WORLD TRADE
ORGANIZATIONWT/L/362
1 September 2000
(00-3422)
Original:  English
REPORT ON THE ECONOMIC REFORM PROCESS IN LATVIA
Communication from Latvia
The following communication has been received from the Permanent  Mission of Latvia, with
reference to the commitments contained in the Report of the Working Party on the Accession of
Latvia to the WTO (document WT/ACC/LVA/32).
_______________WT/L/362
Page i
CONTENTS
I. NATIONAL ECONOMY: BRIEF OVE RVIEW...................................................................1
A. M ACROECONOMIC DEVELOPMENT .............................................................................................1
B. A IMS AND PRIORITIES OF THE ECONOMIC POLICY OF THE GOVERNMENT ...................................4
II. ECONOMIC AND SOCIAL  DEVELOPM ENT ...................................................................6
A. G ROSS DOMESTIC PRODUCT .......................................................................................................6
1. Development trends and structure..........................................................................................6
2. Forecasts .................................................................................................................... ................9
B. P RICES ............................................................................................................................... ........11
1. Consumer prices .............................................................................................................. .......11
2. Producer Prices, Construction and Export Prices...............................................................13
C. B ALANCE OF PAYMENTS AND FOREIGN TRADE TURNOVER ....................................................15
1. Balance of  Payments.......................................................................................................... .....15
2. Foreign Trade by Groups of Commodities and Countries .................................................18
3. Export and Import of Services...............................................................................................2 3
4. Foreign Trade Policy ......................................................................................................... .....24
D. I NVESTMENTS ............................................................................................................................30
1. Capital and Investment ....................................................................................................... ...30
2. Public Investment Program ...................................................................................................3 5
3. Foreign Direct Investment .................................................................................................... .38
E. M ONETARY DEVELOPMENT AND THE EXCHANGE RATE..........................................................43
1. Monetary Policy, Banking System and Stock Market.........................................................43
2. Monetary Indicators of the Banking System of Latvia .......................................................45
3. Interest Rates on Deposits and Credits.................................................................................47
4. Exchange Rate and Foreign Reserves of the Bank of Latvia..............................................48
F. F ISCAL SITUATION ....................................................................................................................50
1. Fiscal Policy and Cent ral Government Debt........................................................................50
2. Tax Revenues................................................................................................................. ..........51
3. General Government Budget Expenditure...........................................................................54
G. L IVING STANDARDS AND EMPLOYMENT ..................................................................................55
1. Living Standards............................................................................................................. ........55
2. Private Consumption and Purchasing Power ......................................................................573. Employment and Unemployment..........................................................................................59
III. SECTORS OF NATIO NAL ECONOMY ............................................................................63
A. M
ANUFACTURING .....................................................................................................................63
B. T RANSPORT AND COMMUNICATIONS ........................................................................................67WT/L/362
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1. Road Transport............................................................................................................... ........67
2. Ports ........................................................................................................................ .................68
3. Railway Transport............................................................................................................ ......69
4. Aviation and Airport “R īga” .................................................................................................71
5. Communications ............................................................................................................... ......72
C. C ONSTRUCTION .........................................................................................................................73
D. E NERGY SECTOR .......................................................................................................................75
1. Present Si tuation............................................................................................................ .........75
2. Energy Supply................................................................................................................ .........78
3. Energy Regulation Council .................................................................................................... 81
4. Prices and Tariffs........................................................................................................... .........83
E. A GRICULTURE ...........................................................................................................................84
F. D OMESTIC TRADE AND MARKET SERVICES .............................................................................87
G. T OURISM ............................................................................................................................... ....90
H. I NFORMATION TECHNOLOGIES .................................................................................................93
IV. PRIORITIES AND REFORMS OF ECONOMIC  POLICY .............................................98
A. I NTEGRATION INTO THE EUROPEAN UNION ..............................................................................98
1. Present Si tuation............................................................................................................ .........98
2. The EU Pre-Accession Financial Assistance.......................................................................101
B. N ATIONAL PROGRAMS ............................................................................................................104
C. P RIVATISATION .......................................................................................................................109
1. Property structure ........................................................................................................... .....109
2. Privatisation of State-Owned Property...............................................................................1103. Public Sha re Offering........................................................................................................ ...111
4. Privatisation of Re sidential Houses.....................................................................................111
5. Privatisation of Municipal Property Units .........................................................................112
6. Privatisation of Land ........................................................................................................ ....113
7. Privatisation Certificates................................................................................................... ...114
8. The State Property Privatisation Fund...............................................................................116
D. B
USINESS PROMOTION ............................................................................................................117
E. S MALL AND MEDIUM -SIZED ENTERPRISES .............................................................................119
F. C OMPETITION PROMOTION AND REGULATION OF MONOPOLIES ............................................121
1. Competitio n Policy........................................................................................................... .....121
2. Regulation of Public Services...............................................................................................1 24
G. Q UALITY ASSURANCE .............................................................................................................127
1. National Program of Quality Assurance.............................................................................127WT/L/362
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2. National Standardisation and Metrology ...........................................................................129
3. National Accreditation System ............................................................................................131
4. Protection of Consumer Interests........................................................................................132
H. R EGIONAL ECONOMIC DEVELOPMENT ...................................................................................133
I. S PECIAL ECONOMIC ZONES AND FREE PORTS ........................................................................140
J. S TATISTICAL INPUT -OUTPUT TABLES ....................................................................................144WT/L/362
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ABBREVIATIONS
CEFTA Central Europe Free Trade Association
CEN European Standardisation Committee
CIF price Price of goods created by the value of goods inclusive of freight
and insurance costs till the border of the importing country
CIS Commonwealth of Independent States
CM Cabinet of Ministers
CSB Central Statistical Bureau
EBRD European Bank for Reconstruction and Development
EU European Union
FOB price Price of goods created by the value of goods inclusive of freight
and insurance costs till the border of the exporting country
GATT General Agreement on Tariffs and Trade
GDP Gross Domestic Product
ILO International Labour Organisation
IMF International Monetary Fund
JSC Joint Stock Company
LDA Latvian Development Agency
MEPRD Ministry of Environment Protection and Regional Development
NGO Non-governmental organisation
OECD Organisation for Economic Co-operation and Development
PA Privatisation Agency
PHARE EU Program for assistance to countries of Central and Eastern Europe
PIP Public Investment Program
PJSC Joint Stock Company assigned for privatisation
PRAQ Regional program of quality assurance
RL Republic of Latvia
SC State Owned Company
SEZ Special Economic Zone
SIA Limited liability company
SME Small and medium-sized enterprises
VAT Value added tax
WTO World Trade Organisation
DEM German mark
ECU European currency unit
EUR Euro
LVL Latvian lat
USD US dollar
SDR Special drawing rights, IMF approved currency
KWh, GWh Kilowatt hour, gigawatt hour
kVA Kilovolt ampere
kcal, Gcal, PJ Kilo-, giga- calory and peta-Joule
– magnitude zero / absent
... data not available or too uncertainWT/L/362
Page 1
I. NATIONAL ECONOMY: BRIEF OVERVIEW
A. MACROECONOMIC DEVELOPMENT
Crucial changes have occurred in Latvia since the regaining of independence in 1991. In the
result of a consistent economic policy the foundations for a market economy have been laid in a
relatively brief period of time and good macroeconomic preconditions for economic growth have been
created.
The reforms have started to yield results. Gross Domestic Product is going up in the recent
years. The prosperity of people is growing as well. The development was particularly successful
between 1996 and mid 1998 when average growth rates of GDP were 6 per cent. However, under the
impact of the banking crisis and Russian financial crisis average annual growth rates from 1995 till
1999 were more modest – 3.9 per cent per year.
In the years of independence Latvia has managed to re-orient its economy. At present its trade
with the countries of the European Union accounts  for nearly 60 per cent of total foreign trade
although before the regaining of independence Latvia nearly had no relations outside the former
socialist block. In the first 3 months of 2000 the biggest share in foreign trade turnover of Latvia was
with Germany (16 per cent of total turnover), Sw eden (9.5 per cent), United Kingdom (8.3 per cent),
Russia (7.9 per cent) and Lithuania (7.2 per cent).
On 10 February 1999 Latvia was the first from the Baltic countries accepted as full member
to the World Trade Organisation. It opens the opportunity to extend external economic activity on the
basis of the most favoured nation treatment with 135 member states of the WTO.
In the second half of 1998 and in 1999 the complicated economic situation in the world and
especially in Russia influenced the development rate of the Latvian economy. Due to the Russian
crisis, Latvian exports and production outputs declined during this period, banking indicatorsdeteriorated, budgetary revenues did not come in as planned and unemployment was on the rise.
Starting with the middle of 1999 the negative impact on the development of national economy
caused by the Russian crisis was gradually overcome and GDP started to go up again. In the fourth
quarter of 1999 compared to the same period in the preceding year there was growth in almost all
basic sectors of national economy resulting in 2.8 per cent GDP growth in the fourth quarter and 0.1per cent during the year.
The decline in industrial and agricultural production caused by the Russian crisis in 1999 was
substantially compensated by growth of construc tion and various service sectors. The growth was
particularly high in construction and repairs of central pipelines, communication and power lines,
repairs of administrative buildings, streets and roads, and computer-related services, architecturalservices, trade of office furniture, machinery and equipment and agricultural raw materials and
building materials.
Although manufacturing outputs went down rather substantially in 1999 (by almost 10 per
cent and most of all in the food and chemical industries) still in some sectors that were predominantly
oriented towards the Western market – such as wood and wood materials, metal and clothing
production – activity went up. Outputs of mining and quarrying went up also in 1999, similarly to
outputs of forestry and fishing. Still the share of these sectors in GDP is not big.
There was a substantial decline in agriculture. The share of agriculture in the gross added
value goes down with every year. In 1999 it fell down to 2.4 per cent. At the same time agriculture
employed approximately 15 per cent of the total workforce. Low productivity and growing external
competition are main obstacles hindering the development of the sector.WT/L/362
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Transport and communications occupy an important place in the national economy of Latvia.
A major part of revenues to this sector are given by transit services. Although in 1999, under the
impact of the Russian crisis, the turnover at ports and transportation by rail substantially went down
still in total terms the sector’s share in GDP remained at the level of the previous year, ensured by a
successful activities of road transport, pos tal service, communications and the airport.
Results of the first months of 2000 show that situation in national economy continues
improving. Industrial output and exports are going up and cargo turnover in ports is rather high. In
three months of 2000 compared to the respective period in 1999 real industrial output has gone up by
3.8 per cent, commodity exports – by 11.8 per cent, cargo turnover at ports – by 7.1 per cent. There
are more activities at the stock exchange. Budget revenues are higher than planned. Good profit
results are reached in the banking system. Interest rates are the lowest since the regaining of
independence. In the first quarter of 2000 compared to the respective period of the previous year GDP
went up by 5.3 per cent.
This gives grounds to hope that this year GDP growth may reach 4-5 per cent.
Table 1.1
Latvia: Key Indicators of Economic Development
1996 1997 1998 1999 2000*
(growth rates, in per cent)
GDP (at constant prices) 3.3 8.6 3.9 0.1 4.5
Private consumption 10.3 5.0 6.2 0.8 4.0
Public consumption 1.8 0.3 6.1 -6.7 0.5
Total fixed capital formation 22.3 20.7 44.0 -10.4 10.0
Consumer prices 17.6 8.4 4.7 2.4 3.5
(in percent of GDP, unless indicated otherwise)
General government budget balance -1.4 0.6 -0.9 -4.4 -2.0
Central government debt 14.4 12.0 10.4 13.9 15.0
Foreign trade balance -15.6 -15.1 -18.5 -16.3 -15.0
Current account balance -5.5 -6.1 -10.6 -10.2 -9.5
Registered unemployment rate (per cent, end
of period)7.2 7.0 9.2 9.1 8.0
Exchange rate, lat per SDR (end of period) 0.7997 0.7997 0.7997 0.7997 0.7997
* Forecast
There are good macroeconomic pre-conditions for growth. Inflation already several years is
one of the lowest among countries in transi tion (average annual inflation in 1999 was 2.4  per cent).
The central government debt is low as well (at present approximately 14  per cent of GDP). Fiscal
deficit of the general government budget since 1996 (except 1999 when under the impact of the
Russian crisis it was 4.4  per cent of GDP) has been lower that the level identified in Maastricht
criteria. Budget for 2000 was approved with the deficit of 2  per cent of GDP.
Since 1994 the lat is stable against SDR currency  basket. This eliminates uncertainty, reduces
currency risk and provides businesses a stable base for planning and price determination. Net foreign
reserves of the Bank of Latvia always had fully covered the reserve money.
Upon the accession of Latvia to the European Union the next step will be the accession to the
European Monetary Union. Therefore the peg of the lat to the EURO is inev itable. Already now there
are no technical obstacles for pegging the lat to the EURO yet this is not planned for the nearestfuture. The Bank of Latvia has made a decision to keep the lat pegged to the SDR currency basket
until the accession of Latvia into the European Union.WT/L/362
Page 3
One of the main economic problems of Latvia is a relatively high deficit in the current
account slightly exceeding 10  per cent of GDP in the last two years. Still it must be noted that the
deficit of the current account was basically offset by the direct foreign investments and long term
loans therefore the level today should not be treated as critical. In 1999 the current account deficit was
slightly brought down. The government has committed to do everything it can to continue bringing
the deficit down in the medium term. This will be achieved through a strict fiscal policy. Structuralreforms will ensure faster growth of exports over imports.
High rate of unemployment is an important problem. In the second half of 1998 and the first
half of 1999 under the impact of the Russian crisis unemployment was on the rise reaching a peak in
April 1999. Yet starting with May unemployment started to go down. At the end of May 2000 the
registered unemployment was 8.6
 per cent of economically active population, yet real rate of
unemployment was substantially higher (according to the methodology of International Labour
Organisation, the survey carried out by the CSB says that unemployment in the first quarter of 2000was 14.6
 per cent).
Real unemployment at the level of approximately 14  per cent stays already for several years.
Every fourth unemployed is a representative of  an unskilled profession. Unemployment has least of
all affected people with the highest professional qualifications.
Unemployment rate is considerably different in different regions and cities. The most difficult
situation remains in Latgale where unemployment in some regions exceeds 20  per cent of
economically active persons. The lowest per capita GDP is also in Latgale where it is two times lower
than in Riga region. Statistics show that the gap between regional development levels and incomes of
people is getting wider.
The potential of economic growth may be best of all described by growth of investments. In
1996 and 1997 they went up by 20  per cent and in 1998 – by even 44  per cent. The fast growth of
investments was promoted by several factors: inflow  of foreign investments mainly due to successful
privatisation, the high credit rating of Latvia, reduction of interest rates and stabilisation of the
banking sector, increase of total economic activity in all sectors and formation of positive future
expectations, etc.
Due to the influence of the Russian crisis total investments in 1999 were less than in 1998. At
the same time foreign nationals invested 214 million Lats (6  per cent of GDP) as foreign direct
investments in Latvia – more than in 1998 when 210 million Lats were invested. The most active
investors in 1999 came from Sweden (17  per cent of investment in the fixed capital) and Estonia (13
per cent). The trust of investing in Latvia is pr omoted by credit ratings awarded by the sovereign
agencies Standard & Poor’s, Moody’s and Fitch IB CA which are among the highest in countries of
Central and Eastern Europe. The awarded credit rati ngs correspond to the so-called investment grade.
On a per capita basis Latvia has come close to those transition economies of Central and Eastern
Europe who are leaders in terms of attraction of foreign direct investments. Latvia is in the 4th position
according to this indicator among countries of Central and Eastern Europe. Denmark, the United
States, Germany, Sweden, United Kingdom and Russia made major investments since the regaining
of independence in Latvia. The priority sectors – main recipients of investments are transport andcommunications, finances and industry.
It is anticipated that in 2000 substantial foreign investments could come into Latvia as a result
of privatisation of large state-owned enterprises. Still the main factor attracting investments will be
the ability of the government to implement measures establishing stable and favourable to business
environment.WT/L/362
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It is also anticipated that in the coming years more foreign direct investments will be made
into sectors where Latvia has a comparative advantage, that is in sectors linked with the favourable
geographical position, available natural resources and in sectors with cheap, yet relatively well-trained
workforce.
Public investments are going up as well and mainly to finance infrastructure. In 1999 total
funds from the state budget, government guaranteed credits and other sources to finance publicinvestment program equalled to approximately 3.8
 per cent of GDP (3  per cent in 1998, 2.7  per cent in
1997) and in 2000 it is planned as 5  per cent of GDP. Public investment  projects in energy sector are
aimed to reconstruct Daugava HES cascade and modern ise heat supply systems. In transport projects it
is planned to renew cover of main motor roads of Latvia and port and railway infrastructure.
Environment protection projects are mainly aimed at the construction of wastew ater treatment plants,
improvement of waste management systems. The bigges t part of state financing is given to information
projects and the development of infrastructure of the national border.
The role of Latvian banks in provision of the economy with financial resources is going up as
well. Domestic credits to enterprises and private persons go up faster than growth of GDP (in 1997
they went up by 77  per cent, in 1998 – by 52  per cent and in 1999 – by 15  per cent). Both activation of
economy and lessening of credit risk alongside with the improvement of the general entrepreneurial
environment have promoted such growth of credit s. Although deposits went down in the result of the
Russian crisis and total banking sector assets decreased – credits were going up all the time.
Based on the overall economic situation in Latvia we may say that Latvia may look into
future with certain optimism. Although there are series of unresolved problems, fiscal and monetary
policy of the government and structural reforms encourage investing into the private sector and
promote growth of economy. This is the foundation fo r growth of well-being of people, security and
development of democracy in the state.
B. AIMS AND PRIORITIES OF THE ECONOMIC POLICY OF THE GOVERNMENT
In Latvia since the regaining of independence in 1991 despite changes of governments there
is a consistent transition from the planned economy to the market economy.
The government headed by Andris B ērziņš started to work in May 2000. In the Declaration of
the Cabinet of Ministers on the planned activities it is said that the government will continue the
direction of work started by the previous governments. One of the key tasks of the government is the
creation of preconditions for fast economic growth in  Latvia by broadening the base for such growth,
promoting involvement of wide public and the regions in economic activity, lessening difference in
levels of well-being at the same time reinforcing the responsibility of each member of the society forthe level of material prosperity, education and health of their families.
The aim of the government is to ensure GDP growth in the nearest years by 5-7
 per cent each
year. To achieve this it is planned to continue strengthening of macroeconomic environment as a
precondition for growth. The government has decided to reach this by:
– maintaining stable exchange rate of the Lats;
– keeping inflation at a rate of 2-4  per cent per year;
– seeing that the fiscal deficit of the budget does not exceed 2  per cent of GDP in 2000
and 1  per cent of GDP in 2001, in the subsequent years to develop a balanced budget
or budget with a surplus;
– to bring down the deficit of the current account till 5  per cent in 2002.
The government pays a lot of attention to privatisation of state-owned property, which is in
the phase of completion. Only large state monopolies are not yet privatised. Privatisation of theseWT/L/362
Page 5
companies is politically and economically significant and complicated. The problem of privatisation
of big companies is in the fact that these enterprise s are too big compared to the total size of Latvian
economy – therefore their privatisation is over-politicised. The most important task is to find the right
strategic investor and ensure that the natural monopoly does not turn from a state monopoly to a
private monopoly. Therefore privatisation of large state owned companies is carried out alongside
with the general de-monopolisation of the sector (for example, energy, shipping, fixedtelecommunications network).
The government has promised to complete privatisation of enterprises within one year and to
entrust privatisation of the largest companies – Latvijas ku ģniecība (Latvian Shipping Company),
Latvenergo, Ventspils Nafta, Lattelekom  to the best international investment banks selecting them
according to the world practice.
A lot of activities are aimed at improvement of entrepreneurial environment, trying to eliminate
bureaucratic obstacles and perfect legislation. The government at the moment carries out severalactivities aimed at improvement of business environment such as streamlining of customs procedures
and tax administration, promotion of the land market and simplification of the process of construction
permits, streamlining of inspections influencing business activity, etc. that may have a positive impact
on the decision to invest in Latvia.
Business activity may also be encouraged by the reduction of real estate and social tax rates
with 1 January 2000. The government plans to continue this process of tax reduction and to establish a
reduced tax rate on revenues from technology use. It is also planned to co-ordinate excise and VAT
tax rates and rules in the Baltic States.
Bearing in mind the fact that competition for the direct foreign investments among the
countries of Central and Eastern Europe becomes stronger the Cabinet of Ministers in March 2000approved the concept “On support to investment projects important for the national economy”. This
concept foresees promotion of important investment projects (training and raising of skill level of
workforce, infrastructure preparation, including for the development of business parks, fiscal
incentives to high technology sectors) without contradicting the EU state support regulations.
The government is prepared to continue fighting unfair competition and other violations of
competition legislation by perfecting monopoly supervision and streamlining the system of state
support. These activities are indispensable for economic growth.
The priority in terms of granting state support is given to foreign market studies, participation
in international exhibitions and fairs, patent registration and introduction of progressive technologies,
to introduce energy saving technologies.
Quite clearly, the further development of Latvia is linked with the process of European
integration and only the accession to the Europ ean Union may ensure the further and irrevocable
reinforcement and growth of the state.
December 1999 marked a new phase in relations between Latvia and the EU as the EU
Council invited Latvia to start accession negotiatio ns into the European Union. The government has
declared its aim to finalise negotiations with the EU by 2003. Integration into the European Union
proceeds in accordance with the National Program for Integration into the EU that contains methodsof legislation harmonisation and the procedure of participation of Latvia in the internal market of
Europe.
By 1 September 2000 it is planned to develop the National Development Plan that will
identify the development priorities of Latvia linkin g them with the available resources both from the
Latvian government and the EU funds.WT/L/362
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II. ECONOMIC AND SOCIAL DEVELOPMENT
A. GROSS DOMESTIC PRODUCT
1. Development trends and structure
Despite a rather substantial decline of industrial outputs the overall economic activity in
Latvia in 1999 stayed at the level of the preceding year and real GDP very minimally – only by 0.1
per cent exceeded the level of 1998 (see Figure 2.1).
Figure 2.1
Real Growth of GDP of Latvia by Quarters
(4th quarter of 1996 = 100  per cent)
99.2108.1 111.1 110.7 108.7114.6 113.7108.8 107.0113.4 114.0 111.8 112.5
5075100125
I II III IV I II III IV I II III IV I
1997 1998 1999 2000
The narrowing of industrial production was compensated by the substantial growth in
construction and some service sectors (see Table 2.1). The real value added generated in total service
sectors by 5  per cent exceeded the level of the previous year. In sectors of production it went down by
6.4 per cent.
Table 2.1
GDP of Latvia by Sectors
(in per cent)
1997 1998 1999
growth
ratesstructure growth
ratesstructure growth
ratesstructure
Gross Domestic Product 8.6 100 3.9 100 0.1 100 
     of which:
Agriculture, hunting and forestry 4.9 5.6 -5.3 4.1 -8.3 3.9
Fishing -24.7 0.2 -3.1 0.3 27.9 0.1
Mining and quarrying 8.6 0.2 8.2 0.2 9.9 0.2
Manufacturing 17.1 22.2 4.0 17.9 -9.8 14.8
Electricity, gas and water supply -0.7 5.0 1.7 5.3 -5.2 5.0
Construction 8.2 4.8 17.0 6.8 8.1 7.6
Services 7.5 62.0 4.5 65.4 5.0 68.4
     of which:
Trade 13.9 16.0 19.9 16.8 10.4 17.8
Hotels and restaurants 0.9 1.3 6.2 1.2 1.5 1.3
Transport, storage and communications 7.4 16.8 -2.8 16.7 0.2 16.3
Financial mediation 4.0 4.8 -0.8 3.6 5.1 5.0WT/L/362
Page 7
1997 1998 1999
growth
ratesstructure growth
ratesstructure growth
ratesstructure
Real estate, renting and business
activities 9.3 5.1 8.0 7.7 17.8 9.3
Public administration and defence;compulsory social security 5.9 5.8 0.8 6.5 1.4 6.1
Education 1.0 4.9 2.6 5.5 0.2 4.6
Health and social work 2.0 3.4 -2.5 3.5 -0.9 4.0
Other community, socialand personal service activities 11.1 3.9 6.2 3.9 7.9 4.0
The decline of outputs in manufacturing in 1999 by almost 10  per cent should be evaluated as
rather essential and even more so as in the last quarters of 1998 production outputs had already
declined due to the Russian financial crisis. The total decline of industrial output because of the crisis,
taking into account the development tendencies of 1997 and 1998, could be evaluated as
approximately 15  per cent. Therefore the increase of manufacturing output in the fourth quarter of
1999 by 2.6  per cent compared to the respective period in 1998 indicates that during the year the
manufacturing industry due to the external demand shock has managed to recover less than 1/5 part.
The following tendencies of change of production outputs alter the structure of national
economy in favour of sectors of services. Now the share of service sectors in GDP reaches 2/3. The
most typical changes in the structure of  Latvian economy are presented in Table 2.2.
Table 2.2
Changes in the Structure of Latvian Economy
(percentage)
GDP
growthChanges
of
employ-
mentStructure of
economy
according to the
value addedStructure of
economy
according to
employmentProduct
-ivity
change
1999 /
19951999 /
19951995 1999 1995 1999*1999 /
1995
Total economy 16.7 -1.7 100 100 100 100 18.7
     including:
Production of goods 8.4 -13.3 44.0 31.6 44.3 39.1 24.6
– agriculture, forestry, fishing -13.7 -19.0 10.8 4.0 18.5 15.2 6.1
– manufacturing and
mining and quarrying14.4 -18.2 22.6 15.0 18.8 15.6 39.5
– electricity, gas and water
supply-6.1 1.0 5.5 5.0 1.6 1.7 -7.1
– construction 44.1 18.7 5.1 7.6 5.4 6.5 21.0
Services 23.9 7.6 56.0 68.4 55.7 60.9 14.8
– trade 51.9 12.9 11.3 17.8 14.0 16.1 34.0
– transport and
communications18.9 1.9 16.0 16.3 8.8 9.1 16.2
– other market services 25.3 7.9 14.3 19.6 12.5 13.8 15.7
– public services
(public administration,education, health care)6.1 6.1 14.4 14.7 20.3 21.9 -0.4
*evaluation of Ministry of EconomyWT/L/362
Page 8
The increase of the share of service sectors in the four years was basically caused by the
substantial growth of trade and various market as well as household services. For example, in trade,
real annual growth was by almost 11  per cent, while in agriculture – in the average by 3.9  per cent.
Such growth of trade (taking into account the sh are of the sector in national economy) let the real
GDP go up by 5.8  per cent in four years. The growth of industrial output increased GDP by 3.2  per
cent.
Table 2.3
GDP by Expenditure Category
1997 1998 1999
million
LVLgrowth
ratesmillion
LVLgrowth
ratesmillion
LVLgrowth
rates
Gross Domestic Product 3,275.5 8.6 3,589.5 3.9 3,662.3 0.1
Private consumption 2,181.1 5.0 2,316.0 6.2 2,400.0 0.8
Government consumption 626.2 0.3 768.1 6.1 696.6 -6.7
Gross fixed capital formation 613.7 20.7 979.4 44.0 914.5 -10.4
Changes in inventories 132.7 – 11.4 – 49.9 –
Exports 1,669.1 13.1 1,841.4 4.9 1,711.1 -5.8
Imports 1,947.3 6.8 2,326.8 19.0 2,109.8 -6.2
Foreign Balance -278.2 – -485.4 – -398.7 –
Total growth of GDP in this period was reached because of increase in productivity (annual
value added per one person employed in national economy). Productivity in Latvian economy rose by18.7
 per cent between 1995-1999 (see Table 2.3).
Productivity in these years increased in almost all sectors except the monopoly sector of
“Electricity, gas and water supply”. Growth of productivity in commodity production was faster than
in service sectors (the biggest – in manufacturing).
Investments in fixed assets went up quite substantially in 1998 and also the gross capital
formation expenditure in relation to GDP reached 27  per cent. The growth of the negative balance of
goods and services in 1998 can be partly explained by the fast growth of investments. Its ratio against
GDP became bigger by 5 percentage points and, compared  to the growth of the share of investment by
8 percentage points, should be evaluated as adequate to changes in GDP expenditure items.
Consequently, growth of imports has allowed reaching such high growth rates of investment.
Although in 1999 investment compared to the preceding year dropped, still the relation of this
expenditure item against GDP stayed high – 25 per cent. Changes in private consumption are not so
variable as changes of investment and its growth  rates basically correspond to changes in GDP -
therefore the relation of private consumption to GDP remains relatively unchanged (average 65 per
cent).
Almost half of total GDP is created in Riga (see Table 2.4).  There are sharp regional
differences in per capita GDP. In Riga region it is two times bigger than in Latgale region. The largest
GDP per one resident in 1997 was in Ventspils and it 3.8 times exceeded the average in Latvia. The
lowest was in Kraslava region – only 1/3 of the average. Besides there is a tendency that in wealthier
areas GDP growth is faster than in the poor areas and the gap widens. In 1997, for example, GDP
went up 8.6  per cent yet in the agriculture area of Zemgale it declined. Services in poorly developed
areas are also underdeveloped. In total, market services in 1997 constituted almost half of GDP, yet inZemgale and Vidzeme – only 1/3. Levelling out regional differences is one of the most serious
problems of economic development of Latvia.WT/L/362
Page 9
Table 2.4
GDP by Regions in 1997 *
including structure of the value added (%)
GDP (%)in agriculture in industryin market
servicesGDP per
inhabitant
(in Lats)
Total 100 100 100 100 1,327
Riga region 56.1 20.0 60.7 62.9 1,810
of which in Riga 48.9 4.5 52.2 58.1 1,975
Vidzeme region 9.4 25.0 10.0 6.1 842
Kurzeme region 15.4 16.3 11.9 15.8 1,499
Zemgale region 9.1 26.6 8.3 6.1 840
Latgale region 9.9 12.0 9.2 9.1 820
*latest statistical data on GDP by regions are for 1997
2. Forecasts
The Ministry of Economy has developed two variants of medium term (till 2006)
development – the slow variant of development (V ariant I) with low growth rates of industrial
production and the dynamic variant (Variant II) – with faster growth of industrial output.
As already mentioned in 1999 the industrial output  considerably lagged behind the level of the
preceding year. Exports to Russia and other CIS were  restoring very slowly. This means that market
expansion possibilities should be linked with other directions and mainly with the EU. A serious
restructuring and modernisation is necessary to be able  to compensate the markets lost in the east and this
will demand investment and time, which makes fast growth of i ndustrial output impossible for the near
future. A purposeful state support is needed to enc ourage this process and it should be linked with export
promotion, increase of compe titiveness of enterprises and activities to support small and medium-sized
enterprises.
The development opportunities of transit business ar e also evaluated. In Variant I they are largely
restricted. On the contrary, in the dynamic variant, it is assumed that situation in Russia will improve faster
which will allow Latvia to enlarge transit services . The improvement of situation in Russia will no doubt
have a favourable impact on the growth of industrial  output of Latvia in already near future. This could
provide additional investment to economy that c ould in turn accelerate the process of industrial
modernisation.
Figure 2.2
Forecast of GDP
(in per cent, 1998 = 100  per cent)
5.0
5.0
5.0
5.0
4.57.0
6.0
6.0
5.5
5.0
4.0
0.5
100110120130140
1998 1999 2000 2001 2002 2003 2004 2005Variant 2
Variant 1WT/L/362
Page 10
Other important factors that may influence the further development of national economy and
are taken into consideration in the GDP growth forecast are:
– market economy foundations have been created in Latvia, there is a stable financial
system, the majority of entrepreneurs have learned to work in market conditions and
they can benefit more from advantages of the market economy;
– Latvia is invited to start accession negotiations into the EU that will have a positive
influence on the investment process in the state and consequently also will increase
growth potential;
– problems linked with competitiveness of some sectors of Latvian economy in markets
of the developed countries (chemical industry, several sectors of machinery, food
industry) allow making very prudent projections of future growth rates.
Table 2.5
Forecast of GDP by Sectors
(real growth in per cent against the preceding year)
2000 2001*2002-2006 *
(annual average)
Gross Domestic Product 4.5 5.0 / 6.0 5.0 / 6.6
Production of goods 4.1 4.8 / 5.8 4.8 / 6.3
– agriculture, hunting, forestry and fishing 4.5 3.8 / 4.0 2.4 / 2.6
– manufacturing and mining and quarrying 3.9 4.5 / 5.0 5.0 / 6.6
– electricity, gas and water supply 2.8 1.0 / 1.5 2.0 / 2.0
– construction 5.6 10.0 / 14.0 8.1 / 11.4
Services 4.7 5.1 / 6.1 5.2 / 6.8
– trade 5.8 5.0 / 5.5 5.0 / 6.3
– transport and communication 2.7 2.0 / 2.5 2.1 / 2.7
– other services 5.3 6.9 / 8.5 6.8 / 9.1
*Variant 1 – in the numerator, Variant 2 – in the denominator.
Table 2.6
Forecast of GDP by Expenditure Category
(against the preceding year,  per cent)
2000 2001 *2002-2006 *
(annual average)
structure growth
ratesstructure growth
ratesstructure
(in 2006)growth
rates
Gross DomesticProduct100 4.5 100 / 100 5.0 / 6.0 100 / 100 5.0 / 6.6
Private consumption 64.6 4.0 64.4 / 64.4 4.5 / 5.5 64.2 / 63.2 4.6 / 6.1
Government
consumption18.3 0.5 17.5 / 17.5 0.5 / 1.5 14.6 / 13.6 1.4 / 1.5
Gross fixed capital
formation26.7 10.0 28 / 27.8 6.5 / 9.0 27.0 / 27.3 5.4 / 6.0
Changes in inventories 0.6 – 0.5 / 0.4 – 0.1 / 0.8 –
Exports 46.8 7.7 47.0 / 46.9 7.4 / 8.3 52.9 / 54.6 9.2 / 11.9
Imports 57.0 7.1 57.1 / 57.1 7.3 / 8.3 58.8 / 59.4 7.9 / 10.0
Foreign Balance -10.2 – -10.1 / -10.2 – -5.9 / -4.8 –
*Variant 1 – in the numerator, Variant 2 – in the denominator.WT/L/362
Page 11
In the forecast of GDP till 2006 the following tendencies were taken into consideration:
– investment will grow faster than GDP;
– private consumption growth rates will be e qual to changes in GDP or slightly smaller;
– real growth of government consumption will be substantially smaller than GDP
growth rates;
– the negative exports-imports balance will gradually decrease by exports growing
slightly faster than imports.
To ensure high annual growth rates of GDP, the domestic products should be able to compete
in the domestic and external market so that there is permanent increase in exports and – nonetheless
important – so that the expansion of the domestic market does not cause an even faster growth of
imports.
B. PRICES
1. Consumer prices
Consumer price inflation in Latvia has gone down from almost 1000 per cent eight years ago
till the level close to the developed countries or 3 per cent (see Table 2.7). However it is forecasted
that also in the nearest future inflation will stay within the limits of 2-4 per cent and will not reach the
level of the EU member states (1 per cent). Essential determinants of inflation are gradualapproximation of prices to the world price level, increase of indirect taxes and administrative
regulation of prices.
Table 2.7
Changes of consumer prices in Latvia in 1991-1999
(percentage)
Year December against December
of the preceding yearAverage per year
1991 262.4 172.2
1992 958.6 951.2
1993 34.9 109.2
1994 26.3 35.9
1995 23.1 25.0
1996 13.1 17.6
1997 7.0 8.4
1998 2.8 4.7
1999 3.2 2.4
Price level is influenced also by a substantially bigger real wage. Also private consumption
has gone up, however in the last few years this growth was not very essential. The most important
condition that helps to explain why consumer price inflation does not go up is the stable exchange rate
that brings down both the material costs of production and prices of imported products. The prudent
fiscal policy is also quite important.
All the commodities and services may be divided into two groups with different price
formation mechanisms (see Insertion 2.1). Open sector goods may be imported and exported therefore
they are subjected to international competition. As a contrast, goods and services of the closed sectorare not subjected to such competition. This group mainly comprises services (f
Lats, hairdresser
services, etc.) and also goods that cannot be stored for a longer period of time.WT/L/362
Page 12
Insertion 2.1.
Price formation mechanisms.
Prices of the open sector goods went up dramatically at the beginning of price liberalisation
and international competition encouraged faster adaptation to the world price level. Therefore price
fluctuations at the moment are quite insignificant. Yet prices of goods of the open sector are lower
than price level in the EU member states. This may be explained by the fact that there is also a small
closed sector component in the open sector price. Fo r example, open sector price also comprises costs
of delivery of the product to the customer.
Prices for goods and services in the closed sector went up slower and over a longer period of
time. This was determined by the fact that the sect or was not influenced by international competition
and also that price of individual services were subsidised before price liberalisation. Prices at large are
still administratively determined. Prices of services requiring large capital investments are most often
state controlled (like apartment rent) or subsidised (like city transport) and growth of these prices is
restricted to lessen social tension, therefore the level of these prices is still much lower than the
respective price level in the developed countries where prices of such capital intensive services as a
rule correspond to costs. Prices for capital intensive services will continue going up till revenues from
sales will cover, firstly, current costs and then al so future costs reaching the level enabling to make
new investments. Prices of these services normally go up proportionally to the growth of income of
people.
State influence is present in the price formation process and not only in the closed but also in
the open sector by altering conditions of economic activity. During the periods when the government
increases indirect taxes, prices go up in both the sectors in the short term and in the long term. For
example, excise tax increase for fuel. In this case price rise for fuel will be short term – only in the
period when price change was made. However at a later stage there might be price rise also for other
groups of commodities correspondingly to growth of production costs.
In general prices of goods in the open sector are much closer to the world price level than
prices of goods and services in the closed sector. This is proved by the low price growth in the open
sector. In future the specificity of price formation in  the closed sector will stimulate inflation. Price
inflation in this sector will be similar to the infl ation in the open sector only when the level of income
of Latvian population will reach the EU level.
Structure of real expenditure over years has changed, therefore CSB has reviewed weights of
goods and services that are important in terms of changes in inflation levels. The weight of
administratively regulated prices in the total consumption basket has increased from 20.4 per cent till
22.3 per cent in 2000 compared to 1998.
Changes of the administratively regulated prices have most of all influenced total changes of
consumer prices in the latest months. Average consumer price level in April 2000 compared to March
went up by 0.4 per cent. The majority of this rise or 0.3 percentage points was predetermined by
increase of administratively regulated prices. The greatest impact on the consumer price index was
made by the increase of prices for liquefied gas that took effect from 1 April. Also prices for bus
tickets in some cities went up from 1 April and tariffs for water supply and sewerage also continuedgoing up.
The non-typical decrease of price level in May in comparison to the previous month (-0.2 per
cent) was determined by changes in the law on excise tax as prices for second hand cars decreased
very substantially (by 11.5 per cent).WT/L/362
Page 13
As mentioned above, the average price level in May 2000 compared to April went down by 0.2 per
cent. In comparison with May 1999 prices had gone up by 3.1 per cent or average for the year – by
2.8 per cent(see Table 2.8). Alongside with the substantial decrease of prices for second hand cars,
prices for the majority of food products went down as well. The most substantial decline was in prices
for sugar – by 7.5 per cent and eggs – by 3.3 per cent. Beer prices went down by 2.7 per cent. The
biggest price rise was for vegetables – by 4.2 pe r cent caused by the appearance of the new cabbage
harvest in the market.
Table 2.8
Inflation in Latvia
Changes of inflation (in per cent )
Year Monthover previous monthover the respective
month of the preceding
yearannual average
January 1.2 2.6 4.3
February 0.2 2.7 4.0
March 0.0 2.3 3.7
April -0.1 1.5 3.4
May 0.4 1.9 3.1
June 0.7 1.9 2.7
July -0.9 1.8 2.5
August -0.2 2.1 2.4
September 0.3 2.4 2.3
October 0.7 2.9 2.3
November 0.8 3.2 2.31999
December 0.2 3.2 2.4
January 1.1 3.1 2.4
February 0.5 3.4 2.5
March -0.2 3.2 2.5
April 0.4 3.7 2.72000
May -0.2 3.0 2.8
2. Producer Prices, Construction and Export Prices
The third quarter of 1999 marked the turning point when the declining tendency of producer
prices started in September 1998 was overcome. Starting with this period each quarter prices were
slightly higher than in the preceding quarter. In the first quarter of 2000 producer prices have finally
become bigger than in the respective period of the preceding year yet still they are smaller than at the
beginning of 1998 (see Figure 2.3).
In the first quarter of 2000 producer prices have gone up by 0.6 per cent both against the
preceding quarter and the first quarter of 1999. Still dynamic of change of price varies in different
sectors. There is still deflation in the sector of food production (where prices dropped by 0.4 per cent
against the preceding quarter). Prices have substantially risen in the publishing sector (by 4.4 per cent
in comparison to the preceding quarter) and even more substantially in the production of chemical
substances (by 25.6 per cent). Prices for secondary processing have grown by 4.2 per cent in
comparison with the preceding quarter and even by 12.4 per cent if compared to the first quarter of1999. Producer prices of steam and hot water supply went up by 2.5 per cent compared to the
preceding quarter and water production, purification and distribution prices – by 5.3 per cent.WT/L/362
Page 14
Figure 2.3
Changes in Prices
(IV quarter of 1997 = 100)
959799101103105107109111113
I II III IV I II III IV IProducer prices in industry Construction prices Export prices Consumer prices1998 1999 2000
Inflation of producer prices in Latvia is the lowest among the Baltic States. In general,
changes of producer prices in Latvia and Estonia during the last few years have been rather similar,although price rise in Estonia was slightly bigger yet in Lithuania – already starting from the second
quarter of the preceding year – there was a rapid increase of producer prices. In the first quarter of
2000 compared to the first quarter of 1999 producer prices in Latvia, as mentioned before, had gone
up by 0.6 per cent, in Estonia – by 3.6 per cent and in Lithuania – by 26.1 per cent.
There is a lot of essential fluctuation in the construction price index (see Figure 2.4).
Figure 2.4
Seasonal Fluctuations of Construction Prices by Quarters
90100110120130140150
I II III IV1995
1996
1997
1998
1999WT/L/362
Page 15
Export prices at the moment do not differ much from the level of 1995. In 1999 compared
with 1995 there is only 3.8 per cent increase in price level. After a seeming stability and slight growth
of exports in 1999 prices started to decline again alongside with the narrowing of exports markets. In
1999 compared to 1998 export prices had fallen by 3.6 per cent. Small rise against the preceding
period was observed in the fourth quarter of 1999 (by 0.3 per cent), yet in relation to the same period
in the preceding year prices were still going down (by -4.1 per cent). The decline was the mostdramatic in the category of food products where prices of exported food in 1999 equalled to only 56.3
per cent of the price level in 1995.
Import prices are calculated in Latvia only starting with 1998, therefore the dynamic series of
this indicator is short. Import prices keep going down every quarter and in 1999 they dropped by 5.3
per cent in comparison to 1998. Notably, that export price reduction was smaller over the same
period. Looking at different groups of products we see that import prices of mineral products have
gone up rather substantially – by 34.4 per cent in the fourth quarter of 1999 compared to the sameperiod in 1998. The biggest decline of prices was in chemical industry and allied products (-10.6 per
cent).
C. B
ALANCE OF PAYMENTS AND FOREIGN TRADE TURNOVER
1. Balance of Payments
Analysis of the balance of payments accounts of Latvia reveals some explicit tendencies that
have not changed for already several years (see Table 2.9):
– the current account balance from expressly positive at the beginning of 1990s has
turned into strictly negative after 1995;
– large trade deficit;
– positive services balance that allows to bring down trade deficit;
– positive balance of investment revenues and current transfers;
– balance of financial and capital account has been stable over the period and is nearly
completely covered the negative balance of the current account.
Table 2.9
Balance of Payments of Latvia
( per cent of GDP)
1997 1998 1999
A. Current account -6.1 -10.6 -10.2
Trade balance -15.1 -18.5 -16.3
Exports 32.6 33.1 30.3
Imports 47.7 51.6 46.6
Non-factorial services, net 6.6 5.0 5.4
Factorial services, net 10.0 0.9 -0.8
Transfers, net 1.4 2.0 1.5
B. Long term capital, net 12.3 8.2 6.1
Basic balance (A + B) 6.2 -2.4 -4.0
C. Short term capital, net -5.9 1.9 7.2
D. Discrepancy 1.6 1.6 -0.5
Total balance (A + B + C + D) 1.8 1.0 2.6
The deficit in the current account is created when the domestic demand is greater than GDP.
This means that investment is higher than the domestic saving and an increasingly bigger share of
foreign saving is used to cover investment. Such process when the domestic demand goes up fasterWT/L/362
Page 16
than GDP is typical of almost all countries in transition. This basically is determined, on the one hand,
by the objective need to restructure production requiring an accelerated process of investing and
consequently the domestic saving may turn out to be too small to take care of this process. On the
other hand, the active privatisation ensures attraction of foreign resources to economy mainly in the
form of foreign direct investments. From this pers pective, growth of deficit in the current account is
fully justified and it should not result in far-reachin g negative consequences for the equilibrium in the
external sector since with time investments crea te the opportunities for faster growth of GDP and
direct foreign investment does not result in debt liabilities. Yet, in Latvia, the reduction of the
domestic saving – investment ratio was influenced not only by the speedy growth of investments but
also by the decrease of saving (see Figure 2.5). In the last three years the situation has improved and
the level of saving has stabilised around 16-17 per cent of GDP.
As seen in Figure 2.5 growth of deficit in the current account in 1998 and 1999 was mainly
caused by growth of investment exceeding 25 per ce nt of GDP, the level of saving staying unchanged.
In 2000 and in the nearest future the current account of Latvia will most probably remain
negative with a slight reduction of the deficit relative to GDP. This will be determined by:
– high level of investment in the GDP consum ption structure. According to the opinion
of the specialists of the ME, it will equal to 25 per cent of GDP or even slightly more.
This will not allow to substantially lower the current account deficit;
– foreign direct investments. According to the evaluation of the ME, net foreign direct
investment may amount to 4-6 per cent of GDP. This means that the current account
deficit should not fall bellow this level. As mentioned earlier, if the deficit of the
current account is created in proportion to the size of foreign direct investment we
cannot consider that there is a misbalance of the external sector;
– the planned decrease of the budget deficit in 2000 till 2 per cent and in 2001 till 1 per
cent. This will create preconditions for the decrease of current account deficit by 2-3
per cent of GDP;
– increase of savings in the private sector, although this may not rise substantially in the
nearest future – average by only 0.5-1 per cent per year. It is based on several factors:the main – competitiveness of Latvian goods and services in the domestic and foreign
markets since to achieve growth of saving  the consumption should grow slower than
GDP. This may be reached by drastic increase of exports and, nonetheless important,
that GDP growth does not cause excessive growth of imports. If in the public sector
the balance may be reached with the strict fiscal policy in the course of 2-3 years,then increase of saving in the private sector is a long term task requiring
modernisation and restructuring of production and engaging in other structural
activities to raise competitiveness of the economy.
Figure 2.5
Current Account, Investment and Saving
( per cent of GDP)WT/L/362
Page 17
-20-100102030
1993 1994 1995 1996 1997 1998 1999Current account
Investment
Savings
To stabilise the external sector in case of large current account deficit it is important to look at
the nature of coverage of the current account deficit and capital flows (see Table 2.10).
Table 2.10
Foreign Capital Flows in Latvia
(million LVL)
1997 1998 1999
million
LVLper cent million
LVLper cent million
LVLper cent
1. Foreign investments in Latvia: 769.7 100 426.3 100 576.3 100
– long term 427.3 55.5 356.5 83.6 240.1 41.7
Capital transfers 8.0 1.0 8.9 2.1 7.4 1.3
Direct 303.4 39.4 209.9 49.2 213.8 37.1
Others 115.8 15.0 137.7 32.3 18.9 3.3
– short term 342.5 44.5 69.8 16.4 336.2 58.3
Portfolio investments -18.7 -2.4 15.7 3.7 132.8 23.1
Others 310.2 40.3 -3.3 -0.8 203.3 35.3
Discrepancy 51.0 6.6 57.4 13.5 – –
2. Latvian investments abroad: 508.9 100 8.3 100 107.6 100
– long term 24.0 4.7 63.6 765.9 15.7 14.6
Direct 3.5 0.7 32.2 388.0 0.03 0.0
Others 20.5 4.0 31.4 377.9 15.7 14.5
– short term 484.9 95.3 -55.3 -665.9 91.9 85.4
Portfolio investments 314.3 61.8 19.6 235.8 -32.2 -29.9
Others 170.6 33.5 -74.8 -901.8 104.8 97.4
D i s c r e p a n c y –––– 1 9 . 3 1 7 . 9
Net capital flows 260.8 100 418.0 100 468.7 100
Net long term capital flows 403.3 154.6 292.9 70.1 224.4 47.9
Net short term capital flows -142.5 -54.6 125.1 29.9 244.3 52.1
Long-term flows dominated in foreign investments in 1997 and 1998. In 1999 this changed in
favour of short term. In 1999 the total long-ter m capital flows went down in comparison to the
preceding year, with a parallel rise of short-term flows.
In 1999 foreign direct investments were equal to the preceding years. Yet, the substantial
reduction of long-term loans essentially influenced the total amount of long-term flows.
The share of government securities and other loans substantially went up in short term flows.
Debt non-forming flows in foreign investments in Latvia lately constitute 1/3 part and these
are basically direct foreign investments.WT/L/362
Page 18
Debt forming flows till 1999 were basically related to the private sector, yet in 1999 the share
of government bonds in these flows went up.
2. Foreign Trade by Groups of Commodities and Countries
In 1999 exports of Latvian commodities under the impact of the Russian financial crisis was
by 5.7 per cent smaller than in the preceding year. Imports, in turn, went down at a faster rate (by 8.4
per cent) thus improving the trade balance. The deficit of trade balance against GDP decreased from18.5 per cent to 16.3 per cent.WT/L/362
Page 19
Figure 2.6
Latvian Commodity Exports and Imports by Months
(million LVL)
6080100120140160180
XII I II III IV V VI VII VIII IX X XI XII I II III IV V VI VII VIII IX X XI XII I II III IV
1998 1999imports
exports
1997 2000
Commodity exports at the beginning of 1999 were substantially below the level of 1998 (see
Figure 2.7). Growth of exports over the year was very small. The figure shows that 2000 has startedoptimistically as exports is not only above the level of 1999 but also slightly above 1998 – or the pre-
crisis level.
Figure 2.7
Commodity Exports by Months
(million LVL)
60708090100110
I II III IV V VI VII VIII IX X XI XII1998
19992000
Growth of exports at the beginning of 2000 compared to the beginning of 1999 was mainly
achieved by growth of exports of wood materials and metal and metal products. Small increase was in
exports of chemical goods. The decline – for agri cultural and food products and light industry goods.
Thus the earlier quantities of exports have been regained yet with a different structure of export
commodities (see Table 2.11 and Figure 2.8).WT/L/362
Page 20
Table 2.11
Exports by Main Groups of Commodities *
(FOB prices)
1998 1999
million
LVLstructure
(%)increase
(current
prices,
per cent)million
LVLstructure
(%)increase
(current
prices,
per cent)
Total 1,068.9 100 10.0 1,008.3 100 -5.7
of which:
Wood and wood products,paper and paperboard389.7 36.5 24.3 402.5 39.9 3.3
Transport vehicles, products
of metal industry and engineering194.9 18.2 2.1 179.4 17.8 -7.9
Light industry products 187.1 17.5 9.8 165.5 16.4 -11.6
Agricultural and food products 115.4 10.8 -18.3 64.5 6.4 -44.2
Products of chemical industry
and allied industries, plastics76.3 7.1 4.3 71.9 7.1 -5.8
Other products of industry 105.5 9.9 27.7 124.5 12.4 18.0
*  According to the Special trade system.
Figure 2.8
Exports by Groups of Commodities
1998 I-III 2000 I-III
7.2%11.8% 12.3%
18.7%
18.4%31.6%8.8%4.2%
18.0%
40.0%13.6%
15.4%
 Agricultural and food products  Chemical products
 Wood and wood products  Light industry products
 Metal industry, engineering and transport vehicles  Other products  
Structure of exports by countries has also changed – the share of EU has gone up and the
share of Russia and other CIS countries – down.
Latvian exports to Russia and other CIS countries in 1999 decreased by more than 40 per cent
compared to 1998. Exports went down in all groups of commodities, the biggest decline being inexports of food products and machine building. In the first quarter of 2000 exports to Russia and other
CIS countries was by 17 per cent smaller than one year before. The biggest reduction was in exportsWT/L/362
Page 21
of agricultural and food products – by 42 per cent, the biggest rise for mineral products – by 75 per
cent. Mineral products last year accounted for 7 per cent of total exports to CIS, this year – already 14
per cent.
Exports to the EU in 1999 were by 4.3 per cent bigger than in 1998 mainly ensured by 7.1 per
cent increase of export of wood, 13.7 per cent of products of metal industry and machine building.
These tendencies stayed unchanged in the first three months of 2000. Latvian commodity export inthe first three months of 2000 was by 17 per cent bigger than in the same period in the preceding year
and the growth was achieved by increase of expor ts of wood and wood materials by 16 per cent and
metals and metal products – more than twice.
Exports to the Baltic States have on the whole dropped by 3.7 per cent in 1999, with a
substantial decline in exports of light industry (by 20 per cent) and growth of exports of chemical
industry products (by 11.4 per cent).
Figure 2.9
Latvian Commodity Exports by Groups of Countries
(%)
49%44% 45%57%63%38% 36% 30%19%12%12%12% 11% 9%
12%9% 8% 9%12% 13%
0102030405060708090100
1995 1996 1997 1998 1999EUCIS   Lithuania and EstoniaOther countries
Commodity imports in 1999 have decreased by 8 per cent in comparison with 1998 (see
Figure 2.10). The decline happened in nearly all groups of commodity and import structure has not
changed much on the whole. The share of capital a nd intermediate goods slightly declined with the
parallel rise of consumer goods. Imports of consumer goods decreased less than imports of other types
of commodities.
Figure 2.10
Commodity Imports by Months
(million LVL)
80100120140160180
I II III IV V VI VII VIII IX X XI XII1998
19992000WT/L/362
Page 22
The biggest trade partner of Latvia is German y amounting to 16 per cent of the total foreign
trade of Latvia (see Figure 2.11). Main import items from Germany are transport vehicles, machinery,
devices and equipment as well as chemical products and textile materials and textile products. The
next largest trading partners are Russia, Sweden and United Kingdom – respectively 9 per cent, 9 per
cent and 8 per cent of the total foreign trade turnover of Latvia.
Figure 2.11
Foreign Trade Turnover of Latvia in 1999*
(million LVL)**
356.319.147.266.475.9107.6165.8170.0121.2630.7
707.3156.9110.2181.0126.3124.856.1261.3258.3940.2
0 100 200 300 400 500 600 700 800 900 1000Other countriesFinlandEstoniaRussiaLithuaniaSwedenUnited KingdomGermany
Exports (FOB prices) Imports (CIF prices)EU
CIS
* According to the Sp ecial trade system.
** With countries where foreign trade turnover with Latvia in total share is not less than 5 per cent.
Table 2.12
Imports by Main Groups of Commodities*
(CIF prices)
1998 1999
million
LVLstructure
(%)growth (in
current
prices, %)million
LVLstructure
(%)growth (in current
prices, %)
Total 1,881.3 100 18.9 1,723.9 100 -8.4
     of which:
Products of metal industry andengineering544.2 28.9 26.0 498.8 28.9 -8.3
Products of chemical industry
and allied industries, plastics290.0 15.4 20.6 283.4 16.4 -2.3
Agricultural and food products 249.9 13.3 13.8 222.9 12.9 -10.8
Transport vehicles 196.3 10.5 48.6 142.9 8.3 -27.2
Mineral products 197.9 10.5 -11.0 195.8 11.4 -1.0
Light industry products 169.7 9.0 18.7 153.2 8.9 -9.7
Wood and wood products, paper
and paperboard94.1 5.0 15.5 92.1 5.3 -2.0
Other industrial products 139.2 7.4 24.5 134.8 7.8 -3.3
*  According to the Special Trade System.WT/L/362
Page 23
In 1999 compared to 1998 the negative trade balance of Latvia with Lithuania went up yet
decreased in trade with Estonia (see Table 2.13). Latvian imports from Estonia went down by 12 per
cent and with Lithuania increased by 7 per cent. Latvian exports to Lithuania dropped by 4 per cent
and to Estonia – by 3 per cent.
Table 2.13
Foreign Trade Turnover of Latvia with Lithuania and Estonia
(million LVL)
Exports Imports Balance
1998 1999 1998 1999 1998 1999
Lithuania
Agricultural and food products 12.6 13.5 25.9 32.4 -13.3 -18.9
Mineral products 2.3 3.8 24.4 29.5 -22.1 -25.7
Products of chemical industry,
plastics20.9 22.5 20.9 19.3 0.0 3.2
Light industry products 11.1 8.8 6.0 5.9 5.1 2.9
Metals and articles of metals 8.7 5.4 7.4 6.5 1.3 -1.1
Machines and equipment, transport
vehicles7.9 7.8 19.2 16.9 -11.3 -9.1
Other industrial goods 15.8 14.2 14.6 15.9 1.2 -1.7
Total 79.3 75.9 118.5 126.3 -39.2 -50.4
Estonia
Agricultural and food products 11.4 8.5 19.2 17.9 -7.8 -9.4
Mineral products 0.9 1.7 8.2 12.6 -7.3 -10.9
Products of chemical industry,
plastics10.4 12.4 22.2 20.6 -11.8 -8.2
Light industry products 4.9 4.0 9.3 7.2 -4.4 -3.2
Metals and articles of metals 5.4 3.7 17.6 11.7 -12.2 -8.0
Machines and equipment, transport
vehicles6.7 5.0 32.0 24.5 -25.3 -19.5
Other industrial goods 8.8 11.9 16.3 15.8 -7.5 -3.9
Total 48.5 47.2 124.8 110.2 -76.3 -63.0
3. Export and Import of Services
The clearly negative foreign trade balance of Latvia is partly offset by the positive balance of
services (see Table 2.14). According to the data of the balance of payments, export of services in 1999
compared to 1998 went down by 8 per cent and import of services – by 15 per cent which, in totalterms, increased the positive balance of services by 11 per cent.
Table 2.14
Export and Import of Services
(million LVL)
1998 1999
Exports Imports Balance Exports Imports Balance
Total services 654.2 475.0 179.2 602.4 402.8 199.6
of which:
Transport services 429.3 130.4 298.9 417.0 111.7 305.3
– sea transport 192.7 12.7 180.0 189.1 9.9 179.2
– air transport 32.7 38.3 -5.5 32.2 38.8 -6.6WT/L/362
Page 24
1998 1999
Exports Imports Balance Exports Imports Balance
– other transport 203.9 79.5 124.4 195.7 63.0 132.7
Travel 107.4 180.2 -72.8 69.0 157.1 -88.1
Financial services 23.3 9.9 13.5 19.6 6.3 13.3
Other business services 63.0 40.3 22.7 48.1 37.5 10.6
Other services 31.2 114.2 -83.0 48.7 90.2 -41.5
Almost 2/3 of export of services is revenues from transit haulage, which constitute
approximately 10 per cent of GDP. The direction of transit cargo going through Latvia is from the
eastern border, that is Russia and Belarus, to the Latvian ports where goods are reloaded on ships andforwarded to different other countries of the world. The central position in the transit process belongs
to port services and railway. Transportation of oil and oil products constitute approximately 60 per
cent of Latvian transit.
4. Foreign Trade Policy
The goal of the foreign trade policy of Latvia is to promote entrance into new, low risk
foreign markets and enlargement of the market share in the already existing markets.
Latvia is implementing a rather liberal trade policy. In the conditions of world globalisation
and economic convergence foreign trade policy of Latvia is devised to respect international
agreements and commitments resulting from Latvia ’s membership in international organisations.
Trade relations with the most important partners of national trade are based on bilateral and
trilateral preferential agreements, such as free trade agreements, and also on multilateral agreements,
such as WTO GATT and GATS providing the opportunity to establish trade relations with a largernumber of countries with identical principles of trade. Further liberalisation of trade is linked with the
foreign policy priorities of Latvia – accession to the EU and membership in the WTO.
Integration of Latvia into the European Union
There was a multilateral screening of the external relations’ chapter in Brussels in April 2000.
Latvia is ready to accept and implement the Community acquis  in the area of external relations as
presented by the European Commission in the Screening A list, Chapter 26.
The current legislation in the area of external relations on the whole corresponds to the EU
acquis . In the area of trade policy instruments, all the existing and planned legal documents have been
as much as possible harmonised with the respective EU regulations. This applies to legal documentson anti-dumping, guarantees and compensation, licensing and dually usable goods, export credit,
technical barriers to trade and other trade related activities. Latvia when negotiating its preferential
trade agreements has on the whole respected the policy of the European Community and it will have
no major difficulties in implementation of laws and their transposition into the national legislation.
World Trade Organisation
Latvia became a full member of WTO on 10 February 1999. Estonia and Jordan were
accepted soon after Latvia.
At the end of 1999 there was the Ministerial Conference in Seattle where it was planned to
open a new round of WTO negotiations focussing on further liberalisation of trade. However, theconference failed due to the huge differences in the position of member states. Opening of a new
round of negotiations now is postponed for an indefinite time.WT/L/362
Page 25
Still at the beginning of 2000 multilateral negotiations were opened discussing further
liberalisation of trade in services and agricultural products that had to be started 5 years after the date
when the WTO Agricultural Agreement and The General Agreement on Trade in Services entered
into force.
It is planned to revise the current principles of trade in services and to continue the general
liberalisation by opening new service sectors to service providers of foreign countries. The position ofLatvia in these negotiations is still being developed taking into account the higher degree of
liberalisation in this sector and the desire to meet the reciprocal openness of the services’ market from
other WTO member states.
In the area of trade in agricultural products it is planned to reduce export subsidies and state
support.
On 7 September 1999 the Cabinet of Ministers adopted Latvia’s position in bilateral
negotiations  in the area of market access for goods and services ( bilateral negotiations with countries
in the process of accession to WTO is the way to reach better market access for goods and services )
with countries who have started WTO accession negations. A specific tariff request was worked out in
regard to goods from Russia, Belarus, Ukraine and China taking into consideration tariffs applied in
these countries, Latvian related tariffs within the WTO and trade turnover between Latvia and
individual countries. In April 2000 negotiations with China were completed.
Domestic market protection
WTO regulations envisage three main trade defence instruments that may be used by a state
to protect domestic producers – internal market safeguards, anti-dumping and countervailing
measures.
On 11 February 1999 the Law on Safeguards was accepted. Provisions of this law have been
already applied in practice when safeguard measures to protect internal pork market were introduced
at the end of 1999.
On 16 December 1999 the Law on Anti-Dumping was adopted. The law shall enter into force
on 1 July 2000.
The Law on Protection against Subsidised Imports was adopted on May 2000. The law
provides for introduction of countervailing measures in cases when subsidised imports injury
domestic producers.
Therefore the Latvian legislation will provide an opportunity to use all trade defence
instruments of the WTO, if necessary.
To ensure common administration of the mentioned trade defence legislation the State
Safeguards Bureau (SSB) – the institution under supervision of the Ministry of Economy – will be
established by 1 July 2000.
Trade regimes
Latvia is basically oriented towards deepening of integration with the EU member states
and EU candidate countries and prepares and enters into trade agreements respecting the abovepriorities.
Free trade agreements (FTA) between the European Union and the associated countries
cover 29 countries thus forming a common free trade area of which Latvia is one part. Latvia stillWT/L/362
Page 26
has to enter into agreements with Romania and Bulgaria within this free trade area – these
agreements are currently being co-ordinated.
At the moment Latvia implements FTA agreements with the EU, European Free Trade
Association (EFTA), Czech Republic, Slovakia, Slovenia, Poland, Hungary, Estonia, Lithuania and
Ukraine (in trade with industrial goods).
FTA with Turkey was signed on 16 June 1998. On 4 March 1999 the Saeima of the
Republic of Latvia ratified the agreement. It is planned that the FTA with Turkey will enter into
force on 1 July 2000. On 9 March 2000 Saeima ratified the agreement between the Republic of
Latvia and Ukraine on trade in agricultural goods. It is anticipated that this document will be
ratified by the Ukrainian parliament in the near future.
Latvia has started the process of co-ordination of FTA with the Faeroe Islands (Kingdom of
Denmark).
Because of introduction of the EURO all the protocols on the origin of goods of the
concluded FTA (except FTA with Turkey and the Europe Agreement) have been amended and
gained effect on 1 January 2000.
In May 2000 at the second meeting of the Joint Committee of the FTA between the
Republic of Latvia and Czech Republic the Parties approved the list of agricultural goods and
customs duties to be reduced according to tariff quotas identified in the list. It is planned that thesechanges might take effect with 1 January 2001. Work at further liberalisation of trade in agricultural
goods is continued also within the scope of the agreement between Latvia and Slovakia.
After then accession to the WTO Latvia enjoys most favoured nation treatment in trade with
135 member states of the WTO. This has created the opportunity to expand external economic co-
operation with the majority of countries of the world and gain new sales markets for Latvian goodsand services.
Latvia also has the most favoured nation regime in trade with countries – non-member
states of the WTO such as Armenia, Azerbaijan, Belarus, Kazakhstan, Russian Federation,
Moldova, Tadjikistan, Turkmenistan, Uzbekistan, and Peoples’ Republic of China, Vietnam.
Work at the preparation for introduction of the most favoured nation regime in trade is
continued within the scope of the agreement on trade and economic co-operation discussed by the
Latvian and Croatian governments.
Figure 2.12
Total exports of Latvia by trade regimes in 1999
(%)
81.8%1.3%16.9%
Free trade agreements
Most favoured nation
treatment
OthersWT/L/362
Page 27
Figure 2.13
Total imports of Latvia according to trade regimes in 1999
(%)
80.8%0.9%18.3%
Free trade
agreements
Most favourednation treatment
Others
FTA envisages liberalisation of trade and the most favoured nation treatment ensures certain
privileges in trade and co-operation. Agreements on co-operation are concluded in order to developand strengthen economic and technological co-operation in the widest possible aspect pertaining to all
sectors considered being mutually interesting and beneficial to the Parties.
The Agreement on Economic and Technological Co-operation between Latvia and Greece
was signed in 1999.
In addition, agreements on co-operation have been concluded between governmental
institutions of the respective countries. To stir-up economic relations the Ministry of Economy in
1999 has made an agreement with the Ministry of  Business Activity and Investments of Belarus,
Ministry of Economy of Slovakia, protocol on co-operation with the Ministry of Economy of Ukraine.
These agreements speak about activities of market studies and information exchange, planning of fairs
and exhibitions, as well as creation of working groups for analysis of co-operation and problem
solving, etc.
Since the streamlining of legal relations between Latvia and Russia has been delayed due to
reasons not depending on Latvia, Ministry of Economy respecting both interests of the state and
individual entrepreneurs to receive products from specific regions has established direct contacts with
regions of the Russian Federation. Ministry of Economy has concluded seven agreements on trade and
economic co-operation and has prepared two agreemen ts for signing. Another five drafts of such
agreements are in the process of co-ordination.
Several intergovernmental commissions (see Insertion 2.2) have been set up to monitor
implementation of trade agreements with the CIS.
Insertion 2.2
Intergovernmental Commissions.
There are regular meetings of Latvian-Ukrainian intergovernmental commission where trade
and co-operation questions are discussed. The 4th meeting was held in October 1999. The meeting
addressed questions of the development of bilateral regional co-operation, co-operation in the area of
environment protection, inter-bank payments, development of transport corridors, elimination of some
errors in the appendices of the Latvian-Ukrainian agreement on trade in agricultural goods.WT/L/362
Page 28
Latvian-Belarussian intergovernmental commission is in force since 1996. In January 2000
the 3rd meeting of the commission took place. It addressed questions of co-operation in the areas of
transit and transport, trade and economic co-operation as well as close-to-border and cross border co-
operation, etc.
The 2nd meeting of the Latvian-Uzbekhistan intergovernmental commission is planned to be
held in August 2000 where it is envisaged to discuss series of questions – on increase of efficiency of
trade and economic co-operation, new forms of co-operation, work in the areas of finances, transport
and transit, etc.
The intergovernmental commission between Latvia and Russian Federation was established
already in January 1997. In January 1998 in the meeting of chairmen of the commission it was
decided to sign agreements on promotion of capital investments and their mutual protection,
elimination of double taxation and tax evasion, co-operation in the areas of standardisation,
certification and metrology, co-operation and mutual assistance in the areas of export control.
Unfortunately, none of the meetings of the commission took place.
A co-ordinated political and economic activity is necessary to restart negotiations between
Latvia and Russia on the intergovernmental level on signing of the planned agreements and their
implementation mechanism.
A problem, from the point of view of Latvian interests, is in the limited financial possibilities
to create network of economic or trade representations in the countries Latvia has signed trade
agreements with where the agreements do not ask for setting up an intergovernmental commission or
a Joint Committees.
One of the mechanisms of implementation of the agreement is organisation of mutual visits
(see Insertion 2.3) providing opportunities for entrepreneurs to establish business contacts, to learn
about possible co-operation and agree on concrete joint activities.
Insertion 2.3
Mutual visits.
In April 1999 a delegation consisting of the officials of the Ministry of Economy, Transport
and Technology of Bavaria visited Latvia. A large group of German businessmen came to Latvia to
meet different business representatives.
In May 1999 the President of Latvia G.Ulmanis went on an official visit to the Czech
Republic and attended Business Days organised by the Latvian Development Agency.
In September 1999 Latvia was visited by delegations of Japanese companies Mitsui and
JETRO. There was a mission of Latvian businessmen in four regions near the Volga-river in the
Russian Federation – Nizhgorod, Samara, Saratov regions and the Republic of Tatarstan.
In October 1999 Latvia was visited by the Prime Minister of the Czech Republic and the
delegation comprising representatives of the Czech Ministry of Industry and Trade and entrepreneurs.
In November 1999 Latvian entrepreneurs visited the Peoples` Republic of China.
In March 2000 within the scope of the visit of the President of Slovenia to Latvia – Minister
of Economy of Slovenia attended Latvia with a group of business people. Such visits promote the
establishment of direct economic contracts and promote international trade. Visits will be continued
also in future.WT/L/362
Page 29
Economic integration between the Baltic States
Functioning of the free trade area between the Baltic States is possible only in case of precise
implementation of the trilateral free trade agreements on condition that non-tariff barriers to trade are
eliminated.
The further development of economic co-operation between the Baltic States could be
reached through the improvement of the border crossing procedures between the Baltic States, by co-
ordination and harmonising of excise tax policies of the Baltic States with the relevant EU legislation
in the same area.
In the establishment of the free trade area between the Baltic States one must remember the
primary goal, that is to become EU member states a nd take a full part in the economic life of Europe.
The legislation of the Baltic States is being harmonised with the requirements of the EU and the rateof this approximation is different in each of the three Baltic States – therefore, a co-ordinated action in
this area would only benefit the development of these states as:
- The Baltic States could share among themselves their experience in implementation
of the EU regulations;
- it would be possible to reduce costs liked with interpretation of the EU regulations
and information of the public about them;
- it is easier for a group of countries rather than one single country to convince the EU
member states on application of special provisions to applicant countries at their
current stage of development;
- The EU could give a positive evaluation of a co-ordinated co-operation between the
Baltic States in the area of approximation of legislation.
If the Baltic States were united it would be easier to convince others about the necessity to
retain some specific regulatory measures (for a certain period of time) in the national legislation also
after the accession to the EU.
An important factor in the establishment of the free trade area between the Baltic States is
free movement of labour and free trade in services. The agreement on free movement of labour
between the Baltic States is currently in the phase of co-ordination. This agreement is especially
important in the area of trade in services as it stipulates free movement of providers of services.
Experts of the Baltic States will continue work at the review of opportunities to develop the
agreement on free trade in services with regard to the EU accession negotiations of the Baltic States.The eventual tripartite agreement on trade in servic es should not result in any major differences in
negotiating the position of Latvia, Estonia and Lithuania in accession negotiations to the EU.
Taking into consideration the geographical position of the Baltic States it is also important to
discuss the tripartite agreement on co-operation in the area of export, import and transit control of
strategically important goods. However, prior to such agreement it is necessary to continue
consultations to clarify the attitude of the European Union and third countries to the conclusion of
such trilateral agreement eliminating reciprocal e xport, import and transit control on internal borders.
In Tallinn, February 2000 there was a meeting between the heads of the Latvian, Lithuanian
and Estonian governments where they approved the new structure of the Baltic Council of Ministers
that will start functioning with 1 July 2000. The number of standing committees now, in accordance
with the new structure, will be reduced from 21 to 17. Some committees are eliminated and some
others, for example, Trade Committee and Economic Committee are joined together and the newcommittee now is called the Committee on Trade and Economy.WT/L/362
Page 30
Harmonised co-ordination of legislation with the EU regulations and directives is important
both in the context of Latvia’s progress towards the EU and establishment of the free economic area
between the Baltic States.
D. INVESTMENTS
1. Capital and Investment
The amount and quality of the accumulated real capital (produced assets) influences the
competitiveness of a state in the world market, economic growth and chances to increase welfare of
people. Therefore the produced assets created by the production activity of subjects in an economy is
one of the most important components of public wealth. During ten years of transition from the
planned to market economy both the amount of cap ital and its technological, sector and property
structure has substantially changed.
The level of the produced assets in Latvia at the moment is low, constituting in 1998
approximately 157 per cent of GDP (according to the closing balance sheet of the National Accounts)– of which 80 per cent were fixed assets and 20 per cent – inventories.
There are no statistical data about the technological structure of fixed assets in the whole
national economy, yet to describe this, we may use data of financial indicators of enterprises; the
latter cover approximately 70 per cent of all produced assets in Latvia. The remaining part –
approximately 30 per cent that are not included in the statistical bulletin “Basic Financial Indicators ofBusiness Activity” are created mainly from the values of the state road and housing fund.
The biggest part of the produced assets of companies is fixed assets. One third of these are
technological equipment and machinery (see Table 2.15).
Table 2.15
Technological Structure of the Produced Assets as of  1 January 1999*
(percentage)
Average in all sectors of
national economyIn commodity
production sectorsIn service
sectors
Produced assets – total 100 100 100
including
fixed assets –total 76.3 68.7 80.2
tangible fixed assets 73.6 67.2 77.0
land, buildings, perennial plants 37.2 33.6 39.2
technological machinery and equipment 21.6 23.0 20.8
other assets 8.6 5.1 10.5
fixed asset formation and unfinishedconstruction6.2 5.5 6.6
intangible fixed assets 2.7 1.6 3.3
inventories 23.7 31.3 19.8
* According to the summary of basic financial indicators of business activity
The share of the fixed asset value of commodity producing enterprises is 33 per cent of the
total fixed assets, which is two times less than in service sectors. Such proportion appeared in the
course of restructuring of the economy when a large part of fixed assets not only changed the owner
but also the area of business. Therefore, there is a high share of real estate in service sectors,especially in the sector of “Operations with real estate, rent and other commercial activity”. Almost
half (46 per cent) of all the values of technological equipment and machinery are in the sector of
“Transport and communications”. This cannot be evaluated straightforwardly – first of all, aWT/L/362
Page 31
substantial modernisation of communications has taken place and a lot of resources have been
invested in the development of port infrastructure, secondly, capital intensive industry sectors had
narrowed production.
Investments into physical capital provide for its growth. Dynamics of investments depend
on several factors, including macroeconomic stability of the state, investor projections, investment
environment, use of current capacities and their correspondence to modern technologies, etc.Decisions on investment are made by concrete subjects of business activity who own this fixed
capital. Property structure of Latvia is presented in Table 2.16.
We see that the biggest part of the fixed capital is owned by private owners. However, in
service sectors, public property equals to 51.1 per cent and private – 48.9 per cent. This is mainly
linked with the high share of transport and communications sector in the total fixed capital (37 per
cent of total fixed capital or 53 per cent of the fixed capital of service sectors). The share of state
property specifically in this sector constitutes approximately 60 per cent. If we add to this also thevalue of the public transport and communication infrastructure which in the mentioned statistical
publication is only partly included (without the value of roads) – the share of the pubic sector in
services will be even higher.
Transformation of the capital ownership structure in the commodity production area during
privatisation has been more explicit, although the share of fixed capital owned by the state, localgovernment and other public organisations is still rather high. One third of all value of fixed capital
is in energy sectors of which approximately 90 per cent are owned by the public sector.
As of 1 January 1999 the share of capital of residents in the private sector of Latvian economy
was almost two times higher than that of non-residents. In commodity producing sectors the share of
capital of residents was 72 per cent, non-residents – 28 per cent. Notably, that during 1998 the shareof residents’ capital in production sectors went up almost by 10 percentage points mainly at the cost
of reduction of the state capital share. In the private sector of services, shares of capital of residents
and non-residents are almost equal. Residents own 55 per cent, non-residents – 45 per cent of capital
and such structure is in place since the beginning of 1998.
Table 2.16
Ownership Structure of Shares or Capital Parts as of 1 January 1999*
(percentage)
Total in
national
economyCommodity
producing
sectorsService
sectors
Share or stock capital, fixed capital – total 100 100 100
of which owned by:
State, local governments, other public organisations 45.4 31.7 51.1
State and local governments 45.2 31.4 51.0
Other public organisations 0.2 0.3 0.1
Private organisations 54.6 68.3 48.9
Residents 33.5 48.9 26.9
Non-residents 21.1 19.4 22.0
*  According to the summary of basic financial indicators of business activity
In total capital of Latvian enterprises the most important position belongs to Latvian
residents, however there are some sectors where the share of non-residents is more than a half. Such
sectors are “Fishing”, “Electricity, gas and water supply” and “Trade”. The biggest share of capital
owned by non-residents at the end of 1999 in the fish ing sector belonged to Panama (60 per cent) andWT/L/362
Page 32
the United Kingdom (32 per cent), in electricity sector – to Germany (56 per cent) and Russia (36 per
cent), trade – UK (15 per cent), United States (27 per cent) and Finland (15 per cent).
Investment intensity analysis of sectors of national economy between 1995 and 1999 shows
that in enterprises with a higher share of non-resident capital, average annual investment growth rates
were higher.
In 1999 total costs of gross fixed capital formation decreased by 10.4 per cent in comparison
with the preceding year. Yet, the share of costs in  total fixed capital in GDP in 1999 reached 25 per
cent which was by 2 percentage points less than in 1998 and by 4 percentage points exceeded the
average level of 1995-1999 (see Table 2.17).
Table 2.17
Gross Capital Formation
1995-1999
(average per year)1998 1999
(real growth,  per cent)
GDP 3.0 3.9 0.1
Gross capital formation 10.1 39.2 -0.3
– gross fixed capital formation 17.1 44.0 -10.4
(in per cent against GDP)
Gross capital formation 23.2 27.6 26.3
– gross fixed capital formation 21.5 27.3 24.9
– changes in inventories 1.7 0.3 1.4
Decrease of investments in 1999 was linked with the slow-down of economic activity under
the impact of the Russian crisis.
Data of the survey on production conjuncture ( business tendencies) in industry show that in
January 1998 company managers have given the high est evaluation of production conjuncture since the
very start of such survey. Also the expected produc tion conjuncture (after six months) was given a very
positive evaluation. In no other period of the survey th ere was such small number of respondents (2 per
cent) forecasting the deterioration of the producti on conjuncture after 6 months. At the end of 1998 the
respective production conjuncture estimations (cur rent and expected) were the lowest since 1995.
Every year in the April survey of production conjuncture data on the existence and size of
investment into fixed assets are collected and in October – projections of the expected investment are
made (see Table 2.18).
Table 2.18
Business Tendency (Conjuncture) Surveys in Industry:   Investment into Fixed Assets of Enterprises
1995 1996 1997 1998 1999 2000
Existing investment
Investment in the current year
(% of the surveyed enterprises)50 53 62 69 64 67
Investment compared to the preceding year
(balance of answers,  %)41 01 21 4 1 1 0
Planned investment
Investment intentions for the following year
(% of the surveyed enterprises)55 57 65 62 65 …
Anticipated investment compared to the
preceding year (balance of answers,  %)13 1 18 5 10 …WT/L/362
Page 33
Until 1999 a growing number of enterprises involv ed in the conjuncture survey had invested
in fixed assets, yet in 1999 their number slightly went down. Investment evaluation shows that there
are very few enterprises where investment in 1999 was bigger than in the preceding year. Rather small
growth of investments is also planned for 2000.
What were the main investment restricting factors between 1995 and 1999 and how did their
impact change in the last years? Entrepreneurs mention insufficient profit as the main factor
obstructing investment in industry (see Table 2.19). In comparison with the preceding years the
number of businessmen who consider that investment is obstructed also by low demand is going up.
Starting from 1999 such factors as, high capital costs and insufficient credits are also mentioned.
Table 2.19
Business Tendency (Conjuncture) Survey in Industry:
Investment Restricting Factors
(percentage)
Average
(1995-1999)1997 1998 1999
Low demand 15.5 14.0 20.3 17.3
High capital costs 17.4 16.8 15.6 17.3
Poor credit provision 16.2 17.5 10.2 11.3
Low profit 30.0 30.8 33.6 32.7
Fear of debt 14.5 16.1 14.1 13.3
Technical factors 3.3 4.2 3.1 5.3
Others 3.0 0.7 3.1 2.7
The majority of investments are made in service sectors. In 1999 the share of non-financial
investment in sectors of industry, agriculture, fo restry and fishing was 30.5 per cent (in 1998 – 26 per
cent) and in the service sector – 67 per cent of total non-financial investments.
Some new tendencies have appeared in non-financial investment distribution between service
sectors in 1998. Until 1996, 50 per cent of investment in  services went to trade whereas in the last two
years this share had dropped and in 1998 equalled to  only 20 per cent. In turn, investment in the sector
of “Real estate, renting and business activities” went up rather rapidly. The share of non-financial
investment in this sector in 1998 reached almost 8 per cent – almost twice more than in the preceding
years. In the unfavourable conditions of the development of economy such tendency could not only
show the advantages of the sector but also the inte ntion to change investment portfolio in favour of
real estate.
In 1999 compared to the respective period in 1998 – non-financial investment went down by
5 per cent. Investment into industry during this period went up by 17 per cent, in services – declined
by 13 per cent. Notably, that during this time for the first time since 1995 investment went down in
almost all services sectors except public services . Out of industrial sectors – investments declined
only in agriculture and construction. These are sectors having the highest share of residents’ capital(approximately 80 per cent) where mostly small private companies operate.WT/L/362
Page 34
Table 2.20
Non-Financial Investment by Sectors
(percentage)
StructureSectors1995 1999Real growth
1999 against 1995Real growth
1999 against 1998
Total 100 100 157.7 -5.0
of which
Agriculture and fishing 1.7 1.8 171.9 -17.4
Manufacturing and mining andquarrying17.1 16.5 144.7 4.8
Electricity, gas and water supply 7.9 14.1 265.2 73.0
Construction 2.8 2.2 129.4 -9.0
Trade 13.5 11.5 306.5 -19.0
Transport and communications 27.7 22.1 80.0 -18.0
Other services 29.3 31.9 207.7 -5.2
As a contrast to the preceding years the highest amount of investments was in the public
sector as in 1999 compared to 1998 investments in public sectors went up and into private sectors –
declined (see Table 2.21). Analysis of investment dynamic by property forms between 1995 and 1999
show that average annually investments into the private sector went up faster than in the public sector,
yet total annual rates of investment into the public sector are more stable and less subjected to
fluctuations. Also in 1999 they were more stable which testifies about purposeful implementation of
the public investment policy despite the unfavourable economic conditions.
Table 2.21
Non-financial Investment by Types of Property
(percentage)
Structure
1995 1999Real growth in
1999 against 1995Real growth in
1999 against 1998
Non-financial investment – total 100 100 157.7 -5.0
of which in:
Public sector 75.2 53.0 81.6 13.0
Private sector 24.8 47.0 387.9 -20.0
The amount and place of investment in the near future will depend on investment
environment, evaluation of the development tendencies of national economy by investors and the
estimation given to Latvia by independent international organisations and other conditions.
The investment process in the near future may be negatively affected by the low domestic
demand and slow changes in external demand.
Investment process may be positively affected by:
- stability of financial environment although there were certain difficulties in the
financial sector due to the Russian crisis;
- positive evaluation of independent international organisations such as Standard &
Poor’s , etc. of investment environment of Latvia;
- Latvia is included in the group of countries to start accession negotiations with the
EU;
- positive projections of businessmen about the improvement of economic activities.WT/L/362
Page 35
2. Public Investment Program
The Public Investment Program (PIP) is developed in Latvia since 1995. The aim of PIP is to
direct public resources for the development of infrastructure, its maintenance and expansion of public
services. PIP is financed from the central and local government budgets, guaranteed loans, grants, and
own resources of project executors.
Total amount of PIP is going up with every year . In 1999 total financial resources of PIP from
the central government basic budget, government credits and guaranteed loans and other sources
(grants, own resources of project executors) amounted to 3.8 per cent of GDP and it is planned that
financing from all sources in 2000 will amount to 5 per cent of GDP (see Table 2.16). Still it is
anticipated that in 2000 the growth of total investments will not be as fast as planned. Experience
shows that actual implementation of PIP from all sources constitutes approximately 70-80 per cent of
the plan (68 per cent in 1996, 67 per cent in 1997, 77 per cent in 1998 and 77 per cent in 1999).
The priority sectors within PIP are transport, energy and environment protection
infrastructure projects. Projects of financial sector and internal affairs are priority sectors financed
from the government basic budget.
Table 2.22
Public Investment Program for 1995-2000
1995
(actual
imple-
mentation)1996
(actual
imple-
mentation)1997
(actual
imple-
mentation)1998
(actual
imple-
mentation)1999
(actual
imple-
mentation)2000
(approved
plan)
(million LVL)
PIP – total 28.5 47.4 88.3 108.4 137.7 205.9
of which:
Central government basic budget 13.8 14.3 23.3 42.3 46.3 39.3
Central government special budget 4.4 3.4 3.6 2.7 6.8 10.6
Loans 10.3 12.3 36.7 31.5 49.8 93.8
Other resources 0.0 17.4 24.6 31.9 34.8 62.2
(percentage of GDP)
PIP – total 1.2 1.7 2.7 3.0 3.8 5.0 e
of which:
Central government basic budget 0.6 0.5 0.7 1.2 1.3 1.0 e
Central government special budget 0.2 0.1 0.1 0.1 0.2 0.3 e
Loans 0.4 0.4 1.1 0.9 1.4 2.3 e
Other resources 0.0 0.6 0.8 0.9 0.9 1.5 e
e – evaluation of the Ministry of Finance.
Public investment program for 1999
According to the summarised information on pr oject implementation, the share of the central
government basic budget in total PIP in 1999 was 34 per cent, special budget – 5 per cent,
government guaranteed credits and government loans – 36 per cent, other resources – 25 per cent
(local government budgets, grants, own resources of companies). It is estimated that 1 lat of the
central government basic budget attracted 2 additional Lats in the form of other financing sources.
199 investment projects were realised within PIP in 1999, of which 64 were submitted by local
governments. Implementation of 146 projects was continued also in 2000.WT/L/362
Page 36
The same as in the proceeding years, 73 per cent of the total financing used in 1 999 was invested
in priority sectors of PIP – energy, transport, environment protection and welfare projects, mainly as credit
resources.
Energy projects foresee modernisation of power stations ( Daugava cascade HES ) and heat
supply outside Riga.
In the transport sector – repairs of main motorways (State Motor Road Project, Kuld īga
Region Infrastructure Projects) and port infrastructure development projects (R īga, Liepāja, Ventspils
and Mērsrags ports) as well as information projects of national importance were implemented (data
transmission network of the national importance, Baltic States data transmission network).
In the environment protection sector, key priorities are upgrading and development of water
supply (Program 800+ covering projects of several local governments) and waste management
systems. Improvements of heat supply, modern isation of water supply and waste management is
carried out. Water supply and wastewater treatment projects in small towns of Latvia are implementedwithin the Program 800+. This program is set up as a sub-program of the National Program of the
Baltic Sea Environment Protection. Its objective is to improve water quality, both in inland waterways
of Latvia and in the Baltic Sea, as well as to eliminate the degradation of the water eco-system and to
implement international commitments related to programs of environment protection. Many grants are
received for 800+ program projects. 21 municipal project was financed within PIP in 1999.
In the sub-sector of waste management – hous ehold waste management projects are being
implemented within the framework of Program 500–. The goal of this program is to reduce pollution
and hazards to the environment arising in the process of household waste collection and disposal.
In the welfare sector – one of the biggest proj ects of the sector – Welfare System Reform is
being implemented. This project covers the introducti on of the social insurance system, along with the
Health Care System Reform Project to develop sickness funds and to introduce new technologies and
optimise the primary and secondary health care infra structure. World Bank loans are being used for
these projects.
The largest share of budgetary financing within the PIP in 1999 was directed to the sectors of
interior (21 per cent of the total amount) and finance (18 per cent) where it was planned to realiselarge projects of national importance such as The Development of Infrastructure of the Eastern Border
of the State and the Creation of the System of Technical Protection, Control and Information on the
Border as well as Customs Points on the Border and The Information System of State Revenue and
Customs Policy Implementation. A well-organised st ate border and improvement in the tax collection
records will encourage growth of the revenue part of the budget.
In the area of education – the Latvia Educat ional Information System project is being
implemented for information supply to school infrastr ucture. Another significant project in the area of
education planned to be funded by the World Ba nk loan and state budget is Increase of Cost
Effectiveness and Quality of Education in Educational Establishments. The goal of this project is to
increase energy efficiency and utilisation of school bui ldings in conformity with current standards of
West European states.
Starting with 1997 substantial attention is devoted to investment projects in the area of
information technology. The invested financing form the state budget has gone up from 2.2 million
Lats in 1997 till 15.2 million Lats in 1999. Main activities in the area of information are linked with
the creation and perfection of various registers, data transmission networks and information systems.WT/L/362
Page 37
Table 2.23
PIP by Sectors
1998 (actual
implementation)1999 (actual
implementation)2000
(approved plan)Sectorsmillion
LVLshare,
 per centmillion
LVLshare,
 per centmillion
LVLshare,
 per cent
Total PIP 108.4 100 137.7 100 205.9 100
     of which:
Transport 34.1 31.5 49.0 35.6 69.6 33.8
Environment, regional development 21.7 20.1 25.8 18.7 57.3 27.8
Energy 11.1 10.3 12.6 9.2 32.9 16.0
Welfare 9.9 9.1 12.7 9.2 14.7 7.1
Education and science 4.6 4.3 5.3 3.9 8.9 4.3
Finances 9.5 8.8 10.7 7.8 6.5 3.2
Interior 9.3 8.6 9.6 7.0 6.6 3.2
Defence 2.1 1.9 3.4 2.4 2.7 1.3
Justice 0.7 0.6 2.5 1.8 2.4 1.2
Foreign affairs 0.2 0.2 0.0 0.0 0.0 0.0
Agriculture 1.2 1.1 2.2 1.6 1.8 0.9
Culture 1.6 1.5 2.0 1.5 1.4 0.7
State Land Service 0.5 0.3 0.8 0.6 0.7 0.3
Others 1.9 1.8 1.1 0.8 0.3 0.1
The amount of financing of local government projects from the central state budget has gone
up as well. In 1997 – 2.8 million Lats or 11 per cent  was the input from the central government basic
budget in projects of local governments, in 1998 – 14 per cent (5.9 million Lats), in 1999 – 19 per cent (9.1
million Lats) and in 2000 it is planned 27 per cent (10.8 million Lats). In total, for implementation of these
projects 34 million Lats were spent, amounting to 24 per cent of the total financial resources of PIP for
1999.
Looking at the distribution of PIP in 1999 by regi ons – (including all sources of PIP financing
– state budget, loans, grants, local government resources, etc.) the majority of resources were directed
to the biggest cities of the republic – R īga (17.1 per cent), Ventspils (12.0 per cent), Liep āja (3.9 per
cent), Daugavpils (3.2 per cent) and Jelgava (1.3 per cent). It is worth noting that the greatest parts of
projects in these cities were implemented with credit resource financing. 38.5 per cent of the resources
of the Public Investment Program (51 projects in to tal) were directed to programs comprising small
projects implemented in several regions of Latvia and also to projects covering the whole territory of
Latvia or its significant part (for example, road reconstruction projects on main highways).
Public Investment Program for 2000
Saeima approved the Public Investment Program for 2000 in the amount of 216.1 million
Lats. The draft decision of the Cabinet of Ministers on PIP with specifications and amendments
suggested by line ministries provides the needed estimate of total 205.9 million Lats. The draft
decision outlines the sources of financing – 39.3 million Lats from the central government basic
budget, 10.6 million Lats from the special budget, 93.8 from credits and 62.2 million Lats from other
sources.
Investments from the central government basic budget have gone down by 18 per cent in
2000 compared to 1999 and equal to 39.3 million Lats. The amount of state loans and state guarantees
has gone up and in 2000 this equals to 93.8 million Lats – by 20 per cent more than in 1999.WT/L/362
Page 38
There is a substantial increase of financing for municipal projects in 2000. It is planned to
direct 10.08 million Lats to projects of local governments, which is by 18.7 per cent more than in
1999. Percentage-wise, comparing municipal project investments to investments into other projects
we see that in 1999 local government projects constituted 19 per cent of the total state basic budget
investments and in 2000 – already 27 per cent or more than one fourth. Regional policy is also one of
the priorities of the European Union.
Generally, the Public Investment Program for 2000 has retained the basic orientation of
investing identified in the previous years, that  is energy, transport and environment protection
constituting 78 per cent of total investment.
The same as in the previous years also in 2000 the majority of investment will be made in
Rīga (29.1 per cent) and R īga region (11.6 per cent) and in the biggest cities of Latvia – Ventspils –
9.2 per cent, Daugavpils – 1.8 per cent. Notably that the majority of these resources are credit
resources.
Public Investment Program for 2001
Ministry of Economy has drafted PIP for 2001 for the total planned amount of 227.7 million
Lats, of which 56.8 million Lats will be contributed by the central government basic budget, special
budgets – 4.8 million Lats, credits – 85.4 million Lats and other sources – 80.7 million Lats. PIP 2001will be discussed in the Cabinet of Ministers after the approval of the “target ceiling”.
Starting with 2000 Latvia has got an opportunity to get financial support from the EU
Pre-structural funds (ISPA, SAPARD ). To attract additional resources the state should provide a
co-financing for project implementation. EU SAPA RD support for the financed projects will not
exceed 75 per cent of the total public investment into a project. ISPA covers not more than 85 per centof the total public investment. The Public Investment Program is the mechanism to ensure the co-
financing.
Concept of the Public Investment Program
The present planning of PIP and its implementation does not quite correspond to the new
requirements in the most important areas of economy and integration into the European Union.
The Concept of the Public Investment Program is developed and submitted to the Cabinet of
Ministers. This program is important to ensure a united strategy of economic development
investments in the state.
The government will have to choose one of the offered two variants. The first foresees the
development of PIP by continuing the present planning model and including PIP into the state budget
as a component of budgetary programs.
Another variant sees the development of PIP as an inter-sector and inter-regional complex
integrated indicative medium-term infrastructure development program united in a single system and
following the same principles. This solution has th e aim to implement a co-ordinated development of
sector infrastructure.
After review of the concept the government will decide on the investment strategy till 2006.
3. Foreign Direct Investment
In 1999, despite the Asian and Russian economic crises, Latvia attracted considerable amount
of foreign direct investment. Continuing implemen tation of consistent activities to improve businessWT/L/362
Page 39
environment and create macroeconomic stability Latvia successfully uses the advantages offered by a
relatively well developed transit infrastructure and a low-cost, highly skilled labour force.
Figure 2.14
Cumulative Foreign Direct Investment in Latvia
(end of period, million US$)
5049271155 1282261345402602
675111
0500100015002000
1995 1996 1997 1998 1999
Equity Debt
FDI in Latvia went up from 22.5 million Lats in 1992 to 1099 million Lats (US$1.885 billion)
at the end of 1999.
As of end of 1999 foreign businesses, in the form of FDI, had invested 453 Lats (US$777) per
capita.
According to the evaluation of EBRD, Latvia at the end of 1999 held the 4th highest position
in terms of accumulated FDI per capita among other East European and Baltic countries (see
Figure 2.15).
Figure 2.15
Cumulative Foreign Direct Investments Per Capita
in Central- and Eastern Europe Countries* in 1999  (US$)
71243273391518545568661777112214471764
0 200 400 600 800 1000 1200 1400 1600 1800 2000RussiaRomaniaPolandSloveniaLatviaCzech Republic
*  Data including projection for 1999. Data on Latvia –from CSB sources
Sources: IMF, central banks and EBRD estimates (Transition Report 2000, page 79; European Bank for
Reconstruction and Development, London).WT/L/362
Page 40
Another measure of the relative importance of FDI in the overall economic activity is the
amount of FDI as a percentage of GDP. In 1997 La tvia this was 9.3 percent of GDP, in 1998 and 1999
– 6 per cent.
Reinvestment of profit by foreign companies established in Latvia is becoming an increasing
source of FDI. The share of reinvested earnings in FDI shows a rising trend from zero in 1995 to
about 20-25 per cent percent in 1998 and 1999.
Foreign direct investment has played an important role in covering the current account of the
Latvian balance of payments. In 1996 – 135 per cent of the current account deficit was offset by FDI,
in 1997 – 152 per cent, in 1998 – 51 per cent and 1999 – 58 per cent.
FDI by kind of activity
There have been substantial changes in the pattern of foreign investment over time. During
the early stages investments were mostly made in sectors linked with use of local resources and
extraction of raw materials, primary processing and low skill labour. Yet, at the end of 1990ies muchmore is invested in sectors that may be considered capital intensive or more oriented towards use of
labour skills and technologies.
Major foreign investments in transport and trad e sector indicate that foreign investors use
geographical advantages of Latvia. In 1992 and 1993 foreign direct investments were mostly made in
agriculture, food and leather processing, construction, auxiliary transport, retail trade, establishmentof financial institutions and some services related to business activity.
Yet, in the mid-1990s major investments were made in port facilities and
telecommunications, largely based on privatisation. As the privatisation process accelerated,
investments in manufacturing increased and went to wood processing, textile industry, clothing,
chemicals, base metals, metal products and machinery. In 1997 the manufacturing sector received thelargest foreign investment.
Figure 2.16
Cumulative Equity Foreign Direct Investments by Sector
(end of period, million US$)
119231 228269
63124188216306317348331
115151250 252
77114149264
050100150200250300350
1996 1997 1998 1999Manufacturing
Trade
Transport and Communications
Financial Services
Others
In 1998 major investment was made in the financial sector and the development of the
wholesale/retail trade network and in sectors where Latvia had comparative advantages, such as the
transit haulage and timber industry and mechanical engineering. A significant part of the foreigndirect investment was made also in the real esta te business (construction/refurbishment of offices).WT/L/362
Page 41
In 1999 sectors, which received the highest share of investment were industry (specifically
manufacturing of textiles, wood products, metal products, equipment), real estate and wholesale and
retail trade.
By the end of 1999, the transport and communications sector still had the highest share of FDI
(25 per cent), followed by the financial sector (21 per cent), industry (20 per cent) and trade (16 per
cent).
FDI by investing country
Large investments in Latvia were made by the Denmark, the USA, Sweden, United Kingdom
and Russia (see Figure 2.17).
More than 50 per cent of foreign direct investment in Latvia comes from the EU countries .
Such investment distribution reflects the trade model of Latvia as well as displays increasing
integration in the European economic system.
Figure 2.17
Cumulative Equity Foreign Direct Investments in Latvia by Country, end of 1999
(structure,  per cent)
20.31.92.23.03.73.95.15.37.37.38.28.49.713.7
0 5 10 15 20 25OthersIsle of ManSingaporeNetherlandsNorwayIrelandFinlandEstoniaRussiaUnited KingdomSwedenGermanyUSADenmark
FDI Development Policy
Alongside with the stable state macroeconomic policy that corresponds to the IMF
requirements and implementation of Maastricht, criteria main factor of attraction of foreign and
domestic investment in 2000 and also in later future will be the ability of the Latvian government toestablish stable and business development oriented environment.
Continuation of a structured dialog between major foreign and domestic investors and the
government is one of the most important priorities for 2000-2001. The dialog with the ForeignWT/L/362
Page 42
Investors Council1 (FICIL) gives the opportunity to iden tify bottlenecks existing in the business
environment and discuss ways to eliminate them. Foreign Investors Council in meetings of
1 June 1999 and 30 November 1999 addressed the following issues:
- availability of skilled labour i.e. improvement of educational system;
- tax policy and administration;
- transport infrastructure/border crossings/customs clearance;
- fight against corruption;
- availability of long-term financing in local currency;
- implementation of the Action Plan to reduce administrative barriers;
- access to public services ( Latvenergo , Rīgas Siltums  etc.).
Based on recommendations of foreign investors, Latvian Development Agency and
representatives of public institutions in co-operation with FICIL developed an Action Plan to eliminate
shortcomings in the identified areas as approved  by the Cabinet of Ministers of 29 February 2000.
Successful implementation of the plan could raise trust into Latvia as a country able to carry out
promises given to investors and thus attract consid erable foreign direct and domestic investments. The
dialogue with foreign investors and the following development of the action plan to improve business
environment was highly evaluated at the Council of Baltic Sea States Business Forum (on 29-30 March
in Stockholm) and also at the Baltic Business Conference during the EBRD meeting in Riga
(19-22 May).
Competition for the foreign direct investments between the countries of Central and Eastern
Europe becomes fiercer and therefore the Cabinet of Ministers in March 2000 approved the concept
“On Enhancement of Investment Project Significant for National Economy”. This concept speaksabout promotion of important investment projects wi thout violation the EU state support legislation in
the following areas:
- training and retraining of workforce;
- infrastructure preparation, including the development of business parks;
- adaptation of fiscal incentives for high technology sectors.
Implementation of concept based on a more efficient use of public resources, including the
Public Investment Program could successfully comp ete in attraction of projects in high technology
sectors.
- Other measures to be implemented in order to attract more extensive foreign
investments:
- consistent and transparent completion of privatisation;
- promotion of regional co-operation (energy, transport, capital market development);
- stability of legislation, mainly in the taxation, foreign trade and ownership areas;
- improvement of the judiciary;
- development of the financial market (market supervision, pension funds, mortgage
system);
- implementation of the anti-corruption program;
- more extensive contribution to the development and implementation of research and
technologies.
                                                     
1 The FICIL consists of the representatives from major foreign enterprises, such as ABB, Alte Leipziger, Coca-
Cola, Ericsson, Ernst & Young, Linstow ASA, Readymix Zement GmbH, Schenker-BTL, Société Générale,Statoil Marketing, Stora Enso, Tatko Group, Volkswagen, Volvo Truck, Jeld-wen  and directors of the US,
British, Swedish and German-Latvian business associations.WT/L/362
Page 43
E. MONETARY DEVELOPMENT AND THE EXCHANGE RATE
1. Monetary Policy, Banking System and Stock Market
The Bank of Latvia (the central bank) implements the monetary policy in Latvia. The law
“On the Bank of Latvia” stipulates that the main goal of the monetary policy is to keep price stability.
The central bank is not dependent on the decisions or orders of the government or government
institutions. The bank is independent in its decision making and practical implementation of thedecisions.
The Bank of Latvia implements a conservative monetary policy supported by the insofar
governments. The fundamental principles of this policy are:
- free convertibility of the national currency;
- no restrictions on capital movements to and from Latvia;
- external stability of the national currency;
- internal stability keeping inflation as low as possible;
- interest rate policy for additional liquidity management.
In the middle of February 1994 the Bank of Latvia unofficially pegged the exchange rate of
the lat to the SDR currency basket (1 SDR = 0.7997 LVL) thus de facto  implementing the fixed
national currency exchange rate policy (see details on the exchange rate policy in 3.5.4). The centralbank plans to preserve the current peg of the lat to  SDR till the time when Latvia is accepted into the
EU. The Bank of Latvia has managed to gain confidence without the use of a formal currency board
system and also the experience of a widely oriented spectrum of monetary tools fully compatible with
the monetary policy instruments at a disposal of the Central Bank of Europe.
The main monetary instrument is buying and se lling foreign exchange, including swap deals
in Lats. This allows the Bank of Latvia to use its foreign currency reserves for regulation of the
domestic money market without affecting the policy of interest rates. To guarantee liquidity the Bank
of Latvia uses open market operations. Lombard credits are granted to ensure the efficiency of inter-
bank payments. In turn, to reduce the liquidity in the system, bank time deposits in the Bank of Latvia
are used. The reserve requirements (from 15 February 1993 till 30 November 1999 were 8 per centand since 1 December 1999 – 7 per cent) are not actively used for the purposes of control over
liquidity of domestic financial sector, still they ensure the stability of the demand of the central bank
resources.
In the middle of 2000 there were 23 commercial banks in Latvia, 1 branch of a foreign bank
(Merita Bank Plc Riga Branch) and 1 representative  office of a foreign bank (Dresdner Bank AG) 
2.
Assets of the five largest banks equal to approximately 60 per cent of total bank assets and 80
per cent of all bank assets are concentrated in 10 largest banks. Almost all banks are private. The
share of state-owned capital in fixed assets of banks at the end of 1999 was 3.7 per cent (4.9 per cent
at the end of 1998). The most substantial share of state capital is in two banks – the Latvian Hypotec
and Land Bank – 100 per cent and Latvijas Kr ājbanka (Savings Bank of Latvia) – 41.8 per cent.
Approximately 2/3 from the fixed capital of  Latvian banks is non-resident investments.
German, Swedish, Finnish, Estonian and Russian banks and several important internationalinstitutions (EBRD, Swedfund, etc.) are shareholders of Latvian banks. There are foreign investments
in 20 banks, of which more than 50 per cent of capital in 12 banks belongs to foreign shareholders, of
which 6 banks are daughter companies of foreign banks.
                                                     
 2 To compare: there are 7 banks in Estonia and 13 in Lithuania.WT/L/362
Page 44
In the second half of 1998 the banking sector of Latvia was negatively affected by the
Russian economic crisis and several banks were in a difficult situation. Total bank assets and deposits
went down under the impact of the Russian economic crisis, the majority of banks ended 1998 with
losses. However, crediting continued growing.
In 1999 there was a gradual improvement of the main indicators in the banking sector. The
total paid capital of the banks had gone up by 4.4 per cent in comparison to the end of 1998. Growthtrends continued also in the first half of 2000. Commercial banks operated with profit. Total net profit
of all commercial banks in 1999 reached 18 million Lats and in the first quarter of 2000 equalled to
approximately 10 million Lats.
Increase of efficiency of the banking system is closely linked with the development of
national economy, structural reforms, development of capital and real estate market. Strengthening of
the banking sector is encouraged by the appearance of respectable foreign banks (Skandinavske
Enskilda Banken, MeritaNordBanken, Norddeutsche Landesbank, etc) in the financial sector ofLatvia.
The Bank of Latvia carries out bank supervision. Bank supervision, according to the opinion
of many foreign experts, is one of the strictest among all the countries of Central and Eastern Europe.
Many requirements for credit institutions in Latvia  are even stricter than in the countries of the
European Union, for example, this refers to classification of loans and rules of saving. The number ofcommercial banks permitted to accept private deposits in Latvia is restricted (in 2000 – 22
commercial banks).
As a reaction to the Russian crisis, the Bank of Latvia reinforced bank supervision even more
introducing restrictions for bank deposits into investments not linked with OECD countries.
Consolidated supervision of credit institutions have  been introduced with 1 July 1999 that allows the
Bank of Latvia better assess risks to commercial banks due to corporate relations.
To increase the reliability of the financial system – work at the establishment of a new
independent financial supervision institutions is under way to unite functions of the Credit
Institution’s Supervision Board of the Bank of Latvia, Stock Market Commission and State Insurance
Supervision Inspection. The law on the establishment of the single financial supervision institutionspells out the plan to start operating with 1 July 2001.
Stock market plays an important role in the attraction of investments. At present, in Latvia the
needed legal base for the development of stock market is in place which corresponds to the
requirements of the EU directives and the institutions necessary for its functioning have been created.
Yet stock market in Latvia is in a very initial stag e of development, therefore it has a small impact on
the economic development.
At the end of December 1999 total market capitalisation of the Riga Stock Exchange (RSE)
was slightly more than 513 million Lats or 14 per cent of GDP (at the end of 1998 – 391 million Lats
or 11 per cent of GDP; at the end of 1997 – 199 million Lats or 6. per cent of GDP). Shares of more
than 70 companies were listed in the Riga Stock Exchange (RSE) at the end of 1999.
The crisis in Eastern Asia and Russia negatively influenced also the Latvian stock market.
Riga Stock Exchange Dow Jones index (2 April 1996 =100) went down from 346 at the end of 1997
to 98 at the end of 1998 and 88 at the end of 1999. Yet the activity in RSE recently started to go up
and at the end of March 2000 Dow Jones index reached 117. The general improvement of economicWT/L/362
Page 45
situation and sales of shares of larger privatised companies in the stock exchange and also
introduction of the Baltic List encourage this 3.
Growth of the capital market in the nearest future will depend on implementation of
privatisation plans and on how effectively stock market will be used by companies to attract capital.
Such stable investors as pension and investment funds may appear in the stock market positively
influencing the financial development.
Over the medium term it is planned to create a harmonised and later also a united Baltic stock
market and to integrate into the financial market of Northern Europe4.
2. Monetary Indicators of the Banking System of Latvia
Under the impact of the Russian economic crises growth trend of monetary indicators of the
banking system was interrupted in August 1998 – bank assets went down, the number of non-resident
customers declined and interest rates went up.  Monetary indicators gradually improved during 1999.
Compared to the end of 1998 – at the end of 1999 broad money M2X had gone up by 8 per cent,deposits – by 6 per cent, credits to enterprises and private persons – by 15 per cent. Positive growth
tendencies of monetary indicators were observed also in the first months of 2000 (see Table 2.24,
Figures 2.18 and 2.19). At the end of 1999 deposits of enterprises and private persons lagged behind
end of July 1998 (pre-crisis situation). At the end of March 2000 basic monetary indicators of the
banking system had already exceeded the pre-crisis level.
Table 2.24
Monetary Indicators of the Banking System of Latvia
(end of period)
1996 1997 1998 1999
(end of period, million LVL)
Net foreign assets 452.2 705.2 552.2 516.9
Net domestic assets 176.0 269.0 506.7 634.2
Domestic credits 351.4 489.4 639.3 736.2
Government (net) 139.9 115.1 70.2 79.9
Enterprises and private persons 211.5 374.3 569.1 656.3
Other items (net) -175.4 -220.4 -132.6 -102.0
Broad money M2X 628.3 871.3 923.0 997.2
Currency in circulation (less vault cash balances) 264.0 332.7 340.2 377.4
Private and enterprises deposits 364.3 538.6 582.9 619.8
of which:
Demand deposits 300.5 420.3 408.9 401.0
Time deposits 63.8 118.3 174.0 218.8
(changes over the preceding period,  per cent)
Domestic credits 6.0 39.3 30.6 15.2
of which:
Enterprises and private persons 3.5 77.0 52.0 15.3
Broad money M2X 19.9 38.7 5.9 8.0
Currency in circulation (less vault cash balance) 26.0 26.0 2.2 10.9
Private and enterprises deposits 15.9 47.9 8.2 6.3
GDP 20.4 15.8 9.6 2.0
                                                     
 3 Starting with January 1, 2000 the Baltic List was introduced including shares of biggest companies listed on RSE,
Tallinn stock exchange and the National Stock Exchange of Lithuania.
 4 At the beginning of May 2000 Baltic Stock Exchanges signed a letter of intent with the stock exchange alliance of
the Nordic Countries – NOREX. The agreement foresees the possibility for the Baltic States to join the alliancein future which may attract large international investment companies to Latvia.WT/L/362
Page 46
Figure 2.18
Broad Money (M2X) and Its Components, Quarterly Profile
(end of period, million LVL)
020040060080010001200
I II III IV I II III IV I II III IV I II III IV IBroad money M2X Domestic deposits of enterprises and private persons
Currency in circulation (less vault cash bilances)1996 1998 1999 1997 2000
Figure 2.19
Credits to Domestic Enterprises, Private Persons and the Government, Quarterly Profile
(end of period, million LVL)
-50050100150200250300350400450500550600
I II III IV I II III IV I II III IV I II III IV IBank domestic
credits toenterprises
Bank creditsto thegovernment(net)
Bank creditsto privatepersons
1996 1997 1998 1999 2000
Deposits of enterprises and private persons steadily went up before the Russian crisis (even
in 1997 exceeding 50 per cent). A relatively more stable political and economic environment
encouraged inflow of short-term capital from Russia and other CIS countries. At the beginning of
the crisis non-residents of the CIS withdrew their money to use it for solution of their problems.
Therefore in the second half of 1998 deposits compared to pre-crisis period had gone down by 10
per cent. Starting with the second quarter of 1999 deposits on banks started to go up again, non-resident deposits rising at a faster rate than those of residents. Since the beginning of 1999 there
was a tendency for time deposits to go up in the total structure of deposits. At the end of September
1999 these equalled to 30 per cent and at the end of March 2000 – already almost 38 per cent.
The amount of credits granted to enterprises and private persons went up substantially over
the passed years (in 1997 – by 77 per cent and in 1998 – by 52 per cent). Credits continued going upalso in 1999, only at a slightly slower rate – by 15 per cent.WT/L/362
Page 47
Growth of credits was encouraged by both structural improvements of domestic borrowing
(substantially less borrowing by the government from the commercial bank sector) and rise of the
general economic activity, the credit risk has gone down, too. Increase of credit portfolio is also
supported by such forms of crediting as pledge of securities, factoring, forfeiting and, especially,
wider practice of leasing.
Some positive changes have occurred in the field of loan repayment deadlines and quality of
credit portfolio. At the end of 1997 – 44 per cent of loans were short term, at the end of 1998 – 33 per
cent and at the end of 1999 their share dropped to 28 per cent with the corresponding rise of the long
term credits.
At the end of 1999 – 6 per cent of granted loans were evaluated as income non-generating
(substandard, doubtful or lost). At the end of 1998 this indicator was 7 per cent, at the end of 1997 –
10 per cent. In compliance with the requirements of the Bank of Latvia income non-generating credits
are secured by special savings therefore such credit does not present a serious threat for stability ofbanks.
The biggest receivers of credits by sectors in the middle of 1999 were manufacturing (26 per
cent of the total credits to enterprises), trade (25 per cent) and transport and communications (13 per
cent). Banks mainly credited increase of the work ing capital of enterprises. Out of total credit,
approximately 32 per cent were commercial credits. In turn, one fourth of the total credit portfoliowas directed to acquisition of fixed assets and funding of investment projects.
Small and medium sized enterprises still have difficulties to get loans (no safe collateral,
underdeveloped land and other real estate market, banks lack information on credit takers, standards
of accounting and audit of enterprises are on a relatively low level, etc.). To improve the situation –
on 9 November 1999 the Cabinet of Ministers approv ed a state supported crediting program of SME
(see more detailed information in Section 5.5).
3. Interest Rates on Deposits and Credits
Interest rates before the Russian crisis gradually went down both for deposits and credits. The
rather low level of inflation and reduction of interest rates and the growing supply of credits
encouraged this process.
Under the impact of the Russian economic crisis – interest rates on loans went up reaching
their maximum in January 1999. In later months there was a tendency for interest rates to go down
again and since July they, with some exceptions, were lower than in the respective month one year
before. In March 2000 the average weighted interest rate for short term credits in Lats equalled to 9.9
per cent, long term – 12.5 per cent, for credits in OECD currencies – respectively 12.4 per cent and10.8 per cent (see Figure 2.20).
Further decrease of interest rates on loans might be expected. Still long term crediting and the
reduction of interest rates may be hindered by the scarcity of long-term resources in banks (the
majority of bank deposits are demand or short term deposits), high costs of attracted resources and the
risk that the lent capital will not be returned (no credit history, no collateral, etc.).
Since 17 March 2000 refinancing rate of the Bank of Latvia which signals to money market
participants about the upper limit of inter-bank market interest rates is 3.5 per cent per year (before –since 25 April 1997 – 4 per cent per year).
Average weighted annual interest rate for attracted short-term deposits in Lats in credit
institutions in March 2000 was 4.2 per cent, long-t erm – 7.8 per cent, deposits in OECD currencies,
respectively, 4.9 per cent and 6.7 per cent.WT/L/362
Page 48
Figure 2.20
Average Interest Rates on Credits in Credit Institutions
(monthly profile, in per cent)
81012141618
I II III IV V VI VII VIII IX X XI XII I II III IV V VI VII VIII IX X XI XII I II III
Long-term (in lats) Short-term (in lats)
Long-term (OECD currencies) Short-term (OECD currencies)1999 1998 2000
4. Exchange Rate and Foreign Reserves of the Bank of Latvia
Fluctuations of exchange rate of the lat against SDR are not allowed since the day of pegging
the lat to SDR5. By pegging the national currency to SDR the Bank of Latvia made the lat more stable
in regard to any individual currency of the basket  than if it was pegged to any individual currency.
Exchange rate fluctuations against individual currencies of the basket depend only on fluctuations in
the world money market.
In conditions of the fixed exchange rate to keep  competitiveness in external markets inflation in
Latvia should be smaller or at least equal to the leve l of inflation in the main trading partner states of
Latvia. Latvia most probably in the medium term w ill not be able to reach this criterion at least in
connection with western countries. Therefore the only way to keep competitiveness is to increase
productivity.
The Bank of Latvia calculates the effective exchange rate of the lat against the currencies of
10 main trading partner-states of Latvia. In 1998 the exchange rate drastically went up against to the
Russian rouble and Ukrainian grivna since these countries devaluated their currencies. The real lat
exchange rate against the western partner-states remained rather stable. In 1999 the real exchange rate
of the lat against the currencies of 10 most important trading partner-states went up by 4.7 per cent,
against the currencies of the developed countries – by 7.3 per cent and dropped by 1.7 per cent against
the currencies of the developing countries.
                                                     
5 SDR currency basket consists of the US dollar (43 per cent), EURO (26 per cent), the British pound (19 per
cent) and Japanese yen (12 per cent).WT/L/362
Page 49
The Bank of Latvia functions similarly to the currency board6 freely buying and selling
foreign currency. According to the opinion of expert s, the fact that the lat has not been officially
pegged to SDR (in contrast to Estonia and Lithuania wh ere the type of fixing of national currencies is
stricter, the so-called currency board system) has ce rtain advantages. It allows faster adjustment to
unpredictable situations (such as active currency speculation) and wider activities in the monetary
sphere, for example to regulate liquidity of banks with the help of open market operations.
To keep a fixed exchange rate, a sufficient amount of foreign reserves is needed. Net foreign
reserve of the Bank of Latvia constantly covers the reserve money in Latvia by more than 100 per
cent. Foreign currency reserve is kept in all SDR currencies proportionally to their presence in the
basket.
During 1999 foreign assets of the Bank of Latvia went up by 57 million Lats or by 12 per cent
(see Figure 2.22).
The coverage of reserve money (currency in circulation and deposits in the Bank of Latvia)
with net foreign reserves at the end of March 2000 was 109 per cent and net reserves were equal to
approximately three months value of imports of goods and non-factorial services of the state.
Accession of Latvia to the European Union will demand as the next step to join the European
Monetary Union. Therefore pegging the lat to EURO is inevitable. Already now, there are no
technical obstacles to peg the lat to the Euro. Howeve r such change is not planned for the near future.
The Bank of Latvia has made a decision not to hurry and keep the attachment to the SDR currency
basket until Latvia accedes to the European Union.
Figure 2.21
Average Exchange Rates of the Bank of Latvia
(monthly profile)
0.20.30.40.50.60.70.80.9
I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI I III
LVL/USD LVL/DEM LVL/SDR1996 1997 1998 1999 20000.9
0.8
0.7
0.60.50.4
0.3
0.2
                                                     
6 Currency Board system means that pursuant to the la w all the issued money should be backed by gold or
foreign currency reserves, that is the central bank may not sell the national currency in the amount exceedingthe purchased foreign currency.WT/L/362
Page 50
Figure 2.22
Net Foreign and Net Domestic Assets of the Bank of Latvia, Reserve Money, Quarterly Profile
(million LVL, end of period)
-1000100200300400500600
I II III IV I II III IV I II III IV I II III IV I
Net foreign assets Net domestic assets Reserve money1996 1999 1998 1997 2000
F. FISCAL SITUATION
1. Fiscal Policy and Central Government Debt
Changes of the economic situation in the last few years have substantially influenced the results of the
national fiscal policy. This resulted in surplus of revenues of the general government consolidated
budget over expenditures in 1997 – by 40.5 million Lats, in 1998 – by 5.1 million Lats. Yet, in 1999fiscal deficit was 155.9 million Lats (see Table 2.25).
Table 2.25
General Government Consolidated Budget
(million LVL)
1997 1998 1999
Revenues* – total 1,307.2 1,577.4 1,589.2
Expenditure – total 1,248.1 1,567.1 1,732.6
Financial surplus (+) or deficit (-) 59.1 10.3 -143.4
Budget lending and repayments 18.6 5.2 12.5
Fiscal surplus (+) or deficit (-) 40.5 5.1 -155.9
Fiscal surplus (+) or deficit (-) (per cent of GDP) 1.2 0.1 -4.3
*  including revenues from privatisation
The law On State Budget for 1999  and later amendments aimed at the reduction of the
revenue and expenditure plan allowed the increased of the fiscal deficit till 4.6 per cent of GDP.
Actual fiscal deficit was 4.3 per cent. Favourable situation in 1997 and 1998 resulted in the budget
surplus. The Russian economic crisis and foregone planned privatisation revenues had a negative
effect on the consolidated budget items in 1999.WT/L/362
Page 51
Fiscal deficit in the first quarter of 2000 reached 2.1 million Lats and was relatively small and
explained by the fact that in the first quarter implementation of several investment projects were
deferred. Their implementation could begin in the second quarter. Therefore, we may forecast that
budget deficit at the end of the second quarter could equal to approximately 54 million Lats and
totally for the year it is planned as 80 million Lats or 2 per cent of GDP.
Growth of the fiscal deficit of the budget in 1999 also caused growth of central government
debt till 510.7 million Lats at the end of the year, including external debt of 359 million Lats and
internal debt – 151.7 million Lats. Compared to the end of 1998 debt went up by 138. 1 million Lats
or 37.1 per cent (see Table 2.26).
The internal debt slightly went down in 1999, yet external debt increased on account of the
sold eurobonds, which at the end of 1999 equalled to 36.2 per cent of the total foreign debt.
Eurobonds were issued because privatisation did not  happen as planned and central government basic
budget failed to receive revenues from privatisation. In the first quarter of 2000 both external andinternal debt went up by another 40.3 million La ts and reached 550.9 million Lats. The debt went up
on account of medium term borrowing bonds (46.6 million Lats).
Table 2.26
Central Government Debt
(end of period, million LVL)
1999 2000
1998I II III IV I1999
against
1998
(%)2000 I quarter
against 1999
IV quarter
(%)
Central Government debt 372.6 390.9 478.1 468.6 510.7 551.0 137.1 107.9
     including:         
internal debt 141.0 159.5 155.7 151.3 151.7 197.7 107.5 130.3
     of which:
short term debt 55.6 74.0 76.2 71.8 73.7 77.8 132.6 105.4
medium term debt 67.3 67.4 67.3 67.3 67.3 113.9 100.0 169.2
long term debt 18.1 18.1 12.2 12.2 6.1 6.1 33.7 100.0
currency debt – – – – 4.6 – – –
external debt 231.5 231.4 322.4 317.3 359.0 353.2 155.0 98.4
     of which:
loans 231.6 231.4 230.7 226.9 228.9 227.4 98.9 99.4
eurobonds – – 91.7 90.4 130.1 125.8 – 96.7
2. Tax Revenues
Tax revenues in the general government budget in 1999 compared to the preceding year went
up by 2.3 per cent exceeding the amount planned for 1999 by 0.9 per cent. This increase was linked
with growth of two taxes – person al income tax and social security contributions. Other taxes stayed
at the level of 1998 (corporate income tax, value added tax) or slightly went down (property tax,
excise tax, customs duties). In the first quarter of 2000 tax revenues went up by 4.1 per cent compared
to the first quarter of 1999 and down by 7.1 per cent compared to the fourth quarter of 1999 (seeTable 2.27).WT/L/362
Page 52
Table 2.27
Tax Revenues in the General Government Budget by Quarters
(million LVL)
1999
1998
I II III IV1999 2000 I1999
against
1998
(%)I quarter of
2000
against I
quarter of
1999 (%)
Tax revenues – total 1,304.7 315.7 328.7 337.0 353.9 1335.3 328.7 102.3 104.1
     of which:
Corporate income tax 92.3 24.2 23.2 21.0 23.8 92.2 22.1 100.0 91.3
Property tax 27.3 5.0 8.4 5.6 5.5 24.5 2.2 89.7 44.0
Personal income tax 219.6 57.7 61.1 60.6 60.4 239.8 61.8 109.2 107.1
Value added tax 316.2 75.3 74.3 78.5 88.1 316.2 78.0 100.0 103.6
Excise tax 169.5 33.6 40.6 41.3 39.6 155.1 36.0 91.5 107.1
Customs duties 19.8 3.6 4.1 3.9 4.5 16.1 3.3 81.3 91.7
Social security contributions* 427.3 102.2 110.7 118.6 121.1 452.6 110.0 105.9 107.6
Other tax revenues 32.7 14.1 6.3 7.5 10.9 38.8 15.3 118.7 108.5
*  Resources included in budgetary accounts (excluding the amounts paid out by the employers on account ofsocial tax).
Personal income tax  increased in 1999 against 1998 and in the first quarter of 2000 against
first quarter of 1999 grew very fast and constituted respectively 9.7 per cent and 7.1 per cent. Increaseof wages in national economy and growth of mini mal wage in 1999 supported such growth. Also in
the first quarter of 2000 average wage went up alongside with the number of employed persons and
improvements in tax administration.
Social security contributions  went up in 1999 compared to 1998 by 5.9 per cent or 25.3
million Lats, in the first quarter of 2000 compared to the first quarter of 1999 by 7.6 per cent or 7.8million Lats. Increase of social security contributions the same as personal income tax is mainly
explained by wage growth of national economy and improvement of administration of these
contributions.
Notably that debt of social tax and social security contributions to the central government
special budget as of 1 April 2000 equalled to 138.3 million Lats (including both prolonged paymentdates and delayed payments).
Value added tax  in 1999 was paid in the same amount as in 1998. This was predetermined by
the slow-down of economic activity. Tax administra tion improvement and increase of taxpayers also
helped to keep this tax at the level of the previous year. Changes in the value added tax payment in
deals with wood materials effective from 1 July 1999 streamlined the procedure of tax compensation
for exporters at the same time increasing value added tax collection. Reimbursement of the value
added tax to peasant farms dropped compared to 1998. Increase of this tax in the first quarter of 2000
was 3.6 per cent or by 2.7 million Lats compared to the first quarter of 1999 which was promoted by
the growth of production outputs and retail trade, especially in March. Still in the first quarter of 2000
value added tax collection implementation (which is the second largest tax after social insurance
contributions) was only 22.5 per cent of the annual plan. Debt of the value added tax to the state basic
budget was 107.9 million Lats that has slightly increased as companies fail to make payment in timeand there are additional tax amounts to be paid by companies in the result of audit.WT/L/362
Page 53
Excise tax  in 1999 gave to the state basic budget only 155.1 million Lats or 91.5 per cent of
payments in the previous year. Excise tax payment is dependent of the structure of taxable goods (see
Table 2.28), changes in tax rates and changes in the consumption structure.
Table 2.28
Structure of Excise Tax*
1998 1999 2000 I
share
(%)million.
LVLshare
(%)million
LVLshare
(%)
Alcoholic beverages 42.3 24.9 45.2 29.1 10.6 29.5
Oil products 106.9 63.1 87.7 56.5 19.5 54.2
Tobacco products 16.5 9.7 17.4 11.2 4.1 11.3
Other excise goods 3.8 2.3 4.8 3.2 1.8 5.10
Total 169.5 100.0 155.1 100.0 36.0 100.0
*  Data of the Ministry of Finance
In the excise tax structure in 1999 compared to 1998 there was a substantial reduction of tax
collections for fuel consumption. This was predetermined by several factors, of which the main is –
decrease of consumption and import of oil products, prise rise in the world market, restrictions toexports of fuel imposed by Russia. With the growth of the number of cars in the state this testifies
about a large-scale illegal trade wi th fuel and massive tax evasion.
The share of excise tax paid for alcoholic beverages in 1999 increased in comparison with
1998. Tax collection was positively influenced by the increase of tax rates: from 1 January,
13 August and 11 December. With the decrease of consumption of strong alcoholic drinks and
increase of consumption of wine and beer it is quite possible that excise tax revenues from alcohol
will decrease in future.
Excise tax revenues were positively influenced by the increase of the taxable base (non-
alcoholic drinks, coffee, motorcycles) and increase of tax rates for other goods (including tobacco
goods).
Corporate income tax paid in 1999 by enterprises was the same as in 1998. In the first quarter
of 2000 there was a decrease by 8.7 per cent compared to the first quarter of 1999. Changes inpayment of this tax were caused by tax overpayment, advance payment done by large companies,
insolvency, post-audit payments.
Customs duties payments in the budget were quite small (approximately 1 per cent) and their
decrease in absolute figures both in 1999 compared to 1998 (3.7 million Lats) and in the first quarter
of 2000 against the first quarter of 1999 (0.3 million Lats) did not significantly influence budgetresults. The importance of this tax goes down alongside with the concluded international agreements,
changes in customs tariffs and tax privileges.
Property tax payments dropped in 1999 compared to 1998 by 10.3 per cent or 2.8 million
Lats. In the first quarter of 2000 due to the changes in property tax rates tax revenues were only 44 per
cent of the amount collected in the first quarter of 1999.
Looking at tax revenues by types of budgets (see Table 2.29) we see that tax revenues in 1999
have gone down – to the central government basic budget by 2.2 per cent or 12.2 million Lats, which
can be explained by substantially less excise tax collection.WT/L/362
Page 54
Table 2.29
Tax Revenues by Types of Budgets
(million LVL)
1999
1998I II III IV1999 2000 I1999 against
1998 (%)I quarter of
2000 against
I quarter of
1999 (%)
Tax revenues – total 1,304.7 315.8 328.7 336.9 353.9 1332.2 328.7 102.3 104.1
 of which by types of budgets:
Central government basic 544.3 135.8 125.2 131.4 139.7 532.1 133.5 97.8 98.3
Local government basic 206.8 52.1 58.9 53.8 54.3 219.1 55.5 106.0 106.5
Central government
special550.9 127.4 144.1 151.1 159.1 581.7 139.0 105.6 109.1
Local government special 2.7 0.5 0.5 0.6 0.8 2.4 0.7 88.9 140.0
3. General Government Budget Expenditure
Expenditure of the general government budget by quarters is presented in Table 2.6.
Table 2.6
Expenditure of the General Government Budget by Quarters*
(million LVL)
1999 I quarter of
1999 2000 I 1999 2000 against
I II III IV against I quarter of
1998 (%) 1999  (%)
Expenditure – total: 427.6 539.3 507.5 551.6 2026.0 464.1 128.9 108.5
General public services 31.0 31.1 31.8 45.8 139.7 29.2 97.8 94.2
Defence 7.9 3.8 8.7 12.2 32.6 8.6 87.6 108.9
Public order and safety,
judiciary21.8 33.9 27.9 32.9 116.5 26.0 127.5 119.3
Education 60.2 76.8 55.1 74.8 266.9 64.6 108.3 107.3
Health care 39.5 62.0 58.0 55.7 215.2 45.7 144.9 115.7
Social security and welfare 153.3 158.0 159.5 162.7 633.5 155.6 117.1 101.5
Housing and community
amenity, environment protection13.7 18.0 23.3 22.7 77.7 14.7 89.5 107.3
Recreation, sport, culture,
religion9.8 13.9 11.9 13.5 49.1 15.1 112.1 154.1
Agriculture, forestry and fishing 13.7 20.6 20.3 25.2 79.8 12.1 110.7 88.3
Transport, communications 20.9 35.0 37.2 29.9 123.0 21.6 134.4 103.3
Other economic affairs 7.8 17.3 16.3 16.1 57.5 13.5 262.6 173.1
Other expenditures 48.0 68.9 57.5 60.1 234.5 57.4 481.5 119.6
*  Non-consolidated budget, working data.
Largest increase in budget expenditures in 1999 compared to 1998 was in health care,
transport and communications and social budget expenditures.
In the first quarter of 2000 expenditure of the general government budget stayed unchanged in
comparison with the first quarter of 1999, with some decrease in the general public services and
agriculture, forestry and fishery expenditures.WT/L/362
Page 55
G. LIVING STANDARDS AND EMPLOYMENT
1. Living Standards
According to the human development index (HDI7) calculated by the United Nations Latvia
in 2000 occupied the 63rd position in the world (92nd in 1998 and 74th in 1999). Although in 1999
wages of people employed in national economy slightly went up, the same as pensions and disposable
income of households – living standards of people on the whole remained rather low. GDP per capita
expressed in purchasing parity units in 1998 equalled only to 27 per cent of the average figure of the
EU.
Polarisation of material wellbeing of people  goes on. Gini index8 is one of indicators
characterising distribution of income. This indicator, according to the data of the household budget
survey, in 1999 was 0.33 (in 1998 – 0.32 and in 1996 – 0.30), which shows the tendency of increase
of income inequality. The disposable income in the average per one household member in the first
quintile9 in 1999 was in the average only 25.10 Lats – 5.4 times lower than average in households of
the highest, fifth quintile. At the same time, the value of a complete subsistence minimum basket of
goods and services in 1999 was 3.3 times higher and constituted 83.18 Lats. Also in the fourth
quintile the average disposable income per one member of a household was lower than the value of
the minimum subsistence basket (by 7 per cent).
The government has started implementation of the poverty eradication program. In the nearest
4 years in accordance with the European Council recommendations it is planned to increase state
benefits to families. Measures are developed to ensure availability of education and health care and to
facilitate credit availability to purchase housing, pay for studies.
In February 2000 the Cabinet of Ministers approved the concept developed by the Ministry of
Welfare – ”On Minimum Income Guarantees to Poor People” providing suggestions how to ensure topeople who are unable to earn their living by themselves a guaranteed and uniform for the whole state
minimum level of income. In this respect, it is planned to set on the national level the guaranteed
minimum level of income, to define obligations of local governments to ensure this minimum income,
state participation to finance such support. This concept will be the basis for amending of the law “On
Social Assistance”.
To develop long term solutions of poverty elimination a concept “Strategy of Poverty
Elimination” has been worked out with the aim to improve life quality of residents of Latvia so that
by the year 2015 the number of people with income less than the established subsistence minimum is
not higher than 10 per cent of total population.
Demographic indicators are among the lowest in Europe. The number of population continues
going down and at the beginning of 2000 population was by 249 thousand (9.3 per cent) smaller than
in the beginning of 1990. This is the result of the negative natural growth of population and negative
balance of inter-country migration. However, in the last few years there were also some positive
signs. Negative values of natural birth rate become smaller. In 1999 compared to 1998 the number of
newly born in the state went up by 5 per cent and the number of the deceased decreased by 4 per cent.
Also the negative balance of inter-country migration is shrinking with every year and in 1999 reached
the lowest level since 1991 (-1847 persons).
                                                     
7 HDI is calculated based on the average life expectancy , level of education and real GDP per capita determined
according to the purchasing power parity principle. However as acknowledged by the developers of HDI thisis still an incomplete characterisation of the quality of life.
8 Gini index varies from 0 to 1. It equals to 0 on condition that there is absolute income distribution equality and
1 – in the opposite case.
9 Quintile – one fifth of the number of surveyed households grouped in a growing order according to the size of
disposable income per one member of a household per month.WT/L/362
Page 56
Average life expectancy is low: in 1998 for men this was only 64.1 years and for women
considerably higher – 75.5 years. These figures stay on the level of 1990 and are on the whole lower
than in many economically developed countries where average life expectancy for men exceeds 70
years and for women – reaches 80 and more years.
To achieve positive changes in demographic processes in the state the government at the end
of 1998 accepted the activity program for improvement of demographic situation. The main goals ofthe program are to secure a qualitative and quantitative reproduction of people. Strategic directions in
its implementation are: strengthening of families and promotion of birth rate, raising of educational
and cultural levels. However, in order to achieve this objective it is necessary to invest considerable
resources in the development of national economy, increase of employment, promotion of research
and education, improvement of health care system.
Health care reform has been launched in Latvia to improve health care  of people and
rationally use the resources allocated from the state budget. The goal of the reform is to create aharmonised and financially balanced health care system. The new system will be based on primary
health care and prevention and also on a universal, effective and united system of health insurance
that will guarantee availability of health care services.
In accordance with the requirements of the EU, social security standards should be
incorporated in rules of financing of health care. With the beginning of 1999 the total amount ofpatient’s contributions should not exceed 80 Lats in a calendar year and patient’s contributions for
each hospital stay should not exceed 15 Lats for adults and 5 Lats for children (excluding payment for
medical manipulations). The most unprotected social  groups of people have been identified and
relieved from patient’s payments. Emergency aid is granted free of charge.
Implementation of health care reform is difficult because of the scarce financing. Less than 4
per cent of GDP has been earmarked in the state budget for health care needs whereas in the majority
of European countries this financing varies from 6 per cent to 9 per cent.
Studies of Central Statistical Bureau (CSB) in the NORBALT II project show that every fifth
resident of Latvia considers that his/her health is bad or very bad. During the last year many people
were forced to refuse from the needed medical service due to the lack of money or health insurancepolicy such as visits to dentists (30 per cent) of cases and dental technician (21 per cent) or to a very
good doctor.
Transformation of the educational system has resu lted in positive changes: de-politicisation of
education, creation of choice opportunities in education, liquidation of state monopoly of education,
decentralisation of education administration.
The number of students at educational establishments since 1993/1994 is gradually going up
and now has reached 500 thousand. Such increase is mainly linked with the growth of the number of
students at higher educational establishments (see Figure 2.23). In 1999/2000 the number of students in
higher educational establishments of Latvia reached 89.5 thousand – 1.9 times exceeding the respective
figure of 1990/1991. The number of university student s in Latvia per 100,000 residents is the highest
among the EU applicant countries.
In accordance with the data of CSB study, 39 per cent of residents older than 18 have special
or higher education. The highest level of education is in the age group from 25 till 49 years, which is
the most demanded in the labour market. Every third person in this age group has the secondary
general education and 51 per cent – secondary special or higher education.WT/L/362
Page 57
Figure 2.23
Number of People in Educational Institutions*
(thousand persons)
467
46424
39454
56485
77499
90
0100200300400500
1990/91
1993/941996/97
1998/99
1999/2000Total number
Higher educational
establishments
*  excluding children in pre-school institutions
Yet, the number of students in the secondary specialised schools and vocational schools has
dropped nearly by 30 per cent in comparison with 1990. The anticipated faster growth of national
economy in the nearest years and integration into the European Union ask for the necessity to extend
and perfect vocational education. It is planned to have closer co-operation between government
institutions, employers and employees. Major attention in the area of vocational education reform will
be devoted to the development of college education by devising high-level, short cycle vocation
education programs.
Educational system due to insufficient fina ncing does not provide teaching staff with the
adequate remuneration, there are no resources for maintenance of educational infrastructure. The
insofar financing of education and science is insufficient to provide adequate solution of the
mentioned problems.
The concept of education approved by the government prescribes main principles for further
development and implementation of a long term and modern educational policy fostering educationalreforms. Within the scope of this concept Saeima at the end of 1998 and middle of 1999 adopted the
“Law on Education”, “Law on the General E ducation” and “Law on Vocational Education”.
2.  Private Consumption and Purchasing Power
Despite the negative impact of the Russian economic crisis on the Latvian economy personal
income in 1999 slightly went up (see Table 2.31).
The average gross wage earned by people employed in the national economy grew in the
average by 5.8 per cent in 1999 in comparison to the preceding year and reached 141 Lats. Average
gross monthly wage of people employed in the pub lic sector was higher – almost 157 Lats and had
increased by 9.7 per cent. At the same time, consumer prices rose by 2.4 per cent. Consequently, real
wage of all people employed in national economy had in the average gone up by 2.9 per cent in 1999compared to 1998, and for those working in the public sector – by 6.5 per cent.WT/L/362
Page 58
Table 2.31
Wages and Other Incomes
(average per month, in LVL)
1993 1994 1995 1996 1997 1998 1999
Average monthly wage of people
employed in national economy:
– in LVL gross 47.23 71.87 89.50 98.73 120.03 133.30 140.99
– in LVL net 60.33 73.40 78.65 88.34 97.47 102.73
– in USD gross 70.07 128.34 169.51 179.18 206.59 225.93 241.01
– in US$ net 107.73 139.02 142.74 152.05 165.20 175.61
Disposable income of households,average per one member (household
budget surveys)51.50 55.45 62.33 64.73
Average old age pensions of non-
working pensioners registered in socialinsurance agencies14.74 24.75 30.17 37.82 42.24 51.26 58.18
Value of goods and services basket of
complete subsistence minimum, per
capita37.59 51.50 63.82 73.78 78.78 82.15 83.18
Real wage index of people employed
in national economy (percentageagainst the respective period of the
preceding year)108.2 97.4 91.2 103.6 105.3 102.9
Still, average wages expressed in dollars for people employed in the national economy in the
4th quarter of 1999 were smaller than in Lithuania (by 7 per cent) and in Estonia (by 20 per cent) and
legged behind the majority of other EU applicant countries.
The highest average gross wages in 1999 were earned by people employed in pipeline
transport (579 Lats), water transport (488 Lats), air transport (313 Lats), telecommunications (338
Lats).
People employed in educational institutions, health care and social assistance and those who
work in recreation, cultural and sports areas received approximately equal level wages – 118-120 Lats
which was substantially lower than the average wage of people employed in national economy (by
approximately 15 per cent).
At the beginning of 1999 the minimum wage in Latvia was raised to 50 Lats. Yet, at the end
of May 1999 the general agreement on raising minimum wage till 65 Lats in enterprises of theconfederation was signed between the Employers Confederation of Latvia and Latvian Free Trade
Unions Confederation.
The average old age pensions of pensioners filed in the social welfare system in 1999
compared to the preceding years went up from 51.26 Lats to 58.18 Lats. This was basically linked
with the amendments to the law “On State Pensions” passed by Saeima on 21 October 1998. The
amendments and other regulatory documents as well as rapid growth of unemployment demanded
considerable additional expenses from the social insurance special budget which lead to the fiscaldeficit of 55 million Lats at the beginning of 2000.
With the view to improve the situation the go vernment developed and Saeima at the end of
1999 passed the amendments to the Law “On State Pe nsions”. The law prescribed that the workingWT/L/362
Page 59
pensioners with beginning of 2000 were eligible to receive pensions of 60 Lats and below. The
transition to the pension age of 62 years both for me n and for women and other changes was also spelt
out in this law. The mentioned changes caused dissa tisfaction of many working pensioners, particularly
teachers and faculty of higher educational establ ishments. Also several international institutions
expressed the opinion that these changes did not correspond to the world practice.
The government in the Declaration of Work of the Cabinet of Ministers in 2001 plans to
eliminate all the restrictions and prohibitions for working pensioners to work and receive pensions
simultaneously terminating the possibility of preliminary retirement and will continue increase
pension age till 65 years. Adjustment of pensions exceeding three minimum pensions will be limited
till the year 2002.
Living standards of pensioners have slightly  improved. In 1998 average pension equalled only
to 62 per cent of the complete value of subsistence minimum consumer basket of goods and services.
However in 1999 this had increased in the average by 8 percentage points r eaching 70 per cent.
Certain insight in the personal consumption and purchasing power is given by the data of the
household budget survey.
In the overall structure of households the biggest share are households of salaried employees (52.3
per cent) and pensioners (30 per cent), however the sh are of households of self-employed people also has
started to grow in the recent years (2.3 per cent).
The tendency of decrease of the average size of a household continues reaching 2.37 persons
per household in 1999. The most popular type of a household is one person households that constitute
31.6 per cent of the total number of households. Among these, 52 per cent are households of
pensioners. Next come two person households – 29.2 percent.
Average disposable income per one member of a household in 1999 has on the whole
increased by 2.40 Lats or 3.9 per cent in comparison to the preceding year. Growth of consumer price
index over the same period was smaller (2.4 per cent) thus purchasing power of people went up by 1.5
percent.
Stratification was the fastest in rural areas during last year. In the lowest quintile – one third
were rural households. One-parent families with children varied between 42-74 per cent (dependingon the number of children). Studies within NORBALT  II project show that there is a very little
representation of pensioner households in the lowe st quintile group. Almost one third of households
residing in Riga belong to the fifth – highest quinti le. It must be noted that the public administration
mechanism is concentrated in the capital, the same as headquarters of big companies, that is why in
Riga employment level is relatively high and, consequently, there are more households with relativelyhigh income.
In 1999 growth of expenditure of households was slower than growth of income. In all groups
of households the main consumption priorities are food expenditure (39.1 per cent) and maintenance
costs of housing or apartments (17.7 per cent). The third priority in all groups is transport expenditure
(7.6 per cent) except pensioner households. Expenditure for food went down in absolute numbers in
1999. Expenditure for clothing, footwear, education has gone down which indicates problems in
household budgets. Inequality in the consumption area continues expanding as real growth ofconsumption had occurred only in the highest quintile groups.
3. Employment and Unemployment
Data of CSB show that the number of people employed in the national economy continues
going down. Their average number in 1999 amounted to 1028 thousand persons, which is the lowestWT/L/362
Page 60
figure since 1992 (with the exception of 1996). At the same time the number of people employed in
the private sector continues going up and their share in the total number of people employed in
economy in 1999 reached 69.7 per cent (see Figure 2.24).
From the total number of the employed every sixth (17.7 per cent) works in manufacturing,
every seventh – in trade (15.3 per cent), agriculture, hunting and forestry (14.9 per cent). 84.7 per cent
of the total number of employed are employees, 3.6 per cent – employers, 7 per cent – self-employedand 4.4 per cent were unpaid family members and relatives working in family farms.
There is a continuing tendency of increase of the number of persons employed in services
(45 per cent in 1990, now almost – 60 per cent). Acco rding to the CSB labour survey, (November) the
number of persons involved in real estate use, rent and commercial activity has risen especially fast
(by 46 per cent) during the last five years, the same as in public administration and defence,
compulsory social insurance (by 25 per cent), wholesale and retail trade, repair of household
appliances (by 22 per cent) and has gone down in health and social care (by 13 per cent) and financialmediation (by 14 per cent).
At the same time the number of persons employed in agriculture and manufacturing has
dropped by 10 per cent. Construction is the only indust rial sector that has shown a rather rapid growth
rate over the period and even employed a bigger (by 22 per cent) number of people.
The share of women in the total workforce at the end of 1999 was 48 per cent and it had not
significantly changed during the recent years. Employment rate of women is 44 per cent and it lags
behind the employment rate of men by 13 percentage points. The main factor usually influencing the
decrease of the employment rate among women is childcare leave (this is especially explicit in the age
group under 35). For the time being the current economic and social conditions ensure men a more
favourable position in terms of finding a job. However, the activity training participation is higheramong women than men, which to a certain degree brings down also the general employment rate of
women.
Figure 2.24
Average number of persons employed in national economy
(thousand persons)
0200400600800100012001400
1992 1993 1994 1995 1996 1997 1998 1999Total employed
Employed in the
public sector
Employed in theprivate sector
Out of all people employed in national economy the majority was persons with secondary
special or technical education (38.8 per cent), hi gher education (20.6 per cent) and the general
secondary education (24 per cent). 12.4 per cent of total workforce had primary or less than primary
education, 4.2 per cent – vocational education. The number of workforce with higher education in
comparison to the respective period in 1998 (despite the total reduction of the workforce) has gone up
by 7.8 thousand or 4 per cent, those with the seco ndary special education – by 4.6 thousand or 1.9 per
cent. At the same time the number of people with vocational education went down by 3.5 thousand or7.8 per cent and with the secondary technical education – by 4.5 thousand or 3.3 per cent.WT/L/362
Page 61
This to a great extent mirrors the current processes in national economy and, namely, the
reduction of production.
Figure 2.25
Unemployment
( per cent, end of period)
0510152025
May November May November May November May NovemberAccording to ILO methodology According to SES data1996 1997 1998 1999
Data of the State Employment Service (SES) show that after the rise of the official
unemployment rate till 10.2 per cent in May 1999 it started to decline reaching 9.1 per cent at the end
of 1999 and 8.6 per cent in May 2000. The highest rate of unemployment is still retained in Latgale
region – in R ēzekne, Balvi, Prei ļi and Krāslava regions (respectively, 26.9 per cent, 22.6 per cent,
22.3 per cent and 21.7 per cent).
Still quite topical is the problem of long-term unemployment. In the total number of
registered unemployed in SES the share of long-term unemployed went up by 4708 persons and theirshare – by 4.8 perc entage points at the end of 1999 compared to the end of 1998 reaching 31.1 per
cent. The highest share of long-term unemployed in the total number of unemployed workforce at the
end of 1999 was in Latgale and, particularly, in Prei ļi region (56.9 per cent), R ēzekne region (54.5 per
cent), Balvi region (55.6 per cent).
CSB surveys also provide information about the duration of the long-term unemployment. For
example, the average time spent by job seekers with out job was 28 months. Almost three fourths of all
job seekers have been looking for jobs longer than 6 months.
The share of people without profession or specialisation in the total number of long term
unemployed constitutes 58.4 per cent that is why it is difficult for them to find jobs. It is practically
impossible to involve in vocational training those unemployed persons who have primary education orthey who do not have even primary education (21.7 per cent).
Insertion 2.4
National employment plan for the year 2000.
The National Employment Plan (NEP) for 2000 comp rises 37 activities aimed at promotion of
employment that may be divided into four basic directions:
- perfection of labour skills;
- development of business activity;
- development of inter-adaptability skills between the company and employees;
- policy of equal opportunities in the labour market.WT/L/362
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Funding of the NEP will be carried out from the budget of the institution responsible for the
specific activity and the total amount of 27.2 million Lats are earmarked for implementation of the
mentioned activities.
In the area of labour skills perfection active measures have to play the most important role.
These are: training and retraining of the unempl oyed, job seekers clubs, improvement of temporary
public works. Unfortunately, in comparison with 1999 the earmarked budget for active measures was
reduced by 0.5 million Lats. In order to use efficiently the resources available in 2000 funding will be
directed towards specific target groups of the unemployed (youngsters, pre-pension age, long term
and other groups of unemployed).
It is also planned to raise efficiency of vocational training and retraining trying to train
unemployed persons in professions and positions adjusted to the market requirements and reaching
the level of employment of these people after training at the level of 45 per cent of those who graduate
from the training course.
In the activities of the job seekers club it planned to form target groups of the unemployed
and to organise specially adjusted activities for each target group.
Organisation of the temporary paid public work s will in future be more oriented towards
principles of project competition encouraging crea tion of new jobs and permanent employment of the
unemployed in the newly created jobs. Short-term temporary paid public works (1-3 months) should
be considered as emergency help to the unemployed in a crisis situation.
Perfection of labour skills to a great extent depends on operation of the system of education
and vocational training. To ensure this and develop in accordance with market requirements, there are
several activities of the reform of education and vocational training including:
- development of new laws and regulatory documents;
- drafting, introduction and development of new education programs;
- development of the system of vocational orientation, etc.
- Activities of business activity development cover:
- promotion of the start of business activity;
- creation of new jobs;
- favourable tax policy to promote employment.
To provide the necessary knowledge to businessmen and starting businessmen there are
certain activities planned in the area of consultation and training.
It is also planned to encourage crediting of SME projects and promote establishment of new
businesses to give a focussed support to the expansion of SME in all regions of Latvia and support to
creation of new jobs.
Within the program of assistance to the depressive areas it is planned to continue
implementation of projects of the Regional Fund with the aim to create 1300 new jobs.
Activities to foster inter-adaptability be tween the company and employees presuppose the
development of a flexible system of contracts through mutual agreement between employers and trade
unions, to streamline legislation (tariff agreement, labour law, law on trade unions) and to establish
regional tripartite co-operation councils.
Policy of equal opportunities in the labour market covers issues linked with the promotion of
employment of women, integration of the disabled people in the labour market, etc.WT/L/362
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Data of November 1999 labour survey shows that job seekers in Latvia (aged 15 and older)
constitute 14.5 per cent of economically active people, which is by 0.7 percentage points more than in
November 1998. Comparing the share of job seekers in the total number of economically active
persons with the registered rate of unemployment in November 1999 and May 1999 we see opposite
trends – the rate of registered unemployed in Latvia had declined by 1 percentage point and the share
of job seekers went up by 0.5 percentage points (see Figure 2.25). To some degree this was linkedwith the increase of the number of people who had lo st the status of the unemployed, as they after the
expiry of the term of unemployment benefit did not arrive to SES agencies to reregister themselves.
Thus, in May 1999 9.9 thousand persons lost their unemployed status and in November – by 10 per
cent more.
The results of the survey show the so-calle d labour reserve – discouraged workers who are
potential job-seekers having lost hopes to find a job or do not know where and how to apply for a job
(classified as economically inactive). Such persons accounted for 7.3 per cent of the total number ofeconomically inactive persons (who did not look for jobs). In comparison with November 1998, this
part of population had decreased by 0.5 percentage points.
The situation in the labour market of Latvia and the EU member states puts forward new tasks
in the area of development of employment policy. Therefore to promote employment it is important to
highlighting not so much the area of social assistance allowing people to live passive lives and waitfor benefits but rather to support personal initiative and desire to alter one’s position in the labour
market.
At the end of 1999 Ministry of Economy in co-operation with the Ministry of Welfare,
Ministry of Education and Scie nce and other public institutions  and NGOs developed the National
Employment Plan for the Year 2000. The activities included in this plan are aimed at achievement ofthe earlier mentioned goals as well as at implementation of the EU guidelines in the area of
employment policy (see Insertion 2.5).
Implementation of the activities spelt out in the Employment Plan will directly and indirectly
support the process of growth of the number of employed people. This will also be promoted by such
factors as forecasted positive changes in the whole economy, careful regulation of the system of taxesand social assistance, perfection of the labour market infrastructure (system of the employment
service, system of information provision).
In the development of the National Employment Plan for 2001 a particular attention will
devoted to such important areas as:
- reflection of local and regional level problems in NEP 2001;
- EU funds and the mechanism of their interaction with activities of NEP;
- supervision of implementation of NEP activities.
- experience of the EU member states in evaluation of efficiency of employment
promotion measures.
III. SECTORS OF NATIONAL ECONOMY
A. M
ANUFACTURING10
Manufacturing outputs started to grow in 1996 going up especially fast (by 17 per cent) in
1997. Russian economic crisis left a negative impact on Latvian industry. Due to the reduction of
                                                     
10 Manufacturing herein will be referred to as industry (if not said otherwise).WT/L/362
Page 64
export possibilities enterprises in Latvia were forced to narrow their industrial output. Starting with
the 3rd quarter of 1999 it started to gradually go up, however not reaching the pre-crisis level.
Figure 3.1
Manufacturing Output
(by quarters, million LVL, at constant prices of 1995)
200250300350400450
I II III IV I II III IV I II III IV I
1997 1998 1999 2000
In 1999 industrial output was by 10 per cent smaller than in 1998 (see Table 3.1). This should
be regarded as a rather substantial decrease of industrial output and even more so because in the lastquarters of 1998 outputs had already decreased under the impact of the Russian financial crisis. Total
decline of industrial output due to the crisis can be estimated as 15 per cent.
In 1999 production outputs decreased in nearly all sectors of industry with the exception of
wood processing and metal production. The declin e of outputs was the most speedy in chemical
industry where exports were mainly linked with CIS markets and the share of exports in overalloutput equalled to almost 2/3.
Table 3.1
Manufacturing of Latvia
1996 1997 1998 1999
Share of the sector (per cent of GDP) 20.9 22.2 17.9 14.8
The number of employed (per cent of the total employed in
national economy)17.7 18.0 16.5 15.4***
Growth rates (per cent against the preceding year) 4.1 17.1 4.0 -9.8
Investment (per cent of all in national economy)* 15.1 16.0 14.9 16.2
Investment (change against the preceding year)* 37.8 33.1 26.5 3.2
Foreign direct investments (per cent of all in national
economy)**17.1 22.8 17.7 17.1
* long-term investment in intangible assets and investment in fixed assets
** foreign investment in the company capital of enterprises registered in Latvia, end of period*** estimation of the Ministry of Economy
In the first quarter of 2000 industrial output wa s by 2.8 per cent higher than in the respective
period of the preceding year. This means that during the year slightly less than 1/5 of the decline in the
manufacturing due to the external demand shock was recovered. Growth was achieved mainly because
of increase of wood processing and outputs of metal, metal products and machine building sectors.
Outputs of food and chem ical industry, in turn, continued declining.
We can see that the existing structure of industrial sectors does not allow fast recovery of the
previous output levels. An essential modernisation and restructuring of industry is required based onserious economic incentives. The future development of individual sectors to a great extent will be
determined also by the ability to benefit from their comparative advantages.WT/L/362
Page 65
Table 3.2
Manufacturing Sectors*
(percentage)
Manufacturing
value addedGrowth rateShare of exports
 in output
1997 1998 1999 1997 1998 1999 1997-1999 (average)
Total 100 100 100 17.1 4.0 -9.8 45.8
Food products 37.3 35.4 32.1 13.6 1.5 -17.1 18.0
Light industry 11.5 11.8 12.5 9.9 1.1 -8.9 67.0
Wood and articles of wood 13.2 14.7 17.6 40.7 14.2 5.4 94.0
Paper industry,publishing and printing5.7 6.6 7.0 20.9 22.5 -8.8 29.0
Chemical industry 6.9 6.2 4.4 16.5 -5.8 -36.6 65.0
Other non-metal
mineral products2.9 3.6 3.8 -6.7 31.3 -10.5 32.0
Metal and metal products 11.4 10.7 12.4 30.0 -1.3 12.0 41.0
Manufacture of
machinery and equipment7.7 7.7 6.6 0.9 -3.8 -18.9 41.0
Other industries 3.4 3.3 3.5 8.8 -0.3 -5.0 86.0
*  Estimation of the Ministry of Economy.
Food industry of Latvia has good prospects, in the sense that there are good raw materials for
processing of meat, milk, fish and grain. There are wide possibilities to produce ecologically clean
and non-traditional food.
Food industry outputs in the first quarter of 2000 lagged behind the level of the preceding
year by 5 per cent. Export of Latvian food products during this period went down not only in theRussian and CIS direction but also to the EU countries, Lithuania and Estonia.
Two main problems should be addressed to improve competitiveness of Latvian food
producers, both in the internal and external market:
- improvement of quality of food products (modernisation of food companies,
introduction of quality standards, high quality raw materials, etc.);
- problems of financial nature. World food product markets are very saturated and due
to the subsidised products of other countries often sold at a reduced price. Many
supplies of raw materials for food production have a seasonal nature, which requires
additional financial resources. Therefore availability of cheap loans is very important.
Processing companies of agricultural products in Latvia basically solve theseproblems at the expense of suppliers, keeping purchase prices of agricultural products
very low and not paying for them in due time. Thus the potential of agriculture as a
sector is diminished and, consequently, the base for the development of food industry
deteriorates.
Outputs of light industry in the first quarter of 2000 were the same as one year before. Export
of textile products to Russia and other CIS countries went down more than twice. Exports to the EUincreased. More than 4/5 of the total export of textile goods went to the EU countries.
The further development of the sector is closely linked with the product demand conjuncture
in the EU member states, maintaining the competit iveness and improving marketing. Textile industry
is a labour intensive sector where labour costs in international competition play a decisive role.
Training of labour force of the sector does not require high costs. Large capital investments in thesector are not needed. Therefore, for many transition economies this sector is among the first toWT/L/362
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successfully compete in the western markets. However with time, with the growth of labour costs
these advantages may disappear.
To keep the gained markets, more attention should be paid to other aspects of competition.
International competition in the area of textile industr y is very vulnerable to changes of demand. A lot of
attention should be devoted to design and introduc tion of new models. The decisive role belongs to
advertising and marketing. Quite important in comp etition between textile products is their brand name,
yet establishment of such name takes a long time. This is why there is lo t of joint ventures in the textile
sector. New machinery, technologies, management and marketing skills enter Latvia through joint
ventures.
Chemical industry in Latvia has long and stable traditions. It produced and produces a wide
range of chemical products – both final consumer goods and intermediate goods, such as artificial
fibre, various paints and varnishes, pharmaceuticals, perfumes, cosmetics, etc.
Main export markets of products of Latvian ch emical industry are in the East. Under the
influence of the Russian crisis output of chemical industry went essentially down in 1999.
Although traditionally in Latvia there has been a good research base of chemical industry and
highly skilled specialists – still entry into western markets is a complicated and lengthy process. In
1999 only 15 per cent of the total export of chemi cal products went to the EU member states.
Wood industry has a stable base of raw mate rials (approximately 45 per cent of Latvia is
covered with wood), well trained workforce, close and stable markets (mainly in the EU countries),
excellent opportunity to increase revenues yielded by this sector by exporting more processed wood
materials. Total export of wood materials in 1999 was by 5 per cent bigger than in the preceding year.
Export of furniture goes up as well. The latter went up by 11 per cent over the reviewed period.
Furniture is also exported mainly to the EU member states.
Latvia has good natural resources for production of construction materials (clay, sand, gravel,
limestone, and gypsum). However, small scale of local construction hinders more dynamic
development. Although construction outputs starting with 1996 go up at a faster rate than outputs of
the majority of other sectors (by 16.5 per cent in 1998 and by 7.8 per cent in 1999) still, remembering
the drastic narrowing of production at the beginning of 1990s, construction outputs are much lowerthan in 1990. The share of reconstruction and refurbishment works in construction is quite high. The
imported facing materials are basically used for these purposes. Construction of private houses
develops slowly as middle class is not yet big enough.
Output of the sector “Other non-metal mineral products” which is basically composed of
construction materials in 1999 was by 10 per cent smaller than in the preceding year.
The further development of the construction material industry will, firstly, depend on the
growth rate of the domestic demand and, secondly, on how effectively the producers are able to
change their production technologies to follow the world tendencies of modernisation of building
materials and fashion.
The share of machine building in the structure of industrial sectors is becoming smaller. This
process may be evaluated in two ways: on the one hand, this may be perceived as a continuation of
structural reforms of the transition period. Outputs of capital intensive sectors with sales markets inRussia went down. On the other hand, in the Latvian economy, the sectors that do not require
essential capital contributions develop at a faster rate. This is a regularity of a transition period as new
businessmen are not able to make bulky capital contributions.WT/L/362
Page 67
Reduction of exports to Russia even more aggr avated crisis of these sectors. Production of
various machinery and equipment in 1999 was by 26 per cent smaller than one year before, devices – by
63 per cent. Only metal production had gone up.
Can capital intensive sectors develop at all in Latvia? There is no simple answer to that. To
the extent these sectors were developed in the days of the USSR – probably not. First of all, former
sales markets are gone. It is problematic to conquer new markets with old equipment andtechnologies. Secondly, capital intensive sectors require also corresponding markets. The small
market of Latvia in such cases acts as a factor slowing down investment. Thirdly, the placement of
sectors in the USSR was sometimes determined not by the economic advantage but rather by political
and subjective motivation. The high labour culture and skill level of Latvian workers certainly also
mattered therefore the particular accent was placed on the development in Latvia of those sectors
linked with precision engineering within the scope of the military industrial complex.
The development of capital intensive sectors in future may be mainly linked with orientation
to wider and more stable markets and use of new technologies.
To encourage investors to come with massive investments to Latvia there should be certain
advantages to motivate them to invest or such advantages should be created. These may take the form
of availability and quality of natural and labour resources, favourable business environment, etc.
B. T
RANSPORT AND COMMUNICATIONS
Transport and communications is an important sector of services in the national economy. In
1999 it gave 16.3 per cent of the total value added. Outputs of the sector during the year went up very
little (by 0.2 per cent).
Favourable geographical position of Latvia, proximity to the Baltic Sea, ice-free sea ports
encourage passenger and cargo transportation. Effi cient and competitive transport and communications
system is an important precondition for economic gr owth. Good geographical pos ition promotes transit
haulage. The majority of cargo transportation in Latvia is transit and international freight. Passenger
carriage is mainly handled domestically, except transportation by air.
In the area of communications, modernisation of the fixed public telecommunication network
is continued, the number of lines switched to the digital system becomes bigger. The sector of mobile
telephones also develops successfully and the number of users rapidly increases.
1. Road Transport
Road transport is the most important means of transport providing service of domestic cargo
haulage and passenger transporta tion. Structure of transportation by road transport on the whole
remained without changes in 1999.
Cargo transportation  in 1999 was 33.4 million tons, which was by 1 per cent less than in the
preceding year. At the same time cargo turnover slightly went up – by 1.3 per cent. This happened
basically because of increase of the average distance of 1 ton of cargo transported in domestic
haulage.
Cargo transportation also in 1999 was done mostly domestically. International transportation
constituted only 5 per cent of total haulage. Both the domestic and international cargo transportation
had slightly decreased.
Although the domestic cargo transportation clearly dominates – the situation with turnover of
cargo is completely opposite i.e. the share of international traffic constitutes 61.8 per cent. As aWT/L/362
Page 68
contrast to domestic transportation, in international traffic the commercial haulage prevails. In 1999 –
62.1 per cent of domestic cargo was transported for company’s own account and 7.9 per cent of
international haulage were carried for the same purpose.
Road transport is the most popular type of pa ssenger transportation. Passenger transportation by
regular bus routes is carried out mainly domestical ly. The share of passengers carried internationally
is very small. Road carriers of Latvia in international routes in 1999 carried 0.4 per cent of allpassengers.
In 1999 167.4 million passengers were carried in regular bus routes. In comparison with the
preceding year – the total number of passengers has slightly increased (by 2 per cent), of which the
number of domestically and internationally carried passengers has become bigger by 1.9 per cent and
7.2 per cent, respectively. Passenger turnover growth rates are faster – by 24.4 per cent. Grow
tendencies continue also in 2000. In the first quarter of 2000 passenger transportation and passenger
turnover went up by, respectively, 6.1 per cent and 18.7 per cent in comparison with the same periodin 1999.
The total number of bus routes has gone up. The majority of them are regional bus routes: at the
end of 1999 there were 1082 regular regional bus routes . There are also 392 long distance routes and 271
city bus routes and 37 international routes. Bus traffic in rural areas with small passenger flows is provided
with the support of subsidies for regular bus traffic in  rural areas. State Road Fund resources are used for
such subsidies and subsidising of city bus traffic was started in 1999. There are no subsidies for
international routes and fix route taximeter buses. In 1999 – 7.5 million Lats were used for subsidies
from the State Road Fund, that is by 1.9 million Lats more than in 1998.
The Cabinet of Ministers in November 1999 approved the updated Concept of Passenger
Transportation developed by the Ministry of Transport. To implement the Concept work at draft Lawon Passenger Transportation was started.
2. Ports
Ports are important part of transit. There are good preconditions for the development of ports
in Latvia. There are 10 ports in Latvia. The three big ports – R īga, Ventspils, Liep āja are more
focussed on handling of transit cargo, seven smaller ones – reload local cargo. Small ports have localimportance and their share in total cargo turnover in 1999 was 1.1 per cent.
Ports mainly operate as senders of cargo as the main direction of transit cargo is from the CIS
countries to the West. In 1999, contrary to the preceding years, cargo turnover went down. 49 million
tons of cargo was reloaded in all ports in 1999 declining by 9.4 per cent in comparison to 1998.
Situation in this transport sector improved in the first months of 2000; cargo turnover was
bigger than one year before. In the first quarter of 2000 total cargo turnover was 13.3 million tons.
This figure is by 7.1 per cent bigger than in the first quarter of 1998. There was growth in both big
and small ports (in the average).
Orientation of big ports towards reloading of transit cargo is demonstrated by cargo structure
in 1999 – more than half of total cargo structure was oil and oil products. Important groups of cargo
were mineral fertilisers and wood materials – more than 1/10 of total cargo turnover. The next biggest
group was ferrous metals and articles of ferrous metals amounting to 7.6 per cent of cargo turnover.
In order to improve competitiveness of ports – R īga trade port and Ventspils port operate in
the free port regime. In March 2000 Saeima adopted the Law in the Free Port of Riga granting the free
port status to the whole territory of the port. Liep āja port is included into the Liep āja special economicWT/L/362
Page 69
zone. More detailed information about activities of free ports and special economic zones is contained
in Section 5.9.
Figure 3.2
Cargo Turnover in the Biggest Latvian Ports
(million tons)
36
2.311.236.8
2.313.3
2.334.1
12
0510152025303540
Ventspils Riga Liepaja1997
1998
1999
In Figure 3.2 we see that Ventspils port is the biggest port in terms of reloaded cargo. It
handles reloading of a considerably more cargo than other ports of Latvia or 69.6 per cent of all cargo
reloaded in Latvia. With the declin e of transit cargo flows Ventspils port in 1999 reloaded by 5.3 per cent
less than one year before. The share of oil and oil pro ducts in the cargo structure of the port is very high.
Cargo turnover in R īga port in 1999 reached 12 million tons, which was a decline by 9.8 per
cent compared to 1998. Traditionally, Riga port handled the largest amount of incoming cargo
(approximately 70 per cent of cargo received in ports). As a contrast to Ventspils, Riga port does not
specialise in any particular cargo handling. The most significant groups of reloaded cargo are timber,
containers, different metals, chemical fertilizers and oil products. All the cargo reloading in the
biggest groups has gone down (with the exception of oil products).
Cargo turnover at Liep āja port in 1999 was slightly above the level of 1998. The increase of
the reloaded cargo was by 27.7 thousand tons or by 1.2 per cent compared to 1998. The majority of
the reloaded cargo was the general cargo, wood materials and metals dominated.
Cargo turnover in small ports did not change in 1999. Cargo turnover rate declined by 12.7
per cent during this period in comparison with 1998. Small ports operate for local needs. Local cargomainly consists of sent-away wood materials and received fish and fish products.
3. Railway Transport
The situation in the railway sector, similarly to 1998, did not improve also in 1999. After
several years of steady growth cargo transporta tion is going down for the second year. In 1999 cargo
transportation dropped to 33.2 million tons, which was by 8.8 per cent less than in 1998. The declinerate of cargo turnover at the same time equalled to 6 per cent. Railway haulage started to grow at the
beginning of 2000: cargo transportation – in the first quarter by 23.1 per cent, cargo turnover – by
26.8 per cent compared to the first quarter of the preceding year.WT/L/362
Page 70
Figure 3.3
Cargo Transportation by Rail by Quarters
(million tons)
9.38.3 8.58.9
7.59.4 9.69.6 9.2
7.6
6.3 6.47.3
6.07.26.9 6.9 7.2
036912
I II III IV I II III IV ITotal Transit haulage1998 1999 2000
The decrease of cargo was caused by both the economic situation in Russia and the
discriminatory tariffs set by Russia in regard to cargo transported through Latvia. The amount of
cargo declined in all directions.
Figure 3.3 shows the importance of transit carg o for railway. The main direction of cargo
carriage is transit through ports of Latvia constituting 9/10 of all transit haulage. This haulage has avery significant role to ensure successful operation of the transit sector. Almost half of Latvian ports
mainland cargo turnover is provided by railway.
The share of other directions in cargo haulage (domestic traffic, export haulage, import
haulage) equal to 21.6 per cent of all cargo. Notably, the decline rates in these directions are faster
than in transit haulage.
The tendencies of the previous years in the area of passenger carriage continue. Also in 1999
the number of passengers carried by rail declined. In 1999 – 24.9 million passengers were carried by
rail, which was a reduction by 17.4 per cent compared to 1998. At the same time passenger turnover
declined by 7.1 per cent. The mentioned tendencies were also true for the first quarter of 2000.
Very small part of passengers – 3 per cent – is carried in international traffic. Other
passengers are carried domestically. The share of passengers carried in suburban routes is very high
amounting to 93.3 per cent of all domestic passengers. Railway has a very important role in thesystem of Riga transport.
Less passengers were carried both in international and domestic traffic. In 1999 this was
respectively less by 18.7 per cent and 17.4 per cent than in 1998.
Passenger transportation creates losses for the sector, which have to be covered from profits
of cargo transportation. Non-profitable passenger transportation is a considerable problem of theLatvian railway. In the Law on Railway there is a provision stipulating state and local government
procurement orders to subsidise the non-profitable but needed passenger transport routes. Subsidising
was started in 1999. 300 thousand Lats were allocated from the state budget. Renewal and
modernisation of railway infrastructure and fixed assets are needed to keep competitiveness.WT/L/362
Page 71
Ministry of Transport in 1999 continued drafting secondary regulatory documents of the CM
subordinated to the Law on Railway laying down de tails of railway operations. In line with the
provisions of the law in 1999 work was started by the Railway Administration which, according to the
law, carries out state management in the railway sector. One of the duties of Railway Administration
is to issue licences for railway carriage.
4. Aviation and Airport “R īga”
Demand for air transportation determines directions of work of Latvian airline companies.
Enterprises of this sector operate in international market. At the moment there is no demand for the
domestic air transportation – that is why all flights are international. Main service offered by airlines
is passenger transportation.
Total number of passengers was steadily going up, however in the last two years it declined. 240
thousand passengers used services of Latvian airline companies in 1999. The number of carried passengers
went down by 8.4 per cent in 1999 compared to 1998. Quite substantial part of passengers or 83.3 per cent
of total carried passengers were carried in regular air routes.
Since flight distance per one passenger has decreased, turnover has declined even faster: in
1999 it was by 20.1 per cent less than in 1998. The share of regular routes was 55.6 per cent of total
passenger turnover.
Cargo transportation by air was comparatively smaller than by other means of traffic. This has a
small impact in the Latvian economy. Transportation of cargo and mail in 1999 equalled to 5.2 thousand
tons presenting a decrease by 26.9 per cent compared to  1998. This type of transportation has typical sharp
fluctuations. At the same time cargo turnover went up by 13.2 per cent.
An important indicator of work of airport “R īga” is the number of passengers receiving
services of the airport. Passenger turnover shows an increasing tendency during the last few years.
Passenger turnover at airport “R īga” in 1999 reached 562.4 thousand passengers. It is an increase by
1.4 per cent compared to 1998. Out of the incoming and outgoing passengers – 45 per cent flew by
aeroplanes of Latvian companies. The main Latvian airline company “Air Baltic” handled the
majority of flights at the airport. The number of airport “R īga” passengers continues going up in 2000.
In the first quarter the growth of turnover of passengers was 5.4 per cent compared to the same period
in 1999.
Figure 3.4
Passenger Turnover at R īga Airport by Quarters
(thousand passengers)
116.3135.7165.7150.6
110.3129.9168.7149.1
107.0
53.762.577.0
66.447.360.684.169.4
48.3
050100150200
I II III IV I II III IV I
Total With aeroplanes of Latvian airline companies1998 1999 2000WT/L/362
Page 72
Turnover of cargo and mail is small. Cargo and mail turnover in airport “R īga” in 1999 was
4.4 thousand tons – by 10.2 per cent less than in 1998.
In May 1999 the Cabinet of Ministers approved the policy of air transport for 1999-2004
spelling out goals and objectives of the sector.
5. Communications
Telecommunication sector develops very rapidly; both fixed and mobile telephone commu-
nication services are available. The operator of the fixed public telecommunications network is
Lattelekom who has the monopoly rights to provide basic telecommunication services in the
mentioned network. In the field of mobile telecommunications there are two operators – Latvijas
Mobilais Telefons and Baltcom GSM .
Lattelekom  continues work at modernisation of the public telephone network. The company
carries out replacement of analogue telephone lines by the digital ones able to provide higher quality
services. The total number of digital lines keeps goin g up in the process of modernisation. At the end
of 1999 the number of digital lines reached 412 thousand going up by 27.8 per cent during the year.
Out of the total number of lines at the end of 1999 – half operated in the digital system, 3575 card and
coin booths were installed.
The number of out-going long distance calls keeps going up in the last few years. In 1999 the
number of out-going long distance calls in the public telephone network has gone up by 8.1 per centcompared to the preceding year. This was basically caused by the increase of domestic long distance
calls. The number of the domestic long distance calls has gone up 10.1 per cent, international – by 2.3
per cent.
Figure 3.5
Total number of Mobile Telephones
(end of year, thousand)
278.9
167.5
76.2
28.5
050100150200250300
1996 1997 1998 1999The sector of mobile telephone services in 1999 continued growing dynamically which was
proved by the growing demand for this type of service. In the area of mobile telecommunications
Latvijas Mobilais Telefons provides services in GSM and NMT-450 systems whereas Baltkom GSM
offers services only in GSM system. Figure 3.5 shows that at the end of 1999 the number of users ofservices of the two companies was approximately 278.9 thousand. The total number of users has gone
up by more than 110 thousand during the year. Increase of availability of mobile telephone
communications is the base for such fast growth of the number of users. This was encouraged by the
growing scope of offered services, lower tariffs and prices for mobile phones. The number of users of
mobile telephones reached approximately 1/3 of number of fixed telephone users. Approximately 11.5per cent of the total population are mobile telephone users.WT/L/362
Page 73
Postal service in Latvia is provided by the non-profit organisation state JSC Latvijas pasts
with branches in all regional centres and 40-50 post offices in each region. Licensed companies also
provide some individual postal services. They have a substantial market share in courier mail services.
Some private companies operate in deliveries of press publications. These companies are serious
competitors of the postal service in the area of delivering newspapers and magazines not only in R īga
but also outside the capital where they operate.
Table 3.3
Activity of Latvijas Pasts
(thousand)
Postal service 1997 1998 19991999 compared to 1998,
per cent
Letters, postcards, parcels, sent 30,349 29,630 30,167 101.8
Packages, sent 73 73 65 89.0
Money transfers, sent 542 537 448 83.4
Newspapers and magazines,delivered71,893 73,972 70,038 94.7
The post has the monopoly rights in the area of letters, postcards and parcels. As shown in
Table 3.3 only these deliveries have slightly gone up. However, packages, money transfers and the
number of press publications delivered by mail in 1999 have gone down at a faster or slower rate.
Starting with 1 January 1999 tariffs for basic postal services have changed. They were mainly
increased because of the necessity to harmonise postal service tariffs with growing costs. Both theincrease of tariffs and stiffening of competition in the postal services sectors where the postal system
does not have monopoly right influences dynamics of the operational indicators.
C. C
ONSTRUCTION
Construction is one of the most dynamic sectors of Latvian economy. Construction outputs in
1998 were by 17 per cent higher than in the precedin g year. Construction outputs also in 1999 were by
7.8 per cent higher than one year before (see Figure 3.6).
Figure 3.6
Changes in Construction Outputs
(percent, 1995 = 100)
100.0105.3114.0133.3144.1
80100120140
1995 1996 1997 1998 1999
The share of construction in GDP in 1999 amounted to 7.6 per cent.
Privatisation of construction has been completed and private sector dominates for already
several years. Of all contractual construction works executed in 1999 – state and local government
enterprises or companies with a share of state equity carried out only 2 per cent.WT/L/362
Page 74
High is the share of repair and reconstruction work in total construction – approximately 2/3
and only 1/3 is new construction. 60 per cent of all construction is civil engineering.
The Russian financial crisis influenced Latvian construction outputs at a much lesser extent
than outputs of other economic sectors – growth rates slowed down only by some percentage points.
Yet, at the end of 1999 the confidence indicator of construction conjuncture (according to
construction business tendency study) had deteriorated. Construction contractors considered that alsothe number of contracts had gone down. At the beginning of 2000 the confidence indicators of
construction conjuncture did not improve much. The main factor limiting construction activity, as
mentioned in the survey, was the insufficient demand rather than financial difficulties and
competition.
Long term financing is needed for faster deve lopment of construction and this would greatly be
assisted by the system of hypot hecated lending. The legal base for the latter has already been
established.
With the increase of the overall economic activity, the construction outputs will start going
up, too and slightly faster than in average in national economy. It is predicted that in future the share
of engineering works in the overall construction structure will go up, mainly, building of ports and
terminals, roads and communication networks, reconstruction of power facilities, building of
environment protection plants.
Public construction infrastructure and legal base has been perfected in the last nine years
(since 1991). The system of national norms and standards has been created and developed that fully
corresponds to the requirements of the EU. Still shortage of certified specialists is a problem for the
sector, qualification of new specialists lags behind the requirements of the day. There is poor
availability of information for participants of construction, low level of management. Construction isalso hindered by the underdeveloped territorial planning, lack of proper territorial plans; local
governments have not developed building regulations, etc. All this creates unnecessary bureaucratic
obstacles and serves as a good base for corruption.
Construction of housing in Latvia in 1999 was slightly lower than in 1998. Inhabitants
themselves financed the biggest part of construction works. Private investment in construction offamily houses was 40.9 million Lats or by 8.8 per cent smaller than one year before.
Thus, the housing fund of Latvia compared to 1990 has not changed much (see Table 3.4).
In Latvia there is in the average 22 square meters of living area per one resident. Comparing
with the countries of the European Union the average total area of housing in Latvia is by 30-50
square meters smaller. The housing fund in the mentioned countries basically consists of 4-5 roomapartments whereas in Latvia it is 1-2 rooms (73 per cent of all flats in 1999) and the level of
amenities also lags behind.
Table 3.4
Housing fund
(end of year, million m2 of total area)
1990 1997 1998 1999
Total housing fund 52.9 53.0 53.2 53.4
of which:
public sector 36.6 25.3 25.2 16.1
private sector 16.3 27.7 28.0 37.3
Average per one person, m219.8 21.5 21.8 22.0WT/L/362
Page 75
Denationalisation of housing property, privatis ation of state and municipal living houses has
changed the property structure of the housing fund. At the end of 1990 the share of private sector in
the housing fund was 31 per cent and at the end of 1999 it had gone up till 70 per cent of total housing
fund.
Several obstacles hinder faster building of hous ing. Firstly, unclear institutional system of
housing – renting of a house is not identified as a type of business activity, rent payment set by localgovernments is not high enough to maintain th e house. Secondly, financial issues – unfavourable
taxation policy for the development of housing, underdeveloped system of crediting. Involvement of the
state in the development of housing fund is nece ssary. On 5 October 1999 the Cabinet of Ministers
approved the Program of Crediting Housing Developmen t. To improve the situation in construction and
living conditions the state should provide opportunity for people in obtaining credit resources with the
assistance of the program of crediting housing developm ent. Its ultimate objective is to satisfy needs of
people for quality housing, activate construction sect or and promote flexibility of housing market.
It is not planned to restart building of many-flat houses on a wide scale funded by the central
and local governments. These resources will be mainly used to create the social living fund with
small, cheap apartments for urgent necessities and especially adapted flats for senior and poor citizens
and invalids. In 1999 total area of social homes went up by 64 per cent. At the end of 1999 1075
persons lived in 461 social flats with the total area of 18.5 thousand m
2.
D. ENERGY SECTOR
1. Present Situation
The urgent problems of the energy sector development at present are:
- streamlining of energy legislation;
- reliability of energy deliveries;
- privatisation and restructuring of energy companies;
- increase of energy efficiency.
Perfection of Regulatory Base
Drafting of legislation is continued (see Box 4.1) in basic two directions:- harmonisation of laws and regulatory documents with the regulations of the European
Union;
- drafting of new laws and regulations in compliance with requirements of external and
domestic markets and development of national power supply services.
The law “On Energy” provides that the strategy of energy policy implementation is contained
in the National Program on Energy (see also Section 4.1) approved by the Cabinet of Ministers on9 September 1997. It is developed for 15 years and is periodically – once in five years – updated.
Insertion 3.1
Harmonisation of Regulatory Docu ments with the EU Directives.
The nearest priorities of legal harmonisation with the EU laws are: stock of oil and oil products,
reliability of deliveries, energy efficiency and in troduction of energy market principles. The law “On
Energy” passed by Saeima on 3 September 1998 is the base for future work. The law incorporates main
provisions of the EU directives.WT/L/362
Page 76
Reliability of deliveries and creation of oil product stock. To secure formation of product
reserve the Ministry of Economy has prepared a package of draft regulations and amendments to the
current legislation. On 9 March 1999 Regulations No. 99, 100 and 101 of the Cabinet of Ministers
were adopted to regulate energy supply in crisis situation speaking about amendments in terms of
delivery of electricity, gas and heat.
Energy Efficiency. Saeima has ratified the En ergy Charter Protocol on energy efficiency and
the related environmental documents. Regulations of the Energy Efficiency Fund and its supervision
council have been approved by the resolution of the Ministry of Economy of 15 July 1998. State
Energy Efficiency Concept has been prepared for submission to the Cabinet of Ministers.
Market liberalisation. Regulations No.326 of the Cabinet of Ministers “On Qualified Users of
Electrical Energy” were adopted on 21 September 1999. The Cabinet of Ministers on 8 September
1999 passed instructions “On the Annual Electricity Consumption to Gain the Status of a Qualified
User of Electrical Energy in 2000”. The committee of the Cabinet of Ministers has approved draft
instructions “On Establishment of State Energy Inspection”. Saeima has reviewed the draft law “On
Regulators of Public Services” in the second reading. Action plan is being developed to create a
united electricity market between the Baltic States as well as the activity plan of privatisation of PJSC
Latvenergo  with the attached time schedules.
Transparency of electricity and gas prices. The necessary measures to ensure transparency are
taken by the Energy Regulation Council. The method of  tariff calculation determines separation of costs of
generation (for natural gas – also storage), transmission and distribution and tariffs are calculated separately
for each segment of the technological cycle. Regulation No.413 of the Cabinet of Ministers of 22 October 1996
“On Electricity Supply and Use” and Regulations No.23 of 28 January 1998 “On Gas Supply and Use” are
applied.
Investments
Both public (central and local government funds) and commercial projects are implemented
in the energy sector (see Insertion 3.2).
Insertion 3.2
Investment projects in the Energy Sector.
With the support of the EBRD loan the reconstruction of Ķegums and P ļavinas HES is
successfully continued with the plan to finish work in 2001. Hydro-aggregate No.3 of Ķegums HES
has been transferred for operations. In P ļaviņas HES – hydro-aggregate No.9 has been reconstructed
as well as repairs of mechanical part of hoisting equipment and reconstruction of the electrical part
have been made. A lot of work was invested in improvement of safety of dams in P ļaviņas HES.
Reconstruction of inducement generators at R īga HES was started.
Modernisation of control and management sy stem of TEC-2 (CHP-2) was completed using
Siemens Rahoitus Oy financing.
In the transmission network in 1999 new consumer centres were opened in R īga and
Ventspils. Several operating substations (110/20 kV sub-station in Bauska, sub-stations Dzintari and
Grīva 110 kV distribution equipment) were renewed and reconstructed. 6kV power transformers were
replaced in the Central sub-station to enable them work with 10kV voltage. To eliminate losses in the
electrical network reactors were installed in Valmiera and Grobi ņa where also automatic reserve
switching of power transformers in 8 110 kV substations was installed. In 1999 the 110kV line
Grobiņa-Liepāja was reconstructed to restrict movement of wires, optical fibre cables in 200 kmWT/L/362
Page 77
110kV lines replaced protective cables. With economic use of available resources a substantial
amount of work was done in 1999 – total 2000 km of constructed, renewed and restored lines – by
500 km more than in 1998 thus reaching the highest total result since 1990.
New distribution equipment was installed and th e old one renewed in electric distribution
networks of Venta, Valmiera and Bauska sub-stations. In 1999 low-voltage compensation equipment
was installed in Tukums, Bauska and Ogre substations.
Work at reconstruction of Riga electrical netw ork is successfully going on: networks switched
to the Centr ālā and Bolder āja stations were changed from 6kV to 10 kV, earthling equipment was
installed in the Centr ālā and Andrejsala, networks in the centre of Riga were changed from 0.22 kV to
0.4 kV, and 0.4 kV networks in D ārzciems and Mežaparks areas reconstructed.
In total – 2038 km of electrical lines in distributions networks were built, renewed and
restored in 1999. 568 transformer substations and 43 thousand customer connections were
reconstructed and streamlined.
JSC “Latvijas G āze” in 1999 decided to pay the maximum attention to attraction of new
customers. In four months of th is year 144 new customers were switched to the gas supply system and
started to receive natural gas, including 28 cons umers annually consuming more than 25 thousand m3 of
natural gas. 3.4 km of new gas distribution networks were built this year. Competition was completed and
contracts with subcontractors made about the buildi ng of gas pipeline in Daugavpils to provide gas to
Daugavpils heat station No.1, industrial buildings a nd individual sector. Route ha s been selected and work
started to supply gas to Liepa village and JSC Lode. In the near future it is planned to start construction of
gas pipeline in Valmiera. Latvijas G āze thinks about to possibility to connect the gas supply system also
Olaine, Prei ļi and Ventspils and individual houses in R īga region, Tukums, Ogre, J ēkabpils and Liep āja
region.
Several new projects have been worked out and sources of financing of these projects are
being looked for.
37 projects for the total amount of 10.378 million Lats have been included in the Public
Investment Program (see Section 3.4.2) for the development of energy sector in 2000 and 6.504
million Lats have been earmarked in the state budget for implementation of these projects.
The priority projects in line with the government policy in the energy sector are:
- construction of new, environmentally friendly power plants;
- increase of energy efficiency and saving of energy;
- installation of co-generation equipment;
- use of local energy resources.
There are economic incentives for construction and commercial activity of small capacity
hydro plants, wind generators and co-generation equipment.
Ministry of Economy as of 1 May 2000 had given 28 licences for small capacity HEP
building to independent producers and 4 licences – for building of co-generation plants necessary forthe development of business activity.
The Energy Efficiency Fund that started to operate in 1998 provides loans to smaller projects,
basically for the replacement of the existing equipment by a more efficient one during reconstruction
of heat supply systems as well as for reconstructi on and construction of small hydro power plants. TheWT/L/362
Page 78
projects foresee improvement of heat insulation and construction of a co-generation plant. Loan part
of financing of projects varies from 5000 LVL to 200,000 LVL.
Co-operation programs, projects, activities
Within the framework of the Danish-Latvian co-operation agreement – projects of
improvement of energy efficiency are being implemented including projects of reconstruction of
boiler houses and heat networks, regional planing, use of renewable resources, etc.
Similar projects will be implemented with the Swedish National Energy Administration.
Work at the creation of electricity market in the Baltic region under the guidance of the
committee BALTREL11 founded on 11 May 1998 by 17 energy utilities of 11 states of the Baltic Sea
continues. Priorities within BASREC – Baltic Sea Region Energy Co-operation have been identified.
Feasibility study “On the Creation of a United Electricity Market in the Baltic States” within
the framework of ES SYNERGY programme has been started.
2. Energy Supply
Both the imported (natural and liquefied gas, o il products, coal) and local fuel (wood and peat) are
used in Latvia to provide fuel and energy (electric ity and heat) to sectors of national economy, commercial
users and residents. Part of electricity is generate d in hydro plants (HES) and combined heat and power
plants (CHP) (using ~20-25 per cent of the imported fuel), another part is imported. Mainly the imported
fuel – heavy oil and natural gas are used in heat ge neration. Small boiler houses use also local fuel and
coal.
Table 3.5
Consumption of Energy Resources in Latvia*
(thousand tons of conditional fuel – ktce**)
Consumption of Energy Resources 1997 1998 1999
Energy consumption – total 6388 6045 5730
of which:
Natural gas 1525 1494 1495
Light oil products 1327 1272 1335
Heavy fuel oil 1156 1086 900
Firewood, peat, coke and other types of fuel 1608 1450 1300
Coal 182 147 120
Electric power (HES and imported from abroad) 590 596 580
* Source: Central Statistical Bureau and Ministry of Economy.
** 1 ktce = 0.02931 PJ.
The structure of energy resources supply in 1999 was: oil products (heavy oil, light oil
products, other oil products) – 39 per cent, natural and liquefied gas – 27 per cent, hard fuel (coal,
wood and peat) – 24 per cent, electricity of hydro plants (including import of electricity) – 10 percent.
                                                     
 11 See details on BALTREL in Report on Economic Development of Latvia, Ministry of Economy, Riga,
December 1998.WT/L/362
Page 79
The structure of consumption of energy resources  in 1999 was: heat energy – 33 per cent, oil
products (fuel and liquefied gas) – 25 per cent, electricity – 16 per cent, natural gas – 12 per cent, heavy
fuel (coal, wood and peat) – 14 per cent.
Significant changes in the balance of energy resour ces in the nearest five years are not predicted
in view of the existing heat and electricity supply capacities, large industrial, commercial and household
energy consumers.
The decrease of the demand of energy resources in 1999 can be basically explained by the
decrease of the general demand for fuel in comparison with 1998.
Gas Supply
An important place – almost 26 per cent in the La tvian energy resources market belongs to gas.
It is forecasted that the share of gas as one of the ecologically cleanest types of fuel in the total energy
consumption of Latvia will go up (consumption of natural gas by 2005 might go up till 2 billion m3
bringing down, respectively, the share of heavy fuel oil). The active gas storing capacity of In čukalns
underground gas storage site is 1.855 billion m3. The largest consumers of natural gas are: heat
generation ~60 per cent, industry ~25 per cent, othe r consumers ~15 per cent. Riga region accounts for
82 per cent of the total natural gas consumption of Latv ia. Natural gas is not used at all in Latgale region
with the exception of Daugavpils city and Prei ļi region. In Kurzeme, the biggest gas consumption is in
Liepāja ~11 per cent (JSC Liepājas Siltums , JSC Liepājas Metalurgs ), in Zemgale region – Jelgava and
Bauska region ~4 per cent.
Oil Products
Oil products are used both as heating fuel and fuel liquid. Prices in the oil product market are
fully liberalised and competitive in comparison to other types of fuel. Free market principles also
function in the area of oil product supply, however there are certain peculiarities. In the fuel marketthere may be several suppliers, yet heavy fuel oil normally depends on one supplier.
Oil products have an important share in the Latvian energy resources market – their market
share is about 35-41 per cent, including heavy fuel oil – 15 per cent. The biggest users of heavy fuel
oil are: heat generation ~70 per cent, industry ~30 per cent. Consumption is basically concentrated in
Latgale region ~25 per cent (mainly in Daugavpils and R ēzekne), Kurzeme region ~20 per cent
(Liepāja, Ventspils cities and Saldus region).
Insertion 3.3
Oil Product Reserves.
In 1999 due to various factors, local government companies had not procured enough heavy
fuel reserve (as of 1 November). Emergency heavy fuel reserve was also not big enough therefore the
situation in certain regions of Latvia- where there was no alternative for the use of heavy fuel oil –
was rather tense. To avoid such situations in future and on the basis of the CM regulations of
22 February 2000 the reserve creation model was accepted. Latvia till 2011 has to increase the share
of reserves of fuel in the system of oil product reserves creating 90 days reserve.
Creation of the oil reserves system is regulated by the law “On Energy” (oil and oil product
reserves in Article 72 and Paragraph 2 of transition provisions) and the EU directives (fuel –
68/414/EEC with amendments in 98/93/EC Article 1, 2).WT/L/362
Page 80
Use of oil reserves is regulated in the law “On Energy” (use of fuel in Articles 63 and 64)
and the EU directives (73/238/EEC – on the plan to be created and realised by a country if there are
difficulties with oil product supply, 77/706/EEC – on genuine solidarity between member states in
the event of difficulties with the supply (Article 1 spells out the possibility to divide the reserved
products between the member states).
Commercial reserves strictly dominate in the oil product reserves yet in future this will
change in favour of oil product security reserve, at the same time providing reserves that would
correspond to the average 90 days consumption.
Hard Fuel
Both – the imported from CIS and Poland (coal) and local fuel (peat and firewood) are used.
The consumption forecast of firewood depends on the extent to which regions will manage to change
from the extensive to rational use of firewood. In  future fuel consumption the share of wood is
forecasted at the level of 25-30 per cent. Biggest users of firewood are: households ~40 per cent, heatgeneration companies ~16 per cent, industry (mainly wood processing companies) and other users
~44 per cent. Firewood and coal are evenly used across all regions. Consumption of peat till 2005
might stay at the level of 1999. Use of peat is co ncentrated around its extraction and processing sites.
Electricity
During the last 2-3 years electricity consumption has stabilised in the average at the level of
6.1-6.3 GWh per year.
Imports play an important role as the quantity of the supplied energy depends on the through-
flow of the Daugava. Due to low precipitation and the respective small amount of generated energy
the locally generated energy in Latvia in 1999 months equalled to 68 per cent of the demand and 32
per cent had to be purchased from Russia, Estonia and Lithuania.
Table 3.6
Electricity Supply in Latvia*
(billion kWh)
Components of electricity supply 1997 1998 1999
Total electricity 6.326 6.328 6.065
Generation – total 4.503 5.796 4.110
of which:
HES 2.946 4.302 2.744
CHP 1.428 1.348 1.222
Block stations and other equipment 0.120 0.131 0.128
Small HES 0.0074 0.014 0.014
Wind generators 0.0016 0.0018 0.002
Import of electricity – total 1.823 0.530 1.955
* Source: PJSC Latvenergo and Ministry of Economy.
Electrical power in Latvia is generated in hydr oelectric power stations (HES) and CHPs of the
PJSC Latvenergo (96.5 per cent), in heat plants of industrial companies (3.1 per cent) and small HES
(0.4 per cent). At the moment there are 52 small HES in Latvia and 5 more will be started in the
nearest future.WT/L/362
Page 81
In comparison with the preceding year the consumption of electricity has dropped by 4-5 per
cent. Consumption of electricity in industrial a nd the like companies has gone down yet has increased
in agriculture and with residential consumers.
Still the largest consumers of electricity are: industry ~35 per cent, residents ~24 and other
consumers ~41 per cent.
Heat
Consumption of heat went down in 1999 mainly due to the high average temperature of air
(only in Riga the average temperature of air in 1998 was 10C and in 1999 20C. Consumption of
centralised heat energy has gone down by approximately 20 per cent in comparison with the
preceding year.
Consumption structure of centralised heating has not essentially changed over the recent years
comprising district heating ~65 per cent, hot wate r supply ~10 per cent, industry ~5 per cent and other
consumers ~20 per cent.
In 1999 in total fuel used in centralised heating – 48 per cent was natural gas, oil products –
34 per cent, coal – 1 per cent, local fuel – 15 per cent. The share of heavy fuel oil and its substitutes
has reduced and consequently infrastructure of natural gas pipelines will change in Latvia also in
future.
In 1999 – 413 thousand tons of heavy fuel oil were bought for the needs of centralised
heating. This year there is a change in the structur e of fuel in favour of natural gas as the share of
natural gas has gone up in Liep āja, Valmiera, Daugavpils, J ēkabpils.
According to the information of JSC Latvijas G āze, there is a possibility to satisfy the demand
for natural gas of all consumers in cities and villages of Latvia connected to the gas network. This gas
supply may be unlimited and at stable prices.
3. Energy Regulation Council
Energy Regulation Council (hereinafter – the Council) functions in accordance with the “Law
on Energy” which stipulates that the Council consists of a chairman and one representative from each
– the Ministry of Economy, Finance, Environment Protection and Regional Development,
Agriculture, Competition Council, electricity company, gas company, Latvian Association of HeatSupply Utilities, Latvian Local and Regional Governments’ Union and also a representative of
consumers – to represent interests of residents.
- Basic tasks of the Council are:
- licensing of electricity, heat, natural and liquefied gas supply utilities;
- workout tariffs calculation methodologies;
- approval of tariffs calculated by energy supply companies;
- development and approval of legal acts relating to energy sector.
Licensing of Energy Utilities
Licensing of energy companies is carried out to:- ensure control over operations of energy companies;
- promote effectiveness and rational work of power utilities;
- respect requirements of environment protection;
- lessen heat losses;WT/L/362
Page 82
- encourage competition in the energy sector.
Special requirements are incorporated in licenses to achieve the above objectives and
companies must report regularly to the Council about the fulfilment of these requirements. In
accordance with the Law on Energy the Council has determine a procedure of reporting on activities
of energy utilities which allows the Licence Office to control their implementation.
Licences have been issued to:- PJSC Latvenergo : generation of electricity – 2 licences, electricity and heat – 3
licences, heat generation – 1 licence, transmission – 1 licence, distribution and sales –
7 licences;
- JSC Latvijas G āze: transmission, storage, distribution and sales of natural gas – 1
licence per each kind of activity, licences for storage and filling, distribution and sales
of liquefied gas.
Additionally, till 31 May 2000 licenses were also given to:- 27 energy supply utilities of which 21 licenses – for generation of electricity in co-
generation regime, 3 – for wind generation of electricity and 5 distribution and sales
of electricity and 1 license for sales of electricity; of which 4 licences to 3 companies
have been cancelled;
- 81 heat supply companies: 83 licenses for heat generation, 50 – transmission and
distribution and 40 – sales, 10 licences of 6 companies have been nullified;
- 46 liquefied gas supply companies: 27 licenses for storage and filling, 34 –
distribution and 46 – sales, 10 licences of 4 companies have been nullified.
Development of Tariff Calculation Methodologies
Basic principles for setting tariffs are:
- to safeguard interests of energy consumers;
- to promote effective and rational functioning of energy utilities;
- to provide transparency of tariff approval procedure.
The Regulator (Council) sets tariffs according to the method of economic stimulation, which
takes account of both the forecasted inflation and growth of economic efficiency of a company (RPI-
X model). The mentioned principles are respected in the effective tariff calculation methods for heat,
natural and liquefied gas supply, co-generation stations with the capacity over 4MW and electricity
sales and network services.
- The effective documents at the moment are:
- “Heat tariff calculation methodology” approved on 27 March 1998;
- “Natural gas tariff calculation methodology” of 5 May 1998 and “Tariff calculation
methodology for liquefied gas”;
- “Tariff calculation methodology in purchase of electrical energy from co-generation
plants with the electrical capacity over 4MW”of 8 September 1999;
- “Methodology of Tariff Calculation of Electricity Sales and Network Services”
approved on 26 October 1999.
Implementation of the EU directives in the area of electrical energy determine also the tasks
to be accomplished by the Council to ensure the third party access. This is spelt out in Regulations
No.326 of the Cabinet of Ministers of 21 Septem ber 1999 “On Qualified Energy Users”. The Council
on 23 December 1999 approved tariffs for services of  distribution and transmission networks. At theWT/L/362
Page 83
end of the year the Council will evaluate and publish in the official newspaper Latvijas V ēstnesis the
reports on the impact of qualified energy users on tariffs of transmission and distribution network
services as well as on tariffs for other users.
At the moment the Council works at the development of the system of discounts for industrial
electricity users with the approved capacity of 400kW and above if the industrial consumer is
planning to increase his electricity consumption. The current system of differentiated tariffs does notencourage industrial customers to develop their production and increase electricity consumption.
Besides, discounts to industrial consumers will not im pact tariffs of other users as they will be applied
only in case of increase of the consumed electricity. Discounts will not be applied to subscription fee
payments for the approved capacity.
Development and approval of legal acts relating to energy sector
Provisions of market creation and technical requirements to ensure safety of system are
currently being incorporated in the management proc edures of the electricity supply system (network
code). It will stipulate operation principles of a system operator respecting the market openness task
in order to ensure access to the electricity tran smission system for users in market conditions. By
30 June it is planned to review the network code dr aft submitted to the regulator for the approval and
co-ordinated with electricity producers and transmission system operators.
4. Prices and Tariffs
Energy Supply Regulation Council approves tariffs for electrical energy, heat energy (in
Riga) and gas (see section 4.4.3).
On 27 November 1997 Energy Regulation Council approved the average sales tariff of
electricity of PJSC Latvenergo and ten differentiated sales tariffs for groups of users that are not going
to change in 2000 (see Table 3.7).
Table 3.7
Average Sales Tariffs for Electricity of PJSC Latvenergo *
(LVL/kWh)
1997 1998 1999 2000
Average electricity sales tariff 0.02849 0.03028 0.03028 0.03028
Residents, users of a united tariff 0.031356 0.033051 0.033051 0.033051
Night tariff 0.02422 0.02574 0.02574 0.02574
Day tariff 0.03460 0.03678 0.03678 0.03678
* Tariffs are listed without VAT.
The current tariffs for natural gas accepted by the Energy Regulation Council regulation
No.75 of 29 December 1997 – “On The Approval of Tariffs of Natural Gas” and user payments in
regulation No.21 of 27 March 1998 – “On the Approval of the Subscription Fee for Natural Gas” –
tariffs and subscription fee for residents have not changed.
Heat tariffs for JSC Rīgas Siltums and PJSC Latvenergo branches have also stayed
unchanged. An increasingly bigger share of costs of public services is attributed to heat energy.
There are no essential changes in prices for en ergy resources set by the free market with the
exception of price for heavy fuel oil. In April 2000 th e price for heavy fuel oil was substantially higher
and equalled to 114 USD/t (DAF price on the border). 40 per cent of total amount of fuel in Latvia is
heavy fuel oil.WT/L/362
Page 84
E. AGRICULTURE12
Agriculture still occupies an important place in Latvian economy although since 1990 the
value added in agriculture has dropped by more than a half. Agricultural outputs continued declining
also in 1999. Added value produced in agriculture, hunting and the related services dropped by 13 per
cent and the share of the sector in the total added value produced in Latvia declined from 2.9 to 2.4
per cent. At the same time, according to CSB survey, the sector at the end of 1999 employedapproximately 15 per cent of the total workforce of Latvia.
One of the main reasons for backwardness of agriculture is low productivity of workforce.
According to the added value per one person employed in agriculture it is 10 times lower than average
in the European Union. Main reason is the small scale of farming. Land properties, on the whole, are
quite small. According to estimations, one farm on the average has 24 ha of land and the next-to
house land allotment – 7.9 ha. Quality of soil is rather poor, approximately 55 per cent are podzol
lands. Machinery is worn-out and technologies outdated. According to the data of the Ministry ofAgriculture – tractors owned by farms have been in the average for 16 years in operation and only 18
per cent – are less than 5 years old. Also a considerable number of production buildings fail to meet
the modern requirements – approximately 60-65 per cent were built 50-60 years ago.
At present the main goal of the agricultural policy is to turn it into a sector able to get
integrated in the European single market and produce products corresponding to the world marketrequirements, compete with products of other countries both in terms of quality and production costs.
An insight into the plant production development tendencies in 1996-1999 is given in
Table 3.8.
Cereal production is a prospective sector in Latvian agriculture. It should fully satisfy the
domestic demand and the need for the energetic fodder for dairy farming, pig and poultry production.Considerable amounts of cereal may be exported from Latvia.
Table 3.8
Sawn Areas and Agricultural Crops
1997 1998 1999
Total
sown area
(thousand
ha)Total yield
(thousand
tons)Total
sown area
(thousand
ha)Total yield
(thousand
tons)Total
sown area
(thousand
ha)Total yield
(thousand
tons)
Grain and legumes 487.5 1,043.5 472.8 970.2 418.1 787.0
Sugar beets 10.9 387.5 16.3 597.0 15.5 451.5
Potatoes 69.6 946.2 58.8 694.1 50.1 795.5
Vegetables 13.5 162.5 11.6 119.6 9.8 130.1
Animal vegetables 14.9 404.0 13.1 347.0 9.1 235.1
Perennial grass and hay 389.7 647.1 392.7 548.5 383.1 400.9
Total 1,002.8 – 983.4 – 912.3 –
Lately, the production of cereals is increasingly concentrated in farms with larger sawn areas.
In 1999 the number of farms with small areas under cereals went down compared to 1998 by almost
1/4 (from 90 thousand farms to 69 thousand). Because of unfavourable weather conditions the average
productivity of plant raising in 1998 was by 8.3 per cent lower than in the preceding year (18.8 cms
from ha).
                                                     
12 The chapter is based on the materials of the Ministry of Agriculture.WT/L/362
Page 85
The development program of agriculture for 2000 foresees that cereal production outputs,
with successful implementation of state measures for stabilisation of the domestic grain market, in
2000 could go up till 1 million tons. However the strong spring frosts considerably reduced prospects
for good results. In further years cereal production should go up both increasing productivity and
enlarging the share of rye and wheat. This will simultaneously increase economic efficiency of grain
production. To satisfy the demand for animal feed it is necessary to increase quality grain productionat lower production costs.
Specialisation and concentration alongside with agriculture modernisation may help to
increase productivity of sugar beet raising. In 1996 it was in the average 26 t/ha, in 1998– already
almost 37 t/ha. In 1999 average productivity, due to bad weather conditions, dropped to 29 t/ha. The
processing problems and also the cheap foreign subsidised sugar hinders further growth of sugar beet
production.
In future if the domestic market protection measures in the area of sugar beet production are
implemented production outputs may stabilise within 500 thousand tons, which would correspond to
the sugar consumption in the domestic market. The stability of the development of the sector will be
promoted by closer co-operation between the produc ers and processing industry and introduction of
sugar quotas starting with 2000.
Areas under potatoes and total yield of potatoes have significantly declined in the last 3 years
– by respectively 28 per cent and 16 per cent. At the same time average productivity went up by 17
per cent. The share of specialised marketable commodity oriented farms in the potato sector is quite
small and potatoes are still mostly raised for personal needs. Low market and purchase prices make
this sector unprofitable for the majority of farms.
Projections say that in the nearest future potatoes production will stay at the level of 1999
which fully satisfies local consumption. A very small amount of potatoes in Latvia is sold to
processing enterprises (approximately 3-5 per cent whereas in the EU – more than 20 per cent).
Out of technical crops – quite remarkable is the growth of harvest of flax fibre (2.2 times
during the last three years). There is a tendency to concentrate flax production in specialised farms
where quality of the harvested product is very good. Areas under rape seed has become bigger (from0.4 ha till 6.5 ha) the same as total yield (from 0.5 thousand t till 11.7 thousand tons).
Table 3.9 contains data on cattle breeding of Latvia. Data show that in 1999 the decline has
touched all directions of cattle breeding. Main reas ons – decrease of export to the East and failure to
compete in Western markets and with subsidised imported products of cattle breeding in the domestic
market.
Table 3.9
Cattle Breeding Production
(all types of farms)
1995 1996 1997 1998 19991999 against 1998
(percentage change)
Meat (livestock, thousandtons)169.3 103.6 97.0 97.1 92.1 -5.1
Milk (thousand tons) 943.9 920.6 985.8 950.2 798.7 -15.9
Eggs (million) 421.0 470.8 465.0 455.7 415.7 -8.8WT/L/362
Page 86
Food calculations developed by the Ministry of Agriculture show that meat output produced
in Latvia still is able to cover only approximately half of the demand. Pork production dominates in
the sector. However, Latvian pig farmers produce considerably less pork than demanded in the
domestic market. Only approximately 1/4 of total pork produced in Latvia is produced in specialised
farms. At the beginning of 2000 there were 23 farms in Latvia (only state farms and statutory
enterprises) where the number of pigs was higher than 1000.
The number of pigs at the end of 1999 was approximately the same as in the preceding year
(96 per cent) but the number of cattle continues declining and at the end of 1999 compared to 1998
had declined by 13 per cent.
Slight reduction of beef outputs is also projected for 2000. The activities that may help to
overcome crisis consequences and improve situation in the beef production sector planned for the near
future alongside with specialisation of farms are: introduction of identification and registration
systems of cattle, subsidies to pedigree stock purchase, etc.
The main problem in the sector of meat produc tion still is the increase of competitiveness of
meat in the domestic market. The necessity to think about the domestic market protection measures
alongside with other activities becomes urgent as this would lead to increase of outputs and
procurement quantities of meat and raise prices. Because of the domestic market protection measures
introduced in 1999 – in the first quarter of 2000 compared to the respective period in the precedingyear procurement prices of pork (live) went up in the average by 13 per cent. At the same time
average purchase prices of beef and poultry considerably went down.
Already since the 1998 crisis in the world milk markets the decline of milk outputs was
influenced by the reduction of purchase prices of milk, the quantity of processed milk and the number
of milk cows. Till October 1999 average purchase prices of milk were by approximately 15 per centlower than in the same period one year before. And only at the end of the year and in the first quarter
of 2000 purchase prices of milk started to slowly go up in comparison with the same periods in the
preceding year. At the beginning of 2000 the number of milking cows in farms was two and a half
times smaller than in 1990 and their number continues declining. In 1999 the number of milking cows
went down by 15 per cent. According to the opinion of exports of agriculture, for the development of
dairy farming as a priority sector – domestic market streamlining and increase of efficiency of milk
processing will become very important challenges.
Total milk output fully satisfies the demand of people for milk and milk products. However
milk production potential in Latvia is not fully used. According to the evaluation of specialists of the
Ministry of Agriculture, an important measure to develop dairy farming as a priority sector inagriculture is to promote export of milk produc ts to reach the amount of 120-150 thousand tons (in
milk equivalent) which is approximately one fifth of total milk output of Latvia in 1999.
To more rationally use natural resources and obtain additional sources of revenues the so-
called non-traditional or alternative activities are developing alongside with the traditional agricultural
production. Such income generating activities are basically started in small, non-usable for in the
traditional agriculture lands, bogs, etc., for exam ple, growing cranberries, mushrooms, medicinal
herbs, etc. as well as biological farming and rural tourism.
There is a certain stabilisation in the development of non-traditional agricultural sectors and
the development of the production corresponding to the market requirements. However, a still faster
development of non-traditional sectors in Latvia is hindered by the lack of investments and their
lengthy payback period, shortage of information and experience in the production and sales of these
products.WT/L/362
Page 87
Analysis of revenues of farmers and revenue forecasts show that income from agricultural
activity is still not optimal enough to maintain the needed level of production.
In January-October 1999 compared to the same period in the preceding year revenues from
sold products and services (excluding revenues of forestry) in farms (from a hectare of agriculturally
used land) declined by 9.5 per cent. At the same time production costs are gradually going up. In 9
months of 1999 compared to 9 months of 1998 they went up by 10.8 per cent, per one hectare of
agriculturally used land.
To encourage a rational, effective and competitive production the Law on Agriculture, among
other things, also stipulates state support to agricultural enterprises equalling to 3 per cent of the central
government basic budget. The planned amount of agri cultural subsidies in the law “On State Budget for
2000” is
17.6 million Lats which is 2.7 per cent of the central government basic budget expenditure. It is planned to
use subsidies for implementation of concrete programs and achievement of certain objectives. The goal ofthe production development subsidies is to achieve, non -administratively, saturation of the internal market
with the domestically made competitive products and to develop exports of priority and prospective
sectors. For this purpose it is necessary to considerably increase productivity and quality of produced
products.
In line with the regulations of the Eur opean Council about the Community support to
pre-accession activities in agriculture and rural development Latvia in the pre-accession period can
benefit from the EU support. Within the scope of this program financing will be given to such
programs as improvement of rural infrastructure, investments into agricultural companies,
environmentally friendly agricultural methods. The share of Latvia in the total financing will amount
to 25 per cent.
F. D
OMESTIC TRADE AND MARKET SERVICES
Retail trade turnover (apart from market turnover, including wholesale trade of automobiles,
their parts and appliances) after the fall in 1995 and 1996 went up at a fast rate (in 1997 – by 21.5 per
cent, in 1998 – by 26.5 per cent and in 1999 by 12 per cent against the preceding year). Also in the
first three months of 2000 there was growth (by 5.6 per cent) compared to the same period in thepreceding year (see Figure 3.7).
Figure 3.7
Turnover of Retail Trade and Public Catering by Months *
(at constant prices, January 1997 = 100)
7085100115130145160175190205220
I IV VII X I IV VII X I IV VII X I IVRetail trade
turnover
Public cateringturnover 
1997 1998 1999 2000
* Retail trade turnover has a strictly seasonal nature. In January there is a substantial fall compared toDecember of the preceding year. Small decline is also in February followed by growth of turnover in the
following months till August and fall in September and November. In December turnover rises again.WT/L/362
Page 88
In 1999 retail trade in non-specialised shops that predominantly sell food dominated in retail
trade turnover. This constituted more than one fourth of the total retail trade turnover (see Table 3.10).
In the last two quarters of 1999 compared to the same time in the preceding year retail trade with
automobile fuel went down by 12 per cent in the III quarter and 15 per cent in the IV quarter. This fallis partly linked with the reduction of outputs of industry, transit services and agriculture.
Table 3.10
Retail trade turnover by type of activity
(current prices)
1999Increase in the IV
quarter of 1999Increase in the I
quarter of 2000
Type of activitymillion
LVLper
centagainst the  IV
quarter of 1998
(constant prices,
per cent)13against the I
quarter of 1999
(constant prices,
per cent)
Total retail trade141597.4 100 9.8 5.6
including:
wholesales of motor vehicles, parts andaccessories 40.4 2.5 43.0 38.9
sales of motor vehicles, motorcycles and parts
thereof 138.6 8.7 13.9 1.0
retail trade of automotive fuel 186.0 11.6 -14.9 -18.4
retailing of food in non-specialised stores 442.4 27.7 6.2 3.3
retailing of non-food in non-specialised stores 56.7 3.5 -2.4 -12.4
retailing of food, beverages and tobacco in
specialised stores 25.1 1.6 19.8 15.1
retailing of pharmaceuticals and medical goods 77.0 4.8 24.6 11.0
retailing of textile fabrics, clothing, footwear
and leather ware 41.9 2.6 24.3 12.3
retailing of furniture, lighting fixtures,
household devices, electri cal devices, radio, TV
goods, paints, glassware etc. 168.6 10.6 21.9 -3.4
retailing of books, newspapers, stationery
and the like in specialised stores 104.0 6.5 -13.8 0.3
retailing of second hand goods 7.6 0.5 61.2 15.6
retailing through the mediation of firmsservicing customers by mail 3.7 0.2 … ...
other retailing outside stores, retailing in kiosks,markets 82.2 5.1 -16.9 95.0
other activities 223.2 14.0 39.6 6.9
Retail Trade Tendency Survey carried out by the Latvian Statistical Institute shows that both
in the I quarter and II of 2000 the indicator of confidence of retail trade in comparison with the
preceding period has gone up.
Low demand, competition, financial costs, trading area (where services are provided), labour
costs are mentioned as the most important factors restricting business activity.
                                                     
13 Data on retail trade turnover for 1998 by basic type of activity of companies are not available.
14 Including wholesale in motor vehicles, parts and accessories.WT/L/362
Page 89
Wholesale trade  in 1999 rose by 12 per cent in comparison with the preceding year (in current
prices). Interestingly that wholesale trade of machinery, equipment and appliances during this period
went by 50 per cent, alcoholic beverages – by 32 per cent, household electrical appliances, radio,
television and other household goods – by 29 per cent. Revenue from contractual mediation went
down almost by a half.
With the aim to eliminate unfair competition, tax evasion, illegal import and distribution of
goods, distorted influence on pricing policy and to ensure more efficient protection of consumer rights
– Regulations No.312 of the Cabinet of Ministers of 30 August 1999 “On the Procedure of Wholesale
and Retail Trade” were passed. The goal of these regulations is to ensure organisational separation of
wholesale and retail trade and to establish the procedure of wholesale and retail trade in the areas not
regulated by other legal documents. The regulations gained effect gradually letting businesses
streamline their types of trade in line with the regulations.
Market services sold in 1999 slightly went up in comparison to 1998 (see Table 3.11). There
was a substantial rise in computer-related services, education services, repair and maintenance of
automobiles, repair of domestic appliances and personal goods, etc. services. Yet, there was a decline
in sales of transportation services mainly linked with consequences of the Russian crisis and the
discriminatory cargo transportation tariff policy of Russia. Bearing in mind that transport services
occupy an important position in total sales of market services, the fall in this sector substantiallydecreased the overall growth rate. However in the firs t quarter of this year compared to the same time
in the preceding year there was an increase in sales of transportation services as well as in almost all
other market services.
Table 3.11
Sales of Market Services
(current prices)
1998 1999
Type of service
million
LVLper
centGrowth in
1998 against
1997
(current
prices,  per
cent)million
LVLper
centGrowth in 1999
against 1998
(current prices,
per cent)Growth in the I
quarter of 2000
against the I
quarter of 1999
(current prices,
per cent)
Total 1,503.7 100 22.6 1,663.4 100 10.6 12.5
including:
repairs and technical maintenance
of automobiles; repairs ofhousehold and personal appliances 26.6 1.8 18.5 33.1 2.0 24.3 -14.0
hotels, motels, camping, short-term accommodation; public
catering 100.6 6.7 14.9 120.5 7.2 19.7 5.3
transport services (including
tourism and excursion services) 659.1 43.8 4.7 634.9 38.2 -3.7 17.6
post and communications 208.6 13.9 37.6 253.9 15.3 22.0 16.2
real estate operations 128.8 8.6 48.8 158.3 9.5 22.9 4.3
rent of machinery and equipment
(without an operator);rent of
household and individual useappliances and equipment 24.8 1.6 242.3 30.5 1.8 22.8 24.6
computers and the related
activities 28.0 1.9 72.9 39.9 2.4 42.7 12.3
commercial services 185.1 12.3 54.3 228.0 13.7 22.7 6.6
education services 26.2 1.7 41.9 34.8 2.1 32.6 7.2
health and veterinary services 32.1 2.1 7.7 31.1 1.9 -2.9 22.0WT/L/362
Page 90
1998 1999
Type of service
million
LVLper
centGrowth in
1998 against
1997
(current
prices,  per
cent)million
LVLper
centGrowth in 1999
against 1998
(current prices,
per cent)Growth in the I
quarter of 2000
against the I
quarter of 1999
(current prices,
per cent)
sewerage, waster disposal and
sanitary cleaning; culture, sports,recreation and entertainment,laundering and dry-cleaning,
hairdressers, cosmetic saloons and
other personal services 83.8 5.6 45.8 98.4 5.9 17.4 8.6
G. TOURISM
Tourism today is one of the sectors with the highest growth rate in Europe and the world.
Tourism provides essential revenues to the state budget, equalises national balance of payments,positively influences creation of new jobs and balances out the development of regions in a country.
Word Travel Organisation forecasts further growth of tourism in the world and particularly in the
region of the Baltic States (see Insertion 3.4).
Latvia may attract foreign tourists with its rich cultural and historic heritage, with nature –
still rich and with little transformation, low pollution levels despite the speedy growth of economyand urbanisation in the 20
th century. Unfortunately, specialists of tourism recognise that the potential
of tourism resources in Latvia is not fully used. This  is also proved by tourism statistics. Contrary to
the general development tendencies of tourism in the world the number of incoming foreign visitors
(incoming tourism) in Latvia not only does not incr ease but even continues going down every year (in
1999 compared to 1998 – by 2.8 per cent). At the same time the number of Latvian residents going onforeign trips (outgoing tourism) is going up rather substantially – by 15 per cent in 1999 compared to
1998 (see Table 3.12).
Insertion 3.4
World Travel Organisation’s Forecasts about the Development of Tourism.
World Travel Organisation predicts that in 2020 the total number of tourists in the world
could reach 1.6 billion instead of the present 625 million. Total expenditures of tourists in that case
would equal to 2 trillion USD per year instead of the present 445 billion.
World Travel Organisation believes that globally Europe will become the most popular target
region till 2020 where the number of tourists could reach 717 million per year thus doubling the
present number of incoming tourists. Already now, tourism contributes 5.5 per cent to the GDP of the
European Union, almost 6 per cent of total employment and more than 60 per cent of exports of
services. Till 2010 tourism directly will create more than 2 million new jobs in the EU (approximately
9 per cent of total employment). Including the positive influence of tourism on other sectors the total
effect of newly created jobs could be even bigger.
In this context quite important is the forecast of the World Travel Organisation that in the
whole Europe till 2020 exactly the Baltic sea regions  will experience the biggest growth of tourism
(based on cruises, flights and sailing, domestic bus and automobile routes, short term sightseeing in
cities, cultural tourism and roads). This means that also Latvia as a country belonging to the Baltic sea
region will have the opportunity to use the forecasted tendencies of tourism conjuncture for the
benefit of the country converting tourism into one of the corner stones of the national economic
development.WT/L/362
Page 91
Table 3.12
Number of People Crossing the Border of Latvia
(thousand people)
1993 1994 1995 1996 1997 1998 1999
Latvian residents: outgoing 2,269 1,794 1,812 1,798 1,877 1,961 2,256
Foreigners: incoming 2,446 1,944 1,633 1,750 1,842 1,788 1,738
At the same time besides the general decline in  the number of incoming visitors to Latvia
nonetheless important is the decline of the duration of average stay (number of days) of foreigntourists in Latvia and their average daily expenditures (see Table 3.13) in the latest years.
Table 3.13
Travel Expenditure and Average Duration of Stay of Latvian and Foreign Tourists*
YearNumber of tourists
having crossed the
Latvian border,
thousandsTotal foreign travel
expenditure,
million LVLAverage length of
stay, 24-hrsAverage
expenditure of one
tourist per day,
LVL
Latvian tourists
1997 1,850 167.2 3.6 25
1998 1,933 171.1 3.5 25
1999 2,207 157.1 3.3 20
Foreign tourists
1997 1,824 118.4 2.4 27
1998 1,801 98.2 2.1 26
1999 1,718 66.0 2.0 19
* data of sample survey
* Between 1997 and 1999 average duration of stay of a foreign tourist in Latvia has dropped from 2.4 to
2 days and average daily expenditure of foreign tourists – by 8 Lats (from 27 to 19). Summing up thesetwo negative factors and the already mentioned decrease in the number of visitors the total expenditureof foreign visitors in Latvia has dropped rather substantially – from 118.4 million Lats to 66 millionLats or 1.8 times. The travel expenditure balance is still strictly negative (import of travel services for
already many years is much higher than export of this service). In 1999 total expenditure of Latvian
tourists exceeded expenditure of foreign tourists in Latvia almost 2.4 times.
Main reasons for stagnation of tourism are:
- insufficient information and advertising in Latvia and foreign countries including
insufficient support to travel information centres (TIC), lack of a united TIC network
and inadequate international co-operation;
- low competitiveness of the tourism product (in the 2 and 3 star category hotels in
Riga prices for individual tourists are 13-18 per cent higher than average in Tallinn,
Vilnius, Stockholm and Helsinki15. Prices for other tourist related services, such as
public catering, rent a car, etc. are also higher than in the neighbouring countries);
                                                     
15 Price differences for hotel services are mainly created by the value added tax (VAT). A uniform VAT rate of
18 per cent is applied to all travel companies of Latvia, including hotels. At the same time, in many countriesof Europe hotels are considered to be the basic elemen ts of tourism infrastructure and lower rates are applied
to promote development of travel business.WT/L/362
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- low quality of tourism infrastructure, especially in rural areas (the majority of tourist
accommodation is low quality, unsatisfactory sanitary conditions, few places where
to play golf, tennis, ride a horse, bicycle, etc., no night life entertainment outside
Riga);
- lack of training of service providers (especially in the area of marketing), shortage of
professional skills, little language proficiency;
- no systemic surveys in the area of tourism development planning;
- lack of co-operation between regions of Latvia in the area of tourism marketing.
The aforementioned factors hindering the development of tourism may be eliminated or
mitigated if the state policy in the area of tour ism is implemented in a co-ordinated way by the
government, local authorities and travel businesses.
The responsible institution for the development of the state policy of tourism and its
implementation is the Ministry of Environment Protection and Regional Development (MEPRD) andthe Latvian Tourism Development Agency under its subordination
16. The Consultative Council of
Tourism functions as a co-ordinator of interests and opinions between the state, local governments
and private sector.
In the last three years several important documents on tourism were developed by the
government and accepted in Saeima that may leave a positive impact on the development of the wholesector. In December 1997 the government accepted the Concept on Tourism Development of Latvia
spelling out the basic principles and objectives of the development of the sector, mechanism of co-
ordinated action between the state, local government institutions, NGOs and business community in
the field of development of tourism. In 1998 Saeima adopted the Law on Tourism
17 with the objective
to provide a legal base for the development of tourism in Latvia, to establish procedures for the state,local governments and travel enterprises acting in the area of tourism and to create preconditions for
protection of interests of tourists. With the decision of the Cabinet of Ministers the list of national
programs of Latvia for implementation of economic policy in May 1999 was supplemented by a new
program – The National Program of the Development of Tourism (see Insertion 3.5 and Section 5.2).
The development of the National Development Plan (see section 5.1) in 1999 was also closely
linked with the development of the National Program of the Development of Tourism. The Plan has a
separate chapter on “Tourism”. Taking into consideration recommendation of the EU Commission
work at the revised NDP is continued in 2000, which will include also identification of priorities in
the area of tourism. Target program On the Development of Rural Tourism was developed in 2000. Its
aim is to define preconditions for the successful development of rural tourism in Latvia and tosignificantly increase the role of tourism in the promotion of rural development, employment and
income diversification. Using natural and human resources and opportunities offered by the
specificity of each region to ensure competitive oppor tunities to rest and improve health for local and
foreign tourists.
Alongside with the activities of tourism organisations on the national level quite recently
there was also growth of activity on the level of regions and local municipalities. For example, Riga
Region Development Council
18 and Riga Region Tourism Development Agency in conjunction with
the Swedish government fund “Swedfund” and the Swedish company “Stockholm Information
                                                     
16 The predecessor of the Agency was the National Travel Board and before it – Latvian Travel Council. Latvian
Tourism Development Agency was set up in March 1, 2000. The task of the Agency is to disseminate informationin foreign countries about travel possibilities in Latvia, to organise participation of Latvian travel companies and
organisations in international fairs, to create travel information offices in foreign countries and Latvia, etc.
17 On October 7, 1999 Saeima passed the Law On amendments to the Law on Tourism specifying more
precisely the legal status of the National Travel Development Agency.
18 it comprises Riga and J ūrmala cities, Tukums, Limbaži, Ogre and R īga RegionsWT/L/362
Page 93
Service” started implementation of the international project “Destination Riga”. Main aim of this
project is to create a modern travel information system in Riga region, able to satisfy the growing
demand for tourist information corresponding to the level of modern technologies. After
implementation of this project in R īga region – R īga region computerised tourism information
system will unite all Tourism Information Centres of R īga region (TIC) with their local databases
(created within the framework of this project) making this information easily available to all otherTIC. Tourist information in Riga region will become available to all users of Internet. With the help
of Swedish experience it is also planned to introduce a computerised reservation system in Riga
region, linking together and making reservations for all tourist services offered in Riga region.
“Destination Riga” will be implemented stating with January 2001. In the event of successful
implementation of this project it may be spread also to other regions of Latvia (however in rural
areas of Latvia this may be hindered by the underdeveloped telecommunications infrastructure and
so far unsettled procedure of commission charge for reservation of travel services).
Insertion 3.5
National Program of the Development of Tourism.
The previously passed documents – the Concept of the development of tourism and the Law
on Tourism should be treated as a legal base for the development of the sector. The National Program
of the Development of Tourism, which should be worked out in 2000, will contain a medium term
(2000-2010) action plan to promote the development of tourism. The aim of the program is to identify
strategic development directions for the creation and development of a competitive tourism where,
through attraction of tourist flows and increase of revenues, it will be possible to promote the
development of the national economy and growth of public welfare. Program priorities are: to co-
ordinate the development of the sector in different areas (tourism education and research,
development of tourism product and infrastructure, travel marketing, etc); to reinforce the institutional
base of tourism and to perfect legal base of tourism for the promotion of business activity; to develop
the incoming tourism (export of travel services), to create a positive image of Latvia; to develop local
tourism (renewal of the movement “Travel around your native land”). Program developers have
calculated that 15.8 million Lats will be needed for implementation of the program between 2000 and
2010 (including the national co-financing – 10.7 million Lats and funds of the EU Pre-Structural
funds – PHARE, ISPA, SAPARD – 3.3 million Lats). Providing program with an adequate financing
the economic effect of the program could be as follows: the number of foreign tourists in 2000-2005
would go up by 5 per cent or 95-122.5 thousand persons per year, 2006-2010 – by 7 per cent or 179.6-
269.1 thousand persons per year reaching 3.63 million foreign travellers in 2011. It is projected that
total expenditure of foreign travellers in Latvia in 10 years could reach 316 million Lats per year. 5-26
thousand new jobs per year could be created in the result of implementation of the program.
H. INFORMATION TECHNOLOGIES
Information technologies (IT) is a set of methods for information collection, transformation,
storage and transmission used in data  processing and communication systems.
According to the classificatory of the general economic activities (NACE), information
technologies may be mostly attributed to such sub-sectors as “Office equipment and computer
production” (from the “Manufacturing” sector), “Telecommunications” (from the sector of
“Transport, warehousing and communications”) a nd “Computers and the related activities” (from
“Operations with real estate, rent and other commercial activity”).
Summarised information about the three sub-sectors shows that totally in Latvia in 1999 there
were more than 500 private companies working in the area of IT with more than 3000 employees.WT/L/362
Page 94
Outputs of the sub-sector “Office equipment and computer production” went up speedily in
1999 and more than twice exceeded the level of 1998.
There are no accurate data about the sub-sector of “Telecommunications” at a disposal of
CSB as statistical information is aggregated on the level of the sector “Post and communications”
where the share of the mentioned sub-sector is quite small. However, with the growth of the number
of Internet users (see Insertion 3.6) and increased data flows we may project growth of the share of
this sub-sector.
In the sub-sector “Computers and the related activities” the highest share belongs to software
development – approximately 75 per cent. According to the data of CSB, the added value in the sub-
sector of “Computers and the related activities” in 1996 reached 5.8 million Lats or 0.2 per cent of
GDP (newer data are not available). According to estimation of the Ministry of Economy, the added
value in this sector in 1997 was 8.6 million Lats or 0.3 per cent of GDP, in 1998 – 12.6 million Lats
or 0.4 per cent of GDP.
According to the data of the national balance of payments, exports of the sub-sector
“Computers and the related activities” in 1998 was 6.1 million Lats, in 1999 it went up till 13.9
million Lats and imports, respectively, was 4.2 million and 3.4 million.
Growth of exports in 1999 may be explained by the fact that prices of products exported by IT
companies have lately risen alongside with the improvements in quality. Still these prices are
1.5-3 times lower than in the Western Europe. Almost all biggest IT companies already have ISO
certificates or are in the process of getting ISO certification. However, net profit of companies in 1999
has on the whole gone down which may be explained by the decline of the exchange rate of the
EURO, growth of wages caused by shortage of qual ified specialists, investments in marketing and
training of employees.
Insertion 3.6
Internet.
According to the study of “BMF Gallup Media”, the number of Internet users in Latvia in
1999 was 113 thousand, which is approximately 6 per cent of all Latvian population (Estonia – 21 per
cent, Lithuania – 5 per cent). Data of questionnaire show that the majority of Internet users in Latvia
are young people between 15-19 (approximately 36,000 persons); persons of older age use Internet
extremely seldom. According to occupations – mostly specialists, managers and people who learn use
Internet. Approximately 4 per cent of Latvian people use Internet on a regular basis.
According to the data of April 2000 of international co-operation organisation of Internet
users – RIPE, in 2000 in terms of Internet coverage Latvia occupies the 35th position in Europe
based to the number of resource computers (one resource computer per 125 persons), Estonia is in
the 17th position and Lithuania – 39th.
At present Internet services in Latvia are provided by almost 30 companies. More than 20,000
computers are switched to Internet, there are about 1000 information servers and 10,000 home pages.
Almost all ministries and most important govern ment institutions have their own home pages on
Internet.
The number of credit card users, cash machines and trading outlets where payment may be
made with credit cards is going up. This is also  supported by the fast development of e-commerce,
which is proved by the rapid growth of the number of Internet shop and bank users at the beginning of
2000.WT/L/362
Page 95
Positive evaluation should be given to the fact that in 2001 it is planned to create the national
information portal on Internet. However, at the same time, the official government newspaper
“Latvijas V ēstnesis” where all the laws and decisions made by Saeima and the government are
published is available on Internet only for payment.
In the NGO centres in almost all towns and cities of Latvia Internet and computers may be
used free of charge and in the majority of cases centre staff is able to provide consultation as well.
There are no computers in nearly half of Latvia’s schools and permanent connection that does
not require telephone calls through a modem exists in only about 90 schools. This is explained by the
state of provision of schools with computer equi pment. At the end of 1999 there were approximately
9300 computers in 1245 Latvian schools, including primary, elementary and vocational schools.
About 20 per cent of all computers are old-fashioned models that cannot be adequately used in
learning process. There is, in the average, one new generation computer per 47 school students.
Within the scope of the information project of the Latvian system of education, schools in Latvia in
1999 received 2700 modern computers with multimedia possibilities. The projects will be intensively
continued also in 2000.
To establish a united automated system of library information in Latvia in 1997 a non-profit
organisation, state limited liability company Library Information Network Consortium was
established. This company now implements the project “The United Latvian Library Information
Network LATLIBNET” envisaging introduction of a uniform information system in libraries of
national importance and development of the technical base for the national electronic library filing
system.
Public libraries are important centres of search and obtaining of modern data. There are
computers in all 32 public libraries, however more than half is not connected to Internet.
Contribution of several public organisations and funds in popularising Internet is quite big. At
present Soros Foundation – Latvia to support and reinforce open society creation in Latvia is
implementing a project of I-points where it is planned to support establishment of more than 25 public
Internet access points in all the territory of Latvia and especially in rural areas and small towns. There
points are being opened in libraries, schools, adult education centres, etc. and their objective is to let
people learn and use, free of charge or for small payment, Internet possibilities, encourage civil
society formation, lifelong learning, development of rural areas.
According to calculations made by companies of the sector – to form a powerful IT services
export industry, the scope of training of computer science students should be increased at least
fourfold, thus state financing for computer science specialities should every year go up by at least 0.6
million Lats.
Although the number of young people willing to learn specialities linked with information
technologies – information science, computer science – in the last 2 years has remained as 3.4 per centof all those who are willing to study the percentage of students enrolled in these specialities in high
schools of Latvia declines (in 1998 – 3.8 per cent, in 1999 – 3.4 per cent). The same as in other
specialities, the number of students enlisted in pay groups becomes higher (in 1998 by 20.3 per cent,
in 1999 – 29.2 per cent).
There is a threat that in future there might be an explicit shortage of highest qualification IT
specialists. For this reason the inter-ministerial working group was established that together with
academia would develop a concept envisaging training of such specialists immediately after
graduation when implementing research projects.WT/L/362
Page 96
In turn, State Employment Service in 2000 plans to increase financing for training of
computer operators and record-keepers till 260 thousand Lats.
According to the data of input – output tables, in 1996 24.5 million Lats were invested in the
office equipment and computers in the total national economy, in software – 3.2 million Lats (newer
data are not available). These data prove that companies to purchase computer equipment spend much
more than to buy software. According to estimations of the international anti-piracy organisationBusiness Software Alliance, at the beginning of 1998 87 per cent of all copies of software used in
Latvia were illegal. However the situation has a tendency to improve. On 6 April 2000 Saeima passed
the law On Copyright regulating use of computer software and databases. Economic police has
become more active as well – in 5 months of 2000 it has initiated 11 criminal cases for violation of
copyright and neighbouring rights, the same number as altogether in 1999.
Foreign investments in the fixed capital of the companies registered in Latvia and working in
the sector of “Office equipment and computer production” in 1999 have gone up by 0.6 per cent incomparison with 1998 and reached 143 thousand Lats of which 99.4 per cent were made by the US
companies. In turn in the sub-sector “Computers and the related activities” in 1999 compared to 1998
foreign investment went up 2.9 times and reached 478 thousand Lats, yet still out of all foreign
investments in Latvian companies this amounts to only 0.1 per cent. Again, also this sub-sector
receives the majority of investment from the US companies. It is expected that in 2000 the number offoreign investment in IT companies in Latvia will  substantially go up proved by several big share
purchase cases of Latvian companies in the first half of 2000.
Conference “Latvia on the road to information society” was held in 1996 discussing the need
for a united and future oriented public policy for the support of the establishment of information
society. The ideas voiced at the conference were put at the start of the national program onInformation (see Section 5.2) accepted by the Cabinet of Ministers in 1999.
The most important element of the National Program on Information Science is a
megasystem – logical association of all information systems of national importance (see
Insertion 3.7).
Insertion 3.7
Creation of an integrated national importance information system (megasystem).
According to the national program On Informatio n Science, it is planned to unite information
resources of all components of this megasystem  using the National Importance Data Transmission
Network. The kernel of megasystem will consist of the following information systems: Population
Register, Enterprise Register, Tax Payers Register, Ca dastral Register, Information system of Road Traffic
Safety department. Apart from this, there are at leas t 30 sectoral information sy stems addressing problems
of one sector, ministry, region or one specific area and using to a greater or lesser degree data of other
information systems – therefore it is planned to unite all these into one system.
14 March 2000 the Cabinet of Ministers adopted “Regulations on the Creation of the
Integrated National Importance Information System (Megasystem)” envisaging that public and local
government institutions, companies, statutory enterprises and public organisations when developing
and implementing projects of information systems, should use the data united in the single
megasystem. These regulations prohibit to request or collect from people or legal entities, also
aggregate and repeatedly store the data that are available in any of information system linked together
in the single megasystem.
Direct access to register data covering the whole territory of Latvia and guaranteeing fast
speed of data transmission and request answer time s will be provided by the state non-profit joint
stock company “Public Information Network Agency”.WT/L/362
Page 97
The national program On Information envisages that activities will be basically implemented
with the support of the Public Investment progra m (PIP). PIP database now includes 106 projects in
the area of information and communications. At the moment 49 projects have reached the phase of
implementation.
The Information Department of the Ministry of Transport evaluates all investment project
applications in the area of information and telecommunications respecting the priorities set out in the
national program. The aggregated information shows that the allocated financing from PIP for
telecommunication and information projects in 1997 was 1.4 million Lats, in 1998 – 11.9 million
Lats, in 1999 – 13.4 million Lats and in 2000 10.3 million Lats. Project applications for 2001 amount
to 40.1 million Lats, however the realistic possibility to provide finances from the state consolidated
budget in 2001 equals to only 11-17 million Lats.
Specialists consider that such financing cannot ensure successful implementation of the
National Program On Information which says that IT infrastructure creation will need more than 200
million Lats, therefore the first priority will be given to those projects that yield the biggest economic
benefit.
Evaluating the situation in local government in 1997 the conclusion was made that
approximately half of all local governments do not have computer equipment and only approximately
30 local governments had created their home pages on Internet. To address this situation in 1998 work
at the investment project “United Information Systems of Local Governments” was started (see
Insertion 3.8) linked with the planned elimination of legal residence address registration. The reform
will be implemented together with the introducti on of new, machine-readable passports, identity
cards, personalisation techniques and software.
Insertion 3.8
Project “United Information System of Local Governments”.
The task of the project is to ensure that all local government benefit from opportunities
provided by information developments. The initial fe asibility study identified that local governments
need data from state registers in order to fulf il the following functions: territorial development
planning, support to business activity, administration of real estate tax, registration of people in their
place of residence, marital status registration, etc.
In turn, local governments had information on registration of marital status and place of
residence, changes in Population register, school age children, provided state and municipal social
assistance, financial management of local governments, real estate, other statistics necessary for
implementation of various public functions.
The project is important because it creates a single information system for all local
governments. Information on residents, real estate and business activity forms the base of information
systems of local governments. To secure successful operation of the system it should be linked with
four state information megasystem registers: Population Register (Ministry of Interior, Citizenship
and Migration Affairs Administration), Real Esta te Register (State Land Service Land Cadaster
Centre), Enterprise Register (Ministry of Justice) and Tax Payers Register (State Revenue Service).WT/L/362
Page 98
Total project costs equal to 15.87 million Lats including: investments from the state budget –
7.21 million Lats, contributions of local governments – 3.3 million Lats, assistance – 5.36 million
Lats. The project is divided into the following sub-projects: “Data”, “Equipment”, “People” and
“Support”. The most important is “Data” sub-project, as it foresees the study of data structures,
creation and organisation of data exchange standards, development of applied software, etc.
The biggest project cost is purchase of computer equipment as it is planned to create
approximately 100 computer networks with the averag e of 50 workstations in a network. It is also
planned to train local government leaders, IT specialists and users.
Legislation in the area of IT is streamlined according to regulations of the EU, WTO and
other international organisations.
Several legislation documents are now in the process of drafting. “Regulations on the Lists of
High Technology Products and Softwa re” are prepared for the review in the Cabinet of Ministers.
These regulations will stipulate the corporate income tax relieves for companies where software
products in net turnover in the year of taxation exceed 75 per cent and who have the ISO certificate.
At the moment the concept of the legal status of electronic documents in Latvia is being
developed.
Cabinet of Ministers on 8 June 2000 conceptually approved the creation of the punishment
(penal) register in the nearest years. In the first phase of the punishment register it is planned to
aggregate information of all persons having received criminal punishment and in the second phase –to create a register of administrative penalties. At present public institutions have difficulties in
getting information about punishment as this information is contained in personal cards.
The National Council on Information Society has been set up with the task to develop
recommendations for the government in the area of implementation of big strategic projects and
identification of the most important areas for support of the development of the society.
IV. PRIORITIES AND REFORMS OF ECONOMIC POLICY
A. I
NTEGRATION INTO THE EUROPEAN UNION
1. Present Situation
In Helsinki, December 1999, the EU Council adopted the decision to start accession
negotiations with Latvia in 2000. Formal negotiations with Latvia and the so-called Helsinki group19
countries were started on 15 February 2000. This marks the start of a particularly active and important
phase in the process of the EU enlargement as accession negotiations are being carried out with the 12
countries and progress in the discussions will be determined not only by the self determination of a
country but rather by real achievements, both in terms of transposition of the EU legislation (acquis
communautaire) and its implementation.
To be better prepared for negotiations the EU Negotiations Delegation with the active
involvement of the Saeima European Affairs Commissi on works at the development and approval of the
official negotiation position of Latvia. On February  21, 2000 the European Integration Council approved
the first 11 official positions of Latvia for accessi on negotiations into the European Union in such
legislation chapters as “Free movement of goods”, “B usiness legislation”, “Statistics”, “Industrial policy”,
“SME”, “Research and development”, “Education an d training”, “Telecommunications and information
technologies”, “Culture and audio-visual policy”, “Consumer and health protection”, “Common foreign
                                                     
19 Bulgaria, Latvia, Lithuania, Malta, Romania, and Slovakia.WT/L/362
Page 99
and defence policy”. By the beginning of June 2000 the position for accession negotiations was approved
also for chapters on “Customs union”, “External economic relations” and “Competition policy”.
Latvia, the same as the first six countries who started their accession negotiations in 1998,
also started with the so-called “easy” chapters. On 15 March 2000 the Committee of Permanent
Representatives (COREPER) following the advice of the European Commission adopted the decision
to open 8 chapters of legislation in negotiations with Latvia. They are: “SME”, “Research andDevelopment”, “Education and training”, “External economic relations”, “Common foreign and
defence policy”, “Competition policy”, “Cultu re and audio-visual policy”, “Statistics”.
Before the accession negotiations, screening of the conformity of the national legislation to
the requirements of the EU is carried out in all ch apters of the Community legislation. This time it is
done in the written form. During the screening exercise a particular attention is paid to the position of
a candidate country in regard to legislative acts passed in 1999 as earlier screening discussions were
focussed on legislation before 31 December 1998.
In 2000 alongside with the accession negotiations, the compliance of Latvia to the criteria of
the EU member-state status as defined in the EU Council meetings in Copenhagen and Madrid will be
reviewed. The implementation of obligations of Latvia within the Association Agreement is also
addressed.
The EU and Latvia Association Council set up within the third Association Agreement met on
15 February 2000. The meeting discussed the question of readiness of Latvia to joint the EU
respecting the second report published by the European Commission in October 1999, the
implementation of the updated in December 1999 Accession Partnership and the National Program for
Integration into the EU. The Association Council stated that Latvia respects the Copenhagen political
criterion, there is a functioning market economy that in the medium term may be able to cope with thecompetition pressure from the EU, assuming that Latvia will be able to maintain its macroeconomic
stability and will continue structural reforms. These and other topical questions will be discussed in
greater detail in the meeting of the Association Council on 16 June 2000.
To review priorities of candidate countries in the process of preparation for accession to the
EU the Accession Partnership
20 document was updated at the end of 1999. The new priorities that
have to be implemented in the short and medium term were (alongside with the Accession
Partnership) approved at the Helsinki EU Council meeting on 10 December 1999.
At the beginning of 2000 the revision of the National Program for the Integration into the EU
(NPIEU) was started to absorb the achievements and plan future work after the new EC Progress
Report and the approval of the updated Accession Partnership. The same as before the NPIEU willcover specific, limited in time activities that th e Latvian government has committed to implement to
ensure the conformity with the EU Copenhag en and Madrid criteria (see Insertion 4.1).
                                                     
20 The Accession Partnership document was for the first time drafted in 1998. It highlighted activities to
eliminate shortcomings identified in the opinion of the European Commission in 1997. The Accession
Partnership is regularly updated. The fulfilment of its priorities will be an indicator to evaluate progress ofLatvia in the accession to the EU and will provide basis for granting financial and technical assistance fromthe EU.WT/L/362
Page 100
Insertion 4.1
National Program for integration into the EU.
The NPIEU spells out the activities to ensure functioning of market economy and ability of
sustain competition pressure from the EU. The activities are aimed:
- to ensure the development of economy and ability to resist competition in the domestic
market of the EU by creation favourable environment for the establishment of small and
medium sized enterprises and their development;
- to improve a system of regulation of public services;
- to privatise state and municipal property and restructure enterprises;
- to create a favourable investment climate;
- to raise competitiveness of industry;
- to co-ordinate foreign policy of Latvia with the basic EU positions, etc.
In the process of preparation for tasks and duties of an EU member state the NPIEU foresees the
following activities:
- enlargement and maintenance of metrological base;
- conclusion of the European Conformity Assessment Agreement (ECAA);
- the development of the national conformity assessment system according to the “new
approach” directives harmonised with the requirements of the national economy and the EU;
- consumer rights protection in Latvia; creation of a EU compliant market surveillance system
to provide protection of life and health of consumers;
- adaptation of the surveillance and protection measures within the Latvian competition policy
in accordance with the requirements of the EU internal market, to reinforce the
competitiveness of Latvian businesses in this market;
- perfection of the state statistical indicators in line with the EU legislation and the “Statistical
Summary” developed by the EU Statistical Office (EUROSTAT), requirements of other
international institutions;
- Population Census of 2000 and Agricultural Census of 2001 within the World Census
processes;
- improvement of the quality of statistical data by perfecting information system in the area of
statistics;
- study, evaluation and gradual implementation of the internal energy market regulations
(interaction of market creation policy and competition policy, security of deliveries,
environment protection, rational use of resources), etc.
NPIEU sets out activities to prepare the community and public administration for membership
into the EU.
In February 2000 Saeima approved the Strategy for the Integration into the European Union.
The goal of the strategy is to reach uniformity of action and understanding between the government
institutions and the public about the accession to the EU. The strategy foresees a uniform planning of
the integration process and offers the decision-making parameters in the EU policy matters. Thestrategy spells out preconditions for successful accession into the EU and strategic directions of work,
such as integration of the society, economic integration, sector, environment and regional
development, welfare, justice and home affairs, culture and education. The Strategy for Integration in
the EU will be implemented when Latvia accedes to the EU.WT/L/362
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Insertion 4.2
New developments in the EU structures.
From 1 January 2000 Portugal has taken over th e presidency from Finland for the period of
six months declaring the eastern enlargement of the EU as one of the key priorities. After Portugal the
presidency in July 2000 will be passed over to France.
In the meeting of the EU Council on 3-4 June  1999 the necessity to resolve the institutional
questions still open after the Amsterdam Agreement were discussed. For this purpose the EU member
states in 2000 started work within the framework of  the intergovernmental conference to finalise the
institutional reform and approve the necessary amendments to the Agreements prior to the
enlargement. The Intergovernmental conference discussed the questions of the composition and size
of the European Commission, vote proportions in the EU Council, possible enlargement of the
qualified majority voting cases and other questions.
2. The EU Pre-Accession Financial Assistance
Figure 4.1
EU Pre-Accession Financial Assistance Instruments
ISPA SAPARDEU pre-accession financial assistance instruments
(2000-2006)
ES PHARE program
Cross border
cooperation
programMulti-country
programsNational
program
Starting with 2000 Latvia can benefit from assistance within 2 Pre-Structural funds:
ISPA – Instrument for the Structural Policies for Pre-accession –  the objective of the fund is
to financially assist future member states in the areas of transport and environment protection thushelping them to implement requirements of the Acquis in the area of environment protection;
SAPARD – Special Action for the Pre-accession for Agriculture and Rural Development the
priorities for support from this fund is the increase of market efficiency, improvement of quality and
health standards promoting creation of new jobs in rural areas. The Fund will also support growth of
efficiency in farms, processing and distribution of agricultural production, promotion of quality of
products, diversification of economic activities in rural areas.
The third EU pre-accession financial support instrument that gave also in the past a
considerable support to Latvia is the EU PHARE program , which is continued also in 2000.
Between 2000 and 2006 the following priorities  will be realised with the EU PHARE
program:
Institutional build-up – assistance to public administration institutions to introduce the
Community legislation (acquis communautaire)  and to prepare for participation in various EUWT/L/362
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policies. Approximately 30 per cent of the total funding will be allocated for implementation of this
priority:
- investments – support will be focussed in two directions:
- to strengthen administratively regulating infrastructure, coming closer to the EU
standards and regulations;
- to encourage economic and social cohesion with activities of the European Regional
Development Fund and European Social Fund thus at the same time getting ready to
work with the EU Structural Funds which will become available to Latvia after the
accession.
The financial assistance from the EU is granted on the basis of the national (if the whole
territory complies with the objective status) or regional (if only certain regions comply with the
objective status) national development plan worked out by a country (candidate country). It means
that resources of pre-structural funds are allocated not to a certain industry or sector but rather forpriorities defined in the development plan.
In December 1998 the development of the National Development Plan was started in
connection with PHARE program activities – “PHARE Special Preparatory Program – SPP for Work
with the EU Structural Funds in Latvia/Technical Assistance”. In 1999 Latvia worked out the National
Development Plan (NDP)
21 for the time period of 2000 and 2002. NDP comprises the following
chapters:
- promotion of business activity,
- regional development,
- tourism,
- agriculture, fishing and rural development,
- economic infrastructure, and
- development of human resources and employment.
The basis for the analysis was the recommendation of the European Commission adopted in
June 1999 on the development of the National Development Plan in candidate countries. In January
1999 when the development of NDP was started the involved institutions did not have the informationor guidelines on the content or form of this document. Both the Ministry of Finance
22 and other
institutions involved in this work used the experience, structure and information included in similar
plans of the EU member states (Nat ional Development Plan of Ireland).
Insertion 4.3
The Policy of Objectives of the EU Structural Funds for 2000-2006.
Three development Objectives have been identified starting with 2000 in order to
decentralise, simplify the implementation of the activities of Structural Funds and to increase
concentration of assistance, efficiency and to reinfo rce control with in the EU Structural Funds which
will in essence cover all the previous six Objectives . Presumably, all the territory of Latvia after the
accession will benefit from the EU Structural Funds within Objective-1 as per capita GDP in Latvia is
lower than 75 per cent of average in the EU. It is possible that already at the end of 2000 Latvia will
start receiving assistance as Objctive-1 territory.
                                                     
21 The Cabinet of Ministers approved the draft of the National Development Plan on October 12, 1999.
22 Initially the Ministry of Finance led the development of the NDP. Later with the decision of the Cabinet of
Ministers of March 7, 2000 the task of the update of the program was given to the International AssistancePrograms Co-ordination Board.WT/L/362
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Objective-1: to promote the development of backward regions and facilitate structural reforms.
The title of this Objective has not changed and also in future it will remain the most important
Objective of the EU structural policy. The same as before, Objective-1 regions will be identified on
NUTS II level and the assistance will be provided to those territories where average per capita GDP is
smaller than 75 per cent of the average in the EU. Territories which earlier where included in
Objective-6 will be added to Objective-1. It is predicted that the new Objective-1 will cover 20 per
cent of the EU population.
Objective-2: economic and social conversion in territories endangered by the industrial and
agricultural decline.
The previous Objective-2 and Objective-5b will be united in this Objective in the closest
programming period. Additionally it is planned that also other areas where there are serious problems
due to the lack of diversity of economic activity may get the support within this Objective. Ovjective-
2 territories will cover not more than 18 per cent of the EU nationals. Objective-2 regions will be
divided into 4 groups: industrial territories, separate cities, rural areas, fishing regions.
Objective-3: human resource development.
The support will be given to activities of fighting long term unemployment, integration into
labour market of young people and persons excluded from this market. The new Objective-3 will
unite the previous Objectives-3 and 4.
At present the NDP is fully redesigned taking into consideration recommendations of the
European Commission trying to use as much as possible SWOT analysis (strengths, weaknesses,
opportunities, threats). Having analysed the already developed strategic planning documents the
SWOT analysis of the following sectors was made: industry, construction, agriculture, transport,
energy, environment protection, communications, financial sectors, education, culture, welfare,
science, research and innovation. Each sector is divided into even smaller subsections. SWOTanalyses of sectors were evaluated identifying the necessity to include the respective sector in the
further process of development of NDP.
Two working groups have been set up – NDP management group  and National Development
Plan Unit  on the basis of the decision of 7 March 2000 of the Cabinet of Ministers and taking into
account the experience of the proceeding year. NDP management group has the right to approvemethodology of NDP preparation, NDP drafting, tim e limits and the documents linked with the NDP
to submit them to the Cabinet of Ministers. The Special Tasks Minister for Co-operation with
International Financial Institutions leads the group. NDP unit carries out daily work, analyses the
strategic planning documents and prepares reviews of these documents. The unit is responsible for
qualitative preparation of NDP, its perfection. It should follow the process of implementation of
priorities identified in the program. A representative of the International Assistance Program Co-
ordination Board leads the unit.
In future
23 the plan will be viewed as a medium term national strategic planning document to
analyse the social and economic situation and to identify the development priorities of the state for the
new six years and activities to be implemented to reach the development objectives. The National
Development Plan will also be used as a base for granting of public investments (government, local
governments, foreign emergency aid, government guarantees).
                                                     
23 The status of the strategic planning document and the definition of NDP was given in the decision of the
cabinet of Ministers of March 7, 2000.WT/L/362
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B. NATIONAL PROGRAMS
On 12 April 1994 the government passed the  Concept of National Programs  and the list of
national programs for implementation of economic policy. Originally there were 10 programs
included in the list, at present there are 15. The Concept on national programs says that the list of
programs may be supplemented or changed in line with the economic situation in the state and the
government policy. On 9 May 1995 the Cabinet of Ministers passed regulations No.129 “On theProcedure of Development and Implementation of National Programs”.
Out of the 15 programs presently included in the list 10 have been developed and accepted in
the Cabinet of Ministers according to the procedure outlined in the said regulations.
Insertion 4.4
List of National programs.
The drafted/implemented national programs:
National program of Quality Assurance;
National program of the Development of Energy Sector;
National program of Transport Development;
National program: Population of Latvia (National Health and Social Security);
National program for the Development of Small and Medium Sized Enterprises;
National program on Information Science;
National program on Culture;
National Program on Biological Diversity;
National Program on Foreign Trade;
National Program on Road Traffic Safety.
Programs in the process of drafting:
National program for Protection of the Environment of the Baltic Sea;
National program on the Regional Development of Latvia;
National program of Construction;
National program: Production and Utilisat ion of Biological Fuel in Latvia;
National program on Development of Tourism.
National Program of Quality Assurance
Ministry of Economy is the responsible institution for implementation of this national
program (see also Section 5.7.1). Activities of the national program can be divided into four basic
directions. Legislation (amendments to the law “O n Conformity Assessment”, “On Safety of Goods
and Services and Liability of A Producer or Servi ce Provider” have been drafted, work at perfection
of legislation regarding food is going on, including introduction of risk analysis in critical points and
registration of food companies). Standardisation (implementation of the public program
“Development of Standardisation in Latvia”, acceptance of new ISO rules into the status of nationalstandards of Latvia). Metrology (development to the concept, preparation of the public program
“Development of Metrology in Latvia”). Conformity assessment – certification and accreditation
(evaluation of the optimal model of the quality assurance infrastructure has been done and proposals
for future development in the area of metrology developed). Quality assurance systems (perfection of
criteria of the quality award of Latvia in line the European model of excellent business practice).Protection of consumer rights (establishment of the Consumer Information Centre). Information and
training (training of Latvian businessmen on the requirements of the EU and WTO on qualityWT/L/362
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assurance and conformity assessment) and international co-operation (work at analytical assessment
of Latvian legislation in the area of the EU legislation on the free movement of goods and protection
of consumers and health).
The National Program on the Development of Energy Sector
The responsible institution is the Ministry of Economy. Reconstruction of Jelgava heat supply
system has been completed in 1999 thus reducing heat losses. PJSC Latvenergo  continues work at the
Daugava cascade reconstruction (will be completed in 2001) and the replacement of equipment in
high voltage substations. Legislation on oil extraction and licensing is being streamlined (to be
completed till 2002). Energy Efficiency Fund has be en established to introduce projects of energy
efficiency raising on favourable credit conditions. II phase of peat extraction and utilisation program
has been started to ensure use of local fuel as an energy source. State budget resources including also
guaranteed government credits and funds are used to carry out the said activities.
The National Program of Transport Development
This program is implemented by the Ministry of Transport. The National Program of
Transport Development consists of the following activities. Road traffic (daily maintenance of state
roads, reconstruction, and subsidies to regular passenger transportation by bus in rural areas,
development of new traffic rules). Railway and railway stations (maintenance of rail track,
modernisation of the telecommunication network of Latvian railway, repairs of electrical and dieseltrains, reconstruction of railway station buildings). Sea ports (construction of wood export terminal in
Krievu island and oil terminal in R īnuži, building of Daugavgr īva access channel, I phase of dredging
in Liepāja port, reconstruction of several berths in Ventspils free port, introduction of global sea
accident communication system in Latvia) and Aviation (enlargement of the network of access roads
to airport Riga, reconstruction of passenger terminal). This national program does not receive directfinancing – funds are given to specific projects. The experience of program co-ordinators is that
financing of implementation of activities is optimal when various sources of funding are used (state
budget resources, special budgets, credits, comp any resources, private capital, EU PHARE funds).
These resources are combined respecting the spec ificity of each concrete activity. According to
information provided by program co-ordinators, approximately 150-200 million Lats are annuallyspent in Latvia for maintenance and development of transport.
The National Program “Population of Latvia (National Health and Social Security)”
The program is prepared by the Ministry of Welfare. The program highlights three basic
chapters “Health”, “Labour” and “Social Security”.  Within the “Health” chapter there are different
activities in the process of development. Among them, creation of the drugs monitoring system;implementation of the effective policy “Pharmaceuticals at a discount” in the primary health care;
promotion of the development of voluntary health insurance system aimed at participation of a patient
in health care. A single health care financial model is being worked out to make rational use of
resources at the same time increasing the availability of medical services and reducing the share of
patent contributions to receive medical service. International co-operation of Latvian pharmaceutical
producers is encouraged. Among practical activities – there is AIDS prevention epidemiological
surveillance and restriction of AIDS proliferation activities, etc.
In the “Labour” chapter – the program document “State Policy in the Area of Safety of
Work” is developed respecting the requirements of the EU, the present possibilities and the
development forecasts. Minimum wage was increased from 42 to 50 LVL, job description lists
and information material on training possibilities were published. Long term unemployed were
involved in activities of Job Seekers’ club. Temporary public works were organised; pre-retirement age people were involved in social care and paid temporary public work; retraining
courses and employment schemes (1999-2001).WT/L/362
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The chapter on “Social Security” focussed on amendments in the current legislation. New
legislation in line with the concept on integration of invalids in the society was developed, crisis
centres’ network (1998-2003) was opened, the system of social assistance benefits simplified
(pensions in Latvia have gone up in 1999 in the average by 13.3 per cent in comparison to the
preceding year). These projects are mostly financed from the state and local government budgets,
state social insurance funds, State Property Priv atisation Fund, the World Bank and other foreign
assistance resources.
The National Program for the Development of Small and Medium-Sized Enterprises
The responsible institution for this program approved in 1997 is the Ministry of Economy
(see also Section 5.5). The most significant achievement in 1999 in the opinion of program co-
ordinators was the acceptance by the government the concept of crediting of small and medium-sized
enterprises. To implement this – in 2000 state guarantees for the amount of 3.2 million Lats were
granted. Important is also the concept on the support to representative organisations of Latvianbusiness with the creation of 19 expert’s in different sectors of national economy. In April 1999 the
financial assistance (to the Latvian Guarantee Agency) from the European Commission – 700
thousand EURO as a contribution into the reserve capital was received and 500 thousand Lats from
the state budget. This will allow to start real credit guarantee providing process for small and medium-
sized enterprises.
The National Program on Information Science
The responsible institution for the implementation of the program is the Ministry of Transport
(see also Section 4.8). The creation of the nation- wide data transmission network was completed
within the scope of this national program covering the total territory of Latvia (almost 60 per cent of
financing received at the beginning of 2000). The project of the Baltic States government datatransmission network was completed to ensure ex change of information between administrations of
the states. Access to international networks was provided and a united Judicial Information System
developed which will promote efficiency of work of  the judiciary. The information system of State
Revenue Service and Customs policy implementation has been developed. State Treasury
modernisation project was carried out. Information System of Social Assistance institutions wasdevised. Within the scope of the Latvian education information system purchase of computer
equipment and the information system on the general education were accomplished. United
environmental data information system and a united Latvian library information network
LATLIBNET were developed. Sources of financin g – Public Investment Program state budget,
PHARE resources.
The National Program on Culture
The responsible institution is the Ministry of Culture. At the beginning of 2000 the Cabinet of
Ministers approved the structure of the national program and subprogram principles. Subprograms on
Cultural Heritage, Music and Dance, Traditional Culture and Crafts, Museums were approved.
The activities and results of the program implementation are: Cultural Heritage (inventory of
the historical centre of Riga, surveys of cultural monuments, streamlining of cultural and historic
environment), Theatres (transformation of state-founded theatres into non-profit organisations),Visual Art (opening of the Latvian Centre of Contemporary Art, establishment of an inter-institutional
design institute, international exhibition projects), Films (film production), Traditional Culture
(international dance festival “Sudmali ņas”), Cultural education (development of lesson plans,
accreditation of art and music schools), Literature (support to literature, popularisation of original
literature, promotion of new works and authors), Museums (national information network,information publications), Libraries (the draft legislation on libraries, project of a single information
network, construction project of the National Library). Sources of funding – state budget, PIP, CultureWT/L/362
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Capital Foundation, foreign partners, budget of local governments, budget of the Ministry of Culture,
“Leonardo da Vinchi” programs, etc.
The National Program on Biological Diversity
The responsible institution for the development of this program is the Ministry of
Environment Protection and Regional Development. The drafting of the program is co-ordinated by
an inter-ministerial working commission. The program was accepted in the Cabinet of Ministers in thefirst half of 2000. The program consists of three parts: environment protection (organised
international conference “On biological diversity” in Riga, worked out the national program on
biological diversity), sustainable use of natural resources (Engure National Park, Lub āna wetland
integrated management plan, draft of Ķemeri national park environment protection plan developed),
environmental policy means and preconditions for introduction of the national program of biological
diversity (laws on Tei či, Krustkalns, Gr īņi and Moricsala nature reserves and Sl ītere national park).
Financing to implement these activities was rece ived from the Environment Protection Fund and
Danish government support funds.
The National Program on Foreign Trade
The responsible institution for the development of this program is the Ministry of Economy.
The program was approved by the government in December 1999. The program is focussed on
implementation of the following groups of activities: provision of information (accumulation of dataon foreign trade of Latvia, analysis of information flows), multilateral and bilateral international
relations (participation of Latvia in WTO, integration into the EU, free trade agreements, united
economic environment of Baltic States, bilateral economic relations with the United States), financial
instruments (export credits, guarantees, insurance), internal market surveillance (antidumping, internal
market protection measures, compensation measures), promotion of competitiveness (trainingprograms for Latvian enterprises, support programs to Latvian exports’ marketing) and international
marketing (participation in international fairs and trade missions, popularisation of the image of
Latvia in EXPO 2000). The activities are financed  from PHARE, Danish public assistance fund, State
Property Privatisation Fund, Ministry of Economy, and resources of the Latvian Development Agency
budgets.
National Program on Traffic Safety
The responsible institution for this program is the Ministry of Transport. On 25 January 2000
the program was approved in the Cabinet of Ministers and now is started to be implemented.
It is planned to improve traffic safety working in three main directions: principles that
guarantee traffic safety, control over traffic safety and the system of reduction of consequences causedby traffic accidents.
The National Program for the Protection of the Environment of the Baltic Sea
The responsible institution is the Ministry of Environment Protection and Regional
Development. The Program contains implementatio n of the following sub-programs: Environment
Monitoring Program (sea monitoring, surface waters monitoring program), program “Blue Flags”
(improvement of beaches and sustainable use of coastal resources, survey of small yachting ports of
Latvia), R īga environment project (waste water treatment and collection), Daugavpils water supply
and sewerage, construction of pressure sewerage pipeline J ūrmala-Rīga, program 800+ (development
of water systems of human settlements in Latvia), program 500- (creation of household waste
management system in Latvia), creation of the hazardous waste management system in Latvia,
elimination of ozone depletion substances (investments into freon non-containing foam and aerosol
products has been started) and the Baltic sea coastal management plan. The financial support – theWT/L/362
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budget of the State Hydro-Meteorology Board, st ate budget, other co-financiers – World Bank,
Environment Protection Club, PHARE.
The National Program on the Regional Development of Latvia
The responsible institution for the development of this program is the Ministry of
Environment Protection and Regional Development. The Program has to be approved by the Cabinet
of Ministers till the end of 2000. The status analysis of the regional development was made within thescope of the program on the regional distribution of 98/99. Analysis of implementation of the regional
development policy concept of Latvia was done.
Sub-programs of the National Program have been developed and are in the process of
implementation. These are: Latvian frontier regional development program (development of territories
close to the national border), Latvian rural development program (definition of development
objectives), renovation program of rural areas of Latvia (streamlining of physical, social and
economic environment), development of areas near cities (to ensure sustainable development,improve well-being), coastal development program (including the program of the development of
small ports) and the development program of sensitive areas (former military port areas, using
German experience). Implementation of the program for the regional development of Latvia is closely
linked with the process of perfection of the Public Investment Program and establishing of planning
regions, basic principles of work of councils and development agencies, the needed support localgovernments to draft development plans paying special attention to opportunities offered by ES
PHARE program “On Investments in Economic and Soci al Cohesion” in regard to target regions of
Zemgale and Latgale, also the development and activity plans of Liep āja region and mid-Daugava
regions. These activities are predominantly funded by the state budget, State Property Privatisation
Fund.
The National Program of Construction
The development of the program is co-ordinated by the Ministry of Environment Protection
and Regional Development. The program very soon has to be approved in the Cabinet of Ministers.
Sub-program “On Design” was developed in 1999, the same as program on hydro technical safety of
HES (hydro-electric stations), development of the concept of construction insurance, program ofincrease of heat efficiency of public buildings, development of housing and rent legislation and the
concept of building standards. The program covered the development of 10 drafts of regulatory
documents and 9 LVS standards for harmonisation of legislation with the EU directives. Development
of methods and recommendations was performed to eliminate administrative barriers in construction,
evaluate heat situation in public buildings, to prepare a model of technical passport and registrationjournal of buildings and their exploitation activities. Sources of funding – state budget and State
Property Privatisation Fund.
The National Program: Production and Utilis ation of Biological Fuel in Latvia
The responsible institution for the development of this program is the Ministry of Agriculture.
The leading and co-ordinating organisation is the Institute of Micro-Biology and BioTechnology of
the University of Latvia. The Institute carries out surveys and organises information activities. The
expected deadline of the development of this program is the third quarter of 2001. The program ismoved forward through different technical research.
The activities of the program are: collection of international information on ecologically clean
ethanol technology; scientific research work in agricultural technologies of rape growing, ethanol
technology, bio-fuel in economy (models developed, technologies specified); creation of various
testing equipment and profound work of popularisation in the society of bio-fuel production (in Talsi,
Valmiera and J ēkabpils regions with concrete projects), setting up of the Information centre,WT/L/362
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participation in preparation of the initial data for the development of technological project of ethanol
plant in Latvia. Funding was provided by the Latvian Research Council program and grants and State
Property Privatisation Fund.
The National Program of the Development of Tourism
The responsible institution for the development of this program is the Ministry of
Environment Protection and Regional Development. The projected deadline for submission of this
draft into the Cabinet of Ministers is the end of 2000. The most important activities of program
implementation in 1999 were participation of Latvian travel companies in 16 international travel fairs
thus popularising travel opportunities to Latvia, initiation of information publications on opportunities
of tourism in Latvia, development of the target program on rural tourism providing a list of measures
to encourage rural tourism, setting up of the Balt ic Tourism information centre in Munster. The
funding is received from the state budget and participant contributions.
C. PRIVATISATION
1. Property structure
Privatisation of enterprises of manufacturing and extracting industries, construction, gas,
fishing, agriculture, hunting and forestry has been basically completed in Latvia. The share of the
private sector in the total added value at the beginning of 2000 reached 66 per cent (65 per cent in
1998) employing 70 per cent of economically active people (68 per cent in 1998).
The share in GDP created by private companies in such sectors as industry, construction,
fishing, agriculture, hotels and restaurants in 1999 exceeded 90 per cent (see Table 4.1). In 2000 it is
quite feasible to basically complete buy-out of land and privatisation of flats.
The share of the private sector in the Latvian economy has been significantly influenced by
the direct foreign investments in the privatised enterprises. Legislation of Latvia provides equal rightsto foreign and domestic investors in the area of equity privatisation. To attract foreign direct
investment the Privatisation Agency has organised 4 international tenders offering 153 medium-sized
and large public companies. In 1997 Privatisation Agency in the privatisation process of state owned
companies (statutory enterprises) attracted foreign investments in the amount of 68 million Lats, in
1998 – 49 million. Lats.
In the state equity units where privatisation was completed (the buyers fully fulfilled
obligations prescribed in privatisation rules and purchase agreement, made all the necessary
payments, invested the required amount of investment, created certain number of jobs) Privatisation
Agency succeeded to attract 1.7 times larger investment than provided in privatisation rules.
Table 4.1
Share of Private Sector in the Gross Value Added (%)
1994 1995 1996 1997 1998 1999
Gross value added at basic prices 37 53 59 62 65 66
of which by kind of activity:
Agriculture, hunting and forestry 81 88 91 91 91 91
F i s h i n g 2 63 75 87 79 29 2
M i n i n g  a n d  q u a r r y i n g 1 83 57 48 59 59 5
M a n u f a c t u r i n g 2 47 18 09 09 69 6
Electricity, gas and water supply 1 2 8 8 12 12
C o n s t r u c t i o n 5 09 19 79 89 89 8
Wholesale and retail trade 68 93 95 98 98 98WT/L/362
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1994 1995 1996 1997 1998 1999
H o t e l s  a n d  r e s t a u r a n t s 5 67 88 89 29 29 3
Transport and communication 19 25 36 41 42 43
Financial mediation 46 73 80 84 82 83
Real estate and other commercial activity 39 49 56 67 69 70
Public administration and national defence – – – – – -
E d u c a t i o n 244478
Health and social care 9 15 22 22 26 27
Other community, social and personal service
activities17 39 53 58 62 63
2. Privatisation of State-Owned Property
Main goal of privatisation in Latvia was to reduce participation of the state in business
activity and to create an environment favourable to private capital. Having studied the positive
experience of the German privatisation program the Latvian government considered that the
paramount goal of privatisation is formation of competitive private businesses by selling the majorityshare package to strategic investors. Thus the formation of the layer of domestic businessmen was
encouraged and foreign direct investments attracted.
Mass-scale privatisation of state-owned property in Latvia may be considered completed. In
almost eight years 97 per cent of all state owned companies and statutory enterprises have been
transferred for privatisation and more than 1500 privatisation agreements concluded (to compare –
The Estonian Privatisation Agency in the same period concluded approximately 600 privatisation
agreements). In 1999 the Cabinet of Ministers transferred for privatisation only 15 state property units– enterprises or parts of enterprises.
Privatisation has fostered growth of capital market in Latvia. The public offering program
recognised as one of the most successful in Eastern Europe has promoted the formation of a large
group of shareholders (see Table 4.2).
In the privatisation process of 1999-2000 more attention is devoted to the preparation of good
models of privatisation of the remaining large state owned companies. This work is based on
invitation of competent foreign consultants to develop privatisation models, strategies and time
schedules, application of internationally recogn ised commercial practice to implement the process,
wide advertisement of deals among target groups of investors keeping in mind the main objective – to
gain maximal income from sales of state-owned property.
A good example is the auction of 26.85 per cent of shares of AS “Latvijas Gaze” in March
2000 when with the assistance of Riga Stock Exchange all the shares were sold at the price 1.5 times
exceeding the initial price and 2.62 times – the par value. This successful auction was organised with
the help of Nomura International .
Privatisation of large public utilities proceeds simultaneously with reinforcement of public
service regulators and gradual liberalisation of these sectors. The law on regulators of public services
has been drafted foreseeing the establishment of a strong and independent multi-regulator in the area
of energy, telecommunications, postal services, railways and passenger transportation (see Section
5.6.2). A new law on telecommunication is being pr epared to reduce the monopoly rights period of
Lattelekom from 2013 to 2003. The Cabinet of Ministers has defined the status of the qualified energy
consumer and possibilities to independently purchase electricity. Establishment of the electricity
transmission system operator will provide equal access to electricity network for producers, users and
traders.WT/L/362
Page 111
In this context the Cabinet of Ministers in February 2000 decided to start restructuring of
Latvenergo and to create a concern consisting of the non-privatised parent company, separate
daughter company to generate electricity in Daugava hydro power plants, one or several daughter
companies for production of heat and electricity in Riga CHPs and one or several daughter companies
for distribution of electricity. Such decision corresponds to implementation task of the EU directives
and establishment of the Baltic energy market. This provides the opportunity to start privatisation of49 per cent shares of Riga CHP.
3. Public Share Offering
Shares of 86 companies have been offered within the program of public offering of to-be-
privatised state-owned companies (statutory enterprises) by 1 May 2000. These have been transferred
into statutory enterprises with the total fixed capital of 245.64 million Lats (see Table 4.2). 111
thousand physical and legal entities of Latvia have become their shareholders.
The number of enterprises included in the public offering has gone down which can be
explained by the fact that privatisation is on the whole completed. In 2000 it is planned to offer to the
public (payment in privatisation certificates) shares of JSC “Kalceks” and state-owned JSC “Latvijas
kuģniecība” (Latvian Shipping Company). If restructuring of Latvenergo is realised in the 4
th quarter
of 2000 it is quite possible that shares of Latvenergo CHPs will be offered in the public offering.
Table 4.2
Shares of State-Owned Statutory En terprises Sold at Public Offering
Year The number of
winners in the public
offeringThe number
of sold
sharesShare in
fixed assets
(%)Number of
enterprises*Fixed assets.
million LVL**
1995 4,651 8,141,184 29.47 21 27.6
1996 7,985 16,219,117 31.59 15 51.3
1997 39,327 15,833,114 24.14 27 65.6
1998 58,696 21,255,748 21.70 19 94.5
1999 293 498,924 22.41 2 2.23
2000 (I-V) 60 1,204,179 27.28 2 4.41
Total 111,012 63,152,266 – 86 245.64
* The number of enterprises where Privatisation Agency has approved the public offering result.** Fixed capital of the joint stock company recorded in privatisation rules.
The program of public share offering for privatisation certificates has until now been the main
source of creation of public securities. The mentioned securities after their initial registration in the
Latvian Central Depository start public circulation in the market thus stimulating growth of security
market capitalisation.
4. Privatisation of Residential Houses
According to the data of the Central Commission of Privatisation of Residential Houses by
1 April 2000 there were 16,584 state and municipal re sidential houses prepared and assigned for
privatisation and 399,630 state and municipal apartments equalling to 79 per cent of the total number of
flats24. Privatisation notifications have been sent  to 229,613 tenants of flats. 170,017 flats have been
assigned for privatisation before priva tisation of the whole house (see Figure 4.2).
                                                     
24 According to the data of the Central Statistical Office at the moment in Latvia there are 505000 state-owned and
municipal flats.WT/L/362
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All flats have been offered for privatisation in 159 municipalities. Towns of regional centres
were the most successful preparing 98 per cent of all flats for privatisation. 222 thousand flats were
prepared for privatisation in seven largest cities of Latvia (77.5 per cent).
The overwhelming majority of flats in seven largest cities have been already privatised
(171 thousand or 59.6 per cent) of which 44.8 per cent were privatised prior to privatisation of the
whole house.
Figure 4.2
Privatisation of Residential Houses
0100000200000300000400000500000
I II III IV ITotal number of
privatised flats
Total number of flatsassigned for privatisation
Number of flats assignedfor privatisation prior toprivatisation of the house
Number of privatisationnotifications sent out
1999 200079%
53% 51%61%70%75%
28%35%44%49%Number of flat s
5. Privatisation of Municipal Property Units
On 17 February 1994 Saeima adopted the law “On Privatisation of State and Municipal
Property Units” establishing a unitary procedure of privatisation. From the date of effect of this law
until 1 May 2000 Ministry of Economy has reviewed 1350 privatisation projects for the total relative
sales price of 65.7 million Lats (including privatisation certificates and compensation certificates for
the nominal value of 41.2 million Lats). The number of privatisation projects of municipal property
units reviewed by the Ministry of Economy in different years is presented in Figure 4.3.
The fastest rate of privatisation in the largest cities of Latvia was in Daugavpils, Jelgava,
Jūrmala, Rīga and Ventspils. Out of regions – in C ēsis, Jēkabpils and Ogre regions, the slowest – in
Jelgava, Kr āslava, Ludza, Prei ļi, Saldus, Valka and Ventspils regions.
Municipalities in 1997 started to privatise land plots under privatised or to-be-privatised
municipal property units (see Table 4.3).WT/L/362
Page 113
Figure 4.3
Privatisation Projects Accepted by the Ministry of Economy
145
2261
60430
133 130
41
0250500
1997 1998 1999 2000*Total
Including land allotments
* as of 1 May 2000
6. Privatisation of Land
Pursuant to the law “On Privatisation of Land in Rural Areas” all land claims in rural areas have
been reviewed and decisions made in regard to re stitution of property rights, granting of land for pay.
The process of transferring land for use pursuant  to the law “On the Completion of Land Reform in
Rural areas” is continued. 82 thousand claimants of rural land have not yet legally formalised their land
property rights and have not bought out 594 thous and hectares.
According to the law “On Land Reform in Cities of the Republic of Latvia”, 23 thousand
claimants of city land have not legally formalised their land ownership rights.
The buy-out of land in towns and rural areas continues (18 thousand agreements since
1 October 1999).
Table 4.3
Privatisation and Buy-out of Land
(before 1 April 2000)
Payment for privatised land
Type of privatisationThe number of
made
agreementsArea (ha) Privatisation
certificatesIncluding
compensation
certificates
1. Land buy-out, of which 170,474 897,022 8,107,614 335,029
1.1. Rural land 122,141 892,340 6,660,132 150,221
1.2. City land 48,333 4,682 1,447,482 84,808
2. Sale of the state and local
government land, of which– 2,156 1,095,804 1,095,804
2.1. Local government land* – 1,005 103,580 103,580
2.2. State land 781 1,151 992,224 992,224
TOTAL 171,255 898,028 9,203,418 1,430,833
* Data of the Ministry of Economy on the concluded agreements by 1 January 2000.
The Privatisation Agency sells the state land under privatised buildings to owners of buildings
as said in the law “On Privatisation of State and Municipal Property Units”. Before 1 April 2000 –
2,566 land privatisation proposals were received (in the first quarter – 473), 838 land privatisationrules approved and 688 purchase agreements concluded. Also local governments in 1997 started
selling land to owners of former municipal buildings. In total, Ministry of Economy till May 2000
approved 236 land privatisation rules of land under buildings and bare land plots for the total value of
5.2 million Lats (4.3 million to be paid in compensation certificates).WT/L/362
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The area of free (not claimed) state land in 1 April 2000 was 303.9 thousand ha.
7. Privatisation Certificates
Until 1 April 2000 – 2.45 million residents have received 103.9 million certificates for the
time lived in Latvia including 772.1 thousand certificates granted to people subjected to political
repression. 92.6 thousand former owners or their heirs have been granted 6.8 million property
compensation certificate, including in the first four months of 2000 – 2.1 thousand former owners ortheir heirs received 0.12 million property compensation certificates. 108.9 million certificates have
been transferred (issued) to accounts opened by physical entities of which 6.7 million were property
compensation certificates.
In compliance with the law “On Privatisation of Land in Rural Areas”, until
31 December 2000 – repayment of rural land compensation certificates will be basically completed
and 8244 persons will receive the total amount of 16.74 million Lats.
In line with the Regulations of the Cabinet of Ministers No.29 of 18 January 2000 – “On the
Procedure of Compensation in Money for Privatisation Certificates of Politically Repressed People” –
compensation in the amount of 5 million Lats will be paid to more than 24 thousand politically
repressed persons in 2000.
Insertion 4.5
Perfection of Legal Background.
Regulations No.395 of the CM of 30 November 2000 – “Amendments to Regulations No.253 of
15 August 1995 “On Operation of Intermediary Companies (Enterprises) with Privatisation
Certificates””.
Regulations No.409 of 14 December 2000 – “Amendments to the Regulations No. 210 of 18 July
1998 “On Use of Privatisation Certificates””.
Regulations No.2 of CM of 4 January 2000 – “Amendments to the CM Regulations No.156 of 18 July
1995 ”On Allocation of Privatisation Certificates and Opening a Privatisation Certificate Accounts””.
Regulations No.29 of 18 January 2000 “On the Pro cedure to Reimburse in Money for Privatisation
Certificates Issued to Politically Repressed People”.
Till 1 April 2000 – 82.5 million certificates were used in privatisation of state and municipal
property units constituting 75.8 per cent of the total number of issued certificates (see Table 4.4 and
Figure 4.4).
Table 4.4
Privatisation Certificates Used in Privatisation
(till 1 April 2000)
Type of Ownership NumberNumber of
Privatisation
Certificates (million)Including
Compensation
Certificates
(thousand)
For purchase of housing 296.7 thousand flats 25.9 414.8
For purchase of companies, etc.properties– 6.3 64.6
For purchase of capital shares (stock) – 41.0 940.0WT/L/362
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Type of Ownership NumberNumber of
Privatisation
Certificates (million)Including
Compensation
Certificates
(thousand)
including public offering 61.4 million shares 34.1 –
For purchase of land 171 thousand land
allotments9.2 1,499.6
Total 82.5 2,919.0
 per cent of issued certificates 75.8 43.3
Figure 4.4
Privatisation Certificates Used in Privatisation
(till 1 April 2000)
0102030405060708090100
IV V VI VII VIII IX X XI XII I II III0102030405060708090100Public offering
Privatisation of companies and
other property (including sharepurchase)
Land privatization
Apartment privatization
1999 2000
20.9 million certificates or 18.9 per cent of the total number of issued certificates were on
accounts of physical entities till 1 April 2000 including 2.7 million compensation certificates.
Holders of privatisation certificates in April 2000 could use services of 42 licensed
intermediary company to assist them in privatisation certificates market.
The total monthly deals carried out by intermed iary companies with privatisation certificates
(selling and buying from physical entities) fluctuated from 0.57 million Lats (in March 2000) till 1
million Lats (December 1999). The price difference of property compensation certificates (PCC) andother certificates (OC) is presented in Figure 4.5.
On 1 April 2000 there were 4.42 million certificates (including 0.69 million compensation
certificates) on accounts of intermediary companies.WT/L/362
Page 116
Figure 4.5
Prices of Privatisation certificates in April 1999 – March 2000
(LVL)
11.522.533.5
V VI VII VIII IX X XI XII I II III IV
Privatisations certificates purchase price from natural persons
Property compensation certificates purchase price from natural persons
Property compensation certificates sales price
Privatisation certificates sales price1999 20003.5
3
2.5
2
1.5
1
8. The State Property Privatisation Fund
Total revenues of the State Property Privatisation Fund are composed from the payments and
disbursements in the result of state property privat isation (10 per cent), resources from privatisation of
municipal property.
Table 4.5
Revenues and Expenditure of the State Property Privatisation Fund in 1999
(thousand LVL)
Foreseen in the law
on state budgetActually
implemented
Revenues:
1. Revenues from state property privatisation 10,572.13 5,481.19
2. Revenues from municipal property privatisation and other
sources540.00 690.70
Total 11,112.13 6,171.89
Expenditure:
1. Payment to the central government basic budget 4,636.00 4,636.00
2. Other expenditure according to the law “On State
and Municipal Property Privatisation Funds”7,138.00 2,163.35
of which:
2.1. for the development of the assisted areas 495.00 350.00
2.2. for repayment of land property compensation certificates 5,000.00 513.00
2.3. for reconstruction of the buildings of the University of
Latvia140.00 140.00
2.4. for attraction of investments and exports promotion for
further development of small and medium-sized enterprises437.00 283.88
2.5. for implementation of national programs 420.00 280.47
2.6. other expenditures 646.00 596.00
Total 11,774.00 6,799.35WT/L/362
Page 117
Total 5481.19 thousand Lats were transferred to the State Property Privatisation Fund in
1999. Resources of the Fund were used in line with the financing earmarked in the Law On State
Budget for 1999. Total expenditure (with the balance in the fund as of 1 January 1999) was 6799.35
thousand Lats of which 4636 Lats or 68 per cent of total expenditure was paid into the central
government basic budget.
Because of the delays in the privatisation of large state property units (JSC “Latvijas
kuģniecība”, JSC “Latvenergo”, SIA “Lattelekom”, etc.) it was not possible to receive revenues to the
privatisation fund as originally planned in the law on state budget for 1999.
In the law on the State Budget for 2000 it is planned that revenues and expenditures from
privatisation of state and municipal property wi ll amount to 30,350 thousand Lats. As of 1 May 2000
revenues equalled to 394.61 thousand Lats and expenditures – to 173.65 thousand Lats.
D. BUSINESS PROMOTION
Priorities of the business development policy and specific measures of perfection and support
to business activity are formulated in several strategic documents of the government – Declaration of
Work of the Cabinet of Ministers, Medium term economic strategy in the context of accession into the
EU, individual national programs (National Prog ram of Quality Assurance, National Program of
Support to Small and Medium-Sized Enterprises, National Program on Foreign Trade), Concept of
Public Support to Business Activity, etc.
The program documents say that the main objective of the policy of business development in
Latvia is to create a favourable environment for business and attraction of domestic and foreign
investment.
Key factors predetermining the favourable environment for business are:
- macroeconomic stability;
- international competitiveness of the taxation system;
- efficiency of the capital market;
- efficiency of infrastructure;
- efficiency of educational system and innovation;
- stability and order of business legislation;
- efficiency of the system of state support.
The main task of the government is to ensure  a stable legal and administrative base. However,
nonetheless important is the issue of state support  both for the establishment of small and medium sized
enterprises and increase of competitiveness of the ex isting enterprises with a particular stress on their
international competitiveness. State support to business is regulated by the law of 1998 “On Control ofState and Municipal Aids to Entrepreneurial Activities” developed in line with the state support
principles accepted in the European Union. The law spells out the main areas where state support may
be granted:
- participation of enterprises in international exhibitions and fairs; external market
studies;
- regional development;
- research, patent acquisition and introduction of progressive technologies;
- small and medium-sized enterprises;
- introduction of quality systems;
- environment protection, energy saving and introduction of environment friendly
technologies.WT/L/362
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Already several years the main problem hindering and restricting the efficient implementation
of business support measures is insufficient budget financing for implementation. There is a series of
activities of business support developed and approved by the Cabinet of Ministers yet they are not
implemented due to the scarce budget financing.
The government declaration on the planned acti vities speaks about the priority status to
external market studies, participation in interna tional exhibitions and fairs, patent acquisition and
introduction of modern technologies, introduction of energy saving technologies.
One of the main aims of the business development policy in Latvia is perfection of legal
framework of business activity, streamlining of legislation. An important step in this respect is the
Commercial Law adopted by Saeima in April 2000. The development of this law, its co-ordination
and approval in Saeima lasted for several years. The law will gain effect on 1 January 2001. The
Commercial Law will replace the current law “On Business Activity”, will systematise in one place
several regulations earlier contained in several legislative documents and will revoke series ofoutdated provisions, typical of a transition period. With the date of effect of the Commercial Law the
number of types of enterprises will be reduced and instead of the present 13 types there will be 5,
which are also known in the majority of the developed countries in the world:
- sole proprietorship;
- company with full liability;
- limited partnership;
- limited liability company;
- joint stock company.
The adoption of the Commercial Law substantially simplifies business legislation in Latvia by
replacing the present 20 legal documents and consolidating them in one law with one legalterminology. Besides that, the Commercial Law also contains several clauses that directly protect
entrepreneurs from the impact of unfair deals.
Alongside with the Commercial Law there are also other specific laws which will continue
being effective, like Insurance Law, Law on Credit Institutions, Law on Securities. The issues not
regulated in the Commercial Law will be regulated in the Civil Law.
On the basis of the recommendations and shortcomings identified by the World Bank Foreign
Investment Advisory Service in “Administrative Barriers to Investment in Latvia” the Cabinet of
Ministers in May 1999 approved the action plan for improvement of entrepreneurial environment.
Amendments to the law “On Taxes and Duties” have been developed in accordance with the
mentioned action plan. On the date of effect of the amendments the start of entrepreneurial activitywill be simplified for both local and foreign entrepreneurs. The general business and investment
climate will improve as well. The amendments in the aforementioned law foresee streamlining
registration of enterprises and other organisations by uniting the process of registration in the
Enterprise Registry and the State Revenue Service. In future the information for registration will have
to be submitted only to the Enterprise Registry which will electronically exchange information with
the State Revenue Service. Total costs of modernisation of the information systems of the Enterprise
Registry and the State Revenue Service to work with the new system of registration will amount to0.5 million Lats.
One of the main priorities of the foreign policy of Latvia is integration in the European Union.
Therefore it is necessary to follow political trends in the European Union including also in the area of
the development of business activity. In 23-24 March 2000 there was a special meeting of the EU
Council in Lisbon aimed at identification of new objectives and strategic directions of the EuropeanUnion in the area of employment, economic reform and promotion of social cohesion. The strategicWT/L/362
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aim declared by the European Union for the next  decade is to become the most competitive and
dynamic, knowledge-based economy of the world, priorities being the development of information
technologies, innovation, science and education.
Availability of cheap, corresponding to the world level telecommunication infrastructure is
mentioned as a key precondition for the development of entrepreneurial activity and development of
the society offering a wide range of services both to enterprises and people. It is necessary to increasethe level of knowledge of the society in the area of use of information technologies. The priority is the
development of different types of e-commerce, fast Internet connections both for enterprises and
residents as well as fast development and use of Internet technologies.
The role of research and development ( R&D ) for economic growth of promotion of
employment was reinforced once again. Priorities in this area are promotion of investment, research
and development, support to co-operation between various research programs and institutions
including different research establishments, universities, libraries and schools by linking them inelectronic data transmission networks. The development of favourable environment for establishment
of innovative small and medium sized enterprises, improvement of the functioning of the internal
market of Europe and increase of efficiency of financial markets is also an important task. The need to
encourage education is underlined both in the context of the general education of young people and
also in the context of training or retraining of persons who due to the fast development of informationtechnologies may potentially lose their jobs.
The strategic development directions declared at the Lisbon meeting of the EU Council
should be taken into consideration also in future in the process of identification of economic
development priorities and designing the business support policy in Latvia.
E. S
MALL AND MEDIUM -SIZED ENTERPRISES
Small and medium sized enterprises at the outset of their business activity and during its
expansion normally come across four main problems.
Firstly, the competence of entrepreneurs and especially the starting entrepreneurs on a wide
range of questions and relative high price for consulting especially in such areas as new markets,
introduction of quality systems and investment attraction.
Secondly, availability of workforce. It essentia lly influences enterprises in the period of fast
growth and in conditions of fierce competition (exporting enterprises). Market at the moment offers a
wide range of training, however fast growing enterp rises may be short of working capital and there is
a big risk in freezing large amount of resources in the form of a long-term contribution for training of
workers.
Thirdly, poor availability of information on the potential markets, state support, co-operation
partners, etc., high prices of such information.
Fourthly, to encourage growth of enterprises the availability to the financial resources is very
important. Financial resources offered to starting businesses at the moment are rather limited. These
are mostly leasing services or guarantees that issued by the Latvian Guarantee Agency. Funds, able to
make capital investments into enterprises, do not function (with few exceptions). This situation is
linked with the difficulty for investment funds “to leave” the purchased company caused by thestructure of the established companies (70 per cent are limited liability companies) and the generally
underdeveloped capital market of Latvia.WT/L/362
Page 120
Insertion 4.6
Credits to Women Engaged in Business.
Having signed the agreement with the Nordic Investment Bank, Hansabank has demonstrated
its good will and readiness to implement crediting program of businesswomen. This program will be
implemented in all Baltic States and the total sum of credit resources is 1 million Euro. The initiative
of the Nordic Investment Bank which followed the political decision of the Nordic Council of
Ministers will certainly help to encourage the development of businesses led by women and will offer
real support.
The credit amount to be granted to Latvian businesswomen is 330,000 Euro. According to
agreement, Hansabank may grant a credit to one enterprise not exceeding 10 per cent of the total
amount of credit resources and this credit should be in the form of co-financing of the project.
Hansabank will make it possible to apply for bank credits in all bank branches – in R īga and
15 other owns of Latvia. A enterprise willing to apply for the loan should make an appointment with
the credit specialist of Hansabank. Interest rates will depend on risk assessment of each specific
project and the security, they will fluctuate within the range of EUROBOR+4 per cent to
EUROBOR+5 per cent.
Only enterprises owned or managed by a woman or where a woman participates in the
strategic decision making may apply for the loans within the program. Before meeting the credit
specialist of Hansabank, the enterprise should prepare a business plan, legal registration documents
and financial statements for the preceding periods.
Experience of the bank shows that areas of activity of small and medium sized enterprises of
Latvia which in the given case will be the main recipients of credits are very different – processing,
services, etc. Financial support in the form of loans is very important for such enterprises. Quite apart
from this specific program, Hansabank considers work with small and medium-sized enterprises as
one of its priorities.
Such crediting marks a positive tendency and hopefully will be the start of further support to
SME.
To ensure comprehensive promotion of the de velopment of SME the following activities are
carried out:
- restructuring of the state support funds and creation of a uniform structure of funds,
system of allocation of finances and their supervision;
- action plan for improvement of business environment adopted by the Cabinet of
Ministers on 29 February 2000 (see Section 5.4);
- development of amendments to the law “On the Control of State and Municipal Aids
to Entrepreneurial Activities” comprising a detailed definition on SME, division into
micro, small and medium-sized enterprises and specific mechanisms of support to
different groups of enterprises; export s upport section and chapter on innovation will
be added;
- development of amendments to the law “On corporate income tax” envisaging tax
relieves for investment and staff training;
- updating of the National Program for SME for 2002-2006 where start-up of a business
and expansion of the existing business support structure will be treated as one complex
set of tools. This includes support of competence of an entrepreneur, proper quality of
workforce, availability of informati on, availability of needed financing;WT/L/362
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- support to savings’ and credit unions – the law “On savings unions” is in the process
of development separating functions of commercial banks and savings’ unions and
simplifying the procedure of establishment, liquidation, supervision and management
of savings’ and credit unions.
Starting with 2001 EBRD assistance for SME crediting will be available in Latvia. This
project is carried out with the support of the European Union and the costs of financial resources will
be similar to big projects.
An important role in the development of SME will be played by the SME development
crediting projects adopted by the Cabinet of Ministers on 9 November 1999. With the assistance of
the Latvian Hypothec and Land Bank (LHLB) it is planned within 3 years to grant credits to SME in
the amount of 10 million Lats. 400-500 SME business plans will be annually financed or the total of
1200 –1500 business plans during three years. Financing activity will expand even more after thethird year of project implementation.
As of 1 June 2000 LHLB had attracted 5 million Euro without using state guarantees. This
means that additional financing will be available to Latvian businesses. LHLB has already financed
89 projects within the framework of this program providing investments for enterprises in the amount
of 3.5 million Lats and creating 300 new jobs.
F. C
OMPETITION PROMOTION AND REGULATION OF MONOPOLIES
1. Competition Policy
One of the most important tasks of economic policy is to provide opportunities for all market
participants to engage in economic activity in the conditions of free and fair competition, by
maintaining and developing equitable competition, restricting market concentration and terminatingillegal activities. The Government in the Declaration of the planned activities highlights measures to
restrict unfair competition and work of the Competition Council in the area of improvement of
efficiency, independence and transparency.
The Competition Council carries out supervision over implementation of the Competition
Law provisions. The activities of the Council may be best of all described by case studies ofviolations of competition legislation carried out by the Council.
In four months of 2000 (compared to the same period of the preceding year) the number cases
on prohibited agreement (collusion) submitted to the Competition Council increased by one third. At
the same time the number of applications on violation of the abuse of dominant position clause and
merger of enterprises has gone down by one half. There was a slight increase of the submitted caseson unfair competition and misleading advertising.
The Competition Council in the first four months of 2000 examined 27 cases (of which 18
were started in 2000) – 13 were finalised and 14 still in the process of review.
Quite considerable number of submissions in the recent months (18 per cent of the total
number) came from enterprises operating in the area of press and mass media. 26 per cent of
submissions were received from legal and physical persons asking the Competition Council to review
the conflict between them and the enterprises regulated by local governments. In many casesclaimants considered that municipal companies, main ly utilities that are in the dominant position in
the respective service markets abuse the exclusive position of these companies.
On 20 December 1999 Saeima passed the law “On Advertisement” that took effect on
24 January 2000. From this date, all the violations that can be classified as breaches of advertisingWT/L/362
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regulations fall under the competence of the law “On Advertisement”. Implementation supervision of
the law is handled by four institutions according to their mandates, including also the Competition
Council. Since the adoption of the law the Comp etition Council has received two submissions on
dissemination of misleading advertisement. The Council decided that no breach was made in the fist
case and the second is still in the process of review. The short experience of implementation of the
law shows that some problems might arise with observation of time limits for the review identified inthe law. The process of review is also not spelt out thoroughly enough.
The Competition Council alongside with the prohibited agreement and abuse of dominant
position also evaluates structural changes in the market that may have an impact on competition i.e.
mergers of enterprises. Mergers in the market may be followed by concentration of resources
potentially causing damage to consumers. Secti on IV of the Competition Law contains clauses on
enterprise mergers.
Pursuant to the Competition Law, market participants who have decided to merge should
notify the Competition Council about their decision prior to the merger. The law does not require
notifying about all mergers. Notification requirement is applied only in the cases that correspond to
compulsory notification criteria stipulated in the law – the total turnover of participants of the merger
in the previous financial year was not less than 25 million Lats and at least one participant had a
dominant position in the respective market prior to the merger. Thus only one part of all mergers inthe market fall under supervision requirement of the Competition Law.
After such prior notification the competition supervision institution evaluates the merger
before its implementation. If the planned merger may hinder of limit competition the Competition
Council may offer possible alternatives of the merger. The prior notification mechanism allows
market participants receive legal confidence about the planned deal.
If the merger that fell under the notification requirement was not notified to the Competition
Council the latter might apply penalty (a fine) or even prohibit the merger.
Mergers as one type of enterprise reorganisation should, according to Competition Law, be
subjected to the state supervision mechanism since retaining of market structures with efficient
competition is in the interests of the state. Merger s of enterprises may change these market structures.
Sometimes only the merging parties benefit from the merger and not the whole community. To
implement the fundamental idea of democracy about welfare to the majority of people the
Competition Council is given the authority to intervene with the principle of free entrepreneurial
activity and to monitor certain mergers.
Article 15 of the Competition Law, Paragraph 1 says: “Agreements between market
participants with the aim or consequence to delay, restrict or distort competition shall be banned
(…)”. This provision is in full compliance with the prohibition applied to member-states’ enterprises
spelt out in the EC agreement or Article 81 of Rome agreement. The banned agreements made
between competitors are considered to be a bad violation of effective legislation. Violation of this
prohibition is treated as legal offence causing serious consequences to the parties who violate the law
as illegal agreement is null and void from the very beginning. The Competition Law also bans such
agreements to prevent market participants from creating restrictions to the development andestablishment of competition in the areas where the state has provided for the existence of competitive
environment to enable the majority of people to benefit from advantages of economic progress.
Competition Law similar to the respective regulatory documents of the European Union
provides that enterprises when making agreements with aims and consequences that may have an
adverse effect on competition in the specific market are obliged to submit a notification about suchagreement to the Competition Council who shall inform the parties about the legality of the new
relationship. If parties to the agreement can prove that the benefit obtained in the result of mergerWT/L/362
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substantially exceeds the damage to competition – agreements may be allowed or allowed with certain
reservations. If, on the contrary, the Competition Council decides that the agreement is prohibited and
if parties have failed to notify about such agreement the enterprises will have to deal with legal
consequences. Therefore it is in the interests of businesses themselves to get the permission from the
Competition Council before agreement is made.
In some cases co-operation-restricting competition may in the short-term benefit consumers.
However bearing in mind the term of the Agreement the restrictions stipulated there might have
caused real negative consequences in the specific market. EU practice shows that agreements, which
restrict competition, neither improve the quality of services nor promote more efficient use of
resources.
Two cases examined by the Competition Council are presented in lower insertions dealing
with supervision of mergers and prohibited agreements. These are “Interpegro-Latvija” and SIA
“RIMI Baltija” merger (see Insertion 4.7) and the agreement in the aviation services market (seeInsertion 4.8).
Insertion 4.7
Merger of “Interpegro-Latvija” and SIA “RIMI Baltija”.
At the end of 1999 the Competition Council, in compliance with the above procedure,
received information about the deal that might lead to the merger between SIA “Interpegro-Latvija”
and SIA “RIMI Baltija”. The information was submitted to ask the opinion from the Competition
Council about the compliance of the deal to competition legislation.
To evaluate the potential impact of the merger on the specific market the Competition
Council defined the market, analysed the existing trade barriers in this specific market, identified
operating market participants and their market shares, singled out possible negative and positive
outcomes of the merger.
At the initial phase of the review of the submitted information main focus was put on the
definition of the limits of economic activities of merger participants or specific market definition in
the interpretation of the Competition Law. Several surveys of trade networks and suppliers were
made. Methodology developed by the Competition Council asks for the study of opinions of both
customers and competitors in order to define a specific market. Information collected during such
studies proved that both the parties of possible mergers and other market participants consider that the
market existing on the respective administrative territory and any food store may be treated as a
competitor. Taking this into consideration and also the range of products offered by the merging
parties, level of income of consumers and shopping traditions, the territory covered by merging
parties, the large number of market participants in all districts of the city – the retail food market of
Rīga was identified as the specific market in the understanding of the Competition law.
In the course of the examination it was discover ed that the turnover threshold requirement (25
million Lats) was satisfied, however none of the parties to the merger had a dominating position prior
to the merger as individual market share of each party in the specific market was smaller than the size
established in the Competition Law, i.e. 40 per cent, (neither of the parties had market power).
Therefore, parties to the merger did not have to provide official notification about the merger to the
Competition Council. At the same time the direct participants of the merger were informed about the
possibility to gain a dominant position in the market for the newly created market participant in the
area of purchase of certain goods and their further sales in the retail market. In such case the merged
company could meet certain additional binding restrict ions to the business activity as provided in the
Competition Law in the section of banning abuse of dominant position.WT/L/362
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The mentioned merger had increased capital concentration in one specific market.
Insertion 4.8
On agreement in the market of aviation services.
The Competition Council has already the practice of handling one case of non-notified
agreement between “Air Baltic Corporation” and “Transaero Airlines”. The co-operation agreement
made on 1 August 1998 on flights between R īga and Moscow (hereinafter the Agreement) contained
features of prohibited agreement in several clauses. In autumn 1998 the Competition Council started
investigation of the possible violation of Article 15 of the Competition Law in the market of aviation
services.
Having examined the Agreement and circumstances around the case the Competition Council
came to the conclusion that the two airlines had made an agreement containing several provisions
aimed at limiting competition in the market of regular passenger air traffic and that these provisions
were not necessary in the Agreement to reach its aim – to organise co-operation in the Riga–Moscow
route. It was decided that the provisions restricting competition included in the Agreement covered
much wider geographical market than Riga–Moscow route. Implementation of these provisions would
mean that “Air Baltic Corporation” and “Transaero Airlines” agree to restrict their activity or the
principle of free entrepreneurial activity refusing from performance of any direct or indirect parallel
activity. Thus competition was eliminated in the areas where it could have existed according to
competition legislation. Attention also deserves the fact that parties to the agreement had agreed on
limiting their activity which is prohibited by the Competition Law as this prevent consumers from
enjoying benefits of competition also in future.
“Air Baltic Corporation” did not use the rights provided in the Competition Law and the
opportunity to timely eliminate the violation of some provisions. Taking into consideration the
mentioned facts and also the time (more than a year) of operation of the Agreement (with provisions
that contradicted the law) and also the fact that on the day of making the agreement the Parties did not
have the intention to terminate it before the expi ration date it was considered that the aim of the
Parties to restrict competition was implemented during the time stipulated in the Agreement.
Having carefully examined the circumstances of the case, the degree of seriousness of the
violation, consequences and quilt of every participant the Competition Council decided to apply
penalty to “Air Baltic Corporation” in the amount of 0.7 per cent from “Air Baltic Corporation”
turnover of the 1998 financial year and transfer this money to the state budget.
Since Latvia has become the applicant country of the EU in agreements where market
participants are residents of member-states the Competition Council can make use of several
international law instruments to implement ideas enshrined in the Competition Law. In the above-
described case “Transaero Airlines” was the enterprise of the Russian Federation. Russia is an
important trade partner of Latvia. However, in the given case there were no international legal
instruments at the disposal of the Competition Council to take an action against “Transaero Airlines”
therefore the enterprise of the Russian Federation was not fined.
2. Regulation of Public Services
In Latvia and also in other countries in the world there are the so-called sectors of natural
monopolies where competition is limited because of the required complicated infrastructure. Such
sectors in Latvia are energy, telecommunications, post, railway transport, water supply and sewerage,
waste management, passenger transportation. To avert the uncontrolled price rise services provided by
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essential to achieve effective work of the regulator before privatisation of the respective public service
companies in areas supervised by the government and local authorities.
At present the system of regulators is not very  well developed – they exist only in energy and
telecommunication sectors and partly also in the railw ay sector. However, also the existing regulators in
terms of independence and efficiency do not meet the standards of the EU member states that should be
also met by Latvia as a candidate country. In the areas not yet supervised by regulation institutions thereis still room for uncontrolled, groundlessly rapid price rise for services provided by the sector without
the matching increase of quality and even without the adequate quality of the service.
The EU regulatory documents on the requirements for sectors of natural monopolies spell out
preconditions for the development of competition and market liberalisation. Among these pre-
conditions there is creation of legal and institutional base for regulation by separating functions of the
regulators and the regulated companies and clearly defining the obligation of the monopoly
companies to provide public services. Shortcomings in the current system of regulation of Latvia werealso mentioned in the EU Commission 1999 Progress Report noting that Latvia still needs to
streamline its legislation to ensure independent regulation in the sectors of public services before the
start of privatisation of large monopoly enterprises.
The Declaration of the Action of the Cabinet of Ministers foresees that a united, professional
and independent institution for regulation of natural monopoly tariffs and rules is to be set up by1 January 2001. Saeima on 30 March 2000 adopted in the second reading the draft law “On
Regulators of Public Services” (see Insertion 4.9).
Insertion 4.9
Draft law “On Regulators of Public Services”.
The goal of the draft law is to ensure a continuous opportunity to receive safe and qualitative
public services for tariffs (prices) corresponding to economically justified costs. It should also
promote the development of economically grounded competition in the regulated sectors by
establishing the procedure of public service regulation and legal relations in the area of public
services.
The draft law covers all the state regulated sectors – energy (also heat supply where electricity
is generated in the process of production of heat), telecommunications, post, railway, passenger
transportation and the sectors to be regulated by local authorities such as household waste
management, water supply and sewerage, passenger transportation, heat supply where electricity is
not generated in the process of heat production. The draft law stipulates that the types of public
services to be regulated on the national level will be defined by the Cabinet of Ministers and in the
areas regulated by local governments – by municipalities.
The draft law after its second reading in Saeima stipulates that with 1 January 2001 the united
regulator –Public Services Regulation Commission will start its activities in the area of sectors
regulated by the state. The Commission will function as an institution under supervision of the
Ministry of Economy.
The transitional provisions of the draft law say that by 1 March 2001 the Public Service
Regulation Commission will take the public service regulation function from the Energy Regulation
Council and Railway Administration in the relevant sectors regulated by the state. The decision-
making institution of the Commission will be the C ouncil. The Cabinet of Ministers will appoint the
chairperson of the council and four members for a five-year period. The regulator will carry out the
following functions:
- will protect interests of users and facilitate the development of public service providers;WT/L/362
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- will identify the method of tariff calculation for public services, except municipal regulators;
- will establish tariffs if special legislation of the sector does not provide for a different
procedure of tariff determination;
- will carry out licensing of public service providing;
- will carry out the preliminary dispute investigation;
- will promote competition in the regulated sectors and supervise the correspondence of the
public service to licence conditions, specific quality and environmental requirements,
technical specification, standards and provisions of agreements;
- will inform the public about its activities and the activities of providers of public services in
the area of public services.
The draft law foresees that the regulator will be independent in functions prescribed by the
law and the Commission will not be subordinated to th e decisions of the government or its institutions
while forming its direct tasks, decision making or issuance of administrative acts. The decisions made
by the regulator or the administrative acts issued may be in their substance revoked only by the court.
The law says that financing of activities of the regulator in the sectors regulated by the state will be
done from the state budget subsidies and in sectors regulated by municipalities – from municipal
budgets. To ensure regulation of public services all providers of public services will make payments
that will be transferred to the central budget and municipal budgets. The rate of such payments shall
not exceed 0.2 per cent of the net turnover of the public services provided by the company in the
preceding financial year.
Alongside with the development of the legal base of regulation nonetheless important are
practical activities to improve the system of regula tion. Such activities are also foreseen in the updated
National Program for Integration into the Europ ean Union and the action plan for the World Bank
Agreement on Structural Adjustment Loan accepted by the government. Within this agreement the
newly established working group in conjunction with the World Bank consultants in April 2000
developed the Implementation Plan of the P ublic Service Regulation Commission outlining its
functional and organisational structure, the related fina ncial costs, training of the regulator’s staff, etc.
(see Insertion 4.10).
Insertion 4.10
Implementation Plan of the Public Service Regulation Commission.
The implementation plan foresees that establishment of a united regulator with take place on a
step by step basis – first, the senior staff (council) will be appointed followed by the detailed planning
phase of the structure of the institution and selection of personnel to enable the organisation be
effective from the time it will be ready to take full responsibility of regulation in a concrete sector.
The Council will set up the Public Service Regulation Commission.
The Council will regulate the provision of public services and will protect interests of service
users. To fulfil this objective the Council will pass decisions and will issue administrative acts on the
procedure of licensing public service providers, tariff calculation methodology and tariffs calculated
by providers of public services. It will also make decisions in dispute settlement cases between
providers of public services and users. The Council will make decisions on principal review of prices,
strategic plan of the Commission, candidates for leading positions, budget and the changes in
regulation policy. Bearing in mind the fact that in some sectors, especially in telecommunications,
technological and economic indicators change very fast the Council will need regular consultations
with specialists of specific sectors.
The Executive institution will be made up of 7 departments, of which four (Tariff,
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while the others (Administrative, Legal and Information) – consulting and support functions. The
Executive Director will manage the work of the executive institution.
The departments engaged in the direct regulation will respect the principles of decision
making within the mandate delegated to the Commission. Directors of departments responsible for
regulation of sectors will co-operate with the respective line ministries, operators, consumer
organisations and other organisations (for example, Competition Council).
Implementation of this plan was started in May 2000 with identification of the necessary
resources (including rent of premises and their equipment, etc.) to enable the establishment and
functioning of the regulator starting from 2001.
G. QUALITY ASSURANCE
1. National Program of Quality Assurance
On 12 April 1994 the Cabinet of Ministers approved the National Program of Quality
Assurance as one of the priority programs for the development of Latvian economy. The main goal of
the program is to harmonise Latvian legislation with the legislation of the European Union in the areaof free movement of goods, to create a corresponding quality assurance and conformity assessment
infrastructure and to promote competitiveness of goods produced in Latvia.
On 15 February 2000 there was a meeting of the Coordination Council of the National
Program of Quality Assurance where the report on the activities implemented within the National
Program on Quality Assurance and the Regional Quality Assurance Program PRAQIII in 1999 wasdiscussed. The Action Plan for National Program of Quality Assurance for 2000 was approved (see
Insertion 4.11).
The regulations of the Cabinet of Ministers in the area of conformity assessment and
certification are revised on the basis of the law of 24 October 1999 – “On Amendments to the Law on
Conformity Assessment”. On 4 April 2000 Regulations of the Cabinet of Ministers on accreditation oftesting and calibrating laboratories and inspection institutions were approved as well as Regulations of
the Cabinet of Ministers on the procedure of recognition of conformity assessment documents issued
in a foreign country.
In line with the invitation of the European Commission extended to Latvia to continue
negotiations about the conclusion of the European conformity assessment protocol (PECA) – on
22-25 November 1999 in R īga there was the second round of negotiations where the text of the
appendices to the agreement were discussed. The EC delegation also visited institutions involved inthe quality assurance process. The work at ratification of the protocol is continued and in Brussels on
23 May 2000 there was a discussion of the enlargement of priority sectors where the process of
approximation of Latvian legislation with the requirements of the EU is going on. Project application
“Latvian National Quality Assurance Project” for PHARE 2000 investment program for the amount
of 2 million EUROs was developed and submitted. The project will cover areas of standardisation,accreditation, metrology and training of entrepreneurs.WT/L/362
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Insertion 4.11
National Program of Quality Assurance in 2000:
Legislation – to develop drafts of regulations of the Cabinet of Ministers on nominal values of
mass and volume of goods and measuring vessels; on fuel quality standards; on electrical safety of
equipment; electromagnetic compatibility; accreditat ion of testing and calibrating laboratories and
certification and inspection institutions; recognition pro cedures when drafting regulations of the Cabinet
of Ministers on Regulations of the Accreditation Council.
Implementation analysis of Articles 28-30 of the EU Agreement and the development of the
concept for elimination of restrictions to the free movement of goods, evaluation of the EU legislation
impact on the development of the national economy of Latvia and overall business activity.
Work at the position of Latvia for implementation of the TBT agreement and participation in
the WTO TBT commission; work in the working group of the Baltic States on co-operation in the area
of quality assurance.
Consumer rights protection and market surveillance – to develop regulations of the Cabinet of
Ministers on household appliances and their labelling; to harmonise Latvian consumer rights
protection legislation with the provisions of the EU legislation; to increase capacity of the Consumer
Rights Protection Centre in the area of regulatory documents and market surveillance.
Publishing of educational and information mate rials on consumer rights protection, issues of
rights and legislation for educational workers and j udges. To organise training on practical questions
of consumer rights protection legislation and their comparison with the EU practice in this area.
Conformity assessment of building materials – to develop draft regulations of the Cabinet of
Ministers on the procedure of conformity assessment of building materials and building products,
instructions of the Cabinet of Ministers on authorisation of institutions for conformity assessment;
adaptation and translation of CEN and ISO standards, to develop Latvian national standards in the
area of conformity assessment of building materials.
Accreditation of certification institutions and testing laboratories. To organise training
seminars for staff of testing laboratories.
Food – to develop draft regulations of the Cabinet of Ministers on requirements of safety of
food additives, components of new food, circulation of mother milk substitutes, food enriching
components, natural mineral water and special food, and to provide information to the public about
the mentioned drafts, to organise training courses on genetically modified organisms and food, control
of genetically modified organisms in nature and f ood market; to represent Latvia in the food control
working group of the Council of Ministers of the Baltic States and Nordic countries.
Standardisation – adaptation of the European standards in line with the goals of the Public
Program on Standardisation; adaptation of ISO and EN standards in the status of national standards of
Latvia; approbation of standard methodologies and translation of standards.
To set up a information system on standards-related legislation.
Participation of SIA “Latvijas standarts” in international fairs.
Metrology – analysis of the situation in Phase I of the implementation of the Quality
Assurance System in the Latvian National Metrology Centre and the development of the good
laboratory practice policy.WT/L/362
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Conformity assessment infrastructure – assessment of conformity assessment institutions and
accreditation system, participation of the Laboratory Department of the Latvian Environment Data
Centre in international inter-laboratory comparative testing, accreditation and supervision.
To organise meetings of the co-ordination council on the assessment of building materials.
Training – seminars about the system of metrology, standardisation and conformity
assessment in Latvia, ISO and EN standards, methods of sample selection, levels A, B and C of the
machine building directive, HACCP system and legi slation of food products, EU legislation in the
area of free movement of goods in priority sectors of Latvia, quality assurance questions. Preparation
of information materials on introduction of ISO standards in enterprises. Co-operation with the
exhibition company BT1 and TV program “Quality” highlighting quality assurance and the process of
implementation of the EU legislation.
Quality systems and quality assurance – information activities linked with the Latvian Quality
Award competition, perfection of criteria of this competition in line with the European excellent
business practice model and the Total Quality Management principles. Organisation of international
conference and the development of a training program on introduction of quality systems in
institutions of public administration. Preparation of a special edition of the magazine “Quality” for
European Commission on the implementation of PHARE PRAQIII program in Latvia.
To prepare a report to the PHARE PRAQIII liaison comm ittee on results of implementation
of PHARE PRAQIII in Latvia and development for proposals for PHARE PRAQIV program.
Within the scope of the National Program on Quality Assurance and with the support of
PHARE PRAQ III program in the first half of 2000 there were seminars for entrepreneurs of Latvia
on 45,004 standards, on sample selection, on machine building directive, on HACCP system and food
legislation and on the EU legislation in the area of  food. At the beginning of 2000 – 7 representatives
of Latvia were given the opportunity to attend meetings in Brussels organised by the European
Commission and the European Standardisation Ins titution CEN. In 2000 – 23 different meetings of
working groups were attended in Europe within the context of continuation of the PRAQ III programproject – Pan European Regulatory Forum on Pharmaceuticals (PERF) – started in 1999. In summer
2000 it is planned to organise in France a seminar for representatives of testing laboratories of
pressure vessels and electromagnetic compatibility and low voltage laboratories.
2. National Standardisation and Metrology
In line with the Concept on the National Standardisation System and Standardisation Law the
following institutions have been established in 1999 on the basis of the Latvian National
Standardisation and Metrology Centre:
- State non-profit company SIA Latvijas Standarts ;
- State non-profit company SIA Latvian National Metrology Centre .
- State civil service agency – State Metrology Inspection.
These organisations function in line with the re spective legal documents on standardisation and
metrology incorporating the respective intern ational requirements and those of the EU.
Standardisation.
The goal of SIA Latvijas Standarts  is to supervise and co-ordinate activities of standardisation
carried out by enterprises and organisations of Latvia and to provide Latvian economy withinformation on standards.WT/L/362
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Main activities of SIA Latvijas Standarts  are:
- to create the national standard fund, to organise the development of Latvian national
standards, adoption of international, regional standards in the status of national
standards;
- to issue and publish Latvian national standards, to maintain database of
standardisation documents and to disseminate standardisation information.
43 technical committees of standardisation in various areas have been established to carry out
the development of national standards, adaptation of international and regional standards.
All the stakeholders interested in standardisation participate in the work of these committees.
These stakeholders are producers, organisations of consumer interests protection, certification, testing,
and accreditation, control and supervision and others.
As of 1 May 2000 – 2115 including 252 adapted international and 1738 EU standards are
registered. 652 European standards have been adapted in 4 months of 2000.
Service of standardisation information since the beginning of the year has been provided to
1820 legal and physical persons.
In co-operation with the Latvian National Metrology Centre, Latvian National Accreditation
Office and State Metrology Inspection – a seminar course on “Metrology, Standardisation and
Conformity Assessment System in Latvia” for specialists of national economy was continued. In May2000 there was a seminar for chairpersons of technical committees on standardisation with
participation of specialists from the German standardisation institution DIN.
Metrology
The aim of the Latvian National Metrology Centre (LNMC) is to supervise and
co-ordinate the activities of Latvian enterprises and organisations in the field of metrology.
Main activities of the Centre are:
- to take part in the development of legal documents in the area of regulated metrology;
- to provide standard base of physical measurements for reproduction;
- to approve type of measuring equipment and include them in the state measuring
devices register;
- to verify and calibrate measuring devices;
- to work together with metrology organisations of other countries;
- to represent national interests in the area of metrology in international metrology
organisations;
- to develop a training program in the area of metrology, to organise training courses
and seminars on metrology and other aspects of quality assurance and consumer
interest protection.
On 25 January 2000 the Cabinet of Ministers passed the concept on the development of the
national metrology of Latvia to harmonise the national metrology system with the practice accepted in
the member states of the EU and the needs of the Latvian economy aimed at promoting
competitiveness of Latvian goods and services both in the domestic and international market and
protection of consumers from proliferation of pro ducts dangerous to life, health and environment.
Implementation of this concept will promote integrat ion of Latvia in the European Union where the
proper conformity assessment mechanism underpinning the free movement of goods is one of the
most important factors.WT/L/362
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The Latvian National Metrology Centre in four months of 2000 has carried out 220 thousand
verifications in different sectors.
Representatives of the Latvian National Metrology Centre participate in the WELMEC
working group No.10 on “Measuring Systems for Liqu ids other than Water” and in the CASCO
working group No.8 “Conformity Assessment Committee”.
The international office of weights and measurements (BIPM) has invited Latvia to attend the
General conference on weights and measurements (CGPM) in the status of the associated member.
State Metrology Supervision.
The State Metrology Inspection –an independent civil service agency – functioning since
1 April 1999 carries out state metrology supervision. It operates according to the law “On Uniformity
of Measurements” and regulations No.331 of 31 August 1998 of the Cabinet of Ministers
“Regulations of the State Metrology Inspection”.
The list of measuring devices subjected to state metrology control and supervision is
contained in Regulations No.334 of the Cabinet of Ministers of 31 August 1998. Since the beginning
of 2000, State Metrology Inspection has carried out state metrology supervision in 520 trading,
service and production companies applying state me trology supervision to 18.3 thousand measuring
devices.
State Metrology Inspection carries out also metrology control of pre-packaged goods
checking the amount of pre-packaged goods to be sold and the conformity of content labels to the set
of rules. Regulations No.336 of the Cabinet of Ministers of 31 August 1998 stipulate 16 different
titles of pre-packaged product groups subjected to the state metrology control. These regulations have
gained effect on 1 July 1999. Since the beginning of 2000 state metrology control of pre-packaged
goods has been carried out in 4 enterprises where 8 types of food were checked.
3. National Accreditation System
Since 1994 the National Accreditation System of Latvia is united and corresponds to
international regulatory standards. In accordance with the law “On Conformity Assessment”,
accreditation, evaluation and supervision of testing and calibration laboratories, certification and
inspection institutions in the non-regulated sphere as well as assessment and supervision in the stateregulated sphere is carried out by the National Accreditation Office – LATAK.
One of the most important tasks of accreditation is to achieve recognition of quality and
safety certificates issued by a single country by other countries without a repeated testing and
certification.
Such international recognition on the level of Europe is organised by the EA (European Co-
operation for Accreditation) which evaluates national accreditation systems of different countries reaching
mutual recognition of accreditation systems and mutual recognition of results provided by the conformity
assessment institutions accredited within these system s. European experts have evaluated the Latvian
National Accreditation Office. Acceptance of the offi ce into the EA as a full member should also be
considered a positive result.
The number of accredited institutions in Latvia is  increasing every year covering all the required
conformity assessment institutions of European EN 45,000 standard series. 3 testing laboratories and 1
calibrating laboratory have been accredited as of 1 May 2000.WT/L/362
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Laboratories also in new, specific areas were accredited in 1999 and first half of 2000. These
were laboratories for mechanical testing of aircraft nodes and part wear, indicators of fire risks related
to substances and materials, fire protection equipment, testing of fire fighting equipment and
substances, blood preparation for biochemical, h aematology and biological testing, testing of
chemical products, petrochemical and physically chemical testing.
The Office has put information about the accredited institutions and the system of
accreditation on web-site: http://www.latak.apollo.lv. Information about the accredited institutions is
published in the newspaper Latvijas V ēstnesis and in the publication “The Accredited Institutions of
LATAK”.
4. Protection of Consumer Interests
On 20 December 1999 Saeima passed the law “On Advertisement”. The aim of the law is to
regulate creation and dissemination of advertisement in Latvia and protect interests of consumers and
producers and the general public in the area of advertisement of goods and services and to eliminateproliferation of advertisement unfair to consumers or producers.
The law “On Advertisement” establishes the general requirements: advertisement should be
legal, honest and fair, it should not decrease the trus t of the society in advertisement, it must comply
with the universal rules of fair competition, there should be no propaganda of violence and warfare. The
law prohibits misleading advertisin g and stipulates the requirements in regard to comparative
advertising. It regulates general conditions of making and spread of advertisements and supervision and
responsibility for violations in the area of advertising.  The law is co-ordinated with the EU directives on
misleading and comparative advertising.
The law “On Advertisement” gained effect on 24 January 2000.
On 23 March 2000 the law “On Amendments to the Code of Administrative Infringements”
was passed specifying penalties for breaches of the Consumer Rights Protection Law (18.03.99) and
the law “On Advertisement” (20.12.99). The laws say that administrative penalties for violations of
consumer rights protection may be applied not only to physical but also to legal persons. Fines may
reach 10,000 LVL and 3,000 LVL for infringements of safety regulations of goods and services. The
law gained effect on 27 April 2000.
On 29 February 2000 the regulations No.78 “On Labelling of Glass Products” were adopted
spelling out that products of crystal glass that correspond to specifications provided in the regulations
may be labelled with the respective symbols – a golden circle (highest quality crystal), quadrangular
silver colour label (lead containing crystal) and isosceles silver colour triangle label (crystal glass).
The regulations also provide methods of identification of crystal glass groups. The regulations willgain effect on 1 July 2000.
On 8 February 2000 CM regulations “On Label ling of Food Products” were adopted. The new
regulation similarly to the previous ones spell out the information to be provided on labels of food
products. All the labels should contain information about the production lot of the food product. In the
consumer-oriented labels the following information should be given:
- trade title of the food product;
- list of components of the food products and quantities of the respective ingredients or
their groups;
- net weight in case of pre-packaged goods;
- minimal validity time or final validity date;
- special conditions for storage or use;
- name and address of the producer or packager;WT/L/362
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- data about the origin of the product if abse nce of such information may be misleading
for the consumer;
- instructions about use if it is impossible to properly use the product in the absence of
such instructions;
- nutrition and energy value, if appropriate.
Additionally to the old set of CM regulations the new ones also provide special requirements
of labelling referring to information about products made from genetically modified components.
Ministry of Economy has drafted several new regulatory documents. The following have been
already passed in Saeima in the first reading:
- draft law “On Safety of Goods and Services” defining the general requirements in
regard to safety of goods, duties of producers and distributors and rights and duties of
market surveillance institutions;
- draft law “On Liability for Deficiencies of Goods and Services” stipulating liability
of a producer, importer and distributor in the event of a deficient product.
The White Paper of 1995 about integration in the internal market, chapter on protection of
consumer rights mentions the promotion of non-government organisations among the six
preconditions to ensure implementation of the consumer rights legislation. For this reason, the concept
on increase of the role of consumer interest protection NGOs was developed providing severalalternatives for support of these organisations.
Consumer Rights Protection Centre is the main institution that implements protection of
rights and interests of consumers. In 1999 the Consumer Rights Protection Centre has:
- inspected trading and service companies – 2,065
- reviewed applications and complaints of consumers – 564
- consulted consumers – 5,417
- consulted sellers and providers of services – 1,731
- reviewed administrative infringement
cases relating to violation of consumer rights – 883
- provided opinions about consumer rights
provided to courts – 6
H. R
EGIONAL ECONOMIC DEVELOPMENT
Latvia is country with marked social and ec onomic differences between different regions. To
reduce these differences there is a special mechanism set up in Latvia providing weak regions the
opportunity to benefit from state support for the development of business environment and growth ofregional competitiveness. The program of the assisted regions unites into a single system public
administration, local government and private structures. It is also monitored by the sub-commission of
the Development of the Assisted Regions in th e Saeima Social and Labour Affairs Commission.
The program on the assisted regions is implemented already three years. Not only the status
of the assisted region but also the project application which priority is identified by a local
government is an essential precondition to receive state support. After that, projects are submitted to
the Ministry of Economy and evaluated in the Co nsultative Commission of the Regional Fund. Non-
profit state limited liability company “Regional Development” then concludes agreements on co-
financing with the applicants of the submitted projects and disburses allocated resources.WT/L/362
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Submitted projects
At the end of 1999 there were more than 760 project applications from 85.5 per cent of local
governments of the assisted regions. The most active were: Prei ļi, Jēkabpils, Kr āslava and Madona
region local governments and enterprises. Unfortunately not a single project till the end of 1999 was
received from 29 local governments: in Ludza region (Bri ģi, Goliševa, L īdumnieki, M ērdzene,
Miglinieki, Nukša, Pilda, Rund ēni and Salnava rural municipalities and Zilupe town), in R ēzekne
region (Čornaja, Feima ņi, Ilzeskalns, Lenži, M ākoņkalns, Nautr ēni and Ozolaine rural municipalities),
in Balvi region (Krišj āni, Lazduleja, Vectilža and V īksna rural municipalities), in Kr āslava region
(Asūne, Krāslava and Ķepova rural municipalities), in Daugavpils region (Ambe ļi and Biķernieki
rural municipalities), in Prei ļi region (V ārkava rural municipality) and in Ventspils region (T ārgale
rural municipality).
The biggest number of applications (70 per cent) came form peasant farms being the most
widespread type of business in the assisted regions. Local governments have submitted 126 projectsor 16 per cent of all projects aimed at improvement of infrastructure and business environment.
The most popular type of support requested is full or partial compensation of interest rates of
target credits amounting to nearly three fourths of the total budget of planned expenditure of the fund.
Approved projects
The decision to support or reject the submitted projects is made by the Consultative
Commission of the Regional Fund employing the benefit points method. 421 projects were approved
and passed over to co-financing from the Regional Fund till the end of 1999 for the total amount
exceeding 4.6 million Lats. These projects in the av erage will be implemented in 2-3 years although
there are also projects for 5 years and longer.
Average contribution of the Regional Fund per a project is 11 thousand Lats.Although more than 2/3 of projects came from peasant farms (see Figure 4.6.) still the
projects related to traditional and non-traditional farming is less than a half. This means that not all
projects submitted by farmers are linked with agriculture.
There are very few projects related to industry and the existing ones are mostly in wood
processing, which is a negative trend.
Projects envisage to create 3452 new jobs, i.e. 8 jobs in the average per one project. Each
newly create job costs the Regional Fund in the average 1351 Lats. It is more expensive in projects
submitted by peasant farms – 1576 Lats and cheaper in projects of various business activities – 962
Lats.
All applicants of the approved projects have received rights to enjoy corporate income tax
relieves. The list of companies entitled to tax ex emptions is published in the newspaper “Latvijas
Vēstnesis”. Tax exemption for the taxation year of 1998 was given to 159 companies and in 1999 to
231 companies more.WT/L/362
Page 135
Figure 4.6
Approved Projects by the Regional Fund by Sectors
(in percent)
Traditional 
agriculture
40%
Non-traditional 
agriculture
3%Services
23%Business 
environment 
creation
4%Infrastructure 
improvement
7%Other types of 
business
1%
Industry (without 
wood processing)
5%Tourism
5%
Wood production 
and wood processing
12%
Revenues and Expenditure of the Regional Fund
During the performance of the Regional Fund in 1998-1999 the main source of its revenues
was State Property Privatisation Fund. At that time resources from the state basic budget and other
sources were not allocated for this purpose. It must be noted that the allocated resources were not
transferred in the planned amounts and within the planned deadlines. For example, in 1999 RegionalFund received by 60 per cent less than planned.
Resources were used for co-financing of projects, economic education activities and
administrative spending.
Co-financing of projects amounted to 82 per cent of Regional Fund expenditures, of which 90
per cent were direct support of businesses (70 per cent – interest rate payments, 3 per cent –investment into the foundational capital from the fund resources) and the remaining part was indirect
support linked with infrastructure (4 per cent) and improvement of business environment (5 per cent).
Apart from this, there was also expenditure for co-financing of economic education activities
organised in a centralised way (see Insertion 4.12).
Insertion 4.12
Economic education activities supported by the Regional Fund in 1998-1999.
Altogether there were 46 seminars in regional centres, towns and rural municipalities involving
1600 entrepreneurs and local government staff. The goal of seminars was to provide information to
municipality staff and businesspeople about state support to entrepreneurship, the directions of the program
on the assisted regions, Regional Fund activities, prep aration of business plans and projects as well as to
give methodological and informati on assistance in preparation of proj ect applications and business plans.WT/L/362
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The methodological material “Regional Devel opment Policy of Latvia” was published and
regional conferences on “The Regional Economic Policy of Latvia and Promotion of
Entrepreneurship in the Assisted Regions” were organised in Balvi, Prei ļi, Jēkabpils, Valmiera, Talsi,
Jelgava and R ēzekne regions. Conferences were attended by 450 participants from the assisted
regions. The goal of these conferences was to inform local governments and entrepreneurs on the
implementation of the Regional development policy of Latvia, the accomplishments and plans for
future of public institutions in the area of regional  development. There were also discussions about the
results of the first phase of economic education activities. Local governments and entrepreneurs
expressed their views in regard to further economic education in the assisted regions.
In the result of the above discussion, there was an idea to organise Business Clubs in Madona,
Jēkabpils, Dobele regions. In December 1999 foundati on meetings of Business Clubs took place and
agreements on co-operation between the Regional fund and local governments were concluded, also
action plans of Business Clubs were agreed.
More than 1/3 of project co-financing was invested in projects related to agriculture  (see
Table 4.6). These projects contain plans not only for the expansion, modernisation and specialisation
of agricultural production, also part of projects de al with the development of non-traditional sectors of
agriculture, such as growing and processing of fruits, berries, vegetables and mushrooms. Farms that
are specialised in raising of certain type of agricultural crops have started to develop new directions ofbusiness such as experiment and demonstration plantation areas. Farm specialists offer consultations
and pass over their experience to other farmers. This is a way to educate and raise interest of farmers
of the region and neighbouring regions willing to start or improve their work in a certain area of
agricultural activity.
Table 4.6
Expenditures of the Regional Fund in 1998 and 1999 by type of activity
Resources from the Regional
Fund by sectors (%)Resources invested by
businesses (lats per 1 lat
of RF co-financing)
Agriculture 33.0 8
Services 7.1 17
Forestry and wood processing 12.1 22
Tourism 3.2 7
Industry 18.3 10
Other types of business 7.8 7
Infrastructure improvement 10.7 4
Business environment creation 7.7 1
Total 100 Average
10
Many projects contain non-commercial, yet far-reaching ideas in regard to work of farms
containing high ethical values. These are rural landscape formation, restoration and preservation.
Basically these are small projects with a few new jobs created yet if implemented they will provide agood base for future development of tourism in the region.
For a large number of peasant farms agricultural production is not the only source of income.
At present there is tendency of reorientation of farm activities from traditional agriculture to services
or a specific production where market space is still relatively empty.
One of the alternative types of business in farms is tourism. There are small projects with a
small number of jobs usually in addition to the basic agricultural activity. Banks are rather reluctant toWT/L/362
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credit such projects while there is no confidence that they will be able to pay back due to poor
infrastructure, price level, etc. reasons.
Nearly 1/5 of projects is linked with the renewal, creation or development of industrial
production. Typically, that in the assisted areas, especially in Latgale, industrial output equals to only
10 per cent of GDP of the region. Due to this reason it is very important to develop industry both for
the whole country and for the assisted areas. The majority of projects financed from the RegionalFund are related to wood and food business establishment, modernisation or expansion of activities.
There are also projects stipulating the development of textile industry, peat processing, optical fibre
production, construction materials, chemical industry and energy.
Insertion 4.13
Regional Fund support to industrial production
Project “Modernisation of the Quartz Optical Fibre Production Facility” implemented in Prei ļi
regions L īvāni town by the company SIA” Anda Optec” is supported by the Regional Fund. It plans to
increase production output and quality that will substantially increase exports.
Capital repairs of buildings, purchase of equipment and devices and the control system of
heating oven was done within the scope of project implementation. In 1999 production outputs went
up by 41 per cent compared to 1997 and at the end of 1999 – 90 per cent of all products were
exported. Products of quartz optical fibre are used in medicine – in eye surgery and other medical
applications. Quality of these products is so high that they are even sold to NASA. Devices produced
in Līvāni are also supplied to the biggest observatory in the world, which is located in Spain. There
are also new partners in Europe: in Italy, France, and Finland.
Regional Fund has invested 11,380 Lats in project implementation, company invested
597,900 Lats. Till the end of 1999 in the course of project implementation 20 new jobs were created
and 26 jobs preserved.
One of the most dynamic sectors of industry is wood processing. The majority of output of
the industry is exported. Therefore wood processing projects occupy an important place in the
Regional Fund expenditure. Forestry and wood industry in the assisted regions is the main alternative
to agriculture in terms of earning revenues. Often the survival of a peasant farm directly depends on
forestry and wood industry.
Business on a specific territory is impossible without adequate infrastructure that lies within
the competence of local governments and public institutions. There are few projects of local
governments in the Regional Fund as the required co ntribution of local governments into projects is
50 per cent. Local governments in their budgets are not always able to allocate the necessary
resources to create infrastructure facilities. This, in turn, has a negative impact on work of local
entrepreneurs as, for example, tourism (also rural tourism) cannot be developed without a streamlined
and developed territorial infrastructure.
Business promoting activities organised by local governments are the example of initiative,
imagination and support of local governments for entrepreneurs. Each of these projects is linked with
the resourcefulness, persistence, purposefulness and far-sightedness of the local government in terms
of development planning.WT/L/362
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Impact of activities of the Regional Fund on the development of assisted regions
The support from the Regional Fund activates both local entrepreneurs and raises private
capital. 10 Lats of contributed co-financing by project implementers approximately corresponds to 1
lat invested by the Fund, which is slightly more th an had been planned. The smaller co-financing is in
projects related to forestry and wood industry. The most substantial co-financing, in turn, goes for
projects of infrastructure and business environment.
Taxes transferred to the budget in the course of project implementation exceeded more than
twice the resources invested by the Regional Fund (2 million Lats against 0.9 million).
Although after a year and a half of Regional Fund activities it is difficult to give a generalised
evaluation about efficiency of its work, still some  conclusions on investment attraction, promotion of
employment and impact on GDP formation can be drawn, at least in regard to those regions of Latgale that
fully correspond to the status of the assisted region. Macroeconomic data on the respective regions may be
used for such comparison.
Table 4.7
Impact of Project Implementation on Employment, Investments
and GDP in the Assisted Regions*
(growth  per cent against the situation if projects were not implemented)
Employment Investment GDP
Balvi region 0.6 22 0.7
Krāslava region 2.3 69 3.6
Ludza region 0.6 21 1.0
Preiļi region 1.2 30 1.7
Rēzekne region 0.9 37 1.3
* estimation of Ministry of Economy
Insertion 4.14
Questionnaire of the Regional Fund carried out at the end of 1999.
Local governments providing their evaluation on project efficiency and contribution into
the development of the region recognised that implementation of projects with the RF financing
proceeds in line with priorities identified in local government development plans. The main benefits
mentioned by entrepreneurs and local governments arising from the use of the RF support are:
- possibility to increase volume of investments . This allowed entrepreneurs to modernise and
expand production faster. Modernisation of industrial companies in turn increased
competitiveness and product quality expanding sales markets, including export possibilities.
Many peasant farms were given the chance to diversify production – both turning to non-
traditional agriculture and developing services and also to start industrial production. Local
governments could start several infrastructure development projects giving them the
opportunity to improve the quality of communal services (utilities) and reduce their costs;
- newly created jobs . Wages improved financial situation of families and also indirectly,
through the paid taxes, increased revenues of local governments. Local governments could
more successfully address social problems in the region;WT/L/362
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- opportunity to realise several entreprene urship environment improvement and adult
economic education activities. Local information centres were set up providing information
about state support possibilities and writing of concrete business plans, special information
activities were also organised;
- experience of business plan development . Possibility to benefit from the Regional Fund
resources often encourages and provides knowledge for entrepreneurs and local governments
to get involved in various projects. Many entrepreneurs and local governments implement
several projects assisted by the Regional Fund and also participate in other projects.
Table 4.7 contains calculations made by specialists of the Ministry of Economy showing that
the biggest impact from project implementation was left on the economic situation in Kr āslava region.
In all regions the share of investments with particip ation of RF exceeds 1/5 of total investment in the
region, yet in Kr āslava region these are more than a half. This testifies that in the mentioned regions a
substantial group of active entrepreneurs use the support of the Regional Fund. In terms of comparing
costs for creation of a new job, the lowest costs among Latgale regions are in Kr āslava and R ēzekne
regions (respectively 640 and 658 Lats). Therefore, we may say that in the mentioned regions RF
resources are used slightly more efficien tly than in the remaining three regions.
The program on the assisted regions should be improved in several areas in order to increase
its efficiency. These areas are:
- the ratio of attraction of the financing to GDP should be set in legislation to have a
stable nature of the financing for the assisted regions program and guarantee
sustainability of the program regardless of often changes of governments;
- although there is a developed normative base with clear, rather objective criteria for
granting status of the assisted region, project application and evaluation still at the
moment it is possible to employ other important criteria expressed by statisticindicators of social and economic situation of the region for a more objective
identification of territories, that were not used in 1997. Systems of criteria based on
the accumulated experience should be developed so that they are based only on
quantitative criteria leaving no place for subjective and biased decisions;
- one of the most important types of support to entrepreneurship from the Regional
Fund is repayment of interest on loans. In  future would be useful to expand and
diversify direct and indirect types of support to businesses, such as: investment in the
fixed capital of companies, subsidies to investment in fixed capital, additional
payment for creation of new jobs, investment into local funds of the assisted regions,
etc.
An inter-ministerial working group has been set up involving representatives of local
governments and academia to review the status of the assisted regions and update the program with
the aim to convert the experience accumulated in the years of implementation into a legal document.
Ministry of Economy prepares amendments to normative acts linked with the review of the status,
increase of the share of assisted territories, more homogeneous division into territorial groups,
diversification of state support intensity, increase of types of state support and provision of stable
financing for the program of support to the assisted re gions in order to be able to get involved in the
use of the EU pre-structural funds.
Local development funds and the development councils of the assisted regions are being set
up with the view to decentralise state support. Until now, there are two development councils of the
assisted regions – in the North-east region including Ape town and 7 rural municipalities in Al ūksne
and neighbouring regions; in Daugava region covering Kr āslava and Prei ļi regions and several rural
municipalities of Daugavpils region. Preparatory work for establishment of local development funds
is also in progress in these regions.WT/L/362
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I. SPECIAL ECONOMIC ZONES AND FREE PORTS
Establishment of free and special economic zones was started in Latvia at the end of 1996 and at
the beginning of 1997. At present, there are four free zones in Latvia: R īga Free Trade Port, Ventspils
Free Port, Liep āja Special Economic Zone and R ēzekne Special Economic Zone.
One of the most important goals of free ports is improvement of infrastructure and
environment to be able to attract new investments and open new production sites.
Liepāja Special Economic Zone.
Liepāja Special Economic Zone (SEZ) was established with the aim to develop and promote
trade, industry, shipping, air traffic and also international exchange of commodities through Latvia.
26 companies have been awarded the status of the zone since the foundation of Liep āja SEZ
in 1997 (17 companies in 1998, 9 – in 1999). 11 companies were grassroots businesses (8 – in 1999).
In 1999 the newly set–up companies attracted Swiss, German and Danish capital.
The successful operation of many companies which have operated also previously has let
them privatise buildings on the territory of SEZ. In 1999 the process of streamlining ownership rights
and their registration in the Land Register was started. Consequently, the state land under buildings
owned by an owner and the adjacent territories were transferred for privatisation. 211 ha of land was
transferred for privatisation.
There are 65 ha of free customs zones on the territory of SEZ. 14 enterprises operate on the
grounds of free zone regulations. 17 free zone certificates have been issued to support work of these
companies. According to the Law On Customs and the Law On Liep āja SEZ, there is a special
procedure of importing and processing commodities, providing services and tax relieves – 0 per cent
of VAT, exemption from excise tax and customs duties if the enterprise has respected the proportion
between exports and goods and services brought in for domestic use.
Net turnover of SEZ enterprises in 1999 reached  83 million LVL, of which exported goods and
services amounted to 80 million LVL (in 1998 this  was, respectively, 81.7 million and 74.5 million
LVL).
Higher level of exports was mainly reached by port enterprises (“Laskana”, “Terrabalt”,
“Trans Liep āja”, “Transwide Service”) and several manufacturing companies (“Liep ājas Metalurgs”,
“Oil Extraction Company”, “Erke”). Main destinations of exports were Denmark, Germany, UK,
Sweden.
SEZ companies provided 3775 jobs. In all enterprises of SEZ average wage was higher than
average wage in Liepaja (see Tables 5.1 and 5.2).
Enterprises when applying for the SEZ status  have to make an agreement with the SEZ
Administration on their business activity on the territory of SEZ negotiating the following:
- total amount of investment, separately indicating investment in modern technologies;
- amount of exported products;
- number of jobs;
- average wage.
20.5 million LVL have been invested in the development of various SEZ companies in line
with the investment agreements (9.3 million LVL in 1999). All SEZ companies basically invested in
modern technologies (64 per cent of total investment).WT/L/362
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Because of heavy investing which will be depreciated over the period of several years the
financial year of 1999 was negative for Liep āja SEZ Administration. The budget of SEZ
Administration was not executed as the projected turnover of cargo, mainly due to the Russian crisis,
was not reached.
However, during the last three years long term agreements have been concluded with
24 enterprises which will manage the territory of 94 ha as well as short term agreements on theactivities on 21 ha of land. Business activity has started also in the earlier abandoned former USSR
military zone which was the main goal of establishment of Liep āja SEZ.
Rēzekne Special Economic Zone
The purpose of establishment of R ēzekne Special Economic Zone (RSEZ) as a territory with
tax exemptions was to develop industry and transport, exports and imports of goods through Latvia
and to attract investments into production, infrastructure development and create new jobs. RSEZ
should promote the development of R ēzekne and the whole Latgale region.
The law on R ēzekne Special Economic Zone was passed on 1 October 1997. However, real
work was started in summer 1998 when the first company received the licence for business activity on
the territory of RSEZ and was awarded the RSEZ enterprise status.
Non-profit JSC “R ēzekne Special Economic Zone” which pursuant to the law is the enterprise
for administration of RSEZ territory was founded in 1997. The registered foundation capital is500,000 LVL, and the contributed – 257,700 LVL of which:
- 120,000 LVL belongs to the state (share holder – Ministry of Economy);
- 16,500 LVL – to local governments;
- 121,200 LVL – to physical land legal entities comprising also 100,000 LVL worth
intellectual investment of physical entities.
As of March 2000, the status of RSEZ enterprise was awarded to 10 enterprises of which 7
have received business operation licences in the territory of RSEZ.
In 1999 RSEZ enterprises employed 1504 people. Average wage in RSEZ enterprises was
higher than average wage in R ēzekne town (see Tables 5.8 and 5.9).
RSEZ enterprises did not finalise year 1999 with profit, mainly due to the Russian crisis.
Consequently, also planned payments into the Business Support Fund of RSEZ and into the budget of
the non-profit JSC “R ēzekne Special Economic Zone” were not made. Agreements on business
operations for the year 2000 have been adjusted so that RSEZ enterprises can pay minimal
contributions into the Business Support Fund and the budget of the JSC regardless of their profits. The
main task of R ēzekne SEZ is to preserve production, find new markets, develop infrastructure to be
able to become more competitive.
In 2000 JSC RSEZ plans to carry out the second share issue to increase its paid foundation
capital.WT/L/362
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Table 4.8
Number of Employees and Average Wage
Average monthly wage (LVL)PeriodNumber of
employees Gross Net
1998 1,131 309.95 215.95 Rīga Free Trade Port
1999 1,184 247.15 175.39
1998 2,697 116.53 84.75 Rēzekne Special Economic Zone
1999 1,504 114.93 85.11
1998 3,745 188.03 134.82 Liepāja Special Economic Zone
1999 3,775 200.77 143.54
1998 3,642 423.23 298.12 Ventspils Free Port
1999 3,423 413.43 290.77
Table 4.9
Average Wage in 1999
Gross Net
Rīga Free Trade Port 247.15 175.39
Rīga 163.54 117.87
Liepāja SEZ 200.77 143.54
Liepāja 128.01 93.90
Rēzekne SEZ 114.93 85.11
Rēzekne 105.93 79.07
Ventspils Free Port 413.43 290.77
Ventspils 216.14 154.53
Rīga Free Trade Port
On 9 March 2000 Saeima adopted a new law “On R īga Free Trade Port” envisaging several
tax exemptions:
- goods and services provided by a VAT taxable person to the licensed enterprise on
the territory or to the administration of the free port shall be taxed with VAT at a 0per cent rate;
- Import of goods into the territory of the licensed enterprise and to the administration
of the free port from foreign countries and export to foreign countries is exempted
from customs duty and excise tax;
- licensed enterprises shall pay for real estate owned by such companies or transferred
to them for use a real estate tax with 80 per cent discount from the calculated amount.
The local government shall also have the right to reduce the remaining 20 per cent
payable or to relieve the enterprise from such tax;
- Port administration shall not pay real estate tax on real estate located on the territory
of the free port and is owned by the state or a local government.
The law on R īga Free Port at least doubles the opportunities of R īga Free Port to take part in
international trade, development of production and services.
There are 27 enterprises operating on the territory of R īga Free Trade port, of which 10
operate in the free port regime and have received all the necessary licences. In 1999 the total
investments made by State JSC “R īga Trade Port” equalled to 2183 thousand LVL including, among
other things:WT/L/362
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- Financing of construction works – 1662.5 thousand LVL;
- Purchase of information technology systems – 28.5 thousand LVL;
- Purchase and modernisation of water pipelines, heat networks and sewerage – 360
thousand LVL;
- Other investments – 132 thousand LVL.
According to the information of the Free Port Ad ministration, four enterprises working in the
free port regime in 1999 had invested 1118.506 thousand LVL.
Total cargo turnover of free port companies in 1999 reached 3804.4 thousand tons which is
3.5 times less than in 1998 (see Table 4.10).
Table 4.10
Cargo Turnover
(thousand tons)
Types of cargo R īga Free Trade Port Ventspils Free Port Liep āja SEZ
1998 1999 1998 1999 1998 1999
Total 13,315.3 3,804.4 3,604.4 34,136.5 2,296.5 2,324.2
Solid cargo 2,914.5 961.4 5,192.7 6,280.4 244.8 296.8
Liquid cargo 2,067.1 58.7 27,465.5 25,706.2 105.9 296.6
General cargo 8,333.7 2,784.3 3,388.2 2,149.9 1,945.8 1,730.8
Licensed enterprises of the free port employed 1,184 people in 1999. Average wage of people
working in the free port was higher than average wage in the city of R īga (see Table 4.1 and 4.2).
Crisis of the Russian financial system in August 1998, partial US embargo on certain types
metal cargo produced in Russia and the negative attitude of Russia in respect to granting discounts to
cargo transportation by the Latvian railway were main reasons why the amounts of processed metals
and container cargo of companies operating in the R īga Free Port substantially went down on 1999.
Ventspils Free Port
Ventspils Free Port was established to promote participation of Latvia in international trade,
attraction of investments, development of produ ction and services and creation of new jobs.
There is 91 enterprise currently operating on the territory of Ventspils Free Port of which 13
have received licences for operation in the free customs zone regime. At the end of December 1999
there were 10 enterprises operating in the free customs zone regime.
Cargo turnover at Ventspils Free Port in 1999 equalled to 34.1 million LVLThe number of employed persons in enterprises of the Free Port in 1999 compared to 1998
dropped by 219 and so did the average wage (see Table 4.1). Still, the average wage level in port
enterprises is higher than average in Ventspils city (see Table 4.2). It is planned to implement several
infrastructure investment projects in Ventspils Free Port:
Construction of new, multi-functional container terminal berths (for containers, Ro-Ro,
general cargo and trailers) including also building of container crane railway track, container loading
and storage area, construction of railway access track;
It is planned to carry out the reconstruction of road bridge across the Venta river thus
providing the opportunity for ships to go up the Venta river behind the bridge;WT/L/362
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Reconstruction of the railway line Ventspils–Zilupe increasing the capacity of this part of the
railway from 20 million till 34 million tons per year, construction of the sorting area “J ūras Parks”
and the Northern circle road, enlargement and modernisation of Ventspils 2 station, development of
the Southern Park.
J. STATISTICAL INPUT -OUTPUT TABLES
Central Statistical Bureau of Latvia has started to calculate and publish input-output tables.
These calculations essentially supplement and specify macroeconomic indicators, providing
additional opportunity to analyse most important tendencies in national economy and forecast with
methods of mathematical statistics.
Regular compilation of input-output tables is compulsory for the member states of the
European Union. Also countries willing to accede to the European Union have started preparatory
work for creation of input-output tables. To accelerate these processes and to ensure a uniform
methodological approach in input-output table calc ulation, countries of Central and Eastern Europe
took part in a joint project led by the Statistical Office of the European Union. Several methodological
problems were clarified during this work and experience of different countries in this complicated
calculation was compared.
Input-output system is a set of statistical tables of which the most important are Supply and
Use tables and Symmetri c Input-Output tables.
As mentioned above input-output tables may be treated as a general model of national economy
providing a detailed description of the domestic production and product flows in the economy. The most
important regularities of economic flows, which in the system of national accounts characterise the flow
of total revenues, are also respected in this mode l when describing flows of  specific products. Creation
of such model demands considerable additional labour and financial resources as this will considerableexpand the scope of statistical reports. Even more so that preparation of the necessary information is
linked with additional workload al so for record-keepers of enterp rises. The necessary complicated
calculations made by statistical institutions are also linked with additional work and resources. At
present the project is carried out with PHARE support.
Input-output tables may be widely used in economic analysis and forecasting, especially when
it is necessary to evaluate direct and indirect impact of various factors on the total national economy.
Indirect impact may be best of all assessed from the Symmetrical Input-Output table. In turn, Supply
and Use tables are better used in evaluation of direct results as they are closer linked with other
statistical information, there are less assumptions in calculations and more details.
Input-output tables are most often used for evalua tion of the direct and indirect impact with a
view to clarify how:
- prices and changes in legislation will affect the value of various resources and types
of consumption;
- change in types of individual resources an d consumption will influence total value of
resources and consumption;
- prices for resources will affect consumption prices;
- changes in consumption will influence resources and vice versa;
- changes in the development of individual sectors will influence total imports.
Sphere of application of symmetrical input-output tables in economic analysis is very wide.
Alongside with evaluation of impact of various f actors it also may be used in the analysis of:
- production from the point of view of cost structure and productivity;WT/L/362
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- employment and unemployment;
- capital formation and efficiency of capital;
- final consumption and export structure;
- impact of production of different products on the environment;
- the necessary amounts of imports taking into account energy demand;
- effect that may be obtained from introduction of new technologies, etc.
Imports matrix of the symmetrical input-output tables is a valuable tool for analysis. All
imported goods and services in this matrix are divided in types of consumption that allows analysing
not only the present situation but also gives the opportunity to evaluate potential changes of:
- domestic prices or incomes with the change of the world price;
- domestic consumption with the change of the world price;
- ratio between imported and produced products if customs tariffs are changed, etc.
Alongside with the mentioned possibilities to  use input-output tables in economic analysis
they also have an important role in improvement of statistics as in the course of preparation of tables:
- it is possible to detect deviations and discrepancies in the basic data;
- it is helpful to identify weights and indices in price and volume calculation;
- balancing the supply and use tables and co-ordinating the results with indicators of
sector accounts it is possible to verify and improve the credibility and consistency of
indicators, verify if all indicator amounts are fully captured, etc.
The published input-output tables for 1996 should be considered as the first attempt to create
such tables in Latvian statistics. We hope that regular calculations of this kind will offer opportunities
for economists to deeper and more efficiently analyse economic processes of Latvia.
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