Economy of Latvia

Theeconomy of Latviais an open economy inEuropeand is part of theEuropean Single Market.Latviais a member of theWorld Trade Organization (WTO)since 1999,a member of theEuropean Unionsince 2004, a member of theEurozonesince 2014 and a member of theOECDsince 2016.Latvia is ranked the 14th in the world by theEase of Doing Business Indexprepared by theWorld Bank Group.According to the Human Development Report 2023/24 by theUnited Nations Development Programme, has a HDI score of a 0.879 (2022 data).Due to its geographical location, transit services are highly developed, along with timber andwood processing, agriculture and food products, and manufacturing of machinery and electronic devices.
Latvia's economy has had rapid GDP growth of more than 10% per year during 2006–07, but entered a severe recession in 2009 as a result of an unsustainable current account deficit, collapse of the real estate market, and large debt exposure amid the softening world economy. Triggered by the collapse ofParex Bank, the second largest bank, GDP decreased by almost 18% in 2009,and the European Union, the International Monetary Fund, and other international donors provided substantial financial assistance to Latvia as part of an agreement to defend the currency's peg to the euro in exchange for the government's commitment to stringent austerity measures.
In 2011 Latvia achieved GDP growth by 5.5%and thus Latvia again was among the fastest growing economies in the European Union. TheIMF/EU program successfully concluded in December 2011.
Privatization is mostly complete, except for some of the large state-owned utilities. Export growth contributed to the economic recovery, however, the bulk of the country's economic activity is in the services sector.
For centuries underHanseaticand German influence and then during its inter-war independence, Latvia used its geographic location as an important east–west commercial and trading centre. Industry served local markets, while timber, paper and agricultural products were Latvia's main exports.
Prior toWorld War I, Latvia was an advanced manufacturing hub within theRussian Empire, primarily serving the Russian market.After attaining independence in 1918, Latvia lost its status as an advanced manufacturing hub.Latvia sought in the interwar period to become an international exporter of food and to re-industrialize.Latvia experienced growth in GDP per capita during the interwar period, although some economic historians have argued that there was stagnation in the period of the authoritarianKarlis Ulmanisregime (1934–1940).
After reestablishing its independence, Latvia proceeded with market-oriented reforms, albeit at a measured pace. Its freely traded currency, the lat, was introduced in 1993 and held steady, or appreciated, against major world currencies. Inflation was reduced from 958.6% in 1992 to 25% by 1995 and 1.4% by 2002.
After contracting substantially between 1991 and 1995, the economy steadied in late 1994, led by a recovery in light industry and a boom in commerce and finance. This recovery was interrupted twice, first by a banking crisis and the bankruptcy ofBanka Baltija, Latvia's largest bank, in 1995 and second by a severe crisis in the financial system of neighbouringRussiain 1998. After 2000, Latvian GDP grew by 6–8% a year for 4 consecutive years. Latvia's state budget was balanced in 1997 but the1998 Russian financial crisisresulted in large deficits, which were reduced from 4% of GDP in 1999 to 1.8% in 2003. These deficits were smaller than in most of the other countries joining the European Union in 2004.
Until the middle of 2008, Latvia had the fastest developing economy in Europe. In 2003, GDP growth was 7.5% and inflation was 2.9%. The centrally planned system of the Soviet period was replaced with a structure based on free-market principles. In 2005, private sector share in GDP was 70%.Recovery in light industry andRiga'semergence as a regional financial and commercial centre offset shrinkage of the state-owned industrial sector and agriculture. The official unemployment figure was held steady in the 7%–10% range.
Thefinancial crisis of 2007–2008severely disrupted the Latvian economy, primarily as a result of the easy credit bubble that began building up during 2004. The bubble burst leading to a rapidly weakening economy, resulting in a budget, wage and unemployment crisis.Latvia had the worst economic performance in 2009, with annual growth rate averaging −18%.
The Latvian economy entered a phase of fiscal contraction during the second half of 2008 after an extended period of credit-based speculation and unrealistic inflation of real estate values. The national account deficit for 2007, for example, represented more than 22% of the GDP for the year while inflation was running at 10%.By 2009 unemployment rose to 23% and was the highest in the EU.
Paul Krugman, the Nobel Laureate in economics for 2008, wrote in hisNew York TimesOp-Ed column for 15 December 2008:
"The acutest problems are on Europe's periphery, where many smaller economies are experiencing crises strongly reminiscent of past crises in Latin America and Asia: Latvia is the new Argentina".
By August 2009, Latvia's GDP had fallen by 20% year on year, withStandard & Poor'spredicting a further 16% contraction to come. TheInternational Monetary Fundsuggested adevaluationof Latvia's currency, but the European Union objected to this, on the grounds that the majority of Latvia's debt was denominated in foreign currencies.Financial economistMichael Hudsonhas advocated for redenominating foreign currency liabilities in Latvian lats before devaluing.
However, by 2010 there were indications that Latvia's policy ofinternal devaluationwas successful.
The economic situation has since 2010 improved,and by 2012 Latvia was described as a success by IMF managing director Christine Lagardeshowing strong growth forecasts. The Latvian economy grew by 5.5% in 2011and by 5.6% in 2012 reaching the highest rate of growth in Europe.The GDP surpassed the pre-crisis level in 2018.
TheRussian invasion of Ukrainein February 2022 caused some economic problems in Latvia. Real GDP growth slowed to 2.8 percent in 2022 from 4.3 percent in 2021. Russia was a major trade partner and EU sanctions impacted this. Dramatic rises in the cost of energy, the need to seek alternative sources of gas and oil as well as logistics issues resulted in inflation averaging 17.2% in 2022 before falling back to single digits in 2023.
Privatisationin Latvia is almost complete. Virtually all of the previously state-owned small and medium companies have been privatized, leaving only a small number of politically sensitive large state companies. In particular, the country's main energy and utility company,Latvenergoremains state-owned and there are no plans to privatize it. The government also holds minority shares inVentspils Naftaoil transit company and the country's main telecom companyLattelecombut it plans to relinquish its shares in the near future.
Foreign investment in Latvia is still modest compared with the levels in north-central Europe. A law expanding the scope for selling land, including land sales to foreigners, was passed in 1997. Representing 10.2% of Latvia's total foreign direct investment, American companies invested $127 million in 1999. In the same year, the United States exported $58.2 million of goods and services to Latvia and imported $87.9 million. Eager to join Western economic institutions like theWorld Trade Organization,OECD, and theEuropean Union, Latvia signed a Europe Agreement with the EU in 1995 with a 4-year transition period. Latvia and the United States have signed treaties on investment, trade, and intellectual property protection and avoidance of double taxation.
Average wages are higher in Riga and Ventspils and their surroundings, with inland border regions lagging behind, mainly the region of Latgale.
Latvia produced in 2018:
In addition to smaller productions of other agricultural products.
In 2022, the sector with the highest number of companies registered in Latvia is Services with 71,692 companies followed by Retail Trade and Finance, Insurance, and Real Estate with 15,300 and 10,287 companies respectively.
Largest Latvian companies by valuation (EUR € billions) according toPrudentiaandNasdaq Riga(2024).
Most ofLatvian electricityis produced with Hydroelectricity. The largest hydroelectric power stations arePļaviņas Hydroelectric Power Station,Riga Hydroelectric Power PlantandĶegums Hydroelectric Power Station.
In 2017 about 4381 GWh were produced in hydro power and 150 GWh in wind power. There are plans to increase Wind electricity production under the 2021-2030 energy plan.
Latvia used to import 100% of itsnatural gas from Russia,until its import was banned in January 2023.
Key ports are located inRiga(Freeport of RigaandRiga Passenger Terminal),Ventspils(Free port of Ventspils), andLiepāja(Port of Liepāja). Most transit traffic uses these and half the cargo iscrude oiland oil products.
Latvian Railwaysis the main state-owned railway company in Latvia. Its daughter companies both carry out passengers services as well as carry a large quantity of freight cargo, and freight trains operate over the whole current passenger network, and a number of lines currently closed to passenger services.
Riga International Airportis the only major airport in Latvia, carrying around 5 million passengers annually. It is the largest airport in theBaltic statesand has direct flights to over 80 destinations in 30 countries. It is also the main hub ofairBaltic.