in vigour, please consult the official portal Covid19.gov.lv (in Latvian and Russian), including the up-to-date information on the containment measures put in place. For public health recommendations, visit the website of the Centre for Disease Prevention and Control.
The government’s declaration of the state of emergency can be retrieved here.

Travel restrictions

The COVID-19 situation, including the spread of new variants, evolves rapidly and differs from country to country. All travelers need to pay close attention to the conditions at their destination before traveling. Regularly updated information for all countries with regards to Covid-19 related travel restrictions in place including entry regulations, flight bans, test requirements and quarantine is available on TravelDoc Infopage.
It is also highly recommended to consult COVID-19 Travel Regulations Map provided and updated on the daily basis by IATA.
The US government website of Centers of Disease Control and Prevention provides COVID-19 Travel Recommendations by Destination.

The UK Foreign travel advice also provides travelling abroad advice for all countries, including the latest information on coronavirus, safety and security, entry requirements and travel warnings.

Import & export restrictions

Following the measures taken by the European Commission, an export license is required to export personal protective equipment outside of the European Union. The export of medicines needed during the state of emergency is prohibited. For updates refer to the website of the Latvian Customs.
For a general overview of trade restrictions due to COVID-19 pandemic, please consult the section dedicated to Latvia on the
International Trade Centre's COVID-19 Temporary Trade Measures webpage.

Economic recovery plan

To know about the economic measures taken by the Latvian government to address the impact of the COVID-19 pandemic on the national economy, please visit the website of the Ministry of Finance and the dedicated section on the official portal Covid19.gov.lv (in Latvian and Russian). Further information can be retrieved on the website of the Ministry of Welfare (in Latvian).
The information on the EU’s economic response to COVID-19 and the actions to minimise the fallout on the EU member states’ economies of the COVID-19 outbreak is available on the website
of the European Council.
For the general overview of the key economic policy responses to the COVID-19 outbreak (fiscal, monetary and macroeconomic) taken by the Latvian government to limit the socio-economic impact of the COVID-19 pandemic, please consult the section dedicated to Latvia in the
IMF’s Policy Tracker platform.

Support plan for businesses

For information on the local business support scheme and taxation measures established by the Latvian government to help businesses to deal with the economic impacts of the COVID-19 epidemic on their activity, please consult the dedicated section on the official portal Covid19.gov.lv (in Latvian and Russian). Further information on support measures for entrepreneurs can be accessed here.
For an overview of the tax relief measures to support businesses, consult the website of KPMG.
For a general overview of international SME support policy responses to the COVID-19 outbreak refer to the World Bank's Map of SME-Support Measures in Response to COVID-19.

Support plan for exporters

The Latvian government allocated EUR 45 million to help farmers who lost part of their turnover due to weak demand from their export markets.
When employees are not working as a direct consequence of limitations imposed to tackle the spread of the virus, 75% of the employee’s average salary for the past six months can be paid by the government (capped at EUR 700/month), provided that the company's income in March or April 2020 decreased by at least 20% in comparison to the same month in 2019, and that the company’s exports amounted to at least 10% of total turnover in 2019 or to at least EUR 50,000.
The European Commission adopted a
Temporary Framework for State aid measures to support the economy in the COVID-19 outbreak, which enables short-term export credit insurance to be provided by the State where needed.

 

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