Economy of Latvia

Economy of Latvia

Riga with its Central Market in the view
Currency	Euro (EUR, €)
Fiscal year	Calendar year
Trade organisations	EU, OECD and WTO
Country group	Developed/Advanced[1] High-income economy[2]
Statistics
Population	1,861,900 (2024)[3]
GDP	$45.04 billion (nominal, 2024)[4] $77.69 billion (PPP, 2024)[4]
GDP rank	97th (nominal, 2024) 107th (PPP, 2024)
GDP growth	2.6% (2019)[5] -2.3% (2020)[5] 4.3% (2021)[5] 2.8% (2022)[5] -0.3% (2023)[6] 1.7% (2024f)[6] 2.4% (2025f)[6]
GDP per capita	$24,193 (nominal, 2024)[4] $41,730 (PPP, 2024)[4]
GDP per capita rank	47th (nominal, 2024) 47th (PPP, 2024)
GDP by sector	agriculture: 3.9% industry: 22.4% services: 73.7% (2017 est.)[7]
Inflation (CPI)	2.7% (2019)[8] 0.1% (2020)[8] 3.2% (2021)[8] 17.2% (2022)[8] 9.1% (2023)[8] 2.0% (2024f)[8] 3.6% (2025f)[8]
Population below poverty line	22.5% (2021 est.)[7] 25.6% at risk of poverty or social exclusion (AROPE, 2023)[9]
Gini coefficient	34.0 medium (2023)[10]
Human Development Index	0.879 very high (2022)[11] (37th) 0.802 very high (33rd) (2022)[11]
Corruption Perceptions Index	60 out of 100 points (2023)[12] (36th)
Labour force	977,523 (2023)[13] 77.5% employment rate (2023)[14]
Labour force by occupation	agriculture: 7.7% industry: 24.1% services: 68.1% (2016 est.)[7]
Unemployment	7.2% (April 2024)[15] 11.9% youth unemployment (15 to 24 year-olds; April 2024)[16]
Average gross salary	€1,671 monthly (2024)
Average net salary	€1,213 monthly (2024)
Main industries	processed foods, processed wood products, textiles, processed metals, pharmaceuticals, railroad cars, synthetic fibers, electronics
External
Exports	$20.73 billion (2023)[17]
Export goods	foodstuffs, wood and wood products, metals, machinery and equipment, textiles
Main export partners	Lithuania(+) 18%  Estonia(+) 10%  Germany(+) 6%  Russia(+) 6%  Sweden(+) 5% (2022)[7]
Imports	$25.49 billion (2023)[18]
Import goods	machinery and equipment, consumer goods, chemicals, fuels, vehicles
Main import partners	Lithuania(+) 22%  Estonia(+) 10%  Germany(+) 9%  Poland(+) 9%  Russia(+) 6% (2022)[7]
FDI stock	$25.91 billion (2023)[19] Abroad: $3.402 billion (31 December 2017 est.)[7]
Current account	−$1.732 billion (2024)[20]
Gross external debt	$40.83 billion (April 2024)[21]
Public finances
Government debt	43.8% of GDP (2024)[22] €19.90 billion (2024)[23]
Budget balance	€1.3 billion deficit (2024)[24] −2.9% of GDP (2024)[24]
Revenues	37.8% of GDP (2024)[25]
Expenses	40.8% of GDP (2024)[26]
Economic aid	€4.6 billion from European Structural and Investment Funds (2007–2013)[27] €5.63 billion from European Structural and Investment Funds (2014–2020)[28]
Credit rating	Standard & Poor's:[29] A (Domestic) A (Foreign) AAA (T&C Assessment) Outlook: Stable[30] Moody's: A3 Outlook: Stable[31] Fitch: A− Outlook: Positive[32] Scope: A− Outlook: Stable[33]
Foreign reserves	$4.46 billion (2022 est.)[7]
All values, unless otherwise stated, are in US dollars.

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,^[34] a member of the European Union since 2004, a member of the Eurozone since 2014 and a member of the OECD since 2016.^[35] Latvia is ranked the 14th in the world by the Ease of Doing Business Index prepared by the World Bank Group.^[36] According to the Human Development Report 2023/24 by the United Nations Development Programme, has a HDI score of a 0.879 (2022 data).^[37] 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,^[38] 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%^[39] and thus Latvia again was among the fastest growing economies in the European Union. The IMF/EU program successfully concluded in December 2011.^[40]

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.

Prior to World War I, Latvia was an advanced manufacturing hub within the Russian Empire, primarily serving the Russian market.^[41] After attaining independence in 1918, Latvia lost its status as an advanced manufacturing hub.^[41] Latvia sought in the interwar period to become an international exporter of food and to re-industrialize.^[41] Latvia experienced growth in GDP per capita during the interwar period, although some economic historians have argued that there was stagnation in the period of the authoritarian Karlis Ulmanis regime (1934–1940).^[41]

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.^[42]

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%.^[43] 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.^[44] 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%.^[45] By 2009 unemployment rose to 23% and was the highest in the EU.^[46]

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".^[47]

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.^[48] 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.^[49]

Economic recovery 2010–2012

The economic situation has since 2010 improved,^[50] and by 2012 Latvia was described as a success by IMF managing director Christine Lagarde^[51] showing strong growth forecasts. The Latvian economy grew by 5.5% in 2011^[52] and by 5.6% in 2012 reaching the highest rate of growth in Europe.^[53] The GDP surpassed the pre-crisis level in 2018.^[54]

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.^[55]

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

Primary

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.^[56]

Manufacturing

• Ogres Knitwear, since 1965

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.^[57]

Corporations

Most valuable companies

Largest Latvian companies by valuation (EUR € billions) according to Prudentia and Nasdaq Riga (2024).^[58]

Rank	Name	Headquarters	Valuation (bil. €)	Industry
01	Swedbank Baltics, AS	Riga	4.345	Banking
02	Latvenergo, AS	Riga	4.024	Energy
03	Latvijas valsts meži [lv], AS	Riga	1.657	Forestry
04	Mikrotīkls, SIA	Riga	0.992	Network equipment
05	Maxima Latvija, SIA	Riga	0.816	Retail
07	SEB banka, AS	Valdlauči [lv]	0.590	Banking
08	Latvijas Mobilais Telefons, SIA	Riga	0.560	Telecommunications
09	Citadele Banka, AS	Riga	0.507	Banking
010	Rimi Latvia, SIA	Riga	0.499	Retail
011	Tele2, SIA	Riga	0.425	Telecommunications
012	Elko Grupa, AS	Riga	0.402	Wholesale of electronics

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,^[59] until its 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

• Baltic Tiger
• Baltic states housing bubble
• Economy of Europe

References

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30. 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.
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43. Ruta Aidis, Friederike Welter: The Cutting Edge: Innovation and Entrepreneurship in New Europe, Edward Elgar Publishing, 2008, p. 32
44. Damien, McGuinness (4 February 2010). "In Pictures: Latvia economy reels in recession". BBC.
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58. https://top101.lv/en/
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External links

• Latvia's Tiger Economy Loses Its Bite Archived 25 April 2010 at the Wayback Machine by Kristina Rizga, The Nation, 28 October 2009
• Latvia's Internal Devaluation: A Success Story?, from the Center for Economic and Policy Research, December 2011
• European Commission's DG ECFIN's country page on Latvia.
• World Bank Summary Trade Statistics 2012