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Latvia - Economy (Notes)

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. The International Monetary Fund (IMF) has noted that Latvia's economic performance the past several years has been among the best of the EU accession countries. Real per capita GDP has roughly doubled compared to its 1995 level. GDP grew by close to 11% in 2006 and annual growth rates of 6-8% in the medium term are predicted by the Latvian Government. Inflation, however, has remained high, at 6-7%, since 2004, following a period from 1999 to 2003 when Latvian inflation rates were at 3% or below. The increase in inflation has delayed prospects of introducing the Euro currency in Latvia. At the same time, Latvia's current account deficit (ranging from 12% to 14% of GDP over the past 3 years) remains one of the key vulnerabilities of the Latvian economy.

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. 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 24th worldwide on the ease of doing business there, according to the World Bank Doing Business 2007 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 Latvia's stable macroeconomic environment, central location in the region, and cheap labor. Representing 5.8% of Latvia's total foreign direct investment (FDI), the U.S. FDI stock in Latvia stood at nearly $420 million at the end of 2006, according to the Bank of Latvia's most recent available figures. In 2005, U.S. goods and services accounted for 1.0% of Latvia's total imports, while exports to the United States accounted for 2.7% 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, continued high economic growth in Latvia will depend on further 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.

Facts at a Glance: Geography - People - Government - Economy - Communications - Transportation - Military - Climate - Current Time - Ranking Positions - Latvian Lats Exchange Rates
Notes and Commentary: People - Economy - Government and Political Conditions - Historical Highlights - Foreign Relations - Relations with U.S.

Facts at a Glance
Current Time
Ranking Positions
Latvian Lats Exchange Rates

Notes and Commentary
Government and Political Conditions
Historical Highlights
Foreign Relations
Relations with U.S.

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