COMMISSION STAFF WORKING DOCUMENT Country Report Latvia 2019 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011
Date: 2019-02-27
Institutions: European Commission, Secretariat-General
Subjects: Latvia, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 27.2.2019  SWD(2019) 1013 final  COMMISSION STAFF WORKING DOCUMENT Country Report Latvia 2019 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2019) 150 final}  
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Reform priorities 

3.1.  Public finances and taxation 

3.2.  Financial sector 

3.3.  Labour market, education, and social policies 

3.4.   Competitiveness reforms and investment 

Annex A: Overview table 

Annex B: Commission Debt Sustainability Analysis and fiscal risks 

Annex C: Standard Tables 

3 

7 

14 

18 

18 

23 

27 

38 

55 

59 

60 

Annex D: Investment Guidance on Cohesion Policy Funding 2021-2027 for Latvia 

66 

References 

LIST OF TABLES 

Table 1.1: 

Key economic, financial and social indicators 

Table 2.1: 

Summary table of 2018 CSR assessment 

Table 3.2.1: 

Financial soundness indicators 

Table C.1: 

Financial market indicators 

Table C.2: 

Headline Social Scoreboard indicators 

Table C.3: 

Labour market and education indicators 

Table C.4: 

Social inclusion and health indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

LIST OF GRAPHS 

Graph 1.1:  GDP growth and components' contributions 

Graph 1.2: 

Investment growth and  contributions, % 

1 

72 

13 

15 

23 

60 

61 

62 

63 

64 

65 

7 

8 

 
 
 
 
 
Graph 1.3: 

HICP inflation and contributions, % y-o-y change 

Graph 1.4: 

Selected labour market indicators 

Graph 1.5: 

Population change and its drivers, % 

Graph 1.6: 

Selected social inclusion indicators 

Graph 1.7: 

Current account and its components, % of GDP 

Graph 2.1:  Multiannual implementation of 2012-2018 country-specific recommendations to date 

Graph 3.1.1: 

The fiscal stance and the economic cycle 

Graph 3.1.2:  Expenditure growth and the discretionary fiscal effort 

Graph 3.1.3:  Government primary expenditure by function 

Graph 3.1.4: 

Tax revenue and implicit tax rates (2016) 

Graph 3.1.5:  Property tax revenue and cadastral values in 2012 and 2018 

Graph 3.1.6:  Estimates of Latvia’s shadow of economy 

Graph 3.2.1:  Credit growth, y-o-y % change 

Graph 3.2.2:  Price to income ratio, index 2010=100 

Graph 3.2.3:  Newly constructed dwelling space, m2 per 1000 people 

Graph 3.3.1:  Job vacancies and labour shortage indicators 

Graph 3.3.2:  At-risk-of-poverty or social exclusion rate by age groups 

Graph 3.4.1:  Productivity annual change, % 

Graph 3.4.2:  Average annual growth 2010 - 2017, % 

Graph 3.4.3:  Real investment, index 2010=100 

Graph 3.4.4:  Real investment by asset type, million EUR in 2010 prices 

Graph 3.4.5:  Wage growth compared to wage benchmarks, % change 

Graph 3.4.6:  Productivity and unit labour costs, annual rate of change % 

Graph 3.4.7:  Export market shares, index 2010=100 

Graph 3.4.8:  Research and development expenditure, % of GDP 

Graph 4.4.1:  Europe's Digital progress report (EDPR), 2018 

Map 3.4.4.1:  GDP per head in Latvian regions, index EU=100 

Map 3.4.4.2:  Population change in Latvian regions,  2010-2016, % 

LIST OF BOXES 

Box 2.1: EU funds and programmes contribute to addressing structural challenges and to fostering 

growth and competitiveness in in Latvia 

Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights 

Box 3.4.1: Investment challenges and reforms in Latvia 

8 

9 

10 

10 

12 

14 

18 

18 

19 

20 

21 

21 

24 

26 

26 

27 

31 

38 

39 

39 

40 

40 

41 

41 

42 

48 

49 

49 

16 

28 

54 

2 

 
 
 
 
 
EXECUTIVE SUMMARY 

Latvia  remains  among  the  countries  whose 
economy  is  catching  up  fastest  with  the  EU 
average, but addressing population decline and 
ensuring  that  economic  growth  benefits  all  of 
society  continue  to  be  important  challenges. 
Latvia’s economic and labour market performance 
has  been  solid  in  recent  years  and  government 
borrowing has remained broadly sound. However, 
growth  has  not  been  fully  inclusive,  as  inequality 
has  remained  high  and  growth  in  peripheral 
regions  has 
the  Riga  region. 
Latvia’s  main  challenge  over  the  coming  decades 
will  be  to  ensure  that  its  economy  continues  to 
catch up with the EU average while coping with a 
falling population. Therefore it will need to invest 
in  innovation,  regional  development  and  human 
capital  to  improve  its  social,  health  and  public 
governance policies (1). 

lagged  behind 

A strong rise in investment and solid consumer 
spending  carried  economic  growth  to  4.7 %  in 
2018.  Consumer  optimism  and  the  inflow  of  EU 
funds have fuelled domestic demand for the past 2 
years  and  are  expected  to  support  GDP  growth. 
However, economic growth is set to slow down in 
2019  and  2020  as  investment  gradually  loses  its 
dynamism. Moreover, weakening external demand 
to  weigh  on  Latvia’s  export 
is  expected 
time,  consumer 
the  same 
performance.  At 
optimism  remains  high  thanks  to  strong  wage 
increases,  which  are  expected  to  continue  feeding 
consumer spending in 2019 and 2020. 

Strong  economic  growth  helped 
increase 
employment  for  the  first  time  in  3  years.  The 
unemployment  rate  fell  to  7.4 %  in  2018  as 
employment  growth  is  forecast  to  have  reached 
1.5 %. The strong economy drew more people into 
the labour market and therefore helped temporarily 
to offset the continuous decline in the working-age 
population.  However,  demographic  trends  will 
make  it  increasingly  difficult  to  increase  the 
number  of  people  employed.  Wages  are  growing 

(1)  This  report  assesses  Latvia’s  economy  in  light  of  the 
European Commission’s Annual Growth Survey published 
on 21 November 2018. In the survey, the Commission calls 
on  EU  Member  States  to  implement  reforms  to  make  the 
European  economy  more  productive, 
resilient  and 
inclusive.  In  so  doing,  Member  States  should  focus  their 
efforts  on  the  three  elements  of  the  virtuous  triangle  of 
economic  policy  —  delivering  high-quality  investment, 
efforts  on  productivity  growth, 
focusing 
reforms 
inclusiveness  and 
institutional  quality  and  ensuring 
macroeconomic stability and sound public finance. 

rapidly  in  Latvia,  (by  nearly  9%  in  2017,  7  %  in 
2018 according to Commission forecast) driven by 
the tightening of the labour market.  

the 

take 

Latvia’s  population  is  projected  to  shrink  on 
average  by  nearly  1 %  annually  over  the  next 
20  years.  That  is  roughly  the  same  pace  as  what 
has been observed since the early 1990s. However, 
whereas until now emigration has been the primary 
driver  of  population  decline,  in  the  future  natural 
population  change  will 
role. 
Moreover,  the  rate  of  decline  in  the  working-age 
population  is  set  to  accelerate  over  the  next  20 
years  compared  with  the  previous  two  decades. 
This  will  mean  that  the  ratio  of  non-working 
population to working population is set to increase 
at  a  faster  pace  than  before,  which  puts  an 
increasing burden on pension policy. Furthermore, 
a declining population tends to make the economy 
less  efficient  as  the  cost  of  infrastructure  is  borne 
by fewer people. 

lead 

taking 

inflation 

Growth in the cost of labour in Latvia has been 
among  the  fastest  in  the  EU  over  the  past  few 
years.  Due  to  the  increasing  shortage  of  workers, 
real  wage  growth  (i.e. 
into 
account)  has  exceeded  productivity  growth  for  a 
number  of  years  already.  This  has  not  had  a 
significant impact on Latvia’s export performance 
so  far,  but  if  the  current  wage  and  productivity 
trend  continues,  the  competitiveness  of  Latvia’s 
exports  could  suffer  in  the  longer  term.  On  the 
other hand, inflation remains broadly in check, the 
economy’s current account is in surplus and credit 
growth  is  low,  thus  significantly  reducing  the 
likelihood of the economy overheating.  

to 

due 

high 

remains 

low 
Inequality 
redistribution  through  the  tax  and  benefit 
system.  The  2017  tax  reform  made  income 
taxation slightly more favourable to those on lower 
incomes,  but overall  the  tax cuts were  only  partly 
targeted  at  this  group.  Moreover,  the  overall  tax 
cut  has  meant  less  funding  is  available  for  social 
benefits.  Public  spending  on  social  protection  and 
healthcare  remains  low  and  is  less  effective  at 
reducing  poverty  and  inequality  than  in  other  EU 
countries. Social dialogue between employers and 
trade  unions  in  the  private  sector  also  remains 
limited. 

Latvia  is  catching  up  fast  with  average  EU 
living  standards,  but  with  great  disparities 

3 

 
 
                                                           
across  its  regions.  Riga  and  its  vicinity  account 
for  more  than  half  of  Latvia’s  GDP  and  are  the 
country’s  economic  engine.  Regions  further  away 
from  Riga  are  both  poorer  and  have  had  slower 
growth. The average wage is 40 % higher in Riga 
than in Latvia’s poorest region, Latgale. The most 
pronounced 
in 
employment  opportunities.  In  the  greater  Riga 
area,  employment  has  increased  by  12 %  since 
2010,  while  in  the  rest  of  the  country  it  has 
declined  by  2 %.  These  disparities  have  also  had 
an impact on emigration; the population decline in 
Riga and its vicinity has been significantly smaller 
than in the rest of the country. 

differences, 

however, 

lie 

The  budget  deficit  is  set  to  increase  slightly  in 
2019 and 2020 as a result of the tax reform. The 
2018 budget balance was better than expected due 
to  strong  economic  growth.  However,  the  2019 
budget  balance 
to  deteriorate 
is  expected 
somewhat due to the high growth in public wages, 
and  the  tax  reform  still  weighing  on  government 
revenue. 

Latvia's  performance  on  the  indicators  of  the 
Social  Scoreboard  supporting  the  European 
Pillar  of  Social  Rights  is  mixed.  There  are 
notable  improvements  in  Latvia’s  labour  market: 
the  employment  rate  is  high  for  both  men  and 
women, unemployment is decreasing and there are 
fewer young people not in employment, education 
or  training.  However,  not  everyone  is  benefiting 
from  the  improved  economic  situation,  and  high 
inequality  remains  a  challenge.  The 
income 
proportion  of  people  at  risk  of  poverty 
is 
decreasing  but  remains  high,  especially  among 
vulnerable groups. Moreover, the impact of social 
benefits  on  reducing  poverty  is  relatively  limited. 
Access to healthcare remains a significant concern, 
given  the  high  number  of  cases  where  people, 
especially  in  the  lowest  income  group,  are  unable 
to receive necessary health services. 

Latvia can boost its long-term growth potential 
by  focusing  private  and  public  investments on 
regional 
innovation,  human 
capital  and 
development.  Latvia 
remains  a  catching-up 
economy and its main national development focus 
is on increasing its GDP per capita. As evidenced 
by falling productivity growth rates, the easy gains 
of  the  early  catch-up  stage  have  been  exhausted. 
This  means  that  productivity  growth  will  have  to 
knowledge-intensive 
on 
increasingly 

rely 

Executive summary 

developing 

investments 

development, 

activities.  Latvia’s  weakest  point  has  been 
innovation, which requires investments in research 
and 
people’s 
in 
knowledge  and  skills,  and  in  other  intangible 
assets. Latvia would also benefit from boosting the 
economic  potential  of  its  peripheral  regions  - 
increasing 
their  accessibility,  and  promoting 
energy  efficiency,  employment  and  investment 
opportunities.  Finally, 
in  social 
inclusion  and  healthcare  are  needed  in  order  to 
tackle  high  inequality  and  uneven  access  to 
employment  and  public  services.  Additionally, 
investment in resource efficiency is also needed in 
order  to  speed  up  Latvia's  energy  transition. 
Annex D identifies key priorities for support by the 
European  Regional  Development  Fund, 
the 
European Social Fund Plus and the Cohesion Fund 
for the 2021-2027 period in Latvia, building on the 
analysis  of 
investment  needs  and  challenges 
outlined in this report. 

Latvia has made limited progress in addressing 
the 2018 country-specific recommendations.  

There  has  been  some  progress  in  the  following 
areas:  

 

by 

passing 

Improving  governance:  this  has  been  achieved 
the  whistleblower 
notably 
protection 
law  and  by  following  up  on 
recommendations  by  the  country’s  Judicial 
Council to improve the insolvency process.  

 

Improving  accessibility,  quality  and  cost-
effectiveness of the health system. 

  Making vocational education and training more 
relevant to labour market; reforms have picked 
up pace in this area and work based learning is 
being 
a 
to  develop 
comprehensive skills strategy are ongoing.  

rolled-out.  Plans 

There  has  been  limited  progress  in  the  following 
areas:  

Improving the accountability and the efficiency 
of public administration. 

Improving  taxation:  some  efforts  have  been 
made  to  improve  tax  compliance,  but  the  tax 
burden on labour remains relatively high. 

 

 

4 

 
 
Executive summary 

and 

its 

law 

and 
international cooperation. 

enforcement  bodies 

  The  education  system  faces  a  challenge  to 
consolidate 
improving 
resources  while 
quality  and  efficiency.  While  Latvia’s 
education  system  performs  well  in  terms  of 
to  quality 
learning  achievement,  access 
education  remains  dependent  on  the  place  of 
residence  and  type  of  school.  In  addition,  a 
disproportionate  share  of  resources  is  used  for 
the  maintenance  of  the  large  school  network 
rather  than  for  teaching  and  learning.  The 
higher  education  system  is  fragmented  and 
while  tertiary  education  attainment  rates  are 
high,  the  proportion  of  science,  technology, 
engineering and mathematics graduates is low. 
Vocational  education  and  training  is  being 
modernised,  but  the  share  of  students  in  this 
type  of  education  and  their  employability  are 
below  the  EU  average,  as  is  participation  in 
adult  learning.  The  low  level  of  digital  skills 
among the labour force limits the use of digital 
technologies by businesses and the potential for 
innovation. 

  Latvia's 

is  significantly  higher 

labour  market  performance 

is 
positive  overall  but  employment  conditions 
levels. 
differ  across  regions  and  skill 
Unemployment 
in 
regions  furthest  away  from  the  capital,  and 
moving  for  work  remains  a  challenge.  Older 
people with outdated skills also encounter more 
difficulties.  Participation  and  spending 
in 
schemes which help the unemployed find work 
are  still  lagging  behind.  Efforts  have  been 
made  to  reach  vulnerable  groups  outside  the 
labour market, but this remains a complex task. 

  The adequacy of social benefits remains low. 
Benefits  rose  only  marginally  and  do  not 
contribute a lot to alleviating the high levels of 
poverty and inequality. Ambitious government 
plans  to  raise  the  minimum  income  level  have 
been  shelved  due  to  a  lack  of  funding.  The 
and 
large 
widespread under-reporting of wages mean that 
a  sizeable  part  of  the  population  has  only 
minimal 
some 
increases in the lowest pensions, ensuring their 
adequacy  remains  a  challenge,  while 
the 
proportion of the elderly at risk of poverty and 

social  coverage.  Despite 

share  of 

low-wage 

earners 

There has been no progress in the following areas:  

 

Improving  the  adequacy  of  minimum  income 
benefits: plans to improve minimum income in 
2019  have  been  proposed  but  funding  has  yet 
to be allocated for them. 

Regarding  progress  towards  its  national  targets 
under 
the  Europe  2020  strategy,  Latvia  has 
attained its employment rate target. It already met 
its  targets  on  preventing  early  school  leaving, 
tertiary  education  attainment  and  on  reducing 
poverty  in  2016,  and  is  performing  well  on 
renewable  energy,  energy  efficiency  and  reducing 
greenhouse gas emissions. However, it is far from 
its  public  research  and  development  investment 
target, which it is unlikely to meet by 2020. 

The  main  findings  of  the  analysis  in  this  report, 
and the related policy challenges, are as follows: 

  The share of capital taxation is set to decline, 
while  the  tax  burden  on  low  wages  remains 
high after the tax reform. The cuts in taxes on 
capital and on labour income have been costly, 
with  significant  benefits  going  to  the  richest 
households  while 
for 
redistributive  policies.  The  tax  burden  on 
labour  has  been  reduced  overall,  but  remains 
high  for  low-wage  earners  relative  to  the  EU 
average.  Moreover,  the  freezing  of  the  values 
used  to  calculate  land  and  property  taxes  will 
reduce  the  revenue  share  of  recurrent  property 
taxation in GDP over time. 

resources 

limiting 

strategy 

laundering 

  Despite  a  sharp  reduction  in  bank  deposits 
by  non-residents,  improvements  in  Latvia’s 
are 
anti-money 
warranted, to control the remaining banking 
risks.  In  the  wake  of  the  closure  of  Latvia’s 
third  largest  bank  ABLV  due  to  allegations  of 
money  laundering,  Latvia  banned  its  banks 
from  servicing  ‘shell  companies’  and  asked 
them  to  come  up  with  new  business  models 
that would considerably reduce the exposure to 
money laundering risk. While the non-resident 
banking  sector  has  now  shed  more  than  60 % 
of  non-resident  deposits,  Latvia’s  anti-money 
laundering  framework  still  needs  substantial 
improvements.  An  international  expert  report 
highlighted  the  need  to  strengthen  the  quality 
and  capacity  of  Latvia’s  supervisory,  control 

5 

 
 
Executive summary 

landlords’ 
housing. 

interests 

in 

the  case  of  rental 

  Latvia  is  close  to  meeting  its  renewable 
energy target for 2020, but more efforts are 
needed  to  improve  energy  efficiency.  A 
comprehensive  programme  for  improving  the 
energy  efficiency  of  dwellings  has  helped  but 
energy consumption trend in the residential and 
transport  sectors  is  growing.  Latvia  is  also  on 
track to achieve its 2020 target for the share of 
energy  produced  from  renewable  sources, 
the  support  scheme  has  proved 
although 
expensive.  

  Latvia's  recycling  rate  is  low  and  there  is 
little  progress  in  recent  years.  Latvia  still 
landfills  most  of  its  municipal  waste.  Poor 
coordination  of  policies  and  lack  of  financial 
incentives  are  the  main  reasons  behind  its 
struggle to increase the share of recycling.  

  Latvia has slightly improved its score on the 
corruption perception index, but corruption 
remains a concern. The recent adoption of the 
whistleblower  law  marks  a  positive  step.  The 
country’s  anti-corruption  body  has  also 
gathered  momentum  recently  thanks  to  it 
uncovering a number of high profile corruption 
cases.  Nevertheless,  government  decision-
making  is  still  perceived  to  be  influenced  by 
favouritism  and  the  procurement  process  as 
the 
susceptible 
implementation  of  the  anti-corruption  strategy 
and  the  lack  of  verification  of  the  officials’ 
assets declarations still raise concerns. 

to  corruption.  Delays 

in 

social  exclusion  are  increasing.  Moreover,  the 
social  protection  of  people  with  disabilities 
remains weak. Social housing is scarce and not 
always fit for living.  

  Low  public  spending  for  healthcare,  and 
unhealthy  lifestyle  choices,  are  the  main 
reasons  for  the  population’s  poor  health. 
Additional  public  financing  has  resulted  in 
tangible  improvements  in  the  availability  of 
health  services  and  reduced  waiting  times  in 
some  areas.  However,  public  spending  plans 
for  2020  remain  well  below  the  EU  average. 
Reforms  to  boost  efficiency  and  quality  in 
healthcare  are  progressing  but  are  in  an  early 
phase.  If  the  new  health  insurance  system 
comes  into  effect,  it  risks  reducing  access  to 
care  for  those  who  cannot  afford  to  make 
voluntary health contributions. 

the 

  Latvia  invests  very  little  in  research  and 
development. 
share  of 
In  2017, 
expenditure  on  research  and  development  was 
0.51 %  of  GDP  (against  2.1  %  in  the  EU 
average).  This  level  was  among  the  lowest  in 
the  EU  and  rather  stable  over  the  last  decade. 
Moreover,  research  funding 
relies  almost 
entirely  on  EU  funds.  Latvia  is  a  moderate 
innovator  with  some  strong  points  like  its 
information,  communications  and  technology 
infrastructure,  but  its  performance  is  lagging 
behind  in  human  resources,  in  public-private 
in 
sector  cooperation,  and 
intellectual  property.  Latvia’s 
innovation 
performance  could  benefit  from  the  more 
active  involvement  of  its  largest  state-owned 
companies, which have the resources to afford 
substantive investment capacity. 

investment 

in 

  Better  internal  labour  mobility  is  crucial  to 
economic  growth  outside  Riga.  Moving  for 
work  to  places  outside  the  capital  region  is 
made difficult by a lack of rental housing. This 
has  often  led  people  who  cannot  find  work 
where  they  live  to  move  abroad  rather  than  to 
move  within  Latvia.  Despite  the  lack  of 
adequate and affordable housing, investment in 
housing  in  places  outside  Riga  has  been  low 
due  to  the  population’s  low  purchasing  power 
and the lack of long-term financing. Investment 
in housing has also been hampered by lengthy 
construction  processes  and  poor  protection  of 

6 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

Strong  GDP  growth  continued  in  2018  as 
investments and private consumption pushed it 
above  4%  for  the  second  year  in  a  row. 
Consumer  optimism  and  EU  fund  inflows  have 
determined  the  growth  conditions  for  the  past  2 
years and are expected to positively influence GDP 
growth  going 
forward.  Exports  performed 
relatively well, considering the expected slowdown 
from  financial  services  and 
transit  services. 
Government consumption increased at a solid pace 
too  and  employment  growth  picked  up  in  2018 
after  several  years  of  stagnation  supported  by 
strong  growth  in  construction  activity.  At  2.6% 
growth,  inflation  remained  about  the  same  as  the 
year before. 

Graph 1.1:  GDP growth and components' contributions 

slow exports and government consumption relative 
to the previous 2 years.  

Consumption 

Solid  private  consumption  is  set  to  remain  the 
core  of  economic  growth  over  the  forecast 
horizon.  In  2018,  household  consumption  is 
forecast  to  have  grown  by  4.5%,  surpassing  the 
previous year's growth as it received a boost from 
strong  employment  growth.  Consumption  was 
further  aided  by  rapid  investment  growth  which 
led 
in  durable  goods 
increase 
consumption.  Optimism  remains  well  above  the 
long-term average and is expected to carry private 
consumption  growth  at  a  healthy  pace  going 
forward. However, weak employment growth will 
slow it down somewhat.  

to  a  steady 

Investment 

construction  were 

The  inflow  of  EU  funds  and  office  space 
construction  are  driving  investment  growth  in 
Latvia.  In  2018,  investment  is  forecast  to  have 
grown  by  11.2%,  slightly  down  from  13.1%  the 
year  before.  Office  space  and  EU-funded  non-
residential 
biggest 
contributors  to  investment  growth.  At  the  same 
time,  investment  in  intellectual  property  was 
stagnant  in  2018.  As  inflows  of  EU-funds  peak, 
infrastructure investment is set to slow but pent-up 
demand for office space and housing should ensure 
investment  growth  of  around  2-3%  over  the 
forecast horizon (Graph 1.2).  

the 

Source: European Commission 

The  Commission's  Winter  Forecast  projects 
growth  to  slow  down  to  3.1%  in  2019  and  to 
2.6%  in  2020.  The  core  growth  drivers  –  above 
average  consumer  optimism  and  the  favourable 
investment  dynamic  –  are  expected  to  remain 
present  over  the  forecast  horizon.  However  a 
number of other factors will mean that growth will 
slow  compared  with  2017  and  2018.  Most 
important  among  them,  investment  growth  is 
expected  to  slow  to  single-digit  pace  as  the  EU 
fund  inflows  peak.  Furthermore,  less  dynamic 
external demand and limited fiscal space are set to 

7 

-30-20-100102030030507091113151719'%, ppsInventories investmentInvestment (GFCF)ConsumptionNet exportsReal GDP growth 
 
 
2. Progress with country-specific recommendations 

7.9% in 2017 and continued growing at around the 
same pace in the first half of 2018. The rapid wage 
growth  has  gradually  pushed  the  services  price 
inflation  up,  but  otherwise  it  has  been  slow  to 
translate into wider inflation. In 2019, energy price 
increases,  recovering  food  price  growth  and  a 
continued  push  from  services  prices  are  expected 
to  lift  inflation  to  2.7%,  before  slowing  down  in 
2020 as the energy price increase halts.  

Graph 1.3:  HICP inflation and contributions, % y-o-y 

change 

Graph 1.2: 

Investment growth and  contributions, % 

Source: European Commission 

Trade 

Export  performed  strongly 
in  2018,  but 
weakening  foreign  demand  and  a  structural 
decline  in  some  of  Latvia’s  services  exports 
suggest  a  slowdown.  Exports  is  forecast  to  have 
grown  by  3.6%  in  2018,  delivering  a  positive 
surprise  given  that  the  decline  in  exports  of 
financial  services  and 
transport  services  was 
expected  to  weigh  heavily  on  Latvia's  overall 
export  performance.  Financial  service  exports 
which amounted to around 1% of GDP in 2017 are 
expected  to  have  declined  significantly  following 
the government’s decision to drastically reduce the 
banking  sector’s  exposure  to  non-EU  clients  by 
banning  banks  from  serving  shell  companies. 
Transport  exports,  are  in  a  long  term  structural 
decline  due  to  Russia’s decision  to divert most of 
its  cargo 
these 
developments,  the  exports  are  forecast  to  perform 
well  despite  expected  slowdown 
in  external 
demand. 

its  own  ports.  Besides 

to 

Inflation 

Energy  and  services  prices  are  expected  to 
dominate the inflation dynamics over 2019 and 
2020. The  2018  inflation  figures  of  2.6%  was 
driven  by  increases  in  energy  and  services  prices. 
This  is  slightly  less  than  2.9%  in  2017  when 
substantial  one-off  increase  in  food  prices  created 
up-tick  in  inflation. Wage  growth  in  Latvia  has 
been among the fastest in the EU – it increased by 

8 

Source: European Commission 

Productivity and unit labour costs 

the  past  couple  of  years  Latvia's 
Over 
productivity  growth  has  accelerated,  which 
dampened  the  high  unit  labour  cost  growth. 
Productivity growth reached 4.7% in 2017, putting 
Latvia  among  the  countries  with  the  highest 
productivity growth in the EU. This is also up from 
the 2.4% average growth of the preceding 3 years. 
The  productivity  growth  is  broad-based  across  all 
main  economic  activities  like  industry,  trade  and 
the  public  sector.  As  a  result,  the  unit  labour  cost 
growth slowed to 3.2% in 2017, compared with an 
average  growth  of  around  5%  since  2012. 
However,  over  3  years  its  growth  rate  of  14.7% 
remains  among  the  highest  in  the  EU.  Looking 
forward,  productivity  growth  is  set  to  slow  along 
with  overall  GDP  growth,  but  is  expected  to 
remain  robust.  The  unit  labour  cost  growth  is  not 
expected  to  abate  significantly  over  the  forecast 
horizon as the falling labour supply is set to remain 
a  permanent  factor.  But  the  cooling  off  of  the 

-40-30-20-100102030400002040608101214161820OtherEquipmentDwellingsOther constr.Totaly-o-y %Forecast-6-4-2024681009Q109Q310Q110Q311Q111Q312Q112Q313Q113Q314Q114Q315Q115Q316Q116Q317Q117Q318Q1Industrial goodsEnergyUnprocessed foodProcessed foodServicesTotal 
 
 
2. Progress with country-specific recommendations 

rate falling to 9.8 % in 2nd quarter of 2018 (below 
the  EU  average  of  15.2 %), down  from  36.2 %  in 
2010.  The  share  of  young  people  not 
in 
employment,  education  or  training  (NEET)  also 
decreased  by  0.9  pp  (year-on-year)  to  10.3 %  in 
2017 (close to the EU average level of 10.9 %)  

Demographic developments 

Latvia’s  population  is  projected  to  continue 
declining  by  around  1%  annually,  but  the 
decline  in  the  working  age  population  is  set  to 
intensify.  Latvia's  population  has  been  declining 
since 1991 at an average rate of slightly above 1% 
annually.  Emigration  has  accounted  for  roughly 
two  thirds  of  the  depopulation,  while  natural 
change has accounted for the remaining third. The 
average  pace  of  the  population  decline  over  the 
next 20 years is expected to be about the same as it 
has  been  over  the  past  three  decades  –  just  above 
1%  annually.  However,  migration  is  projected  to 
gradually  balance,  while  natural  change 
is 
expected  to  worsen.  Also,  the  decline  in  working 
age  population  is  set  to  intensify.  Whereas  since 
1990, the working age population has decreased on 
average at the same rate as the total population, the 
rate of decline is set to increase. Over the next 20 
years  the  average  annual  pace  of  working  age 
population  decline  is  projected  at  1.6%,  while  the 
average  total  population  decline  is  projected  at 
0.9%  annually.  The  decreasing  share  of  the 
working  age  population  means 
the  old-age 
dependency  ratio  is  set  to  increase  faster  than 
before.  The  ratio  of  over  65  year  olds  to  those 
between ages 20 and 64 was about 0.2 in 1990, is 
0.33 now and is projected to increase to about 0.57 
by  2040.  The  population  decline  and  increasing 
policy 
bring 
dependency 
challenges 
fiscal 
sustainability  (see  Section  3.1.4),  labour  supply 
(see  Section  3.3.1),  healthcare  (see  Section  3.3.3), 
education (see Section 3.3.4), productivity, energy 
and 
(see  European 
public 
Commission, 2018h). 

in  a  number  of  areas: 

administration 

important 

ratio 

investment  growth  may  ease  the  labour  demand 
pressure somewhat. 

Labour market 

Latvia’s  economy  raised  the  labour market 
activity  rate  and  employment  but  a  further 
decline  of  the labour force  seems  inevitable. In 
2018,  the  rapid  growth  in  construction  and  trade 
drove  an  increase  in  employment.  At  the  same 
time,  the labour force  continued  to  decline,  albeit 
at  a  slower  pace  than  in  previous  years  as  the 
strong  economy  helped  increased  the  activity  rate 
among  20-64-year-olds,  which  stood  at  83.5  %  in 
3rd quarter of 2018, exceeding its previous peak in 
2008. The unemployment rate continued to fall and 
was  7.1%  in  3rd  quarter  of  2018,  well  below  its 
historical  average,  but  slightly  above  the  EU 
average.  As  a  result  of  the  tight  labour  market, 
wage growth  continued  at  a  rapid pace  spurred  in 
part  by  a  significant  increase  in  the  minimum 
wage.  Looking forward, wage growth is expected 
to  remain  elevated  although 
it  should  ease 
somewhat  as  the  pressure  from  the  construction 
sector eases. 

Graph 1.4: 

Selected labour market indicators 

Source: European Commission 

there  has  been  a 

Since  2010, 
steady 
improvement in most labour market indicators. 
The  long-term  unemployed  rate  continued  its 
downward  path  in  2018  and  stood  at  3.0 %  in  3rd 
quarter  of  2018,  close  to  the  EU  average.  Young 
people  also  benefit  from  the  improvement  in  the 
labour  market,  with  this  group’s  unemployment 

9 

707274767880828405101520253035400102030405060708091011121314151617Activity rate 20-64 (rhs)Unemployment rate 15-74 (lhs)Long-term unemployment rate 15-74 (lhs)Youth unemployment rate 15-24 (lhs)NEET rate 15-24 (lhs) 
 
2. Progress with country-specific recommendations 

Graph 1.5: 

Population change and its drivers, % 

Graph 1.6: 

Selected social inclusion indicators 

Source: European Commission 

Source: European Commission 

Social developments 

Overall  poverty  and  social  exclusion  have 
decreased  to  pre-crisis  levels,  but  vulnerable 
groups  are  being  left  behind.  In  line  with  the 
gradual  improvement  in  the  labour  market,  the 
share  of  people  living  in  very  low-work  intensity 
households  has  been  falling  since  2010  and 
reached  7.6 %  in  2018,  down  from  the  peak  of 
in  2010-2011(2).  Moreover, 
12.6 %  recorded 
severe  material  deprivation  has  been  steadily 
decreasing  since  2011  and  has  fallen  below  pre-
crisis levels (9.5 % in 2018 as compared to 24 % in 
2007).  However,  the  at-risk-of-poverty  rate,  a 
measure of relative poverty, is still above pre-crisis 
levels  (23.3 %  in  2018  as  compared  to  21.2 %  in 
2007). More broadly, the risk of poverty or social 
exclusion  has  decreased  steadily  since  2012  and 
was  at  historically 
in  2018. 
However,  the  risk  of  poverty  or  social  exclusion 
has  been 
the 
and  persons  with  disabilities 
unemployed 
(Section 3.3.2).  The  at-risk-of-poverty  rate 
is 
higher  in  rural  areas,  and  in  2017  the  median 
income  of  rural  dwellers  was  only  76%  that  of 
urban dwellers, against an EU average of 84%. 

low  of  28.4% 

the  elderly, 

increasing 

for 

(2)  Income  data  from  EU-SILC  refer  to  the  previous  year  for 

all Member States except from IE and UK. 

Income  inequality  remains  well  above  the  EU 
average.  In  2018,  the  income  of  the  richest  20 % 
of  the  Latvian  population  was  6.8  times  higher 
than that of the poorest 20 %; a significantly more 
uneven distribution than in the EU as a whole (5.1 
times  in  2017).  The  redistribution  through  taxes 
and  social  transfers  in  Latvia  has  a  lower  impact 
on income inequality than in other Member States, 
due  to  the  limited  adequacy  of  social  protection 
system and the limited progressivity of tax system 
(Section  3.1.3.  on  taxation  and  Section 3.3.2  on 
social policies).  

Wealth  inequality  in  Latvia  is  among  the 
highest  in  the  EU.  With  a  Gini  coefficient  for 
distribution  of  wealth (3)  of  78.5,  the  wealth 
inequality  in  Latvia  is  among  the  highest  of 
Member States. Around half of the wealth reflects 
ownership  of  the  main  residence  and  a  quarter 
reflects  ownership  of  other  real  estate,  which  is 
similar  to  the  EU  average.  Share  of  wealth  as 
financial assets is somewhat lower in Latvia, but it 
is  mostly  owned  by  the  richest  households,  as  in 
the  rest  of  the  EU.  The  high  wealth  inequality  in 
Latvia  persists  despite  low  levels  of  housing-
related debt and a high rate of home ownership in 
the  general  population  (81.5 %),  including  among 
the population who are at-risk-of-poverty (74.2%).   

(3)  The  Gini  coefficient  is  an  indicator  that  ranges  between  0 
and  100.  Lower  values  indicate  higher  equality.  In  other 
words,  a  value  equal  to  0  indicates  that  everyone  has  the 
same  net  wealth,  a  value  equal  to  100  indicates  that  one 
person owns the whole wealth. 

10 

-3-2-10123490949802061014182226303438424650Net migrationNatural changeTotalWorking age65 and overCurrent dataProjection0510152025303540455005060708091011121314151617% of populationAt-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households 
 
                                                           
 
                                                           
2. Progress with country-specific recommendations 

slowest  in  Latvia  over  the  past  15  years  or  so. 
However, whereas wages and GDP per capita have 
risen  in  all  regions  (albeit  much  faster  in  Riga), 
employment  opportunities  have  diverged  –  the 
Riga  metropolitan 
total 
employment  has  increased  from  52%  in  2008  to 
55% in 2017. Latgale and Kurzeme have fared the 
the  country 
worst.  Contrary 
employment in these regions has shrunk compared 
to 2010, the year the economy hit its lowest point 
during the crisis.  

the  rest  of 

share  of 

region's 

to 

External position 

The  current  account  has  remained  balanced 
despite  accelerating  GDP  growth.  In  2018,  the 
current account is forecast to have  been balanced, 
slightly  lower  than  the  0.7%  of  GDP  surplus  in 
2017.  The  current  account  has  remained  roughly 
balanced  since  2014,  largely  due  to  a  better  trade 
balance. From the investment-savings perspective, 
higher  households'  net  savings  rate  has  been  the 
main  contributor  to  balancing  the  current  account 
compared  to  2010  –  2014.  As  a  result,  the  net 
investment  position  (NIIP)  also 
international 
continued  to  improve  and  stood  at  minus  50%  of 
GDP at the end of 2018. While still relatively high, 
the associated economic risks are limited, because 
the  NIIP  is  mostly  composed  of  foreign  direct 
investment,  while 
investment  position 
the 
excluding equity was close to balance at the end of 
2018.  

the  difference 

in  access  to 
Unequal  opportunities  persist 
education  and  healthcare. 
Income  poverty 
between  children  of  low-skilled  parents  and  those 
of  high-skilled  parents  has  been  gradually 
narrowing since 2009: in 2018, it stood at 52.1 pps, 
below  the  EU  average  of  53.9 pps  in  2017. 
Likewise, 
in  2015  students’ 
performance  in  science  in  the  OECD  Programme 
for International Student Assessment that could be 
explained  by  students’  socio-economic  status  was 
among  the  lowest  in  the  EU.  However,  when 
looking  at  how  affordable  education  is  for  the 
different  income  groups,  Latvia  fares  worse  than 
the  EU  average,  with  Latvians  reporting  more 
difficulty  overall  in  affording  education (4).  In 
addition,  there  is  a  clear  gap  in  labour  market 
participation  between  ethnic  minorities  and  ethnic 
Latvians.  Moreover,  access 
is 
unequal among income groups — the low income 
groups report a much higher level of unmet needs 
for  medical  services  than  the  high  income  groups 
(Section 3.3.3). 

to  healthcare 

Regional perspective 

differ 

and 
considerably 

employment 
Economic  development 
opportunities 
among 
Latvian regions.  In 2015, GDP per capita in Riga 
stood at 167% of the national average, while in the 
other  regions  it  was  below  the  national  average 
with the poorest region – Latgale – producing only 
56%  of  the  national  average.  However,  the  GDP 
per  capita  figures  are  influenced  by  the  large 
amount  of  commuters  coming  to  Riga  and  by  the 
fact  that  all  of  the  largest  state-owned  enterprises 
are  registered  in  Riga,  while  producing  economic 
output all over Latvia. Therefore, the differences in 
wages  arguably  provide  a  fairer  view  of  regional 
disparities. Workers in Riga earn 113% of national 
average, while workers in Latgale receive 69% of 
the  national  average.  Furthermore,  the  difference 
in  GDP  per  capita  and  wages  with  Riga  has 
narrowed  for  most  regions,  the  exception  being 
Latvia's  western  region  –  Kurzeme  –  where  the 
growth of GDP per capita and the wages has been 

(4)  From the EU-SILC  module on Access to Services (2016), 
in  2016,  persons  paying  for  formal  education  in  Latvia 
reported much greater difficulty in affording it compared to 
the  EU.  In  Latvia,  8 %  reported  great  difficulty,  26.1 % 
moderate  difficulty,  and  33.1 %  some  difficulty  in  paying 
for  formal  education,  whereas  these  figures  for  EU-28 
stood  at:  6.8 % 
(moderate 
difficulty) and 22.3 % (some difficulty). 

(great  difficulty),  12 % 

11 

 
                                                           
2. Progress with country-specific recommendations 

Graph 1.7:  Current account and its components, % of 

GDP 

Source: European Commission 

Public finances 

The  general  government  balance  remains 
negative  despite  strong  GDP  growth.  The 
general  government  recorded  a  deficit  of  0.7%  of 
GDP in 2018 as a sizeable tax cut and increase in 
defence  and  healthcare  spending  drove  the  slight 
surplus of 2016 back into deficit. The government 
balance is set to deteriorate further in 2019 before 
improving  somewhat  in  2020.  The  Commission 
estimated that the output gap remains substantially 
positive,  making  the  current  deficits  contribute  to 
pro-cyclical fiscal policy stance.  

12 

-30-20-10010203000010203040506070809101112131415161718*% of GDPCapital accountSecondary income balancePrimary income balance  Trade balance - services  Trade balance - goodsTrade balanceCurrent account balance (CA)Net lending/borrowing (CA+KA) 
 
 
2. Progress with country-specific recommendations 

Table 1.1: 

Key economic, financial and social indicators 

(1) NIIP excluding direct investment and portfolio equity shares   
(2) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
(3) The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the 
section on taxation 
Source: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for 
real GDP and HICP, Autumn forecast 2018 otherwise) 

13 

2004-072008-122013-1520162017201820192020Real GDP (y-o-y)10,2-2,62,42,14,64,73,12,6Potential growth (y-o-y)7,40,01,52,33,03,43,63,7Private consumption (y-o-y)12,5-3,33,01,44,1...Public consumption (y-o-y)4,0-2,81,83,94,1...Gross fixed capital formation (y-o-y)21,6-7,2-2,2-8,413,1...Exports of goods and services (y-o-y)14,54,53,44,46,2...Imports of goods and services (y-o-y) 19,1-2,51,24,48,9...Contribution to GDP growth:Domestic demand (y-o-y)14,9-4,91,6-0,35,8...Inventories (y-o-y)0,1-1,1-0,52,40,3...Net exports (y-o-y)-4,92,91,30,0-1,5...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0,3-1,1-0,60,00,20,50,60,7Capital accumulation (y-o-y)3,81,40,80,40,81,11,11,0Total factor productivity (y-o-y)3,4-0,21,21,92,01,82,02,0Output gap6,3-5,6-0,20,21,82,42,11,3Unemployment rate8,715,210,99,68,77,36,76,5GDP deflator (y-o-y)12,52,01,10,93,23,72,12,7Harmonised index of consumer prices (HICP, y-o-y)7,44,60,30,12,92,62,72,1Nominal compensation per employee (y-o-y)24,41,57,37,38,07,15,85,8Labour productivity (real, person employed, y-o-y)7,41,41,62,44,7...Unit labour costs (ULC, whole economy, y-o-y)15,90,15,54,83,14,42,82,9Real unit labour costs (y-o-y)3,0-1,94,43,90,00,70,70,2Real effective exchange rate (ULC, y-o-y)11,2-2,14,33,92,63,60,20,4Real effective exchange rate (HICP, y-o-y)2,01,10,81,3-0,23,70,1-0,1Savings rate of households (net saving as percentage of net disposable income)-9,1-4,5-12,0-4,0-5,8...Private credit flow, consolidated (% of GDP)27,3-0,2-3,40,30,3...Private sector debt, consolidated (% of GDP)86,3115,492,688,083,5...of which household debt, consolidated (% of GDP)32,543,326,923,622,2...of which non-financial corporate debt, consolidated (% of GDP)53,872,165,764,461,3...Gross non-performing debt (% of total debt instruments and total loans and advances) (2).9,96,15,24,7...Corporations, net lending (+) or net borrowing (-) (% of GDP)-9,56,16,52,43,42,92,62,1Corporations, gross operating surplus (% of GDP)30,829,930,226,426,626,124,824,5Households, net lending (+) or net borrowing (-) (% of GDP)-5,6-0,3-3,90,1-1,3-0,20,10,6Deflated house price index (y-o-y)16,9-11,34,24,75,5...Residential investment (% of GDP)4,52,82,42,11,9...Current account balance (% of GDP), balance of payments-16,4-1,9-1,61,60,7-0,2-0,6-0,6Trade balance (% of GDP), balance of payments-16,6-4,7-1,91,20,1...Terms of trade of goods and services (y-o-y)1,4-0,30,02,80,71,4-1,10,3Capital account balance (% of GDP)1,32,22,81,00,8...Net international investment position (% of GDP)-60,0-76,1-65,4-58,4-56,3...NIIP excluding non-defaultable instruments (% of GDP) (1)-30,2-37,8-17,2-9,8-7,6...IIP liabilities excluding non-defaultable instruments (% of GDP) (1)93,8132,4127,0134,5128,2...Export performance vs. advanced countries (% change over 5 years)105,150,615,26,22,9...Export market share, goods and services (y-o-y)..0,53,92,3...Net FDI flows (% of GDP)-5,1-2,6-1,7-0,1-1,9...General government balance (% of GDP)-0,6-5,5-1,30,1-0,6-0,8-1,0-0,7Structural budget balance (% of GDP)..-1,30,0-1,2-1,8-1,7-1,2General government gross debt (% of GDP)10,836,938,940,340,037,135,535,7Tax-to-GDP ratio (%) (3)28,428,630,031,431,430,830,630,8Tax rate for a single person earning the average wage (%)29,029,729,629,1....Tax rate for a single person earning 50% of the average wage (%)26,327,327,427,0....forecast 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2. Progress with country-specific recommendations 

2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

of 

all 

85% 

Since  the  start  of  the  European  Semester  in 
country-specific 
2011, 
recommendations  addressed  to  Latvia  have 
recorded  at  least  ‘some  progress'.  Looking  at 
how Latvia has implemented its CSRs in the years 
since they first began to be issued, 84% of all the 
recommendations  addressed 
to  Latvia  have 
recorded  at  least  ‘some  progress’  (Graph 2.1). 
Latvia  has  achieved  substantial  progress  and  full 
implementation  by  maintaining  fiscal  discipline, 
adopting  the domestic  fiscal  framework  and  by 
improving  macro-prudential  supervision  of  the 
banking sector. 

Graph 2.1:  Multiannual implementation of 2012-2018 

country-specific recommendations to date 

Notes: The multiannual CSR assessment looks at 
the implementation since the CSRs were first adopted until 
the 2019 Country Report. 
The assessment excludes an assessment of compliance with 
the Stability and Growth Pact.  
Source: European Commission 

up 

set 

and 

implemented. 

Latvia  maintains  fiscal  discipline  and  has 
somewhat  reduced  tax  burden  on  low  wages. 
Fiscal  targets  are  set  with  a  tight  margin  to  the 
rules-based  requirements.  A  fiscal  framework  has 
been 
The 
recommendation since 2012 to shift taxation from 
low  wages  to  other  sources  less  detrimental  to 
growth  was  partly  addressed  by  the  2017  tax 
reform.  While  the  tax  wedge  on  low  wages  has 
been  reduced,  it  is  still  high  in  Latvia.  Moreover, 
the tax-cutting measures were only partly targeted 
towards low income groups, while the reform costs 
limit  resources  for  public  services,  including  for 
distributional  policies.  Tax  compliance  has 
improved  over  time  as  a  result  of  the  tax 
administration’s efforts, but remains a challenge.  

in 

activation  measures 

Social policy reforms have not advanced much, 
mostly  due  to  their  costs.  Minimum  social 
benefits  remain  very  low  and  only  a  marginal 
increase has been adopted. Far-reaching minimum 
income  reform  has  not been  introduced,  primarily 
its  cost.  Public  expenditure  of  and 
due 
to 
participation 
for 
the unemployed  remain  limited,  while  outdated 
skills  and  insufficient  knowledge  of  the  Latvian 
to  employment. 
language 
remain  obstacles 
Updating  vocational  education  and 
training 
curricular  has  been  accelerated  and  work-based 
in  adult 
learning 
is 
learning  although 
low. 
Financing  for  public  healthcare  is  increasing  in 
2018-2019, but its level is still low relative to other 
countries and service needs.  

introduced.  Participation 
increasing, 

remains 

The public administration reform plan adopted 
in  November  2017  is  being  slowly  rolled  out, 
aiming  for  streamlining  of  central  government 
as  well  as  greater  efficiency  and  quality  of 
services, but no such plans have been presented 
for  the  local  authorities.  Streamlining  of  central 
government has been launched, aiming for greater 
efficiency  and  quality  of  services,  but  no  such 
plans have been presented for the local authorities. 
The  fight  against  corruption  has  been  ramped  up 
under  the  new  leadership  of  The  Corruption 
Prevention 
and  Combatting  Bureau,  with 
investigations launched in several large corruption 
cases.  However,  verification  of  asset  declarations 
of  the  public  officials  still  raises  concerns.  The 
recent  adoption  of  the  Whistleblower  Protection 
Law  provides  an  opportunity 
increase 
transparency  and  the  efficiency  of  the  public 
administration. 

to 

the 

the 

Overall, Latvia has made limited progress (5) in 
addressing 
country-specific 
2018 
recommendations.  It  made  some  progress  on 
accountability  of  public 
strengthening 
administration, 
the 
Whistleblower Protection Law, by following up on 
recommendations  from  its  Judicial  Council  to 
improve the insolvency process, by increasing the 
provision  of  public  healthcare  services,  and  by 

passing 

notably 

by 

(5)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR is presented in the overview table in the Annex. This 
overall  assessment  does  not  include  an  assessment  of 
compliance with the Stability and Growth Pact. 

14 

15%62%13%10%No ProgressLimited ProgressSome ProgressSubstantial ProgressFull Implementation 
 
 
                                                           
2. Progress with country-specific recommendations 

proceeding  with  the  reforms  in  the  vocational 
education.  Only  limited  progress  was  made  on 
reducing the tax wedge on low-income earners, on 
improving  the  efficiency  of  public  administration. 
No progress was made on improving the adequacy 
of  minimum  social  benefits,  as 
the  planned 
increase in minimum income benefits has not been 
funded.  

Table 2.1: 

Summary table of 2018 CSR assessment 

(1) The assessment of CSR1 does not include an assessment of compliance with the Stability and Growth Pact. 
Source: European Commission 

15 

Latvia Overall assessment of progress with 2017 CSRs: Limited CSR 1: Achieve the medium-term budgetary objective in 2019, taking into account the allowances linked to the implementation of the structural reforms for which a temporary deviation is granted. Reduce taxation for low-income earners by shifting it to other sources, particularly capital and property, and by improving tax compliance. Limited progress (1)  Limited progress in shifting the tax burden away from low wages to other sources  Some progress in improving tax compliance.  CSR 2: Improve the adequacy of minimum income benefits, minimum old-age pensions and income support for people with disabilities. Increase the labour market relevance of vocational education and training, and foster upskilling of low-skilled workers and jobseekers. Increase the accessibility, quality and cost-effectiveness of the healthcare system. Limited progress  No progress in improving the minimum income benefits, minimum old-age pension and income support for people with disabilities  Some progress in improving the labour market relevance of vocational education and training  Some progress in improving the accessibility, quality and cost-effectiveness of the healthcare system. CSR 3: Strengthen the efficiency of the public sector, in particular with regard to local authorities and state-owned enterprises. Strengthen the accountability of public administration by protecting whistle-blowers, preventing conflicts of interest and following-up on the results of the ongoing assessment of past insolvency proceedings. Some progress  Substantial progress in protecting whistleblowers  Some progress in following-up on the results of the assessment of past insolvency proceedings  Limited progress on increasing the accountability of public administration.  Limited progress in increasing the efficiency of local authorities and state-owned enterprises.   
 
 
 
 
 
 
 
 
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: EU funds and programmes contribute to addressing structural challenges and to 
fostering growth and competitiveness in in Latvia 

Latvia  is  one  of  the  countries  benefiting  most  from  EU  support.  The  financial  allocation  from  the 
European  Structural  and  Investment  Funds  (ESIF)  to  support  Latvia  in  facing  development  challenges 
amounts  to  EUR 5.63  billion  under  the  current  multiannual  financial  Framework.  This  is  equivalent  to 
around 3% of the country’s GDP annually. As of the end of 2018, some EUR 4.27 billion (around 76% of 
the  total)  had  already  been  allocated  to  specific  projects.  In  addition,  Latvia  benefits  from  other  EU 
programmes  such  as:  (i) the  Connecting  Europe  Facility,  which  allocated  EUR 269.4  million  to  specific 
strategic  transport  network  projects;  and  (ii) Horizon  2020,  under  which  290  participants  have  received 
funding of EUR 53 million (including 47 SMEs, accounting for funding of about EUR 10 million). 

EU  funding  has  helped  to  address  policy  challenges  identified  in  the  2018  country-specific 
recommendations.  The European Social Fund is being used to upskill and reskill the labour force— as a 
result, so far more than 50 000 unemployed people and almost 9 000 employed people have improved their 
qualifications  and  skills.  The  quality  of  vocational  education  and  training  (VET)  has  improved  as  VET 
school network optimisation is completed, curricula reform is ongoing and over 1 000 students have enrolled 
in  work-based  learning.  The  implementation  of  Latvia’s  health  reforms  is  ongoing  and  ESIFs  are 
contributing  to  improving  the  accessibility,  quality  and  cost-effectiveness  of  the  healthcare  system.  For 
example, to address regional disparities in access to healthcare, 133 medical practitioners have already been 
attracted to rural areas and to cities outside Riga. 

EU funding  is  contributing  to  major  developments  in  the  Latvian  economy  by  promoting  growth  and 
employment via investments in areas such as research, technological development and innovation, business 
competitiveness, sustainable transport, employment and labour mobility. By 2018, investments driven by the 
ESIF had already led to the building or modernisation of more than 300 km of roads, both at regional level 
and in connection with the TEN-T network. Over 40 supported research project supported by the European 
Regional Development Fund (ERDF) have been commercialised, and support has already been approved for 
3 111  businesses,  including  382  start-ups,  generating  665  new  jobs.  ESIFs  have  also  contributed  to 
a reduction of greenhouse gas emissions by 8 570 tonnes of CO2. 

In  addition,  the  Commission  can  provide  tailor-made  technical  support  upon  a  Member  State's 
request  via  the  Structural  Reform  Support  Programme  to  help  Member  States  implement  growth-
sustaining  reforms  to  address  challenges  identified  in  the  European  Semester  process  or  other 
national  reforms.  Latvia,  for  example,  is  receiving  support  to  improve  its  tax  administration,  assess  and 
improve  the  overall  performance  of  its  health  and  develop  its  capital  markets.  The  Commission  is  also 
assisting the authorities in their efforts to fight money laundering through the implementation of a training 
programme. In addition, in 2018, work has started on improving the efficiency of the public sector, in the 
Ministry of Interior in particular. Furthermore, support is being provided to strengthen the coordination and 
monitoring framework of state-owned enterprises.  

EU  funding  contributes  to  the  mobilisation  of  private  investment.  ERDF  alone  mobilises  additional 
private  capital  by  allocating  about  EUR 130  million  in  the  form  of  loans,  guarantees  and  equity.  This  is 
expected to leverage additional private investment amounting to EUR 440 million. Altogether, 2.85% of the 
ESIFs allocation was paid in the form of financial instruments.  

In  addition,  the  overall  volume  of  approved  operations  by  the  European  Investment  Bank  with 
backing  from  the  European  Fund  for  Strategic  Investments  (EFSI)  amounts  to  EUR 229  million, 
which  is  set  to  trigger  a  total  of  EUR 966  million  in  additional  private  and  public  investments 
(February  2019).  Latvia  ranks 8th  as  to  the  overall  volume  of approved  operations  as  a  share of  GDP.  9 
projects  involving  Latvia  have  so  far  been  approved  under  the  infrastructure  and  innovation  window  of 
EFSI. They amount to EUR 207 million in total financing, which should, in turn, generate EUR 567 million 
in investments. Under the SME component, 8 agreements with intermediary banks have been approved for a 
total of EUR 22 million, which should mobilise around EUR 399 million of total investment. 7 298 SMEs 
and mid-cap companies are expected to benefit from this support.  

16 

 
2. Progress with country-specific recommendations 

EU  action  strengthens  national,  regional  and  local  authorities  and  the  civil  society.  EUR 101  million 
have  been  allocated  to  strengthen  the  capacity  of  public  administration  at  different  levels  and  to  enhance 
cooperation with stakeholders.  

More information at: https://cohesiondata.ec.europa.eu/countries/LV 

17 

 
 
 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

adopted tax measures calls for a lower expenditure 
growth.  

Graph 3.1.2:  Expenditure growth and the discretionary 

fiscal effort 

3.1.1.  FISCAL POLICY 

The  government’s 
fiscal  policy  has  been 
expansive  at  the  time  of  cyclical  upturn  in  the 
economy. The fiscal policy stance appears to have 
amplified  volatility  of  the  economy  by  the  fiscal 
tightening 
in  2016,  when  the  economy  was 
temporarily  affected  by  a  drop  in  investment,  and 
by  the  pro-cyclical  expansion  in  2017  and  2018 
(Graph 3.1.1). Moreover, the fiscal stimuli in 2017 
and 2018 added to wage and inflation pressures in 
the  economy,  and  reduced  fiscal  capacity  to 
counteract, when the cycle turns.  

Graph 3.1.1:  The fiscal stance and the economic cycle 

(1) Discretionary fiscal effort (DFE) consists of revenue and 
expenditure effort. (1)=(2)+(3) 
(2) Revenue effort represents discretionary revenue 
measures. In this graph, positive revenue effort means 
expansionary fiscal stance (deficit-increasing). 
(3) Expenditure effort shows the gap between the growth of 
public spending and smoothed potential growth over 10 
years. 
(4) Expenditure benchmark growth follows the notion of the 
expenditure benchmark in the EU fiscal framework (nominal 
smoothed potential growth adjusted for discretionary 
revenue effort). 
For further details on the methodology see Carnot, N. and F. 
de Castro (2015). ‘The Discretionary Fiscal Effort: an 
Assessment of Fiscal Policy and its Output Effect’. European 
Commission, Economic Papers 543, February. 
Source: European Commission – Autumn 2018 forecast 

economic 

expenditure 

less  on  health  and  social 
Latvia  spends 
protection 
than  other  Member  States  on 
average.  The  government  expenditure  structure 
has  changed  very  little  between  2014  and  2018, 
except  for  an  increase  in  defence  spending  and 
lower 
affairs 
on 
(Graph 3.1.3).  The  national  defence  spending 
increased  due  to  the  commitment  regarding  the 
North  Atlantic  Treaty  Organization  to  attain  the 
target  of  2%  of  GDP.  This  is  partly  offset  by  a 
recent  decline  in  the  level  of  subsidies  for  the 
energy  sector,  although  these  are  still  higher  than 
in  other  Member  States  (see  Section 3.4.2  on 
mandatory  procurement  of  electricity).  Public 
spending  on  social  protection  and  health  services 
in  Latvia  has  slightly  increased,  but  remains 

Source: European Commission – Autumn 2018 forecast 

revenue 

Government spending has been volatile and has 
deviated  from  a  prudent  expenditure  path.  As 
a result  of  positive 
surprises  and 
underspending, Latvia achieved a fiscal surplus in 
2016 compared to a planned deficit of 1% of GDP. 
However,  rather  than  safeguarding  the  improved 
starting  base,  the  budgets  in  2017  and  2018  were 
marked  by  strong  expenditure  growth  and  the 
introduction of tax cuts, which exhausted the fiscal 
space. Government expenditure growth went from 
0.2% in 2016 to 10.9% in 2017 and 8.6% in 2018 
(Graph 3.1.2),  exceeding  a  prudent  expenditure 
path  based  on  smoothed  potential  growth  over 
10 years  and  actual  inflation.  In  2019  and  2020, 
expenditure  growth  is  projected  to  moderate  to 
around  5%,  while  the  expansionary  effect  of  the 

18 

201420152016201720182019-2-1012-10123Discretionary Fiscal EffortOutput gapCounter-cyclicaltighteningCounter-cyclicalexpansionPro-cyclicaltighteningPro-cyclicalexpansion-6%-4%-2%0%2%4%6%8%10%12%-2%-1%0%1%2%3%4%14151617181920change in %% of GDPRevenue effort (DFE)Expenditure effort (DFE)GDP deflatorReal potential growthActual expenditure growth (rhs)Expenditure benchmark growth (rhs) 
 
 
 
among the lowest in the EU. Such expenditure is a 
channel  for  redistributive  policies,  for  which 
Latvia  scores  low.  Section 3.3  covers  social  and 
health expenditure in greater detail. 

Graph 3.1.3:  Government primary expenditure by function 

3.1. Public finances and taxation 

The  2018  annual  expenditure  review  has 
delivered  some  savings,  but  it  not  yet  used  for 
the  broader  public  sector  reform.  The  review 
identified  expenditure  savings  of  0.2% of GDP  to 
be  used  for  re-allocations  of  other  spending 
priorities for 2019. Notable examples include more 
cost-efficient  management  of  state-owned  real 
estate and consolidation of information technology 
(IT) infrastructure which will bring further gains in 
the  medium  term.  Completion  of  the  pilot  project 
for  ‘zero-based’  budgeting  for  state 
libraries 
launched  in  2017  has  been  further  postponed  to 
2019,  highlighting  difficulties  in  applying  the 
method  across  public  services.  The  expenditure 
review  process  has  not  yet  fed  into  public  sector 
reform, 
public 
to 
administration  and  readjust  policy  priorities.  The 
State  Chancellery  is  expected  to  lead  the  process, 
with  administrative  support  from  the  Ministry  of 
Finance and other ministries.  

streamline 

intended 

Source: European Commission, 2019 Draft Budgetary Plan 

3.1.3.  TAXATION 

3.1.2.  FISCAL FRAMEWORK AND EXPENDITURE 

REVIEW 

takes 

law  and 

The  fiscal  framework  is  broadly  followed,  but 
expenditure limits are occasionally disregarded 
in  budget 
implementation.  The  budgetary 
planning  is  based  on  the  fiscal  rules  set  by  the 
into  account 
fiscal  discipline 
the allowed deviations for implementing structural 
reforms. However, applying the national budgetary 
rules  is  problematic  in  two  areas.  Firstly,  the 
Latvian  authorities  treat  the transitional  costs  of 
the tax reform as one-off measures, while they are 
not recognised as such by the Commission because 
the adopted measures are deliberate policy actions. 
Secondly, authorities tend to reallocate expenditure 
from  budgetary  positions  the  fiscal  discipline  law 
allows  to  fluctuate,  to  expenditure  positions  fixed 
through  pre-determined 
limits.  The  apparent 
breaches  of  the  fiscal  discipline  law  requirements 
are  flagged  by  the independent  Fiscal  Discipline 
Council (6),  but  this  has  not  yet  led  to  policy 
change.  Disregarding  the  expenditure  limits  has 
contributed to the recent rapid expenditure growth 
and undermines principles of fiscal prudence.  

(6)  http://fiscalcouncil.lv/council 

Latvia  relies  on  labour  and  consumption  tax 
revenue,  while  capital  is  less  taxed.  Latvia’s  tax 
revenue  share  in  GDP  is  lower  than  the  EU 
average.  Labour  and  consumption  taxes  are  the 
taxes  on  capital 
main  revenue  sources,  but 
represent  a  low  share  of  total  revenue,  even 
compared  to  other  Member  States  (Graph 3.1.4). 
While  cross-border  effects  are  often  used  as  an 
argument in favour of setting low tax rates, only in 
few  cases  lower  implicit  tax  rates (7)  on  capital 
have gained disproportionately larger revenue. For 
most  countries,  including  Latvia,  the  relationship 
between level of tax rates and tax revenue broadly 
holds. Moreover, a lower tax burden on capital has 
regressive  distributional  effects,  considering  that 
(i) high-income  households  hold  a  larger  share  of 
financial  and  property  wealth  and  earn  more 
income  from  capital;  and  (ii) lower  capital  tax 
revenue reduces public resources for redistributive 
policies supporting more low-income households.  

A growth-friendly and revenue-neutral tax shift 
would  have  positive  employment  and  GDP 
growth  effects.  Latvia  stands  out  in  terms  of  its 
high tax wedge on low wages; it is recommended 

(7)  The  implicit  tax  rates  measure  the  actual  or  eﬀ ective 
average  tax  burden  levied  on  diﬀ erent  types  of  economic 
income or activities. 

19 

05101520% of GDPLV 2014LV 2018EU 2016EE 2016LT 2016 
 
                                                           
                                                           
3.1. Public finances and taxation 

(Section 1).  Moreover, 

wealth) 
lower  public 
revenues  limit  resources  for  public  services  on 
which vulnerable groups rely.  

inactive  or 

to  be  unemployed, 

The  labour  tax  measures  do  not  significantly 
reduce income inequality and poverty. The 2017 
tax reform only partly targets low-income earners, 
as  the  adopted  measures  are  not  well  suited  for 
reaching  the  lowest  income  households,  which 
tend 
include 
pensioners  with  low  pensions.  For  low-income 
earners  with  dependent  children,  a  large  share  of 
their  taxable  income  was  already  covered  by  tax-
free  allowances  before  the  reform;  they  gain  little 
from  the  personal  income  tax  reduction  and  the 
increases  in  allowances.  One  third  of  pensioners 
the  allowance  for 
than 
had 
pensioners before the reform, which means they do 
not benefit from an increase in the allowance. Such 
pensioners are concentrated in the poorest 20% of 
households. Therefore, social transfers seem better 
suited 
the  poorest  households 
(Section 3.3.2). At a similar cost as the adopted tax 
reform,  increasing  minimum  social  benefits  has 
a potential  to  significantly  reduce  poverty  and 
inequality  in  Latvia  (Ivaškaitė-Tamošiūnė  et  al., 
2018).  

lower  pensions 

reaching 

to 

The  share  of  capital  taxation  is  set  to  decline 
under  the  current  policies.  Revenue  from  taxes 
on  capital  is  estimated  to  decline  from  3.6%  of 
GDP in 2017 to around 3% of GDP by 2020. This 
mostly  reflects  the  costs  of  the  corporate  income 
tax reform, which is somewhat offset by increasing 
tax rate on interest and capital gains. The share of 
recurrent property tax revenue is also projected to 
decline; this is connected to hesitation in updating 
property  values  used  for  taxation  to  bring  them 
into line with market values.  

Property  taxation  is  based  on  outdated  values. 
Recurrent property tax accounts for 0.8% of GDP 
in 2018, below the EU average of 1.6% of GDP in 
2017. Around 60% of property tax revenue comes 
from land, 10% from housing and 30% from other 
buildings  (Graph 3.1.5).  The  real  estate  cadastral 
values used as a basis for taxation are set to follow 
the market values. However, updating of cadastral 
values  has  been  postponed  for  several  years  and 
taxation  still  reflects  market  values  of  2012/2013. 
The proposed, but not adopted, update of cadastral 
values  for  2018  based  on  2015  market  values 
would  have  increased  total  cadastral  values  by 

that it shifts this tax burden to capital and property 
(Section 2).  A  model  simulation  shows 
that 
a revenue-neutral  tax  shift  from  low  wages  to 
property  would  increase  employment  and  GDP 
growth,  while  also  reducing  income  inequality 
(European  Commission,  2017).  Moreover,  as 
property  tax  evasion  is  more  difficult  than  labour 
tax evasion, it could also benefit tax compliance. 

Graph 3.1.4:  Tax revenue and implicit tax rates (2016) 

Source: European Commission — Taxation trends in the 
European Union 

The  tax  measures  adopted  in  2017  are  costly, 
while  the  tax  wedge,  while  smaller,  remains 
high  on  low  wage.  Personal  income  taxation  has 
become  more  progressive,  but  also  lower  on 
average.  The  tax  wedge  on  low  income  has  been 
reduced as a result, but for a single person earning 
50% of the average wage in 2020 it is estimated at 
36%, which is still high relative to the EU average 
of 32.5% in 2017 (European Commission, 2018h). 
The  net  costs  of  the  tax  cutting  and  revenue-
increasing  measures  are  estimated  at  a  total  of 
1.1%  of  GDP  over  2018-2020.  The  richest 
households and capital owners seem to be the main 
beneficiaries of the reforms. Notably, reducing the 
standard  personal  income  tax  rate  from  23%  to 
20% costs 0.8% of GDP, of which 60% goes to the 
richest 30% of tax payers (Ivaškaitė-Tamošiūnė et 
al.,  2018).  Transforming  the  corporate  income 
taxation regime is estimated to cost 0.7% of GDP 
by  2020.  While  some  of 
the  cost  will  be 
transitional,  the  cut  in  the  effective  corporate  tax 
on  profits  and  dividends  benefits  the  richest 
households    (who  own  most  of  the  financial 

20 

LVLVLV01020304050600102030405060Implicit tax rate, %Revenue, % of total taxationcapitalconsumptionlabour 
 
3.1. Public finances and taxation 

34%,  corresponding  to  some  0.3%  of  GDP  in 
property  tax  revenue.  The  largest  differences 
between cadastral values and market values are for 
agricultural land and newly built apartments.  

Distortions in property taxation lead to unequal 
treatment  of  taxpayers.  Similar  properties  can 
have notably different property tax liabilities. This 
is  linked  to  freezing  of  the  cadastral  values  and 
special  tax  treatment  by  some  local  authorities 
which set different tax rates ranging from 0.2% to 
1.5%  and  grant  tax  rebates  up  to  90%.  More 
affluent  municipalities  tend  to  grant  more  tax 
rebates  and  use  them  as  tool  for  attracting 
residents,  thus  gaining  their  income  tax  revenue. 
Property  tax  expenditure  accounted  for  0.1%  of 
GDP  in  2016  (Ministry  of  Finance,  2017).  While 
some  40%  are  socially  motivated,  a  notable  share 
of  revenue  is  foregone  for  a  blanket  rebate  for 
residents  in  the sea-side  resort  of  Jurmala  and 
dedicated  rebates  for  companies  in  the  special 
economic zones and municipal companies in Riga. 
Various distortions hinder the uniform application 
of property  tax  and  equal  treatment  of  all Latvian 
taxpayers  irrespective  of  their  place  of  residence. 
Cadastral  value  freezes  and  blanket  rebates  have 
impacts,  as  property 
regressive  distributional 
wealth 
income 
concentrated 
is 
households. 

in  higher 

Graph 3.1.5:  Property tax revenue and cadastral values in 

2012 and 2018 

Source: State Land Service of Latvia, Ministry of Finance 

Tax evasion has declined, but remains relatively 
high. The share of the shadow economy appears to 
have  declined  over  the  past  years  by  different 

of 

the 

estimates  (Graph 3.1.6).  However,  estimates  also 
show  a  large  measurement  uncertainty,  even 
pointing  in  different  directions  at  some  points. 
under-reported 
share 
Nevertheless, 
economic activity is higher in Latvia than in other 
Baltic  States.  In  particular,  underreporting  of 
salaries  (‘envelope  wages’),  particularly  in  the 
construction  sector,  accounts  for  a  large  share  of 
the  shadow  economy.  Under-reported  work  could 
be  reduced  as  a  result  of:  (i)  a sectoral  wage 
agreement  in  the  construction  sector  setting  a 
minimum wage higher than the national minimum 
(Section  3.3.1);  and  (ii)  electronic  registration  of 
working hours on large construction sites. 

Graph 3.1.6:  Estimates of Latvia’s shadow of economy 

Source: Sauka & Putnins (2018), Schneider (2017), Study and 
Reports on the VAT Gap in the EU-28 Member States (2018), 
State Revenue Service (SRS) (2018) 

Fighting  tax  crimes  remains  a  priority  for  the 
authorities.  Several  measures  to  combat  the 
shadow economy came into force in 2018, such as: 
(i) disclosure of  information on  employers  paying 
average  salaries  that  are  lower  than  the  state 
minimum wage; and (ii) disclosure of information 
on  employers  penalised  for  paying  ‘envelope 
wages’ and taxpayers not submitting tax returns on 
time. By the order of the Prosecutor General, chief 
the 
requested 
prosecutors  are 
prosecution of  financial  and economic  crimes  and 
the  previously  lenient  approach  to  penalties  has 
been  stiffened.  However,  implementation  of  some 
measures  faces  difficulties,  as  new  ways  of  tax 
evasion  are  being  uncovered,  e.g.  updating  cash 
registers  takes  more  time  than  planned,  as  new 

intensify 

to 

21 

020406080100120140160180200taxrevenuecadastralvaluebased on2008-2010marketpricestaxrevenuecadastralvaluebased on2012-2013marketpricescadastralvaluebased on2015marketprices (notadopted)20122018index 2012 = 100LandHousingBuildings0510152025303540051015202530354008091011121314151617share of estimted wage bill, %% of GDPSauka & PutninsSchneiderVAT gap studyEnvelope wages (SRS) (rhs)Envelope wages (Sauka & Putnins)(rhs) 
 
 
3.1. Public finances and taxation 

If  welfare  pressures  are  considered,  risks  to 
fiscal  sustainability  appear  higher.  Healthcare 
and  long-term  care  spending  is  projected  to 
increase by some 3% of GDP by 2070 due to non-
demographic cost drivers pushing up costs, under a 
more adverse scenario in the 2018 Ageing Report. 
This reflects on the currently low public spending 
on  healthcare  (Section 3.3.3)  and  the  expected 
increase  in  demand  for  health  services  as  living 
standards  rise.  Moreover,  the  currently  very  low 
pension  adequacy  is  projected  to  worsen  in  the 
long run, which may not be socially and politically 
total 
sustainable  (Section 3.3.2).  The  average 
pension (including both public and private pension 
income  from  the mandatory  individual  schemes) 
stood  at  24%  of  the  average  wage  in  Latvia  in 
2016,  below  the EU  average  ratio  of  43.5% (9). 
The 2018 Ageing Report projects that the ratio for 
Latvia  will  decline  to  18.6%  by  2070,  indicating 
that  income  from  mandatory  individual  schemes 
would  not  suffice  to  compensate  for  lower  public 
pension  benefits.  The  structural  fiscal  costs 
involved  in  maintaining  the benefit  ratio  at  its 
current level would amount to around 2% of GDP. 
Increasing it to the EU average would entail a cost 
of 10% of GDP.  

(9)  The EU average benefit ratio is for public pensions only. 

problems  are  discovered  in  already  certified  cash 
registers.  

The  tax  administration  has  been  strengthened 
to  work  more  efficient  and  on  more  complex 
cases.  The  World  Bank  has  launched,  with  the 
support  of  the  European  Commission,  a  technical 
assistance  project  on  tax  audit,  VAT  control  and 
fraud  risk  assessment,  and  to  review  the  legal 
framework  for  VAT  compliance.  Specifically, 
Latvia  is  advised  to: (i)  legislate  joint and several 
liability  in  the  case  of  fraudulent  transaction 
chains; (ii) create a large taxpayers’ unit within the 
State  Revenue  Service;  and  (iii) investigate  VAT 
taxpayers  not  submitting  tax  returns  instead  of 
applying automatic deregistration (8).  

The  micro-enterprise  tax  regime  has  become 
more  restricted,  but  is  still  abused  as  a  tax 
optimisation tool. The maximum annual turnover 
for  the  micro-enterprise  tax  regime  has  decreased 
from  EUR 100 000  to  EUR 40 000.  A  higher  tax 
rate is applied for turnover exceeding this amount, 
but  the  overall  tax  wedge  remains  still  more 
attractive  than  that  under  the  general  labour  tax 
regime. The micro-enterprise tax regime dominates 
in  sectors  with  a  high  share  of  labour  input,  like 
taxi  drivers,  arts  and  sporting  activities.  The 
number of micro-enterprise taxpayers decreased in 
2017-2018,  but  still  accounts  for  some  8%  of 
employees.  These  taxpayers  have  lower  social 
contributions and social protection as a result.  

3.1.4.  DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

to  possible  macro-fiscal 

Under  current  policies,  Latvia  faces  low  fiscal 
sustainability risks in the medium and long run. 
The manageable  initial  debt  level  and  the  limited 
sensitivity 
shocks 
underpin the assessment of low fiscal sustainability 
risks (Annex B). Under the 2018 Ageing Report’s 
(European Commission, 2018d) baseline scenario, 
total ageing-related expenditure is not projected to 
increase between 2018 and 2070 as a projected fall 
in pension spending more than offsets increases for 
other items.  

(8)  Technical  Assistance:  Supporting  the  Implementation  of 
the  Mid-Term  Tax  Strategy  of  the  Government  of  Latvia, 
World Bank Group. 

22 

 
                                                           
                                                           
3.2.  FINANCIAL SECTOR 

Financial stability  

the  euro  area  average.  However, 

The  Latvian  banking  sector  remains  sound 
despite the challenges over non-resident banks. 
The total capital ratio is over 22% - in line with the 
euro  area  average  and  well  above  the  10%  that 
banks are required to keep in order to withstand an 
adverse  shock.  The  Latvian  banking  sector’s 
profitability  has  until  recently  been  considerably 
above 
the 
winding  down  of  the  non-resident  banking  sector 
activities 
stringent 
coupled  with  more 
requirements  for  loan  loss  provisions  has  reduced 
the  non-resident  banking  sector’s  profitability. 
This  is,  however,  expected  to  be  temporary  and 
does  not  pose  a  risk  to  the  sector’s  stability. 
Finally, the share of non-performing loans (NPLs) 
at above 5% is somewhat higher than the euro area 
average.  The  NPL  share  dropped  quickly  after 
peaking  during 
in  2010. 
However,  unlike  in  the  other  Baltic  countries,  the 
figures have stopped improving and have remained 
broadly  unchanged  for  the  past  4  years.  This  is 
partly due to negative credit growth during most of 
that  time,  but  primarily  it  is  due  to  deteriorating 
quality of foreign customers’ loan portfolio. While 
the  quality  of  the  domestic  loan  portfolio  has 
continued to improve with loans past due 90 days 
standing at around 3.0% in 2018, the quality of the 
loan  portfolio  of  foreign  customers  has  rapidly 
deteriorated since 2015, landing at around 12% in 
2018 (Bank of Latvia, 2018). The increase in NPLs 
of  foreign  customers  is  linked  to  the  depreciation 
of the Russian rouble.  

the  financial  crisis 

Table 3.2.1: 

Financial soundness indicators 

*ECB aggregated balance sheet: loans excl to gov and MFI 
/ deposits excl from gov and MFI 
**For comparability only annual values are presented 
Source: European Central bank 

A  highly  integrated  and  concentrated  Nordic-
Baltic 
close 
collaboration among financial supervisors. Most 
large  Latvian  banks  belong  to  Nordic  banking 

system  warrants 

banking 

groups, with Swedish lenders SEB and Swedbank 
the  two  leading  names  in  Latvia.  The  creation  of 
Luminor  Bank  AS (10)  in  2017  put  in  place 
Latvia’s  second  largest  credit  institution,  with  a 
market  share  of  15 %  in  deposits  and  25 %  in 
lending.  Given  the  Nordic  economies’  financial 
openness  and  the  relatively  large  size  of  their 
banking  system,  potential  spill-overs  from  shocks 
originating in those countries could be significant. 
Risks mainly relate to the Nordic housing markets 
and — with the exception of Finland — to the high 
indebtedness  of  their  households.  Risks  may 
materialise  in  the  form  of  constrained  lending 
activity,  short-term  deposit  volatility  and  higher 
financing  costs  for  Latvian  banks  given  the 
relatively  heavy  dependence  of  some  Nordic 
countries  on  wholesale  funding.  In  this  regard, 
cross-border supervisory cooperation is warranted, 
to  maximise  the  effectiveness  of  national  macro-
prudential  policy 
level 
playing  field  for  all  credit  institutions  and  reduce 
the risk of regulatory arbitrage. 

instruments,  ensure  a 

Credit growth 

Credit  growth  is  improving  but  remains  below 
that of the other Baltic countries. Following the 
2009-2010  economic  crisis,  credit  growth 
to 
households  was  negative  until  2017.  Since  then, 
the annual credit growth has hovered barely above 
zero, while in the other Baltic countries it had been 
around 6-8 % over the past 2 years. Credit growth 
(adjusted  for  sales  and  securitisation)  to  non-
financial  corporations  has  been  on  average  1.4 % 
over 2018. Since 2010, private sector credit growth 
rates  on  average  have  remained  below  nominal 
GDP growth and as a consequence private debt has 
declined from above 130 % of GDP in 2010 to just 
above 80 % in 2017. 

The slow credit recovery is due to both demand 
and  supply  factors.  High  credit  risk  (bad  track 
records,  weak  borrower  collateral  and  equity), 
shortcomings  in  the  legal  framework  (lengthy 
insolvency procedures, reluctance over income and 
asset  disclosure)  and  the  shadow  economy  are 
important  supply  side 
considered 

the  most 

(10)  Nordea  Bank  (Sweden)  and  DNB  ASA  (Norway)  merged 
their  cross-border  operations  in  the  Baltic  states  into 
Luminor,  but  subsequently  cut  back  their  presence  in  the 
Baltics  in  September  2018  by  selling  a  60 %  stake  to 
Blackstone,  one  of  the  world’s  largest  private  equity 
investment funds,. 

23 

(%)201320142015201620172018Q2Non-performing debt5,67,75,15,24,75,3Non-performing loans-9,76,56,35,65,9Non-performing loans NFC-12,011,111,110,410,7Non-performing loans HH-12,310,47,95,95,6Coverage ratio79,339,937,735,335,932,2Loan to deposit ratio*132,3119,4109,3107,8102,6104,1Tier 1 ratio16,517,519,017,318,420,1Capital adequacy ratio18,020,221,820,420,622,4Return on equity**8,810,210,714,37,6-Return on assets**0,91,01,21,50,9- 
 
 
 
 
                                                           
3.2. Financial sector 

constraints  to  corporate  lending,  especially  to 
SMEs,  keeping  banks’  lending  standards  tight.  At 
the  same  time,  credit  demand  from  non-financial 
corporations is volatile due to the demand for large 
amounts, as smaller investments are often financed 
with  internal  resources.  Subdued  credit  demand 
among households is linked to the shrinking of the 
population,  the  high  incidence  of  undeclared 
incomes  and  to  the  large  share  of  the  population 
that has a bad credit score, a legacy of the financial 
crisis. 

Graph 3.2.1:  Credit growth, y-o-y % change 

(EBA) 

(FinCen)  implicated  Latvia's  then  third  biggest 
bank  ABLV  to  conducting  large  scale  money 
laundering.    Due  to  the  gravity  of  FinCen’s 
implications,  the  European  Central  bank  revoked 
its  licence  and  the  ABLV  bank  went  into  self-
liquidation.    Its  case  reinvigorated  international 
concern about the money laundering risks inherent 
to  the  Latvian  non-resident  banking  sector (11).  In 
March 2018, the European Commission requested 
the  European  Banking  Authority 
to 
investigate  whether  breaches  of  EU  law  were 
committed by Latvia in relation to the above case. 
Latvian  authorities  are  cooperating  well  with  the 
EBA in this enquiry, although there has been some 
delay  in  providing  the  EBA  with  the  requested 
information.    In  the  aftermath  of  the  ABLV  case, 
the  government  expressed  its  firm  commitment  to 
significantly  reduce  the  risk  of  money  laundering 
in  the  Latvian  banking  sector.  In  May  2018  it 
adopted  a  regulation  banning  servicing  certain 
the 
types  of  shell  companies  and  required 
remaining  non-resident  banks  to  change  their 
business models away from providing transactions 
to risky non-resident clients.  

Due to the ban on shell company servicing and 
banks’  business  model  change,  non-resident 
deposits  fell  significantly  in  2018.  In  2018  the 
non-resident deposits in Latvian banks declined by 
60% from 8.2 billion euros (40 % of all deposits) 
in  February  to  3.1  billion  euros  (20%  of  all 
deposits) by the end of 2018 (12). The decline was 
due to non-resident banks ceasing relationship with 
the riskiest clients. The remaining deposits are split 
broadly  equally  between  EU  and  non-EU  clients. 
Although 
declined 
substantially, they remain above the government’s 
initial target of 5% of all deposits. Moreover, they 
have  stabilised  since  August  and  Latvia’s  bank 
supervisor (13)  believes  that  they  are  unlikely  to 
fall further.  

deposits 

foreign 

have 

The  money  laundering  case  concerning  the 
ABLV  Bank  showed  that  weaknesses  in  the 
supervision  remain.  Although,  since  2015,  the 

(11)  Latvia’s  banking  sector  can  nominally  be  divided  in  two 
parts  –  traditional  domestic  market-serving  banks  and 
banks 
transaction 
services to non-residents 

that  focus  on  providing  primarily 

(12)  The  share  of  foreign  deposits  had  already  been  shrinking 
since  2015  when  they  peaked  at  over  12  billion  euros  or 
53% of all deposits 

(13)  Finance and Capital Market Commission or FCMC 

Source: European Central bank 

lending 

Domestic  non-bank 
is  much  more 
buoyant  than  bank  lending.  Although  banks  are 
the  main  providers  of  funding  to  the  Latvian 
economy,  the  role  of  non-bank  players  such  as 
leasing  companies  (e.g.  for 
the  purchase  of 
vehicles)  in  domestic  lending  is  growing.  Latvian 
non-financial  corporations,  particularly  start-ups, 
also  use  risk  capital  as  an  alternative  source  of 
funding. Crowdfunding services, mainly attracting 
foreign  investors  and  foreign  borrowers,  are  also 
increasing at a rapid pace.  

Anti-money laundering supervision 

In  the  wake  of  the  downfall  of  its  third  largest 
bank Latvia has taken swift action to minimise 
money  laundering  risks.  In  early  2018,  the 
United States financial crime enforcement network 

24 

-8-6-4-20246810Jan 12Oct 12Jul 13Apr 14Jan 15Oct 15Jul 16Apr 17Jan 18Oct 18y-o-yo % changeTotal privateNFCsHouseholdsMortgage credit 
 
                                                           
3.2. Financial sector 

capacity 

to  handle 

them  oversee 

to  help 
and 

international sanctions and its staff was increased. 
Financial  Intelligence  Unit’s (15)  staff  was  also 
increased 
the  ABLV 
implement  Moneyval’s 
liquidation 
recommendations.  However,  the  law  enforcement 
authorities’ 
anti-money 
laundering cases remains low. Police investigators 
and prosecutors qualified in anti-money laundering 
are missing, which is one of the causes of the low 
number  of  money  laundering  prosecutions  and 
convictions.  Finally,  despite  improvements,  first 
instance court cases concerning money laundering 
(2019  EU  Justice 
lengthy 
remain 
offences 
Scoreboard (forthcoming). 

Housing market 

House price growth has picked up over the past 
two  years.  The  house  price  growth  exceeded  8% 
in 2017 and continued at the same pace in the first 
half  of  2018.  By  comparison,  the  average  house 
price growth from 2010 to 2016 was 5.5%. Despite 
the  rapid  pace,  house  price  growth  has  remained 
broadly in line with income growth. The  price to 
income  ratio  is  now  only  slightly  higher  than  it 
was in 2010 and significantly lower than it was at 
the height of the real estate bubble in 2008 (Graph 
3.2.2).  The  demand  for  housing  has  been  boosted 
by  a  state  guarantee  programme  helping  families 
and young professionals to get a mortgage against 
lower  down  payment  than  banks  would  normally 
require.  This  has  also  helped  the  mortgage  credit 
growth  turn  positive  in  2017.  The  construction  of 
dwellings  has  also  increased  slightly,  but  over  a 
longer  time  frame  it  has  been  anaemic.  In  stark 
contrast with the other Baltic countries, the amount 
of newly constructed dwelling space in Latvia has 
not increased much since 2010 (Graph 3.2.3).  

(15)  The  Office  for  the  Prevention  of  Laundering  of  Proceeds 

Derived from Criminal Activity 

the  expected 

Finance and Capital Market Commission  (FCMC) 
had  carried  out  several  inspections  at  the  ABLV 
Bank, in the course of which various sanctions and 
corrective measures had been imposed, apparently 
these  did  not  ensure 
results. 
Moreover,  the  2018  Mutual  Evaluation  Report  on 
Latvia’s AML system by Moneyval (14)found that 
while  all  the  key  risk  assessment  and  control 
elements  were  in  place,  their  scope  and  quality 
were inadequate relative to the volume of financial 
flows  going  through  Latvia’s  non-resident  banks 
(Council of Europe, 2018). The report was critical 
in 
law  enforcement’s 
of  Latvia’s 
uncovering  and  prosecuting  money  laundering-
related  crime  and  it  pointed out that the  sanctions 
applied  to  convicted  individuals  did  not  appear  to 
be  dissuasive.  Law  enforcement  bodies  recognize 
deficiencies and are committed to putting in more 
effort  into  fighting  the  money  laundering  crime. 
Finally,  the  Moneyval’s  report  called  for  a  more 
holistic  approach  and  for  better  international 
cooperation  to  fight  money  laundering-related 
crime.  

success 

its  anti-money 

In  response  to  the  Moneyval’s  report,  Latvia 
has  expressed  commitment  to  review  its  anti-
money  laundering  strategy.  To  address  the 
weaknesses  identified  by  the  Moneyval’s  report, 
Latvia has come up with a detailed action plan for 
improving 
laundering/counter 
terrorist  financing  strategy.  The  main  priorities 
listed  in  the  action  plan  include  enhancing  risk-
introducing  preventive 
based  supervision  and 
measures,  ensuring  the  required  human  resources 
for 
effective 
information  exchange  among  the  investigative 
authorities and IT solutions for timely and efficient 
data  management,  among  others.  The  National 
Risk  Assessment  of  Latvia  is  also  under  review. 
The  government  plans  to  strengthen  the  dialogue 
between  the  public and  private  sectors  in order  to 
ensure  the  necessary  information  sharing  and 
collaboration. 

supervisory 

authorities, 

the 

While supervision and control bodies have been 
law  enforcement  authorities’ 
strengthened, 
capacity  also  needs  to  be  increased.    FCMC’s 
powers  have  been  recently  broadened  to  issuing 
regulations  on  risk  assessment  in  national  and 

(14)  The  report  was  based  on  an  assessment  carried  out  in 
Autumn  2017,  i.e.  before  the  closure  of  ABLV  bank  and 
the subsequent regulatory and operational changes 

25 

 
                                                           
                                                           
3.2. Financial sector 

Graph 3.2.2:  Price to income ratio, index 2010=100 

Graph 3.2.3:  Newly constructed dwelling space, m2 per 

1000 people 

Source: European Commission 

Undeclared  wages,  cumbersome  construction 
regulations  and  weak  protection  of  landlords 
hold  back  investment  in  housing.  Since  the 
financial crisis of 2009, banks in Latvia are taking 
a  much  more  prudent  approach  to  granting  credit 
against  undeclared  incomes  and  they  currently 
identify this as one of the main obstacles to higher 
mortgage  credit  growth.  Furthermore,  investors 
point  to  lengthy  and  cumbersome  construction 
regulations  making  the  process  costly  and  leaving 
investors less agile to respond to growing demand. 
Finally,  weak  protection  of  landlords  discourages 
more  investment  into  rental  housing  (European 
Commission 2018a). The government has prepared 
a  draft  rental 
that  would  significantly 
strengthen  the  protection  of  landlords'  interests. 
However,  there  are  concerns  that  the  proposal 
would  shift  the  balance of protection  too much  in 
favour of landlords. 

law 

Source: Statistics Estonia, Central Statistical bureau of Latvia, 
Statistics Lithuania, European Commission calculations 

in 

turn  hinders 

Investment  in  housing  is  crucial  to  facilitating 
better  internal  mobility  and  access  to  quality 
jobs  in  the  peripheral  regions.  A  large  share  of 
owner-occupied  buildings  means  there  are  few 
options  for  people  who  would  like  to  move  for 
jobs outside of the Riga metro area. Moreover, the 
population’s 
low  purchasing  power  makes 
commercial  residential  development  not  viable. 
This 
regional  growth  and 
encourages emigration. The experience of the city 
of Valmiera (16) shows that there is a high demand 
for  affordable  rental  housing  and  that  it  can  be  a 
powerful  policy  tool  to  attract  people  to  the 
local 
municipality,  providing  employees 
businesses.  However, 
that 
residential  development  is  only  viable  if  cheap 
long-term  financing  is  available.  Inspired  by 
Valmiera’s example, the Ministry of the Economy 
has put forward a state support programme aimed 
at  helping  municipalities  finance  rental  housing 
projects. However, this has yet to be approved by 
the government. 

it  also  suggests 

to 

(16)  In 2018 Municipality of Valmiera built 150 flats on its own 
land without involving a real estate developer, thus making 
the  flats  cheaper  than  they  otherwise  would  be.  Within  a 
couple of months 90% of the flats had been rented out. The 
city  cites  lack  of  long-term  financing  as  the  primary 
obstacle to building more apartments. 

26 

8090100110120130140150160060708091011121314151617EELVLTEU0100200300400500600101112131415161718EELVLT 
 
 
                                                           
3.3.  LABOUR MARKET, EDUCATION, AND SOCIAL POLICIES 

3.3.1.  LABOUR MARKET 

well-paid jobs should reverse the net emigration by 
2023. 

the 

improvement 

In  line  with  the  favourable  macroeconomic 
environment, the labour market performance is 
overall  positive.  The  employment  rate  increased 
on  the  back  of  declining  unemployment  and 
growing  activity  rate.  The  long-term  unemployed 
and  young  people  continue  to  benefit  from  the 
steady 
labour  market 
in 
(Section 1).  However,  the  shrinking  pool  of  the 
working  age  population 
to 
increasing  labour  shortages,  in  particular  in  Riga. 
Population  projections  suggest  a  further  decrease 
in  the  working  age  population  and  an  increase  in 
the  share  of  the  elderly  in  the  population  in 
the medium 
(Ministry  of 
Economics,  2018).  In  addition,  structural  gaps  in 
employment  based  on  skills  level,  ethnicity  and 
regions  persist.  Ensuring  skills’  supply  is  one  of 
the  main  areas  where  demand  for  investment 
remains significant. 

is  contributing 

term 

long 

and 

Emigration  is motivated  by working and  living 
conditions, and it contributes to skill shortages. 
Between  2009  and  2016,  the  outflow  of  skilled 
labour  (those  with  at  least  a  medium  level  of 
education) amounted to 120 000 people. More than 
a  half  of  emigrants  had 
tertiary  education, 
equivalent to 17.4% of the high-educated segment 
(ECE,  2018b).  Although 
the  outflows  have 
decreased  in  recent  years,  still  about  half  of  the 
country’s population decline is due net emigration 
labour 
(Section 1).  Emigration 
contributes  to  skills  shortages  (OECD  2017Z). 
Emigration 
low  wages  and 
financial  difficulties 
in  Latvia,  as  well  as 
dissatisfaction with quality of life and social safety 
nets  (Hazans,  2015).  The  rapid  wage  growth 
(Section 1)  in  Latvia  could  discourage  emigration 
and  incentivise  return  migration.  The  Ministry  of 
Economics 
the  steady 
economic  growth  and  increase  of  qualitative  and 

is  motivated  by 

(2018)  assumes 

skilled 

that 

of 

following 

Labour  shortages  are  reported  across  various 
sectors.  Most  shortages  are  in  sectors  related  to 
science, technology, engineering, and mathematics 
(STEM  fields),  including  ICT,  as  well  as  in  the 
healthcare  sector  (see  Section 3.3.3  on  healthcare 
and  Section 3.3.4  on  education) 
(European 
Commission,  2018a).  Labour  shortages  are  also 
becoming  more  pronounced  in  the  construction 
sector 
recent  stronger  growth 
(Ministry of Economics, 2018). In 2018, vacancies 
registered at public employment services doubled, 
reaching pre-crisis levels, of which nearly 80% in 
the  Riga  region.  Since  February  2018,  incentives 
are provided to employers to recruit highly skilled 
workers  from  non-EU  countries  in  occupations 
where a significant shortage of labour is projected. 
The  education  and  skills  governance  systems  are 
also being reformed (Section 3.3.4) 

its 

Graph 3.3.1:  Job vacancies and labour shortage indicators 

Source: European Commission (Eurostat, Economic 
Sentiment Indicator) 

27 

0.00.51.01.52.02.53.0051015202530% of occupied and vacant posts% of firms reporing labour shortagevacancies/jobs (rhs)shortages industryshortages constructionshortages services 
 
 
 
3.3. Labour market, education, and social policies 

Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights 

The European Pillar of Social Rights is designed as a compass for a renewed process of upward convergence 
towards better working and living conditions in the European Union(1). It sets out 20 essential principles and 
rights in the areas of equal opportunities and access to the labour market; fair working conditions; and social 
protection  and  inclusion.  The  analysis  in  this  report 
has been carried out in light of the Pillar’s principles. 

regions  and  skills 

Latvia  faces  challenges  on  a  number  of  indicators 
of the Social Scoreboard supporting the European 
Pillar of Social Rights. Despite the improvements in 
labour  market,  challenges  remain  on  equal 
the 
opportunities, 
labour  market  access,  and  social 
protection  and  inclusion.  Disparities  in  employment 
across 
levels  persist,  while 
participation  in  adult  learning  and  active  labour 
market  policies  is  lower  than  in  other  EU  countries. 
Wages are increasing at a rapid pace and the minimum 
wage was raised in 2018. However, income inequality 
remains  high,  in  part  due  to  the  low  redistributive 
power  of  the  tax  and  benefits  system.  Although  the 
risk  of  poverty  or  social  exclusion  has  been 
decreasing,  it  remains  elevated  for  people  with 
disabilities, the elderly and the unemployed.  

Access  to  affordable  healthcare  is  a  challenge. 
Although  self-reported  unmet  needs  for  medical  care 
are  decreasing,  they  remain  high.  In  2017,  people  in 
the  lowest  income  quintile  reported  a  much  higher 
level of unmet needs for medical and dental care due 
to cost (9.9% and 25.5% respectively) than people in 
the  highest 
(0.9%  and  3.3% 
respectively). 

income  quintile 

The  Youth  Guarantee  is  effectively  supporting 
young  people  in  the  labour  market.  Implementation  of  the  Youth  Guarantee  in  Latvia  started  in  2014, 
targeting young people not in employment, education or training aged 15-29 years. The employment offers 
provided under the scheme are mostly subsidised employment in the regular labour market. The education 
offers  emphasise  several  vocational  tracks,  and  also include  ‘Youth  workshops’  which  provide training to 
help young people with their career choices. The Youth Guarantee is implemented using national funds, the 
European Social Fund and the Youth Employment Initiative. It has helped significantly reduce the rate of 
young people not in employment, education or training, which in 2017 fell to 10.3%, below the EU average 
of 10.9%. 

(1)  The European Pillar of Social Rights was proclaimed on 17 November 2017 by the European Parliament, the Council 
and  the  European  Commission.  https://ec.europa.eu/commission/priorities/deeper-and-fairer-economic-and-monetary-
union/european-pillar-social-rights/european-pillar-social-rights-20-principles_en 

Employment  conditions  differ  across  regions 
and  internal  mobility  remains  a  challenge. 
Uneven regional distribution of jobs and vacancies 
is  one  of  the  key  challenges  the  country  is  facing 
(Ministry  of  Economics,  2018).  The  employment 
rate  in  Riga  is  higher  (73.4%)  than  in  other 

regions, 
in  particular  Latgale  (62.2%).  This 
encourages  residents  of  Vidzeme  and  Zemgale  to 
take  advantage  of  those  region’s  proximity  to  the 
capital  region,  with  the  result  that  10%  and  15% 
respectively  of  their  employed  residents  work  in 
Riga.  The  regional  mobility  support  programme 

28 

 
 
3.3. Labour market, education, and social policies 

coordination between public employment services, 
social  services  and  educational  institutions  is 
insufficient,  which  results  in  poor  monitoring  of 
school-to-work  transitions  and  success  on  the 
labour  market.  A coordinated  approach  aimed  at 
long-term activation of people furthest away from 
the 
improved.  The 
coverage  of  the  active  labour  market  policies  and 
the capacity of the public employment service are 
linked  to  funding,  therefore  the  demand  for 
investment will remain significant.  

labour  market  could  be 

The  prevalence  of  occupational  diseases  is 
increasing  and  the  fatal  accident  rate  is  high. 
The rapid rise in victims of an occupational disease 
results  in  partial  or  full  workability  loss  and 
contributes  to  the  increasing  rate  of  persons  with 
disabilities. While the fatal accident rate is among 
the  highest  in  the  EU,  the  very  low  rate  of  non-
fatal  incidents  is  explained  by  the  poor  accident 
of 
reporting 
underreported  work  contributes  to  the  under-
reporting  of  accidents  at  work  and  heightens 
(Section 3.1.3).  The  State 
occupational 
carries  out  preventive 
Labour 
measures,  but  has  limited  capacity  and  high  staff 
turnover. To pursue the Social Pillar principle on a 
healthy  and  safe  work  environment,  further 
investments may contribute to ensure healthier and 
longer working lives.  

culture.  High 

Inspectorate 

prevalence 

risks 

sufficiently 

provides commuting or relocation support, but the 
uptake  remains  low,  as  the  amount  of  support 
(cumulatively  EUR 400  for  first  4  months)  does 
relocation 
compensate 
not 
expenses  and  the  support  is  temporary.  Lack  of 
affordable  and  quality  rental  housing  is  the key 
bottleneck  for  internal  mobility  in  the  country 
(Section 3.2). 

for 

Gaps  in  employment  based  on  skills  level  and 
ethnicity persist. The employment gap of 15.8 pps 
between  people  with  high-  and  medium-
educational  attainment  in  Latvia  is  among  the 
highest  in  the  EU.  This  is  linked  to  the  relatively 
low  employment  rate  of  medium-educated  men. 
More  than  35%  of  registered  unemployed  have 
vocational  education  and  training  background  and 
half of them are over 50 years old, thus indicating 
outdated  skills.  The  employment  gap  between 
Latvians  and  citizens  from  ethnic  minorities  has 
narrowed  to  3.3 pps,  but  the ethnic  employment 
gap  remains  at  6.5 pps  and  is  wider  for  the  older 
generations.  More  than  40%  of  ethnic  minorities 
over 55 year old have no knowledge of the Latvian 
language or their proficiency is low (Mieriņa et al., 
2017).  In  addition,  participation  in  adult  learning 
for  the  55-64  age  group  is  only  3.5%  (2017). 
Further 
the  older 
generations  and  in  the  Latvian  language  training 
could  support  the  labour  supply  against  the 
backdrop of the negative demographic trends. 

in  upskilling 

investment 

low, 

The spending on and coverage of active labour 
market  policies  remains 
limiting  the 
activation  of  those  furthest  away  from  the 
labour  market.  Latvia  has  made  progress  on 
integrating  the  long-term  unemployed  into  the 
labour market with long-term unemployment rates 
at the EU average. However, participation in active 
labour market policies remains low at 5.8 per 100 
persons  wanting  to  work.  Low  public expenditure 
on  active  labour  market  policies,  at  only  0.6%  of 
GDP  (2016)  contributes  to  this  situation (17). 
Employment  services  can  also  be  difficult  to 
access, especially for more disadvantaged workers 
in  rural  areas,  as  the  low  adequacy  of  social 
assistance  benefits  hampers 
regular  contact 
jobseekers  and  employment  offices 
between 
Information  exchange  and 
(OECD,  2016a). 

(17)  Almost  70  %  of  ALMP  spending  is  financed  by  the 
European Social Fund so the national contribution is even 
smaller. 

A  sectoral  wage  agreement  in  the  construction 
sector  is  a  novelty  in  Latvia,  but  it  requires 
a more flexible legal framework. The agreement 
was reached in 2018, setting a minimum wage for 
the  sector  of  EUR 780  (higher  than  the  national 
minimum  of  EUR 430)  and  reducing  a  surcharge 
for  overtime  work  to  50%.  The  current  legal 
requirement for a surcharge is 100% of contractual 
wage.  Amendments  to  the  Labour  Law  allowing 
for  a  smaller  surcharge  for  overtime  if  the 
is  substantially 
in  a  sector 
minimum  wage 
increased  were  adopted  by  the  Parliament,  but 
were  rejected  by  the  President,  thus  putting  on 
hold the sectoral agreement. This agreement would 
be  a  novelty  for  the  Latvian  industrial  relations 
system,  as  so  far  there  have  been  no  collective 
agreements  at  sector  level  in  the  private  sector. 
Four additional agreements in transportation, wood 
and 
processing, 
telecommunications  will  be  facilitated  through  an 
EU-funded  project, 
thus  strengthening  social 
dialogue at sectoral level. 

pharmaceuticals 

29 

 
                                                           
The  institutional  set-up  for  social  dialogue  is 
well  established,  but  the  capacity  of  social 
partners is limited. In 2016, membership of trade 
unions continued to decrease, falling to just 10.7%, 
while  the  density  of  employers’  organisation  has 
been  increasing  in  recent  years,  reaching  a  figure 
of 44% (Eurofound, 2018). The institutional set-up 
for national level social dialogue is well developed 
and  social  partner  involvement  in  policymaking 
has  improved.  However,  social  partners  lack 
financial  and  human  resources  and  their  capacity 
to  participate  in  the  legislative  process  remains  a 
challenge.  In  this  context,  investment  in  capacity 
building  of  social  partners  is  important  to  ensure 
the effectiveness of social dialogue. 

3.3.2.  SOCIAL POLICIES 

Income inequality and poverty remain high and 
spending  on  social  protection  is  low.  According 
to the Social Scoreboard (Box 3.3.1), Latvia faces 
challenges on equal opportunities, social protection 
and inclusion. In 2016, Latvia spent only  12 % of 
GDP  on  social  protection,  well  below  the  EU 
average  of  19.1 %.  Given  the  low  spending  on 
social  protection,  the  impact  of  social  transfers  is 
limited.  In  2018,  social 
transfers  (excluding 
pensions)  reduced  the  risk  of  poverty  rate  by 
19.1%  in  Latvia  vs.  33.2%  on  average  in  2017  in 
the EU. Likewise, the impact of social transfers on 
inequality  was  only  19.3%,  among  the  lowest  in 
the EU and well below the average (of 40.4%). In 
order  to  accelerate  progress  towards  inclusive 
growth, significant investments would be required 
to  foster  active  inclusion  and  social  integration  of 
people  at  risk  of  poverty  or  social  exclusion, 
including access to integrated social services, food 
and material aid for the most deprived.  

The  adequacy  of  social  assistance  benefits 
little  to 
low  and  they  contribute 
remains 
alleviating  high  poverty  and  inequality.  From 
January  2018,  the  guaranteed  minimum  income 
tops  up  income  to  EUR 53  (some  municipalities 
voluntarily  provide  higher  benefits).  The  average 
housing benefit is less than EUR 15 per person per 
month,  while  the  calculated  poverty  threshold  for 
the 
2017  was  EUR 367.  The  adequacy  of 
the  EU 
minimum 

income  benefits 

is  below 

3.3. Labour market, education, and social policies 

average (18). According to the national data, out of 
the  first  (lowest)  income  quintile,  68.3%  report 
difficulties  making  ends  meet;  however,  only 
16.2%  have  received  the  status  of  ‘poor  person’ 
giving  them  access  to  social  assistance  and  only 
6.7% receive guaranteed minimum income. People 
from  quasi-jobless  households  at  risk  of  poverty 
face  more  difficulty  accessing  certain  services  in 
Latvia  compared  to  other  EU  Member  States (19). 
The  concept  paper  adopted  in  2014  envisaging  a 
significant  increase  in  benefit  adequacy  has  not 
been  implemented  and  the  plan  to  improve  the 
minimum  income  support  system  has  not  been 
adopted,  although  revised  and  resubmitted  to 
the government  multiple 
times  (latest  version 
submitted in May 2018).  

The minimum income level reform could bring 
inequality  and  poverty  in  Latvia  more  in  line 
with  the  EU  average.  The  reform  targets  low 
income  households  and  can  notably  address 
poverty and inequality concerns. However, simply 
making  benefits  more  generous  could  negatively 
affect  the  beneficiaries’  incentives  to  work.  The 
current withdrawal of means-tested benefits at the 
same  rate  as  work  income  increases  impacts  on 
incentives  to  take  up  work.  This  can  be  mitigated 
by a more gradual withdrawal of the means-tested 
benefits. At a similar cost as the 2017 tax reform, 
the  reform  of  the  minimum  income  level,  with 
more gradual transition from means-tested benefits 
to labour income, has the potential to close the gap 
to  the  EU  average  in  terms  of  poverty  and 
inequality  while  improving  incentives  to  work 
(Ivaškaitė-Tamošiūnė et al., 2018).  

A  relatively  high  and  increasing  share  of  the 
elderly are at risk poverty and social exclusion. 
The  at-risk-of-poverty  or  social  exclusion  rate  for 
the elderly  continued  to  deteriorate  and  at  49.0% 
(2018) was significantly above the EU average of 
18.2%  (2017).  From  2013  to  2018  the  rate  of 
poverty and social exclusion among women of 65 

(18)  According  to  the  Benchmarking  Framework  on  Minimum 
Incomes conducted within the SPC Committee. For details, 
see  the  draft  Joint  Employment  Report  2019,  COM(2018) 
761 final. The figures relate to single person households. 
(19)  Information relates to gaps in self-reported unmet needs for 
medical  examination,  housing  cost  overburden  rate,  and 
non-participation in training related to professional activity 
between individuals (18-59) at risk of poverty from quasi-
jobless households and the rest of the population aged 18-
59 (The draft Joint Employment Report 2019, COM(2018) 
761 final). 

30 

 
                                                           
3.3. Labour market, education, and social policies 

years  of  age  and  older  has  increased  by  13.6 pps. 
Mostly,  these  are  pensioners  who  retired  before 
1996  under  the  previous  pension  law,  which 
produced  very  low  benefit  amounts  that  were 
further devalued by low indexation. Moreover, the 
poverty  gap,  which  measures  the  intensity  of 
poverty (i.e. how poor the poor are), is among the 
highest in Europe. This is mainly because pensions 
lag  behind  the  growth  in  labour  incomes  while 
there are no adequate safety nets for the elderly. 

Graph 3.3.2:  At-risk-of-poverty or social exclusion rate by 

age groups 

Source: European Commission (Eurostat 

is 

low  and 

The  adequacy  of  pensions 
is 
projected  to  remain  low  in  the  long  run.  In 
2018, Latvia took some steps to improve situation 
for pensioners by: (i) increasing pensions for older 
pensioners;  (ii)  raising  income  tax  allowances; 
(iii) making  indexation  rules  more  favourable  for 
pensioners  with 
longer  service  records;  and 
(iv) introducing  a  time-limited  survivor’s  pension. 
In addition, a right to inherit state-funded pension 
capital if the deceased has not reached pension age 
will  be  effective  as  of  2020.  However,  the 
generosity  and  coverage  of  the  measures  are 
limited.  The  minimum  pension  and  state  social 
security  old-age  allowance  have  not  been 
increased.  The  minimum  pension  remains  at  the 
2006 
to 
EUR 108.85 per month, depending on the length of 
contributions.  The  pension  adequacy  is  projected 
to remain one of the lowest in the EU in the long 
run (European Commission, 2018c).  

in  a  range  from  EUR 70.43 

level 

the 

rate 

duration 

The unemployed are at high risk of poverty, in 
particular  if  the  duration  of  unemployment 
increases.  Unemployment  benefits  are  paid  for 
the first  9  months  of  unemployment  and  are 
gradually  reduced  in  the  meantime.  Both  the 
replacement 
of 
and 
unemployment  benefit  (for  a  year-long  work 
the  EU  average (20). 
record)  correspond 
However, 
rate  of 
unemployed  persons 
is  high  at  59.6%  and 
increasing. The low social insurance contributions 
of  employees  often  result  in  low  unemployment 
benefits.  Moreover,  the  low  social  assistance 
benefits,  which  support  unemployed  people 
experiencing long unemployment spells, contribute 
to high poverty among the unemployed.  

the  at-risk  of  poverty 

to 

The  social  security  system  does  not  cover  all 
people  in  employment,  and  the  self-employed 
contribute  little  to  their  pensions.  Some  8%  of 
self-employed  without 
Latvian  workers  are 
employees,  as  compared  to  the EU  average  of 
10%.  They  are  not  covered  by  unemployment 
benefits  scheme  or  insured  against  accident  and 
occupational  injuries.  Almost  all  (90%)  self-
employed  pay  social  insurance  contributions  from 
income  that  are  equal  to  the  minimum  wage. 
The low social contributions will result in very low 
old-age  pensions  (European  Commission,  2018c). 
In  addition,  casual  workers  are  not  covered  by 
sickness  benefits  and  seasonal  workers  are  not 
insured against the majority of social risks. 

Social protection for persons with disabilities is 
weak. The share of persons with disabilities at risk 
of poverty  or social  exclusion  in  Latvia  is 42.5%, 
one of the highest in the EU (EU average 30.1%). 
Latvia  has  one  of  the  highest  gaps  in  the  EU 
between  the  at-risk-of  poverty  rate  and  social 
exclusion  rate  for  persons  with  and  without 
disabilities  (20.8 pps  vs. 
the  EU  average  of 
9.2 pps).  Disability  pensions  are  low  and  43%  of 
persons  with  disabilities  receive  pensions  below 
EUR 120  per  month.  The  state  social  security 
benefit, which serves as a base for calculating the 
invalidity pension, has not been revised since 2006 
and  currently  stands  at  EUR 64.03  per  month,  or 

(20)  According to the benchmarking exercise on unemployment 
benefits and active labour market policies conducted within 
the  EMCO  Committee.  See  the  draft  Joint  Employment 
Report 2019 for details.   

31 

010203040506070% of populationChildren (<18y)Working age (18-64)Elderly (65+) 
 
                                                           
3.3. Labour market, education, and social policies 

jobs  directly 

requirement set by law to provide one social work 
specialist  per  1 000  inhabitants.  National  social 
care  centres  face  a  large  staff  turnover,  especially 
to  customer  care 
related 
in 
(caregivers,  social  caregivers,  social  rehabilitators 
and  social  workers).  One  fifth  of  carers  receive 
the minimum  statutory  wage,  and  many  other 
employees are paid only slightly higher than that.  

severe 

experiences 

Access  to  adequate  housing,  particularly  for 
low-income  groups,  is  a  challenge.  15.2%  of 
the population 
housing 
deprivation, significantly above the EU average of 
4.5%.  Half  of  those  below  the  poverty  risk 
threshold  live  in  poor  housing  conditions (21). 
Inhabitants  of  rural  areas,  in  particular  in  the 
Latgale  region,  live  in  worse  housing  conditions 
than the urban population. While the housing cost 
overburden rate in  Latvia  has  been  declining,  still 
almost one-third (32.9 %) of households report that 
housing  costs  impose  a  heavy  burden  (CSB 
2018a).  

Social  housing  is  scarce  and  often  not  fit  for 
living.  In  2016,  social  housing  constituted  only 
0.4% of social housing stock compared to the EU 
average  of  8%.  This  is  insufficient  to  respond  to 
demand  and  currently  there  are  7 000  people 
waiting  for  a  home.  Local  governments,  with  few 
exceptions,  invest  little  to  improve  the  technical 
condition  of  social  housing  and  as  a  result,  one 
third  of  vacant  premises  are  not  fit  for  living. 
State-funded  grants  for  social  housing  have  not 
been available since 2009.  

There  is  little  data  on  homelessness  and  this 
phenomenon  is  not  addressed  at  national  level. 
There is no national strategic document addressing 
homelessness,  and  the  scope  of  existing  policy 
documents  only  addresses  the  provision  of  night 
shelter  services.  According  to  national  data,  in 
2017, more than 6 800 people used municipal and 
private shelters. These service providers are mostly 
located  in  the  largest  cities  of  Latvia  and  data  on 
homelessness  nationwide  is  lacking.  To  address 
the 
the 
provision  of  social  housing,  investment  would  be 
needed, in particular at municipal level. 

issue  of  homelessness  and 

improve 

(21)  Deprivation  measures  include  a  leaking  roof,  damp  walls, 
lack of light, window rot, no private indoor flushing toilet, 
no bath or shower 

EUR 106.72 per month for people who have been 
living with disabilities since childhood.  

The transition from institutional to community-
based care has started. Institutions for children in 
out-of-family  care  and  adults  with  special  care 
needs  are  costly  and  have  poor  social  outcomes. 
Those  are  set  to  be  replaced  by  community-based 
services  at  local  level  and  family-like  care.  In 
2018,  financial  support  for  foster  families  was 
increased  and  a communication  campaign 
to 
overcome  prejudices  about  adults  with  mental 
disabilities  was  launched.  The  policy  is supported 
by  the  EU  funds,  however,  only  a  part  of  overall 
needs  for  community-based  care  services 
is 
covered  and  further  investment  would  be  needed. 
In  addition,  the implementation  of  EU-funded 
projects  has  been  delayed  for  almost  2  years, 
putting  at  risk  its  planned  completion  by  2023 
(State Audit Office, 2018).  

Access  to  long-term  care  is  improving  but 
remains weak. Despite progress in the delivery of 
home  care  services,  unmet  needs  for  homecare 
services  due  to  financial  reasons  was  37.9%  of 
households in need in 2016, above the EU average 
of  32.2%.  The  municipalities  are  responsible  for 
services,  which 
in 
institutional  care  centres.  Low  remuneration  of 
social  workers  and  low  population  density  is  a 
challenge for quality care services in rural regions 
(ESPN, 2018).  

are  mostly  delivered 

Access  to  childcare  facilities  is  low  in  the 
countries’  main  centres  of  economic  activity. 
Availability  of 
(mainly  public) 
affordable 
kindergartens  is  a  challenge  in  Riga  and  other 
larger  cities,  where  young  people  tend  to  migrate 
(Eurofound, 2018). In 2017, 28.4% of all 0-3 year 
olds  were  enrolled  in  formal  childcare,  which  is 
below the Barcelona targets of 33% and below the 
EU  average  of  34.2%  (EU-SILC).  Compensation 
for  inability  to  provide  a place  in  municipal 
kindergarten  does  not  cover  the  costs  of  private 
child-minding services, which can cause people to 
choose  not  to  work  over  accepting  low-wage 
employment. 

Poor  prestige,  low  remuneration  and  heavy 
workload  result  in  high  staff  rotation  and 
recruitment  problems 
service 
providers.  Currently,  38.7%  of  municipal  social 
the  minimum 
services  do  not  comply  with 

social 

at 

32 

 
                                                           
3.3. Labour market, education, and social policies 

Social  enterprises  receive  legal  backing  and 
financial  support,  but  lack  capacity.  In  April 
2018,  the  Law  on  Social  Enterprises  came  into 
force laying down the main principles and working 
arrangements  of  social  enterprises  in  Latvia.  To 
foster  the  creation  of  social  enterprises  a  grant 
programme  is  available  and  so  far  27  of  around 
220  planned  grants  have  been  awarded.  Further 
investment  would help  to  address  such  challenges 
as  poor  managerial  and  business  skills  of  existing 
non-governmental organisations and limited access 
to  business  incubators  (European  Commission, 
2018g). 

in 

for vulnerable groups such as pensioners and low-
income  households.  The  incidence  of  so-called 
‘catastrophic’  and  impoverishing  out-of-pocket 
payments (23)  for  healthcare  (13%  and  4%  of 
households  respectively  in  2013)  is  among  the 
highest 
the  World  Health  Organization 
European  Region  (WHO  2018a;  WHO  2018b). 
The  above  mentioned  factors  contribute  to  high 
inequality,  with  the  poorest  20%  of  households 
reporting  a  much  higher  level  of  unmet  needs  for 
medical  and  dental  care  due  to  cost  (9.9%  and 
25.5%, respectively, in 2017) than the richest 20% 
of households (0.9% and 3.3%, respectively). 

3.3.3.  HEALTHCARE 

Poor  health  outcomes  are  linked  to  low  public 
spending  on  health  and  to  unhealthy  lifestyles. 
Life expectancy is among the lowest in the EU and 
levels  of  preventable  and  amenable  mortality  are 
high (22).  Cardiovascular  diseases  and  cancer  are 
the  biggest  causes  of  death.  Behavioural  risk 
factors  are  more  prominent  in  Latvia  than  in  the 
EU  on  average,  with  rising  obesity  rates  and 
alcohol 
2018). 
Moreover,  the  low  public  financing  for  health 
limits  access  to  quality  and  timely  care  for  all.  In 
response,  the  authorities  have  prioritised  public 
spending on health and have initiated a number of 
reforms  fostering  the  efficiency  and  quality  of 
health services. 

consumption 

(OECD/EU, 

times.  To  overcome 

Restricted  access  to  publicly  funded  healthcare 
leads to unmet needs for care and inequality of 
opportunities.  State-paid  health  services  are 
limited  by  a  ‘quota’  system,  which  leads  to  long 
this  constraint, 
waiting 
patients  tend  to  pay  out-of-pocket  for  private 
services.  Additional 
to 
accessing  healthcare  stem  from:  the  level  of  user 
charges  for  the  public  services,  co-payments  for 
prescribed  medicines  and  out-of-pocket  payments 
for medicines that are excluded from coverage. In 
2016,  out-of-pocket  payments  constituted  44.6% 
of  health  spending  in  Latvia,  well  above  the  EU 
average of 18.2%. This leads to financial hardship 

significant  barriers 

(22)  Amenable  mortality:  premature  deaths  that  should  not 
occur  if  timely  and  effective  healthcare  is  provided. 
Preventable  mortality  is  a  broader  concept  and  includes 
deaths  which  could  have  been  avoided  by  interventions 
focusing  on  wider  determinants  of  public  health,  such  as 
behaviour and lifestyle factors. 

Voluntary  health  insurance  for  a  part  of  the 
population  risks  worsening  their  health  status. 
A  new  health  insurance  system  was  set  to  come 
into effect in January 2019, now postponed to July 
2019. For two baskets of health services, it defines 
a ‘full basket’, and a ‘minimum basket’. The latter 
is limited to a basic set of healthcare services, such 
as  care  provided  by  general  practitioners, 
preventive  checks,  emergency  services  and  some 
other  special  conditions (24).  Around  30 000  to 
53 000  people  (mainly  seasonal  workers  and 
micro-enterprise  workers)  will  have  to  make 
voluntarily  health  insurance  payments  in  order  to 
access  the  ‘full  basket’.  Only  some  5 000  people 
had  made  voluntary  payments  by  early  January 
2019.  The  remaining  of  the  affected  population 
faces the risk of financial hardship if certain health 
problems occur or delaying their treatment until it 
becomes  an  emergency  covered by  the  ‘minimum 
basket’. 

phase 

Health reforms concern a number of areas and 
are  progressing,  although  they  are  still  at  an 
The 
early 
implementation of the hospital sector reform, more 
specifically 
the  configuration  of  new  single-
speciality,  regional  and  tertiary  hospitals  and  the 
operational  development  of  local  hospitals  is 

implementation. 

of 

(23)  Catastrophic  out-of-pocket  payments 

for  health  are 
payments  by  households  out  of  their  own  pocket  that  are 
greater than 40 % of the household's capacity to pay (which 
is  defined  as  the  total  household  consumption  minus  a 
standard amount to cover basic needs). Impoverishing out-
of-pocket  payments  for  health  are  those  which  push 
households  below  a  basic  needs  line  (calculated  as  the 
average  amount  spent  on  food,  housing  and  utilities  by 
households  between  the  25th  and  35th  percentiles  of  the 
household 
for 
household size and composition). 

consumption 

distribution, 

adjusted 

(24)  Services covered by the ‘minimum basket’ are specified in 

government regulation No 555 of 28.08.2018. 

33 

 
                                                           
                                                           
3.3. Labour market, education, and social policies 

in  2014 

access  to  health  services  across  the  country.  The 
number of nurses in Latvia is among the lowest in 
the  EU  (4.6  per  1 000  population  in  2016).  In 
addition,  the  number  of  nursing  graduates  per 
100 000  population  was  well  below  the  EU 
to  39.1 
average 
respectively)  and  has  decreased  since 
then. 
Furthermore,  most  registered  nurses  find  it  more 
attractive  to  work  outside  the  health  sector.  Low 
remuneration is a particular deterrent. The ratio of 
nurses’  wages  to  the  average  national  wage  in 
Latvia  is  among  the  lowest  in  OECD  countries 
(OECD, 2017).  

(27.9  compared 

include: 

The  government  is  taking  steps  to  improve 
recruitment  and  retention  of  health  workers. 
These include an increase in the wages of medical 
practitioners  in  2018  and  the  additional  20% 
in  2019-2021 (25).  Other 
increase  each  year 
measures 
the 
(i) compensation 
extended  working  hours  of  healthcare  personnel; 
and  (ii) using  financing  from  the  EU  funds  to 
provide  incentives  for  doctors  and  nurses  to  work 
in regions outside Riga or to re-enter employment 
in the health sector. Nevertheless, a comprehensive 
strategy  to  tackle  the  shortages  of  nurses  and 
provide  a  nursing  workforce  with  the  skills  mix 
required  for  the  reformed  hospital  and  primary 
care sector is not yet in place.  

for 

The  health  system  remains  underfunded, 
despite  the  spending  increases.  Spending  on 
health  in  Latvia  is  among  the  lowest  in  the  EU. 
The  net  public  spending  for  healthcare  stood  at 
3.4% of GDP in 2016 well below the EU average 
of  7.4% (26).  However, 
the  government  has 
increased the financing for health by 0.5% of GDP 
over  2017-2019,  benefiting  from  a  temporary 
deviation 
target. 
Moreover, the new compulsory health contribution 
provides  further  financing  for  health  of  0.3%  of 
GDP from 2018. The adopted 20% wage increase 
for  health  workers  amounts  to  0.3%  of  GDP  in 
additional  financing  in  2019,  totalling  0.6%  of 
GDP  in  2020.  Nevertheless,  these  increases  are 
measured  against  unchanged  expenditure  plans  in 
nominal  terms.  Therefore,  total  public  financing 
for  health  as  a  ratio  to  GDP  is  estimated  to  have 

the  structural  deficit 

from 

(25)  The  amendment  to  the  Healthcare  Financing  Law  of 

19.12.2018. 

(26)  Financing  from  the  government  schemes  based  on  the 

System of Health Accounts. 

supported with financing from the EU funds. There 
are  also  plans  to  further  develop  the  eHealth 
system  and  pilot  a  small  number  of  multi-
disciplinary  health  centres  for  the  primary  care 
reform  in  2019.  However,  plans  for  reforming 
primary  care,  such  as  setting  the  number  and 
location  of  health  centres  across  the  country,  and 
the  related  investments,  have  not  been  prepared 
yet.  An  action  plan  to  improve  patient  safety  and 
health system quality has been set in motion. Early 
measures taken so far include educating healthcare 
staff in patient safety issues, and better application 
and assessment of clinical guidelines. Furthermore, 
a  framework  of  indicators  for  health  system 
performance  assessment  has  been  drawn  up.  Next 
steps  will  focus  on  structuring  and  analysing  the 
data for these indicators so that benchmarking can 
take  place  at  health  provider,  regional  and 
international  levels.  To  address  behavioural  risk 
factors,  measures  such  as  smoking  restrictions, 
food  regulations  and  restrictions  in  the  marketing 
of  alcohol  and  energy  drinks  have  been 
strengthened. 

There are scope and possibilities for improving 
the  quality  of  healthcare  and  the  efficiency  of 
the  health  system  (OECD/European  Observatory 
on  Health  Systems  and  Policies  2017).  Hospital 
admission  rates  for  asthma  in  Latvia  are  much 
higher  than  the  EU  average.  This  indicates  that 
chronic disease management outside hospitals and 
the functioning of primary care are still below their 
following 
potential.  Furthermore,  mortality 
hospital admission for acute myocardial infarction 
and  stroke  are  higher  in  Latvia  than  in  other  EU 
countries,  with  large  variations  between  hospitals 
around  the  country.  This  suggests  that  there  is 
room  to  raise  the  quality  of  acute  care  and  the 
overall  performance  of  the  hospital  sector.  The 
planned  health  reforms  are  expected  to  result  in 
improvements along the above lines.  

Latvia faces health workforce shortages, which 
hamper  the  delivery  of  public  healthcare  and 
pose  risks  to  the  success  of  the  health  reforms. 
The number of  doctors  in  Latvia  is below the  EU 
average (3.2 per 1 000 population, compared to 3.6 
in  2016  respectively),  and  there  are  particular 
shortages of health workers in areas outside Riga, 
resulting  in  restricted  access  to  specialised  health 
services  in  those  areas.  Patient  pathways  and 
cooperation 
healthcare 
institutions are not yet established to ensure equal 

schemes 

between 

34 

 
                                                           
3.3. Labour market, education, and social policies 

curriculum  has  been  delayed.  New  rules  for 
upper  secondary  schools  set  quality  criteria  that 
will need to be fulfilled in 2020 in order to receive 
state  financing.  Schools  that  do  not  meet  the 
criteria  will  be  required  to  have  a  minimum 
number  of  students  set  by 
the  government. 
Streamlining  the  school  network  may  eventually 
lead to fewer, but bigger upper secondary schools 
that are better able to provide quality education. A 
new competence-based framework curriculum will 
be  rolled  out  in  pre-school  as  of  the  2019/2020 
school  year,  and  gradually, 
in  primary  and 
secondary education between 2020 and 2023. 

A  gradual  switch  to  Latvian  as  the  sole 
language of instruction by 2021 has begun. The 
transition will start in the school year 2020/2021 in 
grades  7-9,  and  as  of  2022/2023  all  general 
subjects  in  upper-secondary  education  will  be 
thought  in  Latvian.  Ethnic  minority  students  will 
still  be  able  to  follow  courses  of  their  language, 
literature and culture in their mother tongue. While 
the  move  may 
improve  minority  students’ 
opportunities  in  (Latvian-taught)  VET,  higher 
education  and  in  the  labour  market,  the  measure 
has  raised  concerns  about  the  quality  of  teaching 
and  about  minority  schools’  capacity  to  deliver 
change without compromising quality, particularly 
for  the  25%  of  students  whose  Latvian  language 
proficiency in writing is not sufficient (27).  

teachers 

in  Latvian 

Many 
schools  are 
approaching  the  retirement  age  and  too  few 
new  teachers  are  joining  the  profession.  Latvia 
has one of the highest shares of female teachers in 
the  EU  (87%)  and  one  of  the  oldest  —  28%  of 
teachers  were  over  55,  and  only  25%  were  under 
40  in  2016/2017  (Ministry  of  Education  and 
Science,  2017).  Young  people  are  not  attracted  to 
the  teaching  profession:  less  than  1%  of  15-year-
olds  aspire  to  work  as  a  teacher:  of  these,  only 
0.2% are men (OECD, 2018b). A gradual increase 
in teachers’ salaries from September 2018 to 2022 
is  linked  to  the  consolidation  of  the  school 
network. 

The  share  of  young  adults  with  tertiary 
education  is  high  and  growing,  but  challenges 
remain  concerning  inclusiveness  and  fields  of 

27  According  to  the  Latvian  Language  Agency  (2016),  about 
75% of youth whose mother tongue is not Latvian are fully 
self-sufficient (fluent) in writing in Latvian.) 

increased  to  3.6%  in  2018  and  to  reach  around 
3.8% in 2019-2020.  

is 

The  additional  public  financing  for  healthcare 
in 2017 and 2018 generated positive results. The 
availability  of  health  services  and  innovative 
medicines 
times  have 
increasing.  Waiting 
reduced in some areas, such as in cancer diagnosis 
and treatment, and in outpatient and day care. The 
government  reports  that  the  annual  ‘quotas’  for 
state-paid  health  services  were  not  exhausted  in 
2017  for  the  first  time  since  the  end  of  the 
economic  crisis.  Furthermore,  the  percentage  of 
Latvians  who  report  unmet  needs  for  healthcare 
fell  from  8.2% 
in  2017; 
nevertheless,  this  remains  much  higher  than  the 
EU average. 

to  6.2% 

in  2016 

3.3.4.  EDUCATION AND SKILLS 

Latvia’s  education  system  performs  well  on 
learning  achievement,  but  some  concerns 
regarding  equity  remain.  Latvia 
invests  a 
comparatively  high  share  of  its  GDP  in  education 
(5.5%  in  2017,  compared  to  an  EU  average  of 
4.7%). Performance in basic skills, as measured by 
the  OECD  Programme  for  International  Student 
Assessment  (PISA)  remains  well  above  the  EU 
average  (OECD,  2016b).  However,  access  to 
quality  education  is  not  fully  equitable,  with 
students 
schools  and 
gymnasiums  receiving  better  quality  education 
than students in the small schools more common in 
rural  areas  (Krasnopjorovs,  2017).  Similarly,  the 
early  school  leaving  rate  is  much  higher  in  rural 
areas (15%) than in urban areas (7%). 

in  bigger 

secondary 

The existing network of secondary schools does 
not allow for the efficient use of resources. The 
number  of  students  in  general  education  (5-18 
years  old)  has  been  decreasing,  in  line  with 
Latvia’s marked population decline (12% between 
2004  and  2013)  and  is  projected  to  contract  by  a 
further  14%  by  2050.  Numbers  of  teachers  and 
schools have only partly followed the demographic 
trends.  A  large  share  of  resources  (17%  vs  7% 
OECD average in 2015) goes to the upkeep of the 
large school network at the expense of investment 
in teaching and learning (OECD 2018a). 

Government  efforts  to  streamline  the  school 
network continue, but the introduction of a new 

35 

 
                                                           
3.3. Labour market, education, and social policies 

increase 
the 
attractiveness of VET. 

labour  market 

relevance  and 

in  2010 

is 
VET  curricula  reform  started 
advancing.  Reform  progress  accelerated  recently 
and  the majority  of  occupational  standards  (230 
from  242)  had  been  updated  by  the  end  of  2018. 
Modular  education  programmes  are  gradually 
being introduced in initial and continued VET, but 
a significant share (172 out of planned 241) remain 
to be developed. Social partners are involved in the 
design  of  the  reform  through  sectoral  expert 
councils.  It  is  expected  that  the  reform,  with  the 
support  of  EU  funds,  will  be  finalised  by  the  end 
of 2021. 

Initial  results  of  new  work-based  learning 
approach are promising. The introduction of the 
scheme started in 2017 and data shows that in the 
2017/2018  school  year  there  were  around  1 000 
students  in  work-based  learning  and  above  4 000 
in work practice. So far, 18 professional education 
institutions  offer  work-based  learning  for  second- 
and third-level professional qualifications and 230 
programmes  for  85  professional  qualifications 
have been adapted to include work-based learning. 
The  EU-funded  project  to  support  work-based 
learning  and  practical  training  has  been  running 
the  Employers’ 
since  2017  and 
Confederation of Latvia. 

led  by 

is 

Latvia  performs  below  the  EU  average  as 
regards  digital  skills.  Half  of  the  population 
(52%)  are  lacking basic  digital  skills,  and  the gap 
with  other  EU  countries 
is  even  wider  for 
advanced  skills  (European  Commission,  2018j). 
The  national  strategy  aims  to  provide  training  on 
information technologies tailored to labour market 
needs, involve more young people in this field, and 
develop modern and interactive learning processes. 
Latvia  would  require  substantial  investment  to 
improve  the  digital  skills  of  its  population  and 
labour  force  for  the  digital  transformation  of  its 
economy and society.  

The  level  of  adult  participation  in  learning 
remains  relatively  low.  Only  7.5%  of  adults 
participated  in  learning  in  2017,  below  the  EU 
average  of  10.7%  and  the  national  target  of  15%. 
learning  has  been 
Participation 
strengthened thanks to EU funds. Since the launch 
of 
in  2017,  almost  17 000 
employed  people  have  participated.  Every 

the  programme 

adult 

in 

studies. Tertiary educational attainment among 30- 
to 34-year-olds has increased from 25.7% in 2007 
to 43.8% in 2017 and is now among the highest in 
the  EU.  However,  inclusion  of  persons  with 
disabilities  in  higher  education  at  24.5%  is  lower 
the  EU  average  of  30.3%  (EU-SILC). 
than 
Moreover,  participation  of  men 
tertiary 
education  remains  significantly  lower  than  that  of 
women  and  the  proportion  of  tertiary-educated 
adults  with  a  degree  in  science,  technology, 
engineering, and mathematics (STEM fields) is, at 
20.5%,  below  the  EU  average  of  25.7%.  As  for 
labour  market  needs,  41%  of  state-funded  study 
places are provided in STEM programmes (28).  

in 

fragmentation  of  higher 

The 
education 
institution  and  programmes  affects  education 
quality.  Higher  education  remains  fragmented 
the 
despite 
incentives  for  consolidation  and 
gradual 
strengthening  of  quality  assurance, 
supported by EU funds. Nevertheless,  the  number 
of  study  programmes  grew  by  a  third  between 
2005 and 2017, while student population declined 
by  38%.  The quality of  education  and  science  are 
suffering as a result of the fragmentation. In 2017, 
performance-based  funding  (around  3%  of  total 
funding for higher education) was distributed to 14 
higher education institutions that have successfully 
involved  students  in  research  and  development, 
participated  in  international  research  projects  and 
cooperated with businesses. 

training 

Despite  the  significant  reform,  participation  in 
vocational  education  and 
(VET) 
remains  low.  In  2017,  the  employment  rate  of 
recent upper secondary VET graduates dropped to 
69.2%,  below  the  EU  average  (74.8%)  and  the 
enrolment in VET remained, at 38.1%, also below 
the  EU  average  (49.3%  in  EU).  While  the 
vocational  school  environment  is  significantly 
improved, the lack of career guidance at the lower 
levels of education is a potential obstacle for future 
enrolment.  Graduate  tracking  is  organised  at 
school level, meaning that Latvia is still one of the 
few  EU  countries  without  a  centralised  approach. 
Continued  investment  in  and  stronger  links  with 
local economic and labour market needs, including 
through  work-based  learning,  could  help  further 

(28)  State-funded study places account for 42% of the total (the 
remaining  58%  being  fee-paying)  (Government  of  Latvia, 
2018). 

36 

 
                                                           
3.3. Labour market, education, and social policies 

participant  is  over  45  years  old  and  every  fifth  is 
low  skilled.  Efforts  to  enhance  access  to  training, 
particularly  for  low-qualified  adults,  are  impeded 
by  limited  information  and  guidance,  shortage  of 
skills  recognition  and  validation  services,  and  by 
insufficient  non-financial  and  financial  incentives, 
these 
especially 
launched 
government 
challenges, 
a national  skills  strategy  project  with  the  OECD, 
which  will  contribute 
to  Latvia’s  2021-2027 
national  medium-term  strategy  on  education  and 
skills.  

for  SMEs (29).  To  address 

has 

the 

Investment needs 

improve 

training, 
and 

flexible  upskilling 

Increased  investment  in  skills,  education  and 
training,  healthcare  and  social  inclusion  are 
important  for  improving  Latvia’s  productivity 
and  long-term  inclusive  growth.  The  shrinking 
working-age  population  is  leading  to  growing 
skills  and  labour  shortages.  Further  investment  in 
labour  market 
human  capital  could 
lifelong 
relevance  of  education  and 
learning, 
reskilling 
opportunities,  as  well  as  regional  labour  mobility. 
This  would  in  turn  reduce  skills’  shortages  and 
respond to demographic and technological change. 
Using  the  full  labour  potential  also  requires 
matching  investment  in  social  inclusion  with  a 
reduction  of  material  deprivation.  Matching 
investments  are  also  needed  to  improve  the 
population’s  health  status  and 
the 
accessibility,  affordability  and  effectiveness  of 
healthcare, childcare and long-term care, including 
transition  from  institutional  to  community-based 
care. 

increase 

(29)  According  to  the  benchmarking  framework  on  adult  skills 
and learning conducted within the EMCO Committee. See 
the draft Joint Employment Report 2019 for details.   

37 

 
                                                           
3.4.  COMPETITIVENESS REFORMS AND INVESTMENT 

3.4.1.  PRODUCTIVITY AND INVESTMENT 

Graph 3.4.1:  Productivity annual change, % 

Investment needs 

investment 

In  order  to  continue  converging  with  the  EU 
average, 
innovation,  human 
in 
capital  and  regional  development  is  needed. 
Despite  its  rapid  convergence,  Latvia  needs  to 
continue to transform the structure of its economy 
towards more sophisticated products and services. 
Given  the  small  domestic  market,  Latvia’s  main 
prospects  lie  with  exporting  higher  value-added 
goods and services and growing its export  market 
shares. At the moment, Latvia does relatively well 
in exports of knowledge-intensive services, but the 
share  of  high-tech  goods  in  its  exports  is  low.  In 
order  to  facilitate  the  economy’s  transformation, 
Latvia needs to invest in human capital, including 
skills  and  health  (see  section  3.3.4).  It  needs  to 
invest  more  in  research  and  development  both  in 
the  private  and  public  sectors,  including  by 
engaging the state-owned enterprises more closely 
in  its  innovation  system.  Finally,  Latvia  needs  to 
invest  in  regional  development  -  investment  in 
infrastructure and housing would help to integrate 
the  lagging  regions  with  centres  of  economic 
activity  and  facilitate  internal  labour  mobility. 
Additionally,  investment  in  resource  efficiency  is 
also  needed  in  order  to  speed  up  Latvia's  energy 
transition. 

Labour productivity 

Latvia's  productivity  has  been  converging  with 
the  EU  average  at  a  rapid  pace,  but  remains 
among  the  lowest  in  the  EU.  In  2017,  labour 
productivity in Latvia was 68 % of the EU average 
—  considerably  higher  than  the  figure  of  54 %  at 
the  height  of  the  previous  boom  in  2007.  The 
average  productivity  growth  rate  remains  among 
the fastest in the EU, although it is currently only 
half  of  the  levels  attained  before  the  2009-2010 
crisis (Graph 3.4.1) 

(1) EU - non-weighted average of all EU member states 
NMS - non-weighted average of the EU member states that 
joined since 2004 

Source: European Commission 

Productivity  growth  since  2010  has  been 
broadly  based  across  economic  activities.  
Productivity growth has been fairly similar among 
economic  activities,  with  the  exception  of  high-
skilled services where it has been negative (Graph 
3.4.2).  Construction  has  had 
the  highest 
productivity  growth,  but  that  is  likely  due  to  the 
recent  construction  boom  and 
is  potentially 
unsustainable. The negative productivity growth in 
high  skill  services  can  be  attributed  to  investment 
in capacity as firms hire employees in expectation 
of 
the 
increasing  demand  as  evidenced  by 
accompanying strong increase in employment. 

38 

-8-6-4-20246810121997199819992000200120022003200420052006200720082009201020112012201320142015201620172018EULVNMS 
 
 
 
3.4. Competitiveness reforms and investment 

Graph 3.4.2:  Average annual growth 2010 - 2017, % 

been  quite  volatile  (Graph  3.4.3).    Since  2010 
investment  growth  in  Latvia  has  underperformed 
compared  with  the  other  Baltic  countries,  but  has 
been  somewhat  more  rapid  than  in  most  Member 
States  that  joined  after  2004,  although  that  is 
partially explained by the rebound from the severe 
decline that took place during 2009 and 2010. 

Graph 3.4.3:  Real investment, index 2010=100 

(1) High-skill services are comprised of information and 
communication services and financial services 
Low-skill services are comprised of trade and transport 
services, real estate services, professional services, and arts 
and entertainment services 
(2) The market services are grouped according to their 
wage level relative the economy average wage 
Source: European Commission 

Looking forward, due to its small domestic market, 
Latvia's  productivity  growth  prospects  are  closely 
linked  with  its  export  success.  Moreover,  the 
population decline presents an additional challenge 
to productivity growth as the falling of the number 
of  users  puts  a  strain  on  the  efficiency  of 
infrastructure  and  other  activities  that  provide 
solely  for  the  domestic  market  (see  European 
Commission 2018). Finally, given the large role of 
state-owned  enterprises  in  Latvia's  economy (30), 
their  contribution  to  the  economy's  productivity 
growth is sizable and under government influence. 

Investment 

Despite a recent surge, investment levels remain 
only  slightly  above  the  EU  average.  The  rapid 
growth  over  the  past  2  years  has  helped  real 
investments recover what was lost during the 2016 
dip,  yet  it  was  only  in  2018  that  real  investments 
surpassed  their  2012  level.  Following  the  initial 
post-crisis  recovery,  real  investments  started  to 
decline  again  in  2013  before  finally  mounting  a 
recovery  in  2017.  While  public  investment  has 
increased  compared  to  pre-crisis  levels,  private 
investment  remains  considerably  lower  and  has 

(30)  The  SOEs  account  for  around  10%  of  all  private  sector 

employment in Latvia 

Source: European Commission 

Investments 
in  non-residential  construction 
have  had  the  strongest  performance  of  all 
investment  asset  types.  This  is  due  to  the 
increased  public  investment  expenditure  and  the 
construction  of  logistics  infrastructure  and  office 
space,  reflecting  the  strong  performance  of  the 
transport  and  business  services  sectors  since  the 
crisis (Graph 3.4.2). On the other hand, investment 
in dwellings has been weak, reflecting the effect of 
the declining population, deficiencies in rental and 
construction regulations (Section 3.2) and barriers 
to  credit  (Section  3.2).  Looking  at  the  investment 
trends across economic activities, manufacturing is 
2017, 
performing 
investment in manufacturing was 33 % lower than 
it  had  been  in  2012.  This  is  in  line  with  the 
manufacturing  output  growth  since  2010,  which 
has  overall  been  weaker  than  the  economy’s 
growth. 

particularly 

poorly. 

In 

39 

-2%-1%0%1%2%3%4%Value addedProductivityEmployment0501001502002502000200120022003200420052006200720082009201020112012201320142015201620172018*EELVLTEU 
 
                                                           
 
3.4. Competitiveness reforms and investment 

has  exceeded  the  Commission  wage  benchmarks 
(see  Graph  3.4.4),  suggesting  that  wage  growth 
may be too rapid to be sustainable. By comparison, 
real wages (adjusted for inflation) are increasing at 
a  slower  pace  due  to  rising  inflation.  Real  wages 
grew  at  a  rate  of  4 %  in  2017.  Wage  pressures, 
however,  should  temper  somewhat  as  of  2019  as 
investment  growth  normalises. 
the 
However, the falling labour supply is set to ensure 
that the labour market will remain tight.  

rate  of 

Graph 3.4.5:  Wage growth compared to wage 

benchmarks, % change 

Graph 3.4.4:  Real investment by asset type, million EUR in 

2010 prices 

Source: European Commission 

Private  investment  is  held  back  by  firms’ 
concerns  about  demand  conditions.  According 
to  the  European  Investment  bank  survey  from 
2018,  25%  of  Latvian  firms  considered  they  had 
invested  too  little  over  the  last  years,  which  is 
among  the  highest  rates  in  the  EU.  At  the  same 
time, only 29 % of firms in Latvia report operating 
at or above full capacity, which is the lowest value 
in  the  EU.  The  share of  finance-constrained  firms 
also  appears  to  be  higher  in  Latvia  than  in  other 
Member  States.  Overall,  decisions  by  Latvian 
firms  to  withhold  investment  seem  driven  by 
demand  conditions  and  some  structural  barriers. 
Weakness in internal demand may be related to the 
declining population, as the number of consumers 
in  domestic  markets  is  shrinking.  In  a  recent 
uncertain 
Eurobarometer  Survey, 
economic outlook was seen as a major obstacle by 
43 %  of  respondents  (EU  average:  29 %).  In 
addition,  a  majority  of  respondents  cited  the  cost 
and  availability  of  external  financing,  and  the 
stability  and  complexity  of  tax  legislation,  as 
obstacles  to  investment  (European  Commission, 
2018i). 

poor 

or 

Cost competitiveness 

Wages  are  growing  fast  on  the  back  of 
favourable economic conditions and a tightened 
labour  force.  Monthly  wages  grew  by  7.9 %  on 
average  in  2017,  representing  the  fastest  growth 
rate  of  the  last  3  years.  Since  2012,  wage  growth 

(1) Benchmark 1 is wage growth prediction based on 
inflation, productivity and unemployment 
Benchmark 2 is wage growth that is consistent with constant 
unit labour cost-based real exchange rate. See Arpaia and 
Kiss, 2015, for details about the methodology. 
Source: European Commission  

about 

concern 

Latvia's 

Unit labour cost growth has been slowing down 
but  remains  among  the  highest  in  the  EU 
cost 
raising 
competitiveness.  After  the  economic  crisis,  unit 
labour cost (ULC) (31) growth accelerated in 2012 
with  growth  hovering  around  5%  annually  until 
2016. In 2017, ULC growth slowed to around 3%. 
The  ULC  growth  in  Latvia  has  considerably 
exceeded  those  of  its  main  trading  partners  as 
evidenced  by 
real  effective 
the  ULC-based 
exchange  rate  (REER),  which  has  appreciated  by 
10.3%  between  2014  and  2017.  The  wage  cost 
appreciation relative to the trading partners carries 

(31)  Unit labour costs are calculated as nominal wages divided 
by  real  productivity.  The  change  in  ULC  shows  the  wage 
inflation  minus  productivity  growth  and  is  used  as  a  first-
hand measure for the sustainability of wage growth. 

40 

05001000150020002500300035004000Other constructionDwellingsEquipmentOther investment-20-1001020304019992000200120022003200420052006200720082009201020112012201320142015201620172018Benchmark 1Benchmark 2Actual wage growth 
 
 
 
                                                           
3.4. Competitiveness reforms and investment 

the  risk  of  making  Latvia’s  exports  too  expensive 
to compete in foreign markets.  

Graph 3.4.7:  Export market shares, index 2010=100 

Graph 3.4.6:  Productivity and unit labour costs, annual rate 

of change % 

Source: European Commission 

(1) The selected peer countries  - Romania and Lithuania - 
have been the top performers in export market share 
growth among EU countries over the considered period.  

Source: European Commission 

Wage  growth  spurred  by 
labour  market 
tightening  is  the  primary  driver  of  unit  labour 
cost  growth.  The  breakdown  of  ULC  growth 
shows  that  the  average  productivity  growth  over 
the past 3 years has been among the fastest in the 
EU.  However,  Latvia’s  wage  growth  of  around  7 
% in the past 5 years has been much higher than in 
the  rest  of  the  EU,  therefore  driving  the  relative 
ULC  appreciation.  The  reason  for  the  recent  fast 
wage  growth  is  the  falling  labour  supply  and  an 
investment-led  increase  in  labour  demand.  A 
shrinking  labour  supply  is  set  to  be  a  permanent 
factor 
the 
demographic  situation.  Conversely,  rapid  wage 
growth may alleviate the pressure of falling labour 
supply  if  the  country  manages  to  stem  outward 
migration. Further relief to the shortage of workers 
could come from other policies aimed at ensuring 
economic  growth  in  regions  outside  of  the  Riga 
metropolitan area, lowering the tax wedge for low-
wage workers, facilitating better internal mobility, 
improving the labour market relevance of training 
of the low-skilled and improving health outcomes.    

the  Latvian  economy  due 

in 

to 

to 

linked 

indicators 

real  effective  exchange 

Other 
external 
competitiveness  show  a  more  positive  picture. 
The rapid wage growth has been slow to be passed 
on  to  prices  of  goods  and  services  –  unlike  wage 
growth,  inflation  in  Latvia  has  been  only  slightly 
higher  than  in  its  main  trading  partners.    HICP 
rate 
inflation-based 
(REER) (32)  has  appreciated  only  modestly  over 
the  past  years  (see  European  Commission  2018). 
Crucially,  Latvia’s  export  market  share  has 
continued to grow, albeit slower than in other EU 
catching-up economies (see Graph 3.4.7) (33). ULC 
growth  also  has  had  no  visible  impact  on  the 
external  balance  as 
the  current  account  has 
remained  roughly  balanced  since  2010  and  is 
forecast 
to 
to 
Commission’s  Autumn 
forecast.  Furthermore, 
risks of domestic demand-led overheating like the 

remain  balanced  according 

in 

the  home  country  with 

(32)  The real effective exchange rate (REER) compares the cost 
developments 
the  cost 
developments  in  its  main  trading  partners.  If  the  costs  in 
the  home  country  grow  faster  than  in  its  main  export 
markets,  then  REER  is  said  to  be  appreciating  and 
therefore  possibly  making  the  home  country’s  goods  less 
competitive  in  its  export  markets.  In  this  report  two 
different  measures  of  REER  are  referred  to  -  the  ULC-
based  REER  and  the  HICP-based  REER.  The  first 
compares wage growth and the second compares inflation. 
The  second  is  a  more  widely  used  benchmark  for 
measuring price competitiveness. 

(33)  Ireland,  Romania  and  Lithuania  have  grown  their  export 
market share the most among EU countries since 2010  

41 

-12-10-8-6-4-20246820102011201220132014201520162017LV productivityEU productivityLV unit labour costEU unit labour cost9510010511011512012513013514020102011201220132014201520162017EstoniaLatviaLithuaniaPolandRomania 
 
 
 
 
                                                           
one  experienced  during  2004  –  2008  are  low 
because  credit  growth  has  been  sluggish  and  both 
households 
corporations 
continue to deleverage (see section 3.2).  

non-financial 

and 

Research and innovation 

level 

Investment  in  research  and  development  in 
Latvia  is  low  and  dependent  on  European 
Structural  and  Investment  Funds  (ESIFs) (34). 
In 2017, R&D intensity recovered somewhat from 
last  year’s  drop,  reaching  0.51 %  of  GDP  (see 
graph  3.4.8).  The  increase  was  mainly  fuelled  by 
renewed  ESIF  funding  which  raised  the  public 
funding 
to  0.37 %  of  GDP.  Business 
expenditure  on  R&D  also  increased,  but  the  level 
of 0.14 % of GDP is among the lowest in the EU. 
A  substantial  increase  in  investment  in  R&D  is 
necessary 
to  effectively  develop  a  national 
research and innovation (R&I) system with a focus 
on increased and sustainable funding from national 
sources.  Moreover,  Latvia  will  likely  not  meet  its 
national  R&D  intensity  target  of  1.5 %  of  GDP. 
Latvia’s total expenditure on R&D is now at about 
the same level as it was a decade ago, making this 
the only national target where Latvia has achieved 
no  progress,  largely  due  to  the  low  political 
importance given to R&D funding. 

(34)  In  2017  Latvian  national  funding  represented  44%  of  the 
total  financing  for  research  and  development,  totalling 
EUR  60.1  million.  In  comparison,  amount  of  foreign 
investments  (structural  funds  as  well  as  other  foreign 
funding)  was  30%  of  the  total  financing  for  research  and 
development, totalling EUR 41.1 million.    

3.4. Competitiveness reforms and investment 

Graph 3.4.8:  Research and development expenditure, % of 

GDP 

(1) Non-weighted averages for EU15 and EU13 
(2) EU15 – EU Member States that joined before 2004 
EU13 – EU Member States that joined after 2004 
Source: European Commission 

the 

and 

fragmentation  of 

to  underfunding 

Public  research  is  of  varying  and  inconsistent 
quality  due 
the 
fragmentation  of  research  performers  and  of 
the governance of the R&I system.  In 2015, the 
share  of  publications  in  top  journals was  5.9 %, 
compared with  the  EU  average of  11.1 %. This  is 
research 
largely  due 
institutions and because Latvia lags behind the EU 
average  in  terms  of  numbers  of  researchers,  PhD 
students  and  STEM  graduates.  This  weakness  is 
aggravated  by  inadequate  administrative  capacity 
and 
and 
implementation  among  a  multitude  of  ministries 
received 
and 
European 
from 
recommendations 
Commission’s  Horizon  2020  Policy  Support 
Facility,  which  advised  it  to  put  the  research 
funding  management  under  one  roof  and  to 
increase  the  share  of  competitively-won  research 
funding  for 
  The 
government has taken the first steps to address the 
latter  issue,  but  the  recommendation  to  tackle  the 
fragmented governance remains to be addressed. 

scattering  of  policymaking 

2018,  Latvia 

the  research 

institutions. 

agencies. 

the 

the 

In 

A  broad  variety  of  instruments  to  promote 
innovation  exists  but  these  are  underutilised. 
The  majority  of  the  successful  research-industry 
the  ‘Competence 
cooperation  focuses  around 
Centres’  scheme,  which  draws  industry  to  work 
together with research institutions. The portfolio of 

42 

0.00.51.01.52.02.52008200920102011201220132014201520162017EU15 averageEU13 averageLatvia 
                                                           
 
3.4. Competitiveness reforms and investment 

exacerbated  in  the  future  due  to  demographic 
developments. 

Integration  of  digital  services  is  gradually 
improving  but  there  is  a  shortage  of  skilled  IT 
professionals.  Businesses  increasingly  use  cloud 
computing and electronic information sharing, but 
overall  the  use  of  these  compared  to  the  EU 
averages  is  limited,  while  Latvian  enterprises 
continue  to  underexploit  the  potential  of  online 
selling  and  purchasing  of  goods  and  services, 
remaining  considerably below  the EU  average  for 
SMEs’ e-commerce and related levels of turnover. 
Further  improvements  in  the  digitalisation  of 
businesses are also limited by the shortage of high-
skilled  professionals  and  a  persistently 
low 
specialists (39).  Among 
proportion  of 
enterprises  that  recruited  or  tried  to  recruit  ICT 
specialists,  50 %  reported  hard-to-fill  vacancies. 
Latvian  enterprises  are  also  underinvesting  in 
improving  digital  skills:  only  10 %  of  enterprises 
provide  training  to  their  personnel  to  develop  and 
upgrade  their  ICT  skills,  which  is  significantly 
below 
the  EU  average  of  21 %  (European 
Commission, 2018j).  

ICT 

Energy efficiency 

the  schedule  on 

More  efforts  are  needed  to  improve  overall 
energy efficiency in Latvia, in particular in the 
residential  and  transport  sectors.    Even  though 
Latvia is on track to achieve its indicative Europe 
2020  energy  efficiency  target,  it  is  significantly 
behind 
its  energy  saving 
obligation(40). In 2016, it had made only 6% of the 
total savings it had committed to achieve over the 
2014  to  2020  period.  Moreover,  in  2017  Latvia's 
energy consumption increased driven primarily by 
residential  and  transport  sectors.  This  implies 
Latvia  has  fallen  further  behind  its  energy  saving 
schedule.  While  the  comprehensive  renovation 
programme  financed  under  the  structural  funds 
will  contribute  to  improve  Latvia's  performance, 
more  efforts  are  needed  in  order  to  achieve  its 
overall  energy  saving's  target  by  2020.  ESIF-
funded programmes will likely not be enough to do 
that, incentives to draw larger private investments 

(39)  The share of employed ICT specialists is one of the lowest 
in  the  EU  —  2.2 %  of  total  employment,  compared  with 
EU average of 3.7 %. 

(40)  Under Energy Efficiency directive Latvia is obliged to save 
on  average  1.5%  of  its  final  energy  consumption  annualy 
from 2014 until 2020. 

innovation  support  measures  includes  vouchers, 
technology transfer and development programmes. 
However, the share of firms engaged in innovative 
activities is fairly small (35), which may explain the 
lack  of  demand  for  some  of  the  instruments  on 
offer.  The  supply  of  researchers  from  the  public 
sector (36)  and  the  mobility  of  researchers  to  the 
private sector is rather low and not increasing (37), 
which  hinders  the  development  of  innovation 
activities.  The  government  is  promoting  closer 
research  cooperation  among  the  largest  state-
owned  enterprises  and  is  asking  them  to  set  their 
innovation  strategies.  The  poor 
medium-term 
innovation  performance 
an 
adjustment in Latvia’s smart specialisation strategy 
to focus on the areas of its economy with the most 
potential. 

requires 

likely 

Digitalisation 

in 
assets 

a  mixed 
Its 

performance 
strongest 

Digital  transformation  is  progressing  well,  but 
Latvia is lagging behind in integration of digital 
technology  by  businesses.  Latvia  continues  to 
digital 
display 
are 
transformation. 
connectivity, entrepreneurial culture and ICT start-
ups, where it performs above the EU average. IT-
related  services  (public  IT  services  in  particular) 
  Latvia  has 
improved  considerably  in  2018. 
implemented various policy measures over the last 
few  years  to  improve  in  areas  of  moderate 
performance  (e.g.  the  innovation  voucher)  and  to 
consolidate  areas  of  strong  performance  (e.g.  the 
(38). 
Law  on  Aid  for  Start-up  Companies) 
However,  challenges  remain  in  the  integration  of 
digital technologies, in access to finance and in the 
supply  and  demand  of  digital  skills.  The  low  and 
decreasing number of graduates in STEM subjects 
contributes 
the  acute  shortage  of  highly 
qualified  human  resources  in  the  Latvian  R&I 
system, both in the research institutions and in the 
sector.  This  problem  may  be 
productive 

to 

(35)  Value  added  in  high-tech  (HT)  and  medium-high-tech 

(MHT) companies was 2.3 % of GDP in 2016. 

(36)  The  number  of  researchers  (FTE)  employed  by  the  public 
sector has been steadily decreasing over the decade and in 
2016  was  equal  to  2.7  per  thousand  active  population, 
ranking 22nd, EU average — 3.9. 

(37)  Researchers  (FTEs)  employed  in  businesses  per  thousand 
active  population  in  2016  value  0.6,  ranking  24th,  EU 
average — 3.9. 

(38)  European Commission, Digital Transformation Scoreboard 

2018. 

43 

 
                                                           
                                                           
3.4. Competitiveness reforms and investment 

The  Commission 

conventional rail core network. The main TEN-T 
corridor  railway  infrastructure  is  not  yet  in  place 
(the ‘Rail Baltica’ railway corridor connecting the 
Baltic  states  to  the  standard-gauge  European 
network). 
Implementing 
Decision on the Rail Baltica expects completion of 
this  missing  link  by  2026  and  sets  out  a  timeline 
for the intermediate steps. According to the current 
assumptions  (Ernst  &  Young,  2017),  further 
investments  of  about  EUR 1.67  billion  will  be 
needed  to  complete  the  project  in  Latvia.  The 
precise  investment  need  will  be  known  upon 
completion  of  the  technical  design  phase.  So  far, 
only 14 % of railway lines are electrified (although 
the  percentage  should  increase  significantly  with 
the completion of the EU-funded major project for 
railway  electrification).  Between  2005  and  2015, 
final  energy  consumption  in  transport  in  Latvia 
increased  on  average  annually  by  1.0 %,  which  is 
slower  than  the  1.8 %  average  annual  increase  of 
GDP.  This  is  highly  correlated  with  trends  in 
passenger  activity 
freight 
rather 
transport. 

than  with 

Business environment 

in 

further 

improving 

in  Latvia 

The  business  environment 
is 
favourable, but the shadow economy remains a 
challenge. Latvia is ranked 19th out of 190 in the 
2018  World  Bank  Doing  Business  Review, 
unchanged  in  comparison  with  the  previous  year. 
Most  Latvian  sub-indicators  are  high  in  the 
ranking  except  for  getting  electricity,  recovery 
rates 
insolvency  cases  and  dealing  with 
construction  permits.  The  Latvian  authorities  are 
working  on 
the  business 
environment,  especially  for  SMEs  and  start-ups, 
based  on  annual  action  plans.  Recent  policy 
measures  include  the  introduction  of  the  ‘consult 
first’  principle  and  the  issuing  of  guidelines  to 
improve  cooperation  between  public  authorities 
several 
and 
e-government services have been further enhanced, 
such  as  the  electronic  tax  declaration  system  and 
the  entrepreneurship  section  of  the  Latvija.lv 
e-government  portal,  which  provides  information 
on how to start and develop a business. An SME-
test  and  ‘start-up  test’  are  applied  to  all  new 
(European  Commission,  2018e). 
regulations 
remains  a 
the  shadow  economy 
However, 
structural  constraint  and  is  among  the  largest 
environment 
deficiencies 
and 
mentioned 

the 
business 

entrepreneurs. 

organisations 

Moreover, 

of 
by 

business 

in  energy  efficiency  would  be  needed  including 
through  energy  performance  contracting  (41)  and 
energy  efficiency  obligation  scheme.  Latvia 
achieved 39.0% (according to provisional Eurostat 
data)  share  of  renewable  energy  in  2016  and  is 
likely  to  meet  its  2020  target  of  40%,  albeit  at  a 
high  cost  (see  European  Commission,  2018h). 
the  share  of  renewable  energy  in 
However, 
transport  was  only  4  %  in  2016  and  it  is  unlikely 
that the adopted biofuel additive requirements (into 
force since early 2018) will close the gap in view 
of achieving 10 % of renewables share in transport 
by  2020.  Electro-mobility  will  contribute  to  this 
target but on a smaller scale. 

Transport 

its 

fatality 

The  quality  of  transport  infrastructure  has 
improved  significantly  in  recent  years,  but  the 
quality  of  the  road  infrastructure  remains  well 
below  the  EU  average.  Latvia  had  a  medium 
ranking  in  the  2016  EU  transport  scoreboard. 
Transport  remains  the  principal  source  of  energy 
consumption  and  pollution.  Road  TEN-T  corridor 
infrastructure,  although  in  place,  still  needs  a 
substantial upgrade to adapt to the growing traffic 
intensity  and  to  increase  safety  standards.  Latvia 
has  made  big  improvements  in  its  road  safety 
remains 
performance,  but 
considerably above the EU average (70 deaths per 
million inhabitants in 2017, against the EU average 
of  49).  After  an  impressive  decrease  of  14 %  in 
the  previous  year, 
to 
fatalities 
preliminary  figures  for  2018  show  an  increase  of 
5 %.  Connections  between  TEN-T  corridors  and 
national  or  local  transport  networks  (including 
across borders) are rated very poorly: Latvia ranks 
27th  out  of  28  in  the  EU  transport  scoreboard  for 
the  quality  of  roads).  The 
traffic 
congestion  and  related  pollution,  particularly  in 
Riga,  remain  an 
limited 
traffic 
of 
coordination 
management  and  other  policy  measures  for  urban 
transport. 

issue  due 
the 
investments  with 

levels  of 

compared 

rate 

to 

Latvia  is  lagging  behind  in  the  completion  of 
Rail  Baltica  and  therefore  of  the  TEN-T 

41  Latvia  already  partly  removed  regulatory  barriers  to  attract 
private  investments  in  the  residential  sector trough  energy 
the 
performance 
government,  municipalities  and  other  stakeholders  have 
started to overcome regulatory, financial and legal barriers 
for energy performance contracting in public sector 

contracting.  Discussions  between 

44 

 
                                                           
3.4. Competitiveness reforms and investment 

sorting 

facilities, 

introduction  of  pay-as-you-go  schemes,  separate 
collection, 
recycling 
infrastructure for dry and wet recyclables, projects 
improving  waste  data  reporting  and  extended 
producer  responsibility,  and  capacity  building 
projects  for  municipalities 
the 
necessary  waste  management  reforms  around  the 
country. 

implement 

to 

performance 

eco-innovation 

impacted  by  businesses’ 

is 
Latvia’s 
negatively 
low 
investment.  The  low  financial  capacity  of  SMEs 
means little innovation on sustainable development 
(43)  is  taking  place.  The  fragmented  support 
landscape  presents  another  barrier.  The  overall 
position  of  Latvia  in  the  Eco-Innovation  Index 
2017  has  declined  and  Latvia  now  ranks  22nd  in 
the  EU 
2017b). 
(European  Commission, 
Prioritisation  of  research  and  more  investment  in 
the  bio-economy,  smart  materials,  sustainable 
energy  solutions  are  beginning  to  deliver  the  first 
results,  but  they  need  to  be  continued  in  order  to 
help  Latvia  shift  its  economy  to  environmentally 
sustainable foundations.  

Waste  water  treatment  is  unsatisfactory  in  a 
number of agglomerations and requires further 
investment.  The  estimated  investment  needed  to 
ensure  adequate  collection  and  treatment  in  the 
remaining  agglomerations 
is  EUR 64  million 
(European  Commission,  2017b).  Latvian  rural 
areas  have  lower  access  to  safe  water  and  to  the 
centralised  water  supply  system  than  urban  areas. 
Waste  water  treatment  will  also  help  with  much-
needed nutrient abatement in the Baltic Sea, which 
suffers  from  eutrophication,  which  in  turn  is 
affecting  provision  of  ecosystem  services.  On 
climate  change  risks,  Latvia  is  subject  mainly  to 
coastal  erosion, 
floods  and  drought. 
Investment  in  sustainable  water  management,  in 
particular nature-based approaches, would mitigate 
the negative effects of flooding and droughts. 

river 

Despite past improvements Latvia's greenhouse 
gas intensity remains significantly above that of 
the  EU  average.  Latvia  is  expected  to  over-
achieve its 2020 effort sharing decision greenhouse 

(43)  Eco-innovation  is  ‘any  innovation  that  makes  progress 
towards  the  goal  of  sustainable  development  by  reducing 
impacts  on  the  environment,  increasing  resilience  to 
environmental  pressures  or  using  natural  resources  more 
efficiently and responsibly’. 

entrepreneur  surveys.  A  number  of  measures  are 
being  implemented  to  enhance  tax  compliance. 
These  include  introducing  benefits  through  an 
‘enhanced cooperation programme’ and improving 
monitoring  capacities.  However,  progress  on  tax 
compliance  in  Latvia  has  so  far  been  modest  (see 
Section 3.1.3). 

in 

terms 

performs  well 

Latvia 
of 
entrepreneurial culture and ICT start-ups. The 
Global  Entrepreneurship  Monitor  shows 
that 
Latvia’s  strong  performance  in  entrepreneurial 
culture  is  backed  by  a  widespread  perception  of 
entrepreneurship  as  a  desirable  career  choice. 
Latvia also performs particularly well on ICT start-
ups, having one of the highest ICT enterprise birth 
rates  in  the  EU.  This  also  reflects  the  success  of 
recent policies that are conducive to the creation of 
a  business-friendly  environment  and  support  for 
start-ups (European Commission, 2018j). 

Environment and climate 

investments 

in  waste 
Despite 
significant 
landfilling  rate  remains 
infrastructure,  the 
high. In 2016, the waste recycling rate was 64 %, 
and  the  municipal  waste  recycling  rate  (including 
composting)  was  25 %.  Latvia  risks  missing  the 
2020  municipal  waste  recycling  target  and  the 
2020  landfill  diversion  target  for  biodegradable 
waste  because  recycling  and  waste  issues  are  not 
addressed  systematically  (European  Commission, 
of 
2018b).  Effective 
recyclables,  including  bio-waste,  is  not  being 
carried  out  effectively  yet,  while  economic 
incentives  for  households  to  separate  waste  at 
source  are  lacking.  Moreover,  extended  producer 
responsibility schemes do not fully cover the costs 
of separate collection and subsequent treatment of 
waste.  As  a  result,  the  transition  to  a  circular 
economy  remains  challenging  for  Latvia.  The 
share of secondary use of raw materials was 3.9 % 
in 2016, compared with the EU average of 11.7 %. 

collection 

separate 

Investments need to be scaled up to comply with 
the  ambitious  recycling  targets  for  the  post-
2020  period  (42).  Investments  should  focus  on 
projects  higher  up  in  the  waste  hierarchy,  such  as 

(42)  Directive  (EU)  2018/851,  Directive  (EU)  2018/852, 
Directive  (EU)  2018/850  and  Directive  (EU)  2018/849 
amend  the  previous  waste  legislation  and  will  set  more 
ambitious recycling targets for the period up to 2035. 

45 

 
                                                           
                                                           
3.4. Competitiveness reforms and investment 

Only  2 %  of  manufacturing  companies  are  active 
in high technology sectors. 

in 

the 

SME  internationalisation  is  actively  promoted. 
The Latvian Investment and Development Agency 
(LIDA)  offers  information  and  has  representative 
offices  in  major  EU  and  non-EU  export  markets. 
‘International  Promotion  of 
Moreover, 
Competitiveness’  programme  supports  SMEs’ 
internationalisation  by  covering  costs  related  to 
participation 
trade  fairs  and 
international 
organisation  of  trade  missions.  Companies  also 
have  access  to  short-term  and  long-term  export 
credit  guarantees.  Latvia  has  an  efficient  customs 
system. The country continues to score among the 
best  EU  performers  on  both 
information 
availability  and  advanced  rulings  on  customs, 
which  facilitate 
the  declaration,  release  and 
clearance of the intended import or export of goods 
(European  Commission,  2018c).  The  performance 
on  border  agency  cooperation  has  not  changed 
since  2015  and  still  seems  to  indicate  some  room 
for further improvement. 

is 
The  use  of  e-commerce  and  e-business 
increasing. The percentage of SMEs that make use 
of  electronic  sales  channels  has  increased  by  2.5 
percentage points to 10.6 %, reducing the gap with 
the  EU  average  (17 %).  The  percentage  of  SME 
turnover  from  e-commerce  has  also  increased 
somewhat  (up  0.5  pp.  to  8.6 %).  While  the 
proportion  of  SMEs  that  export  to  other  EU 
Member  States  increased  from  3.9 %  to  4.7 % 
between  2015  and  2017,  this  figure  is  still  quite 
low  when  compared  to  the  EU  average  of  8.4 %. 
High  delivery  costs  seem  to  be  a  major  barrier 
encountered  by  firms  wanting  to  sell  online  to 
customers in other EU countries. 

Latvians  are 
the  most  active  users  of 
collaborative economy platforms within the EU. 
According to a recent Eurobarometer survey, 40 % 
of  Latvian  citizens  have  used  services  offered  via 
collaborative  platforms,  which  is  considerably 
above  the  EU  average  of  23 %.  This  mainly 
concerns  collaborative  platforms  for  transport 
services,  which  are  highly  developed  and 
frequently used in the Baltic countries. 

Energy union 

Latvia  is  progressing  well  towards  completing 
the  key  electricity  infrastructure  projects  that 

gas  emissions  target.  Its  own  projections  expect 
emissions  to  increase  by  8%  relative  to  2005 
levels,  compared  to  a  target  that  allows  for  an 
emission  increase  of  17%.  However,  the  situation 
is  less  positive  when  it  comes  to  achieving  the 
more ambitious 2030 target which requires Latvia 
to reduce its emissions by 6% by 2030 (relative to 
2005  levels).  They  are  projected  to  rise  by  13%, 
instead.  Moreover,  despite  past  improvements 
Latvia's  greenhouse  gas  intensity  also  remains 
significantly  above 
the  EU  average. 
that  of 
Achieving  the  2030  targets  will  thus  require 
significant additional measures and accompanying 
investments, 
transport, 
agricultural  and  manufacturing  sectors,  where 
emissions are projected to increase the most.  

in  particular 

the 

in 

3.4.2.  SINGLE MARKET INTEGRATION 

Internal market for goods and services 

Latvia  is  a  very  open  economy  and  well 
integrated  in  regional  and  EU  markets.  Trade 
openness  in  Latvia  is  about  120 %  of  GDP,  far 
above the 83 % of GDP for the EU as a whole. The 
share  of  the  Latvian  intra-EU  export  of  goods  is 
about two thirds, slightly higher than in Lithuania 
but still below Estonia, where about three quarters 
of  goods  go  to  other  EU  Member  States.  The 
services sector accounts for about 74 % of Latvia’s 
total  value  added  and  68 %  of  total  employment, 
and  has  been  steadily  increasing  since  2010.  The 
ICT sector has shown impressive growth over the 
last  few  years,  surpassing  4 %  of  GDP.  Overall, 
regulatory  restrictions  in  the  services  sector  are 
lower than the EU average. 

Export volumes  have  grown  rapidly since  2010 
and  stand  out  as  the  main  driver  of  economic 
growth.  According  to  provisional  data  from  the 
Central  Statistical  Bureau  of  Latvia,  over  the  first 
eight months of 2018, the foreign trade turnover of 
Latvia at current prices reached EUR 18.05 billion, 
which  is  9.8 %  more  than  in  the  corresponding 
period  of  2017.  Machinery  and  mechanical 
appliances, electrical equipment and wood articles 
are 
significant  export  products, 
constituting  18 %  and  17 %  respectively.  Most 
Latvian producers (65 %) are concentrated in low- 
technology  industries,  such  as  basic  wood  and 
metal  processing,  with  little  innovation  prospects. 

the  most 

46 

 
3.4. Competitiveness reforms and investment 

for 

the  electricity  produced 

deployment  of  the  Latvian  renewable  energy 
potential.  In  the  spring  of  2018  the  Ministry  of 
Economy initiated a reform of the existing support 
from 
scheme 
renewables with a view to reduce the costs to final 
consumers  (a  threshold  of  0.3 %  of  GDP).  The 
Ministry  of  Economy  proposed  a  set  of  solutions 
the  mandatory  procurement 
for 
component  as  of  January  2022.  The  Ministry  has 
also  proposed  necessary  amendments 
the 
Electricity  Market  Law  to  ensure  greater  control 
mechanisms of the existing scheme.  

abolishing 

to 

investments 

Latvia  has  a  high  potential  to  further  develop 
renewable  energy  sources  in  a  cost-effective 
way.  Support  mechanisms  to  encourage  more  use 
of  renewable  energy  sources  (including  in  district 
heating)  and  further 
to  develop 
additional renewable energy production, including 
in  smart  grids  and  energy  storage  infrastructures 
would be needed. This would be an opportunity to 
boost  Latvia’s  economy,  strengthen  security  of 
supply  and  expand  exports  within  the  EU  and 
towards  non-EU  countries,  hand-in-hand  with  the 
needed synchronisation of its electricity grids with 
the European electricity system. 

Investment  needs  in  the  energy  sector  will  be 
formulated  in  the  energy  plan  due  December 
2019. On 28 December 2018, Latvia submitted to 
the  Commission  its  draft  integrated  national  and 
energy  plan  on  how  to  achieve  the  2030  energy 
and  climate  objectives.  Latvia  plans  to  submit  the 
final  plan  by  December  2019,  according  to  the 
deadline  stipulated  in  the  Governance  Regulation. 
In  its  final  plan  to  be  adopted  by  31 December 
2019 
the 
Governance  of  the  Energy  Union  and  Climate 
Action (44),  Latvia  should  provide  an overview  of 
its  investment  needs  until  2030  for  the  different 
dimensions  of 
including 
renewable  energy,  energy  efficiency,  security  of 
supply, and climate mitigation and adaptation. This 
information  will 
the 
identification  and  assessment  of  Latvia’s  energy 
and climate-related investment needs. 

the  Energy  Union, 

the  Regulation  on 

further  contribute 

line  with 

to 

in 

(44)  Regulation (EU) 2018/1999. 

form  part  of  the  implementation  of  the  Baltic 
energy market interconnection plan (BEMIP). The 
third  interconnection  between  Latvia  and  Estonia 
is  planned  to  be  finalised  by  2020  and  the 
‘Kurzeme  ring’  in  the  autumn  of  2019,  both  on 
schedule.  The  project  development 
the 
construction of an internal 330 kV powerline ‘Riga 
TEC-2 — Riga HES’ started in August 2018 and is 
planned to be finalised by 2020, together with the 
third Latvia and Estonia interconnection. 

for 

Synchronisation  of  the  Baltics  countries’  grids 
with  continental  Europe  remains  the  key 
priority  for  the  years  to  come.  The  projects’ 
main  goal  is  to  increase  the  security  of  supply  of 
the  whole  Baltic  region.  The  political  roadmap 
the  European 
signed  on  28 June  2018  by 
Commission  and  three  Baltic  states  and  Poland 
paved the way for implementation of the project by 
2025.  This  will  include  building  the  necessary 
infrastructure  to  reinforce  the  internal  grid  of  the 
three  Baltic  states,  building  a  high-voltage  direct 
current  line  between  Lithuania  and  Poland  and 
carrying  out  optimisation  measures.  Significant 
investment  will  thus  be  required  for  the  coming 
years  to  construct  the  necessary  infrastructure  for 
synchronisation. 

system 

Work on developing the regional gas market is 
ongoing, with the aim to make it operational in 
and  Finnish  gas 
2020.  Estonian,  Latvian 
transmission 
a 
memorandum  of  understanding  on  12 October 
2018  to  pave  the  way  towards  integrating  the 
natural gas markets of Latvia, Estonia and Finland 
in  2020. The regulatory  framework  is expected  to 
be adapted in the course of 2019 and 2020. 

operators 

signed 

The opening of the domestic gas market in 2017 
had  a  positive  impact  on  the  gas  prices  for 
consumers  and 
increased  competitiveness; 
however,  full  unbundling  is  yet  to  be  resolved. 
Despite  the  positive  impact  of  the  opening  of  the 
gas  market  in  April  2017,  Latvia  still  needs  to 
finalise  the  unbundling  of  its  transmission  system 
operator Conexus. The national regulator certified 
the  transmission  system  operator  in  September 
2018 on condition that full unbundling of Conexus 
ownership  will  be  resolved  by  January  2020  to 
ensure that it complies with the Gas Directive.   

Reform  of  the  renewable  energy  support 
further 
scheme 

expected 

enable 

to 

is 

47 

 
                                                           
3.4. Competitiveness reforms and investment 

Digital single market 

Graph 4.4.1:  Europe's Digital progress report (EDPR), 2018 

Latvia has been among the EU frontrunners on 
fibre and 4G deployment. It has the highest fibre 
to the premises (FTTP) coverage in the EU in rural 
areas  (69%),  and  being  well  above  the  EU’s 
average  by  the  next  generation  access  (NGA) 
coverage in the whole country (91%).  

However  notable  urban/rural  divide  persists,  in 
terms  of  fixed  broadband  coverage,  with  18  %  of 
the  rural  households  lacking  fixed  broadband 
infrastructure (European Commission, 2018j). The 
absence of progress in fixed broadband coverage is 
partially  compensated  by  a  rapid  increase  in 
mobile  broadband,  thanks  to  data  bundles  being 
widely  available  at  affordable  prices  and  high  4G 
coverage. In addition, in order to keep up with the 
fast  pace  of  connectivity  developments,  market 
players  need  appropriate  spectrum  blocks  to  be 
trials  and 
them  for  early  5G 
to 
available 
deployment. 

Bridging the digital divide remains a challenge, 
despite  the  progress  ensured  by  EU-funded 
projects.  Some  progress  in  coverage  has  been 
made  through  the  ‘middle-mile  project’  financed 
from  EU  structural  funds  to  deploy  optical  cables 
and  optical  network  access  points  in  places  that 
currently  have  no  broadband  access  and  no  plans 
for commercial deployment. At every access point, 
operators  have  the  opportunity  to  create  a  local 
loop  (the ‘last  mile’)  utilising  the  new  network  to 
offer  retail  services  to  end  users.  ‘Last  mile’ 
investments by companies are, however, lacking in 
some  parts  of  the  country.  Further  efforts  are 
necessary to close the last mile gap. 

The  use  of  digital  services  is  widespread  but 
digital skills remain a challenge. More and more 
Latvians  are  using  internet  services  such  as 
internet  banking  and  e-government.  However, 
citizens’  digital  skills  will  need  to  improve  if 
Latvia  is  to  benefit  from  an  inclusive  labour 
market and improve the productivity of businesses 
(see 
and 
Sections 3.3.4 and 3.4.1).  

integration  of  digital 

technologies 

Source: European Commission 

3.4.3.  REGIONAL DEVELOPMENT 

economic 

differences 

the  country  as  a  whole 

Significant 
persist 
between the capital and the other regions of the 
country.  While 
is 
converging  with  the  EU,  the  gap  in  economic 
performance  between  the  capital  region  and  the 
rest  of  the  country  has  not  narrowed  since  EU 
accession.  Between  2010  and  2016,  the  Riga 
region grew 19 % more than the EU average, while 
the  other  regions’  growth  remained  significantly 
lower (always below 10 %, with only 2 % growth 
in  Zemgale).  The  city  of  Riga  plays  a  key  role  in 
the  economy  of  Latvia,  contributing  around  54 % 
to  the  total  GDP.  It  has  almost  threefold  higher 
GDP  per  capita  (107 %  of  the  EU  average)  than 
the regions of Latgale (36 %) and Zemgale (38 %), 
which  are  lagging  behind  in  this  area  (Map 
3.4.4.1). 

48 

 
 
 
3.4. Competitiveness reforms and investment 

Map 3.4.4.1:  GDP per head in Latvian regions, index EU=100 

Map 3.4.4.2:  Population change in Latvian regions,  2010-

2016, % 

Source: Eurostat, Own calculations 

Source: Eurostat, Own calculations 

Socioeconomic  disparities are  linked to  a rapid 
depopulation and ageing of the Latvian regions. 
(Riga  and  Pieriga) 
Riga  metropolitan  area 
constitutes 51 % of the population of Latvia and is 
the  only  region  that  has  experienced  positive  net 
migration.  In  all  other  regions,  depopulation  is 
caused  by  negative  natural  change  and  negative 
balance  of  both  inter-regional  and  international 
migration. Depopulation and exacerbated ageing of 
the  society  is  heavily  affecting  peripheral  regions 
(Map 3.4.4.2) which have lost more than 10 % of 
the  population  since  2010,  while  Riga  region  lost 
only 2.1 %. This is due to demographic trends and 
to external and internal migration. Depopulation is 
putting  strains  on  the  public  sector  capacity  to 
deliver  on  the  efficiency,  accessibility  and  quality 
of the public services, with particularly significant 
pressures  on  education  and  health  systems  (see 
chapter  3.3).  Regional  and  social  disparities  are 
partly  exacerbated  along  language  differences  (25 
%  of  Latvian  population  belongs  to  the  Russian 
speaking minority) with the poorest of the Latvian 
regions,  Latgale,  having  a  large  Russian  speaking 
minority  (37  %)  and  only  47  %  of  Latvian 
speakers. In addition to the divide among regions, 
socioeconomic  differences  persist  also  due  to 
urban–rural divide, with 43.5 % of the 1.97 million 
Latvians  living  in  cities  (with  0.74  million  in 
Riga),  19.4  %  in  towns  and  suburbs,  37.1  %  in 
rural areas).  

the 

integration 

Lack  of  a  qualified  workforce  and  of  good  job 
opportunities heavily affect the competitiveness 
of  peripheral  regions.  Lack  of  good 
job 
opportunities has detrimental social effects such as 
relatively  higher  levels  of  poverty  risks  in  the 
peripheral  regions (45)  compared  to  Riga,  and  is 
one  of 
leading  causes  of  emigration. 
Productivity  (see  3.4.1)  differs  notably  among 
Latvian  regions,  with  the  Riga  region  at  74 %  of 
the  EU  average,  with  much  lower  levels  in  other 
regions (38 % in Latgale). Enterprises in Latvia are 
characterised by their lack of innovation prospects 
(see  3.4.1),  small  size (EBRD,  2017),  low  added 
value/complexity, high resource intensity and lack 
of 
in  global  value  chains.  Most 
producers  (65 %)  are  in  fact  concentrated  in  low 
technology  industries,  such  as  basic  wood  and 
metal  processing,  with  little  innovation  prospects. 
Only  2 %  of  manufacturing  companies  are  active 
in high technology sectors. These shortcomings are 
even  more  pronounced 
regions,  where 
companies  face  also  other  hurdles  such  as  lack  of 
finance  and  access  to  services.  Particularly  in  the 
Latgale  region,  most  of  the  unemployment  (15 % 
compared  to  4 %  in  Riga)  is  structural  (40 %  of 
unemployed  are  long-  term  unemployed)).  As  a 
result,  Latvian  regions  experience  a  general  skills 
mismatch  between  the  active  workforce  and  the 
demand from the productive sectors due to the lack 
of  adequately  qualified  workforce  (see  section 
3.3.1)  despite  higher  unemployment  rates.  These 

in 

(45)  The  at-risk-of-poverty  rate  in  Latgale  was  27 %,  while  in 

Riga it was 13 %. 

49 

 
 
 
                                                           
3.4. Competitiveness reforms and investment 

factors  limit  the  attractiveness  for  the  external 
investments which are necessary to trigger regional 
economic development. 

territorial  attractiveness.  Access 

The  quality  of  public  services  differs  notably 
among  different  Latvian  regions,  influencing 
their 
to 
specialised  health  services  is  often  an  issue  in 
peripheral regions, exacerbated by the shortages of 
health workers in areas outside Riga, resulting also 
in  restricted  access  to  quality  healthcare  (see 
Section 3.3.3). General education quality levels are 
uneven throughout the country (see Section 3.3.4). 
In  rural  areas  equal  accessibility  to  water  and 
sanitation  services  by  end  users  is  sometimes 
challenging, with lower access to safe water and to 
centralised water supply systems in comparison to 
urban  areas.  Furthermore,  28 %  of  Latvia’s  rural 
population does not receive sanitation coverage of 
adequate  quality  (EBRD,  2016).  These  data  show 
that outside the Riga metropolitan area, large parts 
of  Latvia  do  not  present  sufficient  territorial 
attractiveness,  making  it  very  difficult  to  tackle 
emigration, especially of young people. 

Local  public  administration  efficiency  remains 
an  issue,  with  municipalities  struggling  to  be 
cost-efficient and to provide good quality public 
services.  The  sustainability  of  municipal  finances 
and  the  ability  to  provide  services  is  generally  an 
issue  for  municipalities,  particularly  in  the  most 
deprived  areas,  with  direct  impacts  on  public 
services to citizens. The territorial socio-economic 
divide  is  aggravated  considering  that  the  main 
source of internal revenues for municipalities stem 
from  personal  income  and  property  taxes,  with 
revenues  typically  smaller  for  municipalities  of 
poorer  regions.  The  implementation  of  territorial 
development  strategies  is  hampered  by  the  low 
capacity  and  fragmentation  of  local  bodies  to 
administer  integrated  territorial  investments,  and 
the generally low motivation to attract investments 
and create jobs. 

3.4.4.  QUALITY OF GOVERNANCE 

Quality of governance 

digital 

distinct 

investment 

Significant  regional  differences  over  mobility 
endowments 
and 
infrastructure 
underline 
needs. 
Connectivity  gaps  with  peripheral  and  border 
regions  are  still  extremely  pronounced:  the  share 
of population in a neighbourhood of 180 km radius 
accessible  within  1h30  by  road  is  only  37 % 
(compared  to  the  EU  average  of  46 %).  Mobility 
difficulties  limit  both  the  possibility  for  the 
workforce  to  commute  but  also  the  attractiveness 
for  new  productive  investments.  The  lower  socio-
economic  development  in  the  regions  is  marked 
also  by  the  presence  of  ‘inner  peripheries’.  These 
are  marginalised  territories  facing  challenges  of 
access to regional centres and to basic services of 
general  interest  throughout  much  of  the  country. 
These inner peripheries are especially found in the 
north-eastern part of the country bordering Estonia 
and Russia, due to poor accessibility, and in a large 
part  of 
to  poor 
the  Kurzeme  region,  due 
accessibility  to  regional  centres  and/or  services 
(ESPON, 2018). Moreover, digital public services 
in rural areas are hampered by a lack of broadband 
coverage. 

institutionalise 

Latvia  has  made  efforts  to  improve  the  quality 
of  governance.  Latvia  ranks  high  on  access  to 
government  information  because  of  long-term 
efforts  to 
it  and  digitalisation 
efforts  are  also  positive.  However,  transparency 
does  not  eliminate  all  corruption  at  once.  Latvia 
has  strong  strategic  planning  capacity  and  a 
moderately effective  inter-ministerial coordination 
set-up.  However,  regulatory  impact  assessments 
are not fully deployed for evidence-based analysis, 
while public complaints have been made about the 
unpredictability 
regulations. 
Consistent  human  resources  management  across 
different levels of government is low and the civil 
service  remuneration  system  still  largely  depends 
on  the  financial  capacity  of  the  ministries  and 
agencies.   

laws 

and 

of 

Public sector reform 

The public administration reform plan adopted 
in  November  2017  is  being  slowly  rolled  out. 
The  stated  aim  remains  to  make  the  central 
government leaner, more effective, responsible and 
flexible by  centralising support functions (such  as 
accounting),  reducing  staff  levels  on  average  by 
2 %  per  year,  fostering  innovation  and  training, 
and  making 
remuneration  system  more 
competitive with the private sector. In 2018, some 

the 

50 

 
 
3.4. Competitiveness reforms and investment 

for 

services 

increase 

businesses 

in  the  EU  and  is  ranked  6th  in  the  EU  on  digital 
public 
(European 
Commission,  2018k).  Further  efforts  are  planned 
the  effectiveness  of  public 
to:  (i) 
administration  through  the  efficient  use  of  cloud 
computing  services;  and  (ii)  create  a  more 
favourable business environment for entrepreneurs 
and  SMEs  by  lowering  administrative  burden 
through 
security 
and 
vulnerability and preventing cyber-attacks.  

e-services 

reducing 

Public procurement 

in 

but 

and 

have 

improved, 

transparency 

public 
Efficiency 
procurement 
not 
significantly.  The  use  of  negotiated  procedures 
without  prior  publication  of  a  contract  notice  has 
slightly  increased    from  10 %  in  2017  to  12 %  in 
2018 (EU average: 4 %). The share of tenders with 
the  participation  of  only  one  bidder  has  also 
increased from 27 % in 2017 to 36 % in 2018 (EU 
average:  24 %). 
In  addition,  some  negative 
perceptions  of  the  fairness  of  the  procurement 
procedures  and  of  possible  corruptive  practices 
could lead to decreased competition because of the 
dissuasive  effects  on  potential  bidders  (FICIL, 
2018). A lack of transparency, in particular on low 
value  procurements  at  municipal 
level,  still 
persists, although it is hoped to be solved in 2019 
with  the  publication  of  all  procurement-related 
information on a single website. The Procurement 
Supervision 
out 
investigations  based  on  complaints  received  from 
whistleblowers, bidders and the media. In 2017, 45 
such checks were carried out, while in 2018 there 
were  20  checks  of  procurements  involving  EU 
funds. 
of  
knowledge  and  use  of  e-procurement  could 
improve 
of 
procedures. 

transparency 

efficiency 

Greater 

Bureau 

carries 

(IUB) 

and 

use 

Justice system and insolvency  

to 

improve 

Measures 
the  quality  and 
independence  of  the  justice  system  are  being 
gradually  implemented.  The  amended  Law  on 
the Judicial Power, among others, strengthened the 
powers  of  the  Council  for  the  Judiciary  in 
appointing  court  presidents,  transferring  judges  to 
vacant  positions,  and  approving  judicial  training. 
The  procedure  for  selecting  candidate  judges  is 
now  determined  by  the  Council  and  new  legal 
safeguards  ensuring  the  membership  of  elected 

3 500  staff  were  trained,  including  180  high-level 
managers,  while  staff  cuts  were  mostly  limited  to 
eliminating  vacancies.  An  example  of  good 
practice  in  the  centralisation  of  functions  is  the 
State Treasury providing accountancy services for 
eight  other  institutions,  including  Ministry  of 
Finance  from  2019.  The  reform  would  benefit 
and  verifiable 
from 
performance indicators. 

annual 

targets 

clear 

population 

The  public  sector  reforms  currently  exclude 
municipalities,  which  enjoy  a  high  degree  of 
and 
declining 
autonomy.  The 
urbanisation leave legacy infrastructure and public 
services  under-used  in  some  rural  areas.  These 
trends  make  the  case  for  the  downsizing  of 
efficient 
administrations,  more 
municipal 
budgeting,  and  exploring  innovative  solutions  to 
ensure  accessibility  and  quality  of  services  for 
residents. Local authorities account for some 60 % 
of  all  public  sector  employees.  There  is  only 
limited benchmarking to assess the performance of 
administrations  at  municipal  level  (46).  The  state 
audit 
demonstrated  marked 
differences  in  service  delivery  and  costs.  Out  of 
119  municipalities,  at  the  beginning  of  2018,  39 
are under the threshold of 4 000 inhabitants and a 
further 18 do not meet other legal criteria. Lack of 
critical  mass  may  pose  challenges  in  ensuring 
sufficient  labour  supply  to  attract  new  investment 
and promote entrepreneurship. Local governments 
have  been  encouraged  to  cooperate  voluntarily  in 
policy  areas  with  a  cross-regional  dimension, 
while  more 
reforms 
(including  administrative,  territorial  and  service 
reforms) would be welcome.  

far-reaching 

regional 

reviews 

have 

Digital public services 

Latvia  has  substantially  improved  its  digital 
public  services.    Progress  has  been  driven  by:  (i) 
increased e-government use; (ii) the availability of 
pre-filled  forms;  and  (iii)  the  availability  of  open 
data  due  to  the  launch  of  the  national  data  portal, 
which  makes 
to  access  public 
administration  datasets  and  metadata  directly  and 
to link to other data sets. Latvia has improved in its 
ranking of digital public services, from 14th to 9th 

it  possible 

(46)  Small Business Union annually publishes an index of most 
business-friendly  municipalities,  showing  the  importance 
of both size and business-orientation of local governments 
in attracting investment. 

51 

 
                                                           
3.4. Competitiveness reforms and investment 

the 

justice 

system, 

judges  in  the  Commission  for  the  Selection  of 
Candidates  for  Offices  of  Judges  are  envisaged. 
However,  with  only  a  few  employees, 
the 
administrative  capacity  of  the  Council  remains 
very  low,  since  the  Court  Administration  with 
almost  hundred  employees  remains  under  the 
authority of the Ministry of Justice. As regards the 
for 
quality  of 
improvement remains, particularly on making legal 
aid  more  accessible  (2019  EU  Justice  Scoreboard 
(forthcoming))  but 
are 
envisaged  in  civil  cases.  Judicial  map  reform  was  
implemented, reducing the need to transfer cases to 
less  burdened  courts,  but  the  merging  of  courts 
could  be  accompanied  by  an  appropriate  re-
distribution of vacant and other judicial posts, and 
court  presidents  using  case-management  tools  in 
order  to  resolve  the  issue  of  certain  overburdened 
courts..  

remedial  measures 

room 

the  effectiveness  of 

the 
The  analyses  of 
insolvency  framework  are  being  gradually 
followed-up.  Judges  and  other  experts  on 
insolvency  law  published  an  analysis  of  selected 
insolvency cases from 2008-2014, which had been 
suspected of abuses, and the report concluded that 
in  44  of  those  cases  signs  of  grave  misconduct 
were  present.  While  the  statute  of  limitations  has 
already expired and disciplinary action against the 
judges  involved  was  not  possible  anymore,  the 
cases  were  sent  to  the  general  prosecutor,  who 
concluded there were no grounds for any criminal 
charges. Legislative measures aimed to address the 
identified deficiencies appear to be in place. A new 
overview  of  insolvency  jurisprudence  in  2015-
2018  aims  at  improving  consistency  of  case  law 
and legal certainty and representatives of investors 
(FICIL)  confirm  a  certain  progress.  Disciplinary 
liability  and  control  of  insolvency  administrators 
by  the  Insolvency  Control  Service  under  the 
Ministry  of  Justice  appears  to  be  in  place,  but  to 
achieve  its  effectiveness,  continuous  action  by 
authorities is needed. On-site visits by the Control 
Service  have  discovered  irregularities  in  80%  of 
visits  (but  mostly  of  minor  significance,  such  as 
failing  to  submit  a  report  to  creditors,  while 
sometimes  more 
serious,  e.g.  charging  of 
unreasonable costs). 

Fight against corruption 

Corruption  remains  a  concern,  but  Latvia  has 
some  corruption 
improved 

score  on 

its 

the 

indicators.  In  the  2018  Global  Competitiveness 
Report  Latvia’s  score  on 
incidence  of 
corruption has improved. Moreover, Latvia’s rank 
as  regards  corruption  control  is  better  than  the 
previous year in the 2017 World Bank Governance 
Indicators.  However,  the  2017  Eurobarometer 
survey  showed  that  corruption  is  both  more 
in  EU 
widespread  and  more 
countries  on  average(47).  The  share  of  businesses 
pointing  to  corruption  being  an  obstacle  to  their 
business has, however, decreased. 

tolerated 

than 

increased 

to  have 

The  Corruption  Prevention  and  Combating 
Bureau  appears 
its 
effectiveness,  but  there  are  delays 
in  the 
implementation  of  the  national  anti-corruption 
strategy and in adopting relevant legislation. In 
October  2018  the  Bureau  for  the  Prevention  and 
Combat  of  Corruption  (KNAB)  underwent  a 
reorganisation  to  strengthen  its  analytical  and 
investigatory  capacity.  The  salary  level  of  KNAB 
staff  increased,  but  the  staffing  level  is  still  not 
deemed  adequate..  The  number  of  investigations 
carried out by KNAB has increased by 42 % since 
the new head took office in June 2017. By the end 
of  the  year  KNAB  is  expected  to  have  adopted  a 
mid-term  report  on  the  implementation  of  the 
2015-2020  national 
strategy. 
According to the authorities, there are delays in the 
implementation  of 
the  strategy.  All  public 
institutions,  including  state-owned  enterprises  and 
municipalities have the obligation to set up by the 
end of 2018 a system of internal control to prevent 
corruption  and  the  risk  of  conflicts  of  interest. 
According  to  a  report  released  in  July  2018,  only 
45% of the institutions surveyed had established a 
plan for anticorruption measures.  

anti-corruption 

Latvia is strengthening its legal anti-corruption 
framework  by  adopting  a  whistleblower 
protection law. The whistleblower protection law 
was  adopted  in  October  by  Parliament  and  will 
enter into force on 1 May 2019. The Law regulates 
channels  for  reporting,  establishes  protection  for 
whistleblowers,  and  designates  a  contact  point  in 
the State Chancellery. A Code of Ethics, which has 
been  under  discussion  for  several  years,  was 
adopted  by  the  Cabinet  of  Ministers  on  21 

(47)  84 % consider that corruption is widespread in Latvia (EU 
average  68 %).  59 %  consider  that  corruption  is  tolerated 
(EU  average  26 %),  whereas  only  31 %  consider  it 
unacceptable (EU average 70%). 

52 

 
                                                           
3.4. Competitiveness reforms and investment 

November  2018..  However,  the  draft  does  not 
cover  politically  appointed  persons,  an  issue  also 
been signalled by GRECO (2017). Discussions on 
a  law  regulating  lobbying  have  been  dragging  on 
for several years. 

Amendments to the Law on conflicts of interest 
are  under  discussion,  but  some  draft  proposals 
raise  concerns.  A  first  raft  of  amendments  to  the 
Law  on  conflict  of  interest  was  adopted  by 
Parliament on 18 October 2018. These regulate the 
cooling-off  period  for  officials  leaving  the  public 
sector,  extend  the  categories  of  officials  who  are 
requested to submit asset and interest declarations, 
extend the obligation to declare conflict of interest 
for  Members  of  Parliament  and  clarify 
the 
difference  between  donations  and  gifts.  Other 
amendments  under  discussion  would  exempt 
certain  categories  of  officials  (approximately 
14 000  officials  performing  supervisory  and 
control  functions)  from  the  obligation  to  submit 
interest  declarations.  This  may  open  the  door  for 
abuses,  as  heads  of 
large 
discretion  to  decide  who  should  fill  in  these 
declarations. Moreover, there is a proposal to keep 
the  declarations  online  only  for  a  limited  period, 
which may prevent the comparison of wealth with 
previous years. 

institution  enjoy 

of 

clear 

interest 

conflict 

following 

declarations, 

Asset  and  interest  declarations  are  still  not 
checked 
approach. 
a 
Declarations are updated by officials on an annual 
basis  on  an  electronic  platform  run  by  the  State 
Revenue  Service  (SRS).  Approximately  60 000 
public  officials  submit  such  declarations,  Latvia 
being  among  the  EU  countries  with  the  most 
regulation 
of 
extensive 
(EuroPAM). Except for personal data information, 
declarations are open to public scrutiny. As regards 
verification 
the 
these 
responsibilities are split between KNAB, which is 
in charge with the conflict of interest part, and the 
SRS,  which  is  in  charge  of  verifying  the  assets. 
While KNAB seems to have a risk-based approach 
in  checking  these  declarations,  there  is  no  similar 
approach on the part of the SRS. This results also 
from  the  latest  GRECO  report  (2018),  which 
states:  ‘Compared  to  the  KNAB,  no  internal 
criteria  for  in-depth  verifications  in  respect  of 
those  public  officials  who  may  be  susceptible  to 
higher corruption risks and no internal procedure 
on  how  to  conduct  such  assessments  have  been 
elaborated 
two 
recommendations  from  2015  by  the  State  Audit 
Office  for  the  SRS  to  check  asset  declarations 
against previous years and to develop performance 
indicators  to  assess  the  effectiveness  of  the  asset 
interest  declarations  system  have  been 
and 
postponed until December 2019.  

SRS)’.  Moreover, 

(by 

53 

 
3.4. Competitiveness reforms and investment 

Box 3.4.1: Investment challenges and reforms in Latvia 

Section 1. Macroeconomic perspective  

In 2017 the investment rate in Latvia was 21% of GDP. This is close to  the average investment rate since 
2010, but significantly lower than the 30 % of GDP average investment figure for 2000-2008. The decline 
compared to the pre-crisis period reflects a slowing convergence process as Latvia becomes richer but also 
reflects  lower  demand  for  residential  investment  due  to  Latvia’s  population  decline.  Investment  in 
equipment  and  non-residential  construction  are  above  the  EU  average,  reflecting  the  sizeable  role  of 
financing  from  EU  funds  (Section 3.4.1).  By  contrast,  investment  in  intellectual  property  products  is 
substantially below the EU average and has not increased since 2000. Weak investment in housing is the flip 
side of weak mortgage lending (see Section 3.2). As growth in lending is expected to remain below nominal 
GDP growth for the foreseeable future, the reduction of household debt is expected to continue. 

Section 2. Assessment of barriers to investment and ongoing reforms  

Main barriers to investment and priority actions underway 

1.  Investment  in  housing  is  hindered  by  a  lengthy  and  costly  construction  process,  poor  protection  of 
landlords’  interests  in  the  rental  law  and  a  lack  of  long-term  financing  (of  30  years  or  more)  for  projects 
outside  Riga.  Housing  investment  outside  Riga  is  crucial  to  regional  development  as  it  facilitates  better 
employment opportunities through higher labour mobility within the country. Regional development is also 
an important ingredient in reducing emigration and thus slowing the rate of population decline.  

2. The relatively large shadow economy is the primary structural obstacle to higher credit growth according 
to Latvian banking and other business associations. Banks are reluctant to lend to firms whom they suspect 
hiding some of their transactions to avoid paying taxes, even if their financial situation would allow them to 
obtain credit (Sections 3.1 and 3.2). 

3. R&D investment in Latvia is among the lowest in the EU and is overly dependent on EU funds. While a 
variety  of  instruments  are  on  offer  to  boost  R&D  investments,  they  are  not  fully  utilised  due  to  lack  of 
demand. Given that some of the largest, best funded companies in Latvia are state-owned, directing them to 
engage  in  R&D  activities  more  actively  is  one  of  the  few  policy  levers  available  to  promote  R&D 
investment. Latvia has taken the first steps in this respect by requiring its largest state-owned enterprises to 
lay down their R&D strategies (see Section 3.4.1).  

54 

 
 
ANNEX A: OVERVIEW TABLE 

Commitments 

Summary assessment (48) 

2018 country-specific recommendations (CSRs) 

CSR 1:  Achieve 
the  medium-term  budgetary 
objective in 2019, taking into account the allowances 
linked to the implementation of the structural reforms 
for  which  a  temporary  deviation  is  granted.  Reduce 
taxation for low-income earners by shifting it to other 
sources,  particularly  capital  and  property,  and  by 
improving tax compliance. 

Latvia  has  made 
addressing CSR 1  

limited  progress 

in 

  Achieve the medium-term budgetary objective in 
2019, taking into account the allowances linked to 
the  implementation  of  the  structural  reforms  for 
which a temporary deviation is granted. 

The  compliance  assessment  with  the Stability 
and  Growth  Pact  will  be  included  in  spring 
when final data for 2018 will be available. 

  Reduce 

taxation  for 

low-income  earners  by 
shifting it to other sources, particularly capital and 
property, … 

  Limited  progress.  No  new  measures  are 
implemented in response to the 2018 CSR. 
The 
being 
implemented, but their effect is limited. 

adopted  measures 

are 

  …and by improving tax compliance. 

  Some progress. Tax compliance has been 
strengthened  by  more  detailed  tax  reports 
being requested from businesses and using 
data  available  in  public  registers.  Stricter 
sanctions  for  financial  and  economic 
crimes are applied. 

CSR 2:  Improve  the  adequacy  of  minimum  income 
benefits,  minimum  old-age  pensions  and  income 
support  for  people  with  disabilities.  Increase  the 

Latvia  has  made 
addressing CSR 2: 

limited  progress 

in 

(48)  The following categories are used to assess progress in implementing the 2017 country-specific recommendations (CSRs): 
No progress: The Member State has not credibly announced nor adopted any measures to address the CSR. This category covers a 
number  of  typical  situations,  to  be  interpreted  on  a  case-by-case  basis  taking  into  account  country-specific  conditions.  They 
include the following: 

no legal, administrative, or budgetary measures have been announced  
in the national reform programme, 
in any other official communication to the national Parliament/relevant parliamentary committees or the European Commission,  
publicly (e.g. in a press statement or on the government's website);  
no non-legislative acts have been presented by the governing or legislative body;   
the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures to be taken (unless the CSR explicitly asks for orientations or exploratory actions). However, it has 
not proposed any clearly-specified measure(s) to address the CSR. 

Limited progress: The Member State has: 
announced certain measures but these address the CSR only to a limited extent; and/or 
presented  legislative  acts  in  the  governing  or  legislative  body  but  these  have  not  been  adopted  yet  and  substantial  further,  non-

legislative work is needed before the CSR is implemented;  

presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 
Some progress: The Member State has adopted measures  
that partly address the CSR; and/or  
that address the CSR, but a fair amount of work is still needed to address the CSR fully as only a few of the measures have been 
implemented. For instance, a measure or measures have been adopted by the national Parliament or by ministerial decision, but 
no implementing decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way towards addressing the CSR and most of them 

have been implemented. 

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately. 

55 

 
 
 
                                                           
A. Overview table 

labour  market  relevance of  vocational  education  and 
training, and foster upskilling of low-skilled workers 
and jobseekers. Increase the accessibility, quality and 
cost-effectiveness of the healthcare system. 

 

Improve 
income 
the  adequacy  of  minimum 
benefits,  minimum  old-age  pensions  and  income 
support for people with disabilities. 

 

the 

Increase 
relevance  of 
labour  market 
vocational  education  and  training,  and  foster 
upskilling of low-skilled workers and jobseekers. 

 

Increase 
effectiveness of the healthcare system. 

the  accessibility,  quality  and  cost-

56 

  No progress. The most recent plan (2018) 
to  improve  the  minimum  income  support 
system  2019-2020,  although  announced, 
has not been implemented. The guaranteed 
minimum  income  increase  of  EUR 3.20 
entered  into  force  on  1 January  2018. 
Several  measures  were  taken  to  improve 
the  overall  situation  for  the  elderly  e.g.: 
indexation of pensions with long insurance 
periods,  supplements 
to  old  age  and 
disability  pensions  for  work  period  before 
1996, a time-limited survivor’s pension. In 
2018,  financial  support  for  families  with 
two  and  more  children  was  increased. 
However,  the  minimum  pension  and  state 
social security old-age allowance have not 
been increased.  

students 

  Some  progress.  No  new  measures  have 
been taken on the vocational education and 
adult  learning.  Ongoing  programmes  are 
continuing  and  are  supported  using  EU 
funds.  VET  reforms  have  picked  up  pace 
and  work-based  learning  is  being  rolled 
out, but outcomes in terms of the share of 
VET 
recent  graduate 
and 
employment  remain  lower  than  the EU 
average.  While  upskilling  low-skilled  and 
jobseekers has been strengthened using EU 
funds,  participation  in  adult  learning  and 
active  labour  market  policies  remains  low 
and  public  expenditure  on  active  labour 
market  policies  is  low.  An  ESF-funded 
activation  programme  for  the  long-term 
unemployed  was  launched  in  second  half 
of  2018.  In  April  2018,  the  Latvian 
government  endorsed  the  implementation 
of  Latvia’s  national  skills  strategy  project 
to  develop  a  comprehensive  medium-term 
education and skills policy agenda. 

  Some  progress.  Public  financing  for 
healthcare  has 
increased,  which  has 
resulted in reduced waiting times for some 
interventions  and  increased  availability  of 
health  services,  but  the  level  remains  low 
relative  to  other  EU  countries.  Structural 

 
A. Overview table 

in 

reforms in the sector are proceeding slowly 
concrete 
and 
some 
implementation  plans  are  still 
to  be 
formulated,  for  instance  in  primary  care 
reform. 

cases 

Latvia has made some progress in addressing 
CSR 3: 

  Limited 

progress. 

The 
adopted 

public 
administration 
in 
reform 
November 2017 is being slowly rolled out. 
The  public 
exclude 
municipalities,  which  enjoy  a  high  degree 
of autonomy. No measures on governance 
state-owned 
authorities  or 
of 
enterprises have been presented. 

reforms 

sector 

local 

CSR 3: Strengthen the efficiency of the public sector, 
in particular with regard to local authorities and state-
owned  enterprises.  Strengthen  the  accountability  of 
public  administration  by  protecting  whistle-blowers, 
preventing  conflicts  of  interest  and  following-up  on 
the  results  of  the  ongoing  assessment  of  past 
insolvency proceedings. 

  Strengthen  the  efficiency  of  the  public  sector,  in 
particular  with  regard  to  local  authorities  and 
state-owned enterprises. 

  Strengthen 

the 

accountability 

public 
administration  by  protecting  whistle-blowers, 
preventing  conflicts  of  interest  and  following-up 
on  the  results  of  the  ongoing  assessment  of  past 
insolvency proceedings. 

of 

law 

  Some  progress.  The  adoption  of  the 
shows 
whistleblower  protection 
substantial  progress.  Despite  an  increased 
effectiveness of the Corruption Prevention 
and  Combatting  Bureau,  there  are  delays 
in  the  implementation  of  the  National 
Anti-Corruption  Strategy  and  in  adopting 
relevant  provisions,  such  as  a 
law 
regulating lobbying activities or a Code of 
ethics covering politically elected persons. 
Proposed  amendments 
law  on 
conflicts of interests would exempt certain 
categories  of  officials  from  submitting 
interests  declarations.  The 
assets  and 
approach  followed  for  the  verification  of 
asset declarations is still unclear. 

the 

to 

Europe 2020 (national targets and progress) 

Employment rate: 73% 

R&D: 1.5 % of GDP 

The  employment  rate  (for  the  20-64  age 
group)  increased  further  to  74.8%  in  2017 
from  73.2%  in  2016.  The  trend  remains 
positive (76.8% in Q2 -2018). 

R&D  expenditure  was  0.51 %  of  GDP  in 
2017, up from 0.44 % of GDP in 2016. Latvia 
is not on track to meet its target. 

In  2017,  R&D 

intensity 

in  Latvia  was 

57 

 
 
 
A. Overview table 

composed  of  27%  private  investment  (0.14% 
of  GDP)  and  73%  public  investment  (0.37% 
of GDP). 

According  to  the  latest  national  projections 
and taking into account existing measures, the 
target is expected to be achieved: 8 % in 2020 
compared to 2005 (with a margin of 9 pps). 

Furthermore, while the target for 2016 was an 
increase  of  no  more  than  12 %  compared  to 
2005,  the  preliminary  figures  show  that  the 
non-ETS  emissions  increased  by  4 %.  The 
interim target has thus been achieved. 

In  2017,  Latvia’s  share  of  renewable  energy 
was  39.0 %.  This  is  1 pps  short  of  its  2020 
target. 

In 2017, Latvia’s primary energy consumption 
increased to 4.5 Mtoe from 4.3 Mtoe in 2016. 
The  final  energy  consumption  also  increased 
from 3.8 Mtoe to 4.0 Mtoe. Given the current 
trend, Latvia is on track to achieve its energy 
efficiency target. 

The  share  of  early  school 
leavers  from 
education and training decreased from 10% in 
2016 to 8.6% in 2017. 

The  already  high  tertiary  attainment  rate 
continued  to  increase  reaching  43.8  %  in 
in  2017.  Gender 
2017,  up  from  42.8% 
disparities  remain  strong,  with  the  tertiary 
attainment  rate  32.1%  for  men  and  53%  for 
women. 

living 

The number of people living at risk of poverty 
and/or 
jobless  households  was 
reduced  by  125 000  in  2017  compared  to 
2008, so Latvia has met its poverty target. 

in 

Greenhouse gas emissions: increase by 17% between 
2005 and 2020 (in non-ETS sectors) 

Renewable energy target: 40% 

Energy  efficiency:  5.4  Mtoe  expressed  in  primary 
energy  consumption  (4.5  Mtoe  expressed  in  final 
energy consumption) 

Early school leaving: 10%  

Tertiary education: 34% attainment rate for age group 
30 - 34 

Poverty/social exclusion: reduction of the number of 
people  at  risk  of  poverty  and/or  living  in  jobless 
households by 121 000 compared to 2008. 

58 

 
ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

59 

 
 
 
 
B. Debt sustainability analysis and fiscal risks 

60 

General Government debt projections under baseline, alternative scenarios and sensitivity tests2017201820192020202120222023202420252026202720282029Gross debt ratio40.037.135.535.734.734.233.933.633.533.634.034.435.0Changes in the ratio (-1+2+3)-0.3-2.9-1.60.2-1.0-0.5-0.3-0.3-0.10.20.30.50.6of which(1) Primary balance (1.1+1.2+1.3)0.3-0.1-0.20.0-0.1-0.2-0.3-0.2-0.4-0.5-0.6-0.7-0.8(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)-0.3-1.0-1.0-0.5-0.4-0.4-0.3-0.2-0.4-0.5-0.6-0.7-0.8(1.1.1) Structural primary balance (bef. CoA)-0.3-1.0-1.0-0.5-0.5-0.5-0.5-0.5-0.5-0.5-0.5-0.5-0.5(1.1.2) Cost of ageing-0.1-0.1-0.2-0.2-0.10.10.20.20.3(1.1.3) Others (taxes and property incomes)0.00.00.00.00.00.00.00.00.0(1.2) Cyclical component0.70.90.80.50.30.20.00.00.00.00.00.00.0(1.3) One-off and other temporary measures0.00.00.00.00.00.00.00.00.00.00.00.00.0(2) Snowball effect (2.1+2.2+2.3)-2.0-2.2-1.2-1.2-1.0-0.7-0.6-0.6-0.5-0.4-0.3-0.2-0.2(2.1) Interest expenditure0.90.80.70.70.70.70.80.80.80.91.01.11.2(2.2) Growth effect-1.7-1.5-1.1-1.0-0.9-0.7-0.7-0.7-0.7-0.6-0.6-0.7-0.7(2.3) Inflation effect-1.2-1.4-0.8-0.9-0.9-0.8-0.7-0.7-0.7-0.7-0.7-0.7-0.7(3) Stock-flow adjustments2.1-0.8-0.71.40.00.00.00.00.00.00.00.00.0Note: For further information, see the European Commission Fiscal Sustainability Report (FSR) 2018. b. For the medium-term, the risk category (low/medium/high) is based on the joint use of the S1 indicator and of the DSA results. The S1 indicator measures the fiscal adjustment required (cumulated over the 5 years following the forecast horizon and sustained thereafter) to bring the debt-to-GDP ratio to 60 % by 2033. The critical values used are 0 and 2.5 pps. of GDP. The DSA classification is based on the results of 5 deterministic scenarios (baseline, historical SPB, higher interest rate, lower GDP growth and negative shock on the SPB scenarios) and the stochastic projections. Different criteria are used such as the projected debt level, the debt path, the realism of fiscal assumptions, the probability of debt stabilisation, and the size of uncertainties. c. For the long-term, the risk category (low/medium/high) is based on the joint use of the S2 indicator and the DSA results. The S2 indicator measures the upfront and permanent fiscal adjustment required to stabilise the debt-to-GDP ratio over the infinite horizon, including the costs of ageing. The critical values used are 2 and 6 pps. of GDP. The DSA results are used to further qualify the long-term risk classification, in particular in cases when debt vulnerabilities are identified (a medium / high DSA risk category). [2]Thechartspresentaseriesofsensitivitytestsaroundthebaselinescenario,aswellasalternativepolicyscenarios,inparticular:thehistoricalstructuralprimarybalance(SPB)scenario(wheretheSPBissetatitshistoricalaverage),theStabilityandGrowthPact(SGP)scenario(wherefiscalpolicyisassumedtoevolveinlinewiththemainprovisionsoftheSGP),ahigherinterestratescenario(+1pp.comparedtothebaseline),alowerGDPgrowthscenario(-0.5pp.comparedtothebaseline)andanegativeshockontheSPB(calibratedonthebasisoftheforecastedchange).Anadversecombinedscenarioandenhancedsensitivitytests(ontheinterestrateandgrowth)arealsoincluded,aswellasstochasticprojections. Detailed information on the design of these projections can be found in the FSR 2018.LV - Debt projections baseline scenario[1]Thefirsttablepresentsthebaselineno-fiscalpolicychangescenarioprojections.Itshowstheprojectedgovernmentdebtdynamicsanditsdecompositionbetweentheprimarybalance,snowballeffectsandstock-flowadjustments.Snowballeffectsmeasurethenetimpactofthecounteractingeffectsofinterestrates,inflation,realGDPgrowth(andexchangerates in some countries). Stock-flow adjustments include differences in cash and accrual accounting, net accumulation of assets, as well as valuation and other residual effects.[3] The second table presents the overall fiscal risk classification over the short, medium and long-term. a. For the short-term, the risk category (low/high) is based on the S0 indicator. S0 is an early-detection indicator of fiscal stress in the upcoming year, based on 25 fiscal and financial-competitiveness variables that have proven in the past to be leading indicators of fiscal stress. The critical threshold beyond which fiscal distress is signalled is 0.46. 20253035404550556020162017201820192020202120222023202420252026202720282029Debt as % of GDP -LVBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario203040506020162017201820192020202120222023(% of GDP)Stochastic debt projections 2019-2023 -LVp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline20253035404550556020162017201820192020202120222023202420252026202720282029Debt as % of GDP -LVBaselineHistorical SPB scenarioSGP scenario20253035404550556020162017201820192020202120222023202420252026202720282029Debt as % of GDP -LVBaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenarioBaselineHistorical SPBLower GDP growthHigher interest rateNegative shock on SPBStochastic projectionsRisk categoryLOWLOWLOWLOWLOWMEDIUMDebt level (2029)35.040.236.736.737.4Debt peak year20182029201820182029Percentile rank66.0%73.0%Probability debt higher41.1%Dif. between percentiles28.8LOWLong termDSALOWDebt sustainability analysis (detail)Medium termLOWLOWShort termLOW(S0 = 0.2)(S1 = -2)S2LOW(S2 = 0.7)S1 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

1) Latest data Q3 2018. Includes not only banks but all monetary financial institutions excluding central banks. 
2) Latest data Q2 2018. 
3) Quarterly values are not annualised  
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

61 

201320142015201620172018Total assets of the banking sector (% of GDP)1)128,2130,6131,3117,5104,774,9Share of assets of the five largest banks (% of total assets)64,163,664,566,573,5-Foreign ownership of banking system (% of total assets)2)59,052,547,449,751,658,6Financial soundness indicators:2)              - non-performing loans (% of total loans)-9,76,56,35,65,9              - capital adequacy ratio (%)18,020,221,820,420,622,4              - return on equity (%)3)8,810,210,714,37,68,2Bank loans to the private sector (year-on-year % change)1)-2,0-4,5-0,16,3-0,63,6Lending for house purchase (year-on-year % change)1)-4,5-3,4-3,3-0,50,20,6Loan to deposit ratio2)-67,359,962,460,670,6Central Bank liquidity as % of liabilities1)-0,31,01,01,00,2Private debt (% of GDP)92,696,288,988,083,5-Gross external debt (% of GDP)2) - public30,636,430,432,729,828,6    - private42,039,140,340,939,639,0Long-term interest rate spread versus Bund (basis points)*177,0134,546,844,451,747,4Credit default swap spreads for sovereign securities (5-year)*110,399,676,562,048,941,2 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

1 People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI). 
2 Unemployed persons are all those who were not employed but had actively sought work and were ready to begin working 
immediately or within two weeks. 
3 Long-term unemployed are people who have been unemployed for at least 12 months. 
4 Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2019. 
5 Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation). 
6 Average of first three quarters of 2018 for the employment rate, unemployment rate and gender employment gap. Data for 
unemployment rate is seasonally adjusted. 
Source: European Commission 

62 

201320142015201620172018 6Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)9.88.59.910.08.6:Gender employment gap (pps)4.24.64.12.94.34.4Income inequality, measured as quintile share ratio (S80/S20)6.36.56.56.26.3:At-risk-of-poverty or social exclusion rate1 (AROPE)35.132.730.928.528.2:Young people neither in employment nor in education and training (% of population aged 15-24)13.012.010.511.210.3:Dynamic labour markets and fair working conditionsEmployment rate (20-64 years)69.770.772.573.274.876.8Unemployment rate2 (15-74 years)11.910.89.99.68.77.5Long-term unemployment rate3 (as % of active population)5.74.64.54.03.33.2Gross disposable income of households in real terms per capita4 (Index 2008=100) ::98.5103.9107.0:Annual net earnings of a full-time single worker without children earning an average wage (levels in PPS, three-year average)82318670934810082::Annual net earnings of a full-time single worker without children earning an average wage (percentage change, real terms, three-year average)2.65.07.07.4::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction525.421.517.621.621.9:Children aged less than 3 years in formal childcare23.021.622.928.328.4:Self-reported unmet need for medical care13.812.58.48.26.2:Individuals who have basic or above basic overall digital skills (% of population aged 16-74)::49.050.048.0: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator 
1 Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included 
2 PISA (OECD) results for low achievement in mathematics for 15 year-olds. 
3 Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science. 
4 Average of first three quarters of 2018. Data for youth unemployment rate is seasonally adjusted. 
Source: European Commission, OECD 

63 

Labour market indicators201320142015201620172018 4Activity rate (15-64)74.074.675.776.377.0:Employment in current job by durationFrom 0 to 11 months16.414.714.513.515.0:From 12 to 23 months10.811.310.110.210.0:From 24 to 59 months18.720.119.120.120.5:60 months or over54.153.856.256.154.5:Employment growth* (% change from previous year)2.3-1.31.4-0.30.01.9Employment rate of women(% of female population aged 20-64)67.768.570.571.872.774.6Employment rate of men (% of male population aged 20-64)71.973.174.674.777.079.0Employment rate of older workers* (% of population aged 55-64)54.856.459.461.462.364.9Part-time employment* (% of total employment, aged 15-64)7.56.87.28.57.77.0Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)4.33.33.83.73.02.9Participation in activation labour market policies(per 100 persons wanting to work)6.86.84.35.8::Transition rate from temporary to permanent employment(3-year average)44.350.257.257.9::Youth unemployment rate (% active population aged 15-24)23.219.616.317.317.012.1Gender gap in part-time employment3.84.25.54.75.85.4Gender pay gap1 (in undadjusted form)16.017.317.017.0::Education and training indicators201320142015201620172018Adult participation in learning(% of people aged 25-64 participating in education and  training)6.85.65.77.37.5:Underachievement in education2::21.4:::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)40.739.941.342.843.8:Variation in performance explained by students' socio-economic status3::8.7::: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

* Non-scoreboard indicator 
1 At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.  
2 Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone. 
3 Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation. 
4 People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months. 
5 Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59.   
6 Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard. 
Source:  European Commission, OECD 

64 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare3.33.43.53.63.7:Disability1.21.21.31.41.4:Old age and survivors7.87.77.47.47.3:Family/children1.01.21.31.61.7:Unemployment0.50.60.60.60.7:Housing0.10.10.10.10.1:Social exclusion n.e.c.0.20.10.10.10.1:Total14.114.414.314.715.0:of which: means-tested benefits0.40.30.20.20.2:General government expenditure by function (% of GDP, COFOG)Social protection11.411.511.411.912.0:Health3.93.73.83.83.7:Education5.75.75.95.95.5:Out-of-pocket expenditure on healthcare (% of total health expenditure):38.539.142.144.6:Children at risk of poverty or social exclusion (% of people aged 0-17)*40.038.435.331.324.723.9At-risk-of-poverty  rate1 (% of total population)19.219.421.222.521.822.1In-work at-risk-of-poverty rate (% of persons employed)8.68.98.19.28.38.8Severe material deprivation rate2  (% of total population)25.624.019.216.412.811.3Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan7.68.310.66.96.97.9Tenant, rent at market price29.923.128.326.725.824.7Proportion of people living in low work intensity households4 (% of people aged 0-59)11.710.09.67.87.27.8Poverty thresholds, expressed in national currency at constant prices*198020292263251727432844Healthy life years (at the age of 65)Females6.44.24.64.04.5:Males5.34.04.04.14.4:Aggregate replacement ratio for pensions5 (at the age of 65)0.50.50.40.40.40.4Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::54.858.763.363.7GINI coefficient before taxes and transfers*53.152.051.249.848.648.1GINI coefficient after taxes and transfers*35.735.235.535.434.534.5 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

1 Value added in constant prices divided by the number of persons employed. 
2 Compensation of employees in current prices divided by value added in constant prices. 
3 The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology.  
4 Average of the answer to question Q7B_a. "[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome?". Answers were codified as follows: zero if received everything, one if received 
75% and above, two if received below 75%, three if refused or rejected and treated as missing values if the application is still 
pending or don't know. 
5 Percentage population aged 15-64 having completed tertiary education. 
6 Percentage population aged 20-24 having attained at least upper secondary education. 
7 Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm  
8 Aggregate OECD indicators of regulation in energy, transport and communications (ETCR). 
Source: "European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of SMEs' applications for bank loans)." 

65 

Performance indicators201220132014201520162017Labour productivity per person1 growth (t/t-1) in %Labour productivity growth in industry-2.44-2.903.134.474.347.86Labour productivity growth in construction10.26-2.352.030.05-7.2513.21Labour productivity growth in market services1.72-0.921.280.072.913.93Unit Labour Cost (ULC) index2 growth (t/t-1) in %ULC growth in industry9.858.445.301.972.830.17ULC growth in construction1.229.717.555.5415.95-6.88ULC growth in market services7.494.296.037.335.004.04Business environment201220132014201520162017Time needed to enforce contracts3 (days)469469469469469469Time needed to start a business3 (days)15.512.512.55.55.55.5Outcome of applications by SMEs for bank loans4:0.851.190.490.840.30Research and innovation201220132014201520162017R&D intensity0.660.610.690.630.440.51General government expenditure on education as % of GDP5.705.705.905.905.50:Number of science & technology people employed as % of total employment444443454546Population having completed tertiary education5252727283030Young people with upper secondary education6848687868587Trade balance of high technology products as % of GDP-1.17-1.03-1.24-1.67-1.31-1.78Product and service markets and competition200320082013OECD product market regulation (PMR)7, overall::1.61OECD PMR7, retail::0.40OECD PMR7, professional services:::OECD PMR7, network industries8::2.66 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 prices) 
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR) 
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR) 
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR) 
          Waste intensity: waste (in kg) divided by GDP (in EUR) 
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP   
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP 
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change) 
Real unit energy cost: real energy costs as % of total value added for the economy 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as % of value added for  manufacturing 
sectors 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP 
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT. 
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste 
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP 
Proportion of GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG emissions 
(excl. land use, land use change and forestry) as reported by Member States to the European Environment Agency. 
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2010 EUR) 
Transport carbon intensity: GHG emissions in transport activity divided by gross value added of the transport industry 
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels 
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk. 
Diversification of the energy mix: Herfindahl index covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels 
* European Commission and European Environment Agency 
Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators) 

66 

Green growth performance201220132014201520162017MacroeconomicEnergy intensity kgoe / €0,230,220,220,210,200,20Carbon intensity kg / €0,580,560,550,540,52-Resource intensity (reciprocal of resource productivity)kg / €2,002,072,022,011,831,95Waste intensity kg / €0,12-0,13-0,12-Energy balance of trade % GDP-6,1-5,6-4,2-3,2-2,3-3,0Weighting of energy in HICP%15,715,915,415,114,313,8Difference between energy price change and inflation %7,3-1,7-1,74,4-6,8-1,4Real unit of energy cost% of value added24,223,722,723,123,5-Ratio of environmental taxes to labour taxesratio0,210,240,260,260,26-Environmental taxes% GDP3,03,23,43,53,63,5Sectoral Industry energy intensity kgoe / € 0,200,190,190,190,180,17Real unit energy cost for manufacturing industry excl. refining% of value added21,020,620,020,621,3-Share of energy-intensive industries in the economy% GDP9,58,68,48,59,0-Electricity prices for medium-sized industrial users€ / kWh0,110,110,120,120,120,12Gas prices for medium-sized industrial users€ / kWh0,040,040,040,030,030,03Public R&D for energy % GDP0,010,010,010,010,010,01Public R&D for environmental protection% GDP0,010,010,010,020,010,01Municipal waste recycling rate%14,725,927,028,725,223,27Share of GHG emissions covered by ETS*%24,023,220,720,019,4-Transport energy intensitykgoe / €0,510,510,520,590,560,55Transport carbon intensitykg / €1,381,401,441,661,55-Security of energy supplyEnergy import dependency%56,455,940,651,247,244,1Aggregated supplier concentration indexHHI47,347,223,141,930,4-Diversification of energy mixHHI0,300,300,290,300,320,35 
 
 
 
 
 
 
ANNEX D: INVESTMENT GUIDANCE ON COHESION POLICY 

FUNDING 2021-2027 FOR LATVIA 

Annex D Investment Guidance on Cohesion Policy Funding 2021-2027 for Latvia (49) 

Building  on  the  Commission  proposal  for  the  next  Multi-Annual  Financial  Framework  for  the  period 
2021-2027  of  2  May  2018  (COM  (2018)  321),  this  Annex  D  presents  the  preliminary  Commission 
services views on priority investment areas and framework conditions for effective delivery for the 2021-
2027 Cohesion Policy. These priority investment areas are derived from the broader context of investment 
bottlenecks,  investment  needs  and  regional  disparities  assessed  in  the  report.  This  Annex  provides  the 
basis  for  a  dialogue  between  Latvia  and  the  Commission  services  in  view  of  the  programming  of  the 
cohesion policy funds (European Regional Development Fund, Cohesion Fund and European Social Fund 
Plus). 

Policy Objective 1: A Smarter Europe – Innovative and smart industrial transformation 

Latvia’s innovation performance lags behind most other EU countries with low added value/complexity, 
high  resource  intensity  and  lack  of  cooperation  and  integration  in  global  value  chains.  This  has  direct 
consequences on the country’s productivity and competitiveness. High priority investment needs (50) have 
therefore been identified to enhance research and innovation capacities and the uptake of advanced 
technologies, where appropriate in cooperation with other countries, in line with the EU Strategy for the 
Baltic Sea Region, and in particular to: 

  strengthen innovation performance and foster productivity growth by identifying smart specialisation 

areas on the basis of national and regional needs and potential; 

 

increase the number of innovative firms in the smart specialisation sectors by fostering research and 
innovation to facilitate the transition towards new technologies and value added activities; 

  strengthen  research  and  innovation  by  increasing  the  attractiveness  and  the  competitiveness  of  the 

research system; 

  support collaborative research between universities and businesses. 

Latvia  rates  highly  in  the  offer  of  digital  public  services  by  the  government  with  some  weaknesses  in 
quality  and  open  data  availability.  However,  companies  and  people  (for  lack  of  skills)  do  not  make 
sufficient use of the digitalisation opportunities. Priority investment needs have therefore been identified 
to reap the benefits of digitalisation for citizens, companies and governments, in particular to: 

  upscale and accelerate e-government, interoperability of systems and open data availability; 

 

 

increase information and communications technology uptake in small and medium-sized enterprises, 
including supporting infrastructures and services; 

increase e-services provision and their uptake, with special focus on rural areas, elderly people and in 
a cross-border context. 

(49)  This Annex is to be considered in conjunction with the EC Proposal for a Regulation of the European Parliament and of the 
Council on the European Regional Development Fund and on the Cohesion Fund COM(2018) 372 and the EC Proposal for a 
Regulation of the European Parliament and of the Council on the European Social Fund Plus COM(2018) 382, in particular as 
regards the requirements for thematic concentration and urban earmarking outlined in these proposals. 

(50)  The intensity of needs is classified in three categories in a descending order – high priority needs, priority needs, needs. 

67 

 
 
                                                           
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Latvia 

In  Latvia  the  level of  private  research  and development  expenditure  is the  lowest  in  the  EU, inevitably 
limiting  the  advancement  of companies  towards  the  technological  frontier,  as  well  as  their  productivity 
and competitiveness. High priority investment needs have therefore been identified to  enhance growth 
and competitiveness of small and medium-sized enterprises, in particular to: 

  promote  entrepreneurship,  in  particular  start-ups  and  accelerators,  also  via  technology  transfer  and 

development programmes and promoting alternative sources of financing; 

  strengthen  the  competitiveness  and  growth  prospects  of  innovative  small  and  medium-sized 

enterprises for more sophisticated products and services, to move up the global value chain; 

  support  small  and  medium-sized  enterprises  to  internationalise  activities  and  identify  new  export 

markets, cooperation networks and interregional clusters, particularly in the Baltic Sea region. 

The  transition  to  new  technologies  in  Latvia  is  hampered  by  low  digital  proficiency  within  companies. 
Moreover,  insufficient  availability  of  skilled  human  resources  is  one  of  the  country’s  biggest  issues.. 
Investment  needs  have  therefore  been  identified  to  develop  skills  for  smart  specialisation,  industrial 
transition and entrepreneurship, in particular to: 

 

reskill and upskill small and medium-sized enterprises in smart specialisation areas, with a particular 
attention to digital skills and entrepreneurship in order to increase productivity; 

  enhance  market  relevance,  innovation  and  viability  of  research  institutions’  projects,  via  ad  hoc 

training activities. 

Policy Objective 2: A low carbon and greener Europe – Clean and fair energy transition, green and 
blue investment, circular economy, climate adaptation and risk prevention (51) 

Latvia's economy is still relatively energy intensive, well above the EU average. Although Latvia is on 
track to achieve its indicative energy efficiency target for 2020, further efforts are needed to achieve more 
ambitious  energy  and  climate  targets  for  2030.  High  priority  investment  needs  have  therefore  been 
identified for energy efficiency and renewable energy, in particular to: 

 

improve energy efficiency in public buildings in housing and in businesses; 

  support further deployment of renewables, including in district heating; 

  deploy solutions for smart electricity distribution grids and storage. 

The  climate  change  risks  Latvia  is  facing  are  coastal  erosion  and  river  floods,  with  impacts  on  the 
economy and infrastructure damage. Investment needs have therefore been identified for climate change 
adaptation, risk prevention, disaster resilience, in particular to: 

  address risks identified in the national risks assessment, with the focus on prevention; 

  promote coordinated and cooperative preventive measures in line with the EU Strategy for the Baltic 

Sea Region. 

(51)  While  outside  of  the  scope  of  the  ERDF  and  the  Cohesion  Fund  (art.  6,  paragraph  1(h),  COM  (2018)372),  energy 
interconnectors could be financed by the Connecting Europe Facility in line with its objectives (art. 3, paragraphs 1 and 2 (b), 
COM(2018) 438) 

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D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Latvia 

Latvia  lacks  a  systematic  approach  to  addressing  recycling  and  waste  issues,  in  particular  separate 
collection and treatment of biodegradable waste. Priority investment needs have therefore been identified 
to promote the transition to a circular economy, in particular to: 

support waste prevention, reuse and recycling; 

develop the use of recycled materials as alternatives to raw materials. 

Equal  accessibility  to  water  services  by  end-users  is  sometimes  challenging,  particularly  in  rural  areas. 
Investment  needs  have  therefore  been  identified  to  promote  sustainable  water  management,  in 
particular to: 

  Complete drinking water and waste water treatment schemes, principally in rural areas. 

Policy  Objective  3:  A  more  connected  Europe  –  Mobility  and  regional  information  and 
communications technology connectivity 

The  transport  infrastructure  in  Latvia  remains  far  below  the  EU  average  standards  in  terms  of  the 
network’s  coverage,  carbon  emissions  and  safety  issues,  with  significant  regional  accessibility  issues. 
High priority investment needs have therefore been identified to develop a sustainable, climate resilient, 
intelligent,  secure  and  intermodal  Trans-European Transport Networks and their  accessibility,  in 
particular to: 

bring national sections of the Trans-European Transport Networks road core and comprehensive network 
to meet EU standards, including safety; 

complete the Trans-European Transport Networks conventional rail core network; 

improve access to the Trans-European Transport Networks and cross border mobility. 

Levels  of  traffic  congestion  in  larger  Latvian  cities  remain  an  issue  due  to  the  limited  coordination  of 
investments with policies for urban transport. Priority investment needs have therefore been identified to 
promote sustainable multimodal urban mobility, in particular to: 

develop  urban  transport  systems  within  relevant  integrated  territorial  development  strategies  and 
sustainable urban mobility plans, with a focus on functional areas. 

There is a significant digital divide, in terms of coverage and take-up, between urban and rural areas in 
Latvia,  even  though  the  country  performs  relatively  well  in  terms  of  overall  broadband  connectivity. 
Investment needs have therefore been identified to enhance digital connectivity, in particular to: 

deploy very-high capacity networks, eliminating coverage gaps in rural and less populated areas; 

improve the cybersecurity and physical security of public very high capacity networks investments. 

Policy Objective 4: A more social Europe – Implementing the European Pillar of Social Rights 

A shrinking working age population, caused in part by ageing and emigration, leads to growing skills and 
labour  shortages;  social  partners’  capacity  is  limited.  Priority  investment  needs  have  therefore  been 
identified to improve access to employment and promote the social economy, in particular to: 

69 

 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Latvia 

strengthen the capacity of labour market institutions and services; 

improve the outreach and coverage of active labour market policies; 

support voluntary sectoral and regional labour mobility; 

promote the social economy and support for start-up social entrepreneurs; 

enhance the work ability of workforce, support safe and healthy working lives; 

foster bipartite social dialogue and support social partners in capacity building. 

The  education  and  training  system  lacks  efficiency;  participation  in  adult  learning  is  low;  and  regional 
differences in access exist. High priority investment needs have therefore been identified to improve the 
quality,  effectiveness  and  labour  market  relevance  of  education  and  training  and  to  promote 
lifelong  learning,  flexible  upskilling  and  reskilling  better  anticipating  change  and  new  skills 
requirements, including through infrastructure, and in particular to: 

improve access to quality and affordable early childhood education and care; 

strengthen work-based learning and incentivise investment in training by employers; 

attract, motivate and retain more students in science and technology related subjects; 

support  training  for  teachers  and  trainers  and  innovative  actions  to  improve  the  attractiveness  of  the 
teaching profession; 

reduce fragmentation in higher education and increase research capacity; 

enhance inclusive quality education for persons with disabilities;  

expand lifelong learning, reflecting anticipation of skills needs; support skills acquisition and recognition, 
including language and digital skills. 

Poverty  and  social  exclusion  remain  high,  especially  for  people  with  disabilities,  the  elderly  and  the 
unemployed;  social  housing  is  scarce  and  income  inequality  is  a  challenge.  High  priority  investment 
needs  have  therefore  been  identified  to  foster  active  inclusion,  improve  employability  and  address 
material deprivation through food and basic material assistance, including accompanying measures, 
and in particular to: 

support integrated active inclusion measures with involvement of local communities and civil society;  

improve access to personalized and integrated social services for disadvantaged groups; 

reduce  homelessness  and  housing  exclusion,  improve  access  to  social  housing,  including  through 
infrastructure. 

70 

 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Latvia 

Health outcomes are weak and timely access to affordable healthcare and long-term care is limited. High 
priority investment needs have therefore been identified to enhance equal and timely access to social, 
healthcare and long-term care services, including through infrastructure, and in particular to: 

ensure equal access to affordable, accessible and good quality social services and healthcare; 

support reskilling, upskilling and retention of healthcare, long-term and social care workforce; 

support  the  transition  from  institutional  care  to  independent  living  and  community-based  care  services 
with a focus on cooperation between health and social services; 

strengthen disease prevention and functioning of healthcare following a person-centred approach. 

Policy  Objective  5  –  A  Europe  closer  to  citizens  by  fostering  the  sustainable  and  integrated 
development of urban, rural and coastal areas and local initiatives 

Latvia’s  principal  cities,  and  Riga  in  particular,  have  played  a  dominant  role  in  Latvia's  speedy 
convergence,  but  there  are  large  disparities  in  income  and  employment  opportunities.  In  particular  the 
lack of affordable housing has been an obstacle to regional development. Also, there is a strong urban-
rural  divide  in  economic  and  social  development.  High  priority  investments  needs  in  tailor-made 
sustainable  and  integrated  development  of  urban,  rural  and  coastal  areas  and  local  interventions, 
addressing urban-rural linkages have therefore been identified in order to complement policies to address 
the socio-economic disparities and the demographic challenges, in particular to: 

improve the attractiveness of urban areas and business environment and create links with the functional 
urban areas; 

address the needs and potential of the areas that are lagging behind in economic and social development, 
by combining adaptation and quality of life measures with investments enhancing growth; 

invigorate the capacity of local authorities to develop sound integrated territorial strategies and to assess 
and select projects. 

Factors for effective delivery of Cohesion policy 

promotion of social innovation and social experimentation of projects and programmes; 

development of a roadmap for administrative capacity building necessary for the effective administration 
and implementation of the Funds; 

improved and more efficient measures to prevent and address conflict of interest, fraud and corruption; 

broader use of financial instruments and/or contributions to a Latvian compartment under InvestEU for 
revenue-generating and cost-saving activities; 

simplified  requirements  and  shorter  procedures  in  the  implementation  of  EU  funds,  particularly  for 
applicants and beneficiaries; 

increased capacity of beneficiaries and intermediate bodies to prepare and implement projects; 

increased partnership capacity of social partners and of civil society organisations; 

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D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Latvia 

improved public procurement performance, in particular by making efforts to reduce the rate of ‘single-
bidding’ and by enhancing e-services and more transparent procurements at municipal level. 

72 

 
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