COMMISSION STAFF WORKING DOCUMENT Country Report Latvia 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 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: 2020-02-26
Institutions: European Commission, Secretariat-General
Subjects: Latvia, economic situation, green economy, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 26.2.2020  SWD(2020) 513 final  COMMISSION STAFF WORKING DOCUMENT Country Report Latvia 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 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(2020) 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 

3.5.  Environmental sustainability 

A.  Overview Table 

B.  DSA statistical annex 

C. 

Standard Tables 

D. 

Investment Guidance on Just Transition Fund 2021-2027 for Latvia 

E. 

Progress towards the Sustainable Development Goals (SDGs) 

References 

LIST OF TABLES 

1.1. 

2.1. 

Key economic and financial indicators - Latvia 

Summary table of 2019 CSR assessment 

C.1. 

Financial market indicators 

C.2. 

Headline Social Scoreboard indicators 

C.3. 

Labour market and education indicators 

C.4. 

Social inclusion and health indicators 

C.5. 

Product market performance and policy indicators 

C.6.  Green growth 

LIST OF GRAPHS 

1.1. 

1.2. 

1.3. 

1.4. 

GDP growth and contribution of components 

Investment growth and contributions, % 

HICP inflation and contributions, % 12-month average year-on-year change 

Selected labour market indicators 

1 

3 

8 

14 

20 

20 

25 

29 

41 

54 

60 

66 

67 

73 

75 

81 

13 

16 

67 

68 

69 

70 

71 

72 

8 

9 

9 

10 

 
 
1.5.  Wages, productivity and unit labour costs, index 2000=100 

1.6. 

1.7. 

2.1. 

Selected social inclusion indicators, % of population 

Current account and its components, % of GDP 

Overall multiannual implementation of 2012-2019 CSRs to date 

3.1.1. 

The fiscal stance and the economic cycle 

3.1.2.  Expenditure growth and the discretionary fiscal effort 

3.1.3.  Estimated tax wedge on labour in 2020, compared to relatively high and relatively low 

levels in other EU countries 

3.1.4.  Effect on income distribution of the increase in the basic allowance presented in the 

budget for 2020 

3.2.1.  House prices / wages ratio, index, 2006=100 

3.3.1.  Unemployment rate by education attainment 

3.3.2.  At-risk-of-poverty rate by age groups 

3.3.3.  Density of practising doctors across regions of Latvia 

3.4.1. 

Labour productivity growth, annual % change 

3.4.2.  Average productivity growth 2013 - 2018, % 

3.4.3.  Unit labour cost growth and its components, % 

3.4.4.  Average real investment growth 2013 - 2018, % 

3.4.5.  Control of Corruption indicator 

3.5.1.  Greenhouse gas emissions, index, 1990=100 

3.5.2.  Greenhouse gas emissions by sector, million tonnes of CO2 equivalent 

3.5.3.  Energy consumption by sector, million tonnes of oil equivalent 

LIST OF BOXES 

2.1. 

EU funds and programmes to address structural challenges and to foster growth and competitiveness in 

Latvia 

3.3.1.  Monitoring performance in light of the European Pillar of Social Rights 
3.4.1.  Administrative & territorial reform in Latvia 
3.4.2. 

Investment challenges and reforms in Latvia 

10 

11 

12 

14 

20 

20 

22 

22 

28 

30 

34 

38 

41 

41 

42 

43 

52 

54 

55 

56 

17 
28 
45 
49 

2 

 
 
 
 
EXECUTIVE SUMMARY 

reforms 

investment.  Key 

Economic  activity  remains  robust  despite 
slowing 
are 
progressing  well,  but  ensuring  that  growth 
benefits all parts of society remains a challenge. 
While investment is set to slow, Latvia’s growth is 
expected to remain robust on the back of a strong 
support  private 
labour  market,  which  will 
longer-term 
a 
growth.  From 
consumption 
perspective,  Latvia  is  among  the  frontrunners  of 
EU convergence; however, as the country becomes 
richer, its income growth will increasingly depend 
on  investments  in  human  capital  and  innovation, 
limited.  Public 
whose  performance  has  been 
finances  have  remained  broadly  sound  with 
government debt decreasing. However, growth has 
not been fully inclusive, as inequality has remained 
high and peripheral regions have lagged behind the 
Riga  region.  Catching  up  with  the  EU  average, 
decarbonising  its  economy  and  spreading  the 
growth benefits more broadly while coping with a 
falling population will be Latvia’s main challenges 
over the coming decades.  

external 

GDP growth is moderating as investment slows 
down  and  exports  face  headwinds  from  a 
deteriorating 
environment.  GDP 
growth reached 2.1% in 2019, marking the end of 
the  EU-fund  fuelled  investment  boom,  which  had 
pushed  GDP  growth  to  above  4%  over  the 
previous  two  years.  While  investment  growth 
declined  from  double-digits  in  2017  and  2018  to 
around 4% in 2019, private consumption remained 
steady, supported by strong labour market and high 
wage  growth.  Declining  financial  and  transport 
services  weighed  on  export  growth  on  the  one 
hand,  while  a  good  harvest  gave  a  boost  to  grain 
exports,  on  the  other.  Overall,  though,  slowing 
in  Latvia’s  export 
foreign  demand  reflected 
growth, which in 2019 was 2.7%, down from 4.0% 
the year before. Looking forward, growth is set to 
remain stable at around 2½ % over 2020 and 2021.  

its  upward 

from  7.4% 

Labour  market  performance  is  strong.  The 
employment  rate  continued 
trend 
(76.8% in 2018), on the back of a declining labour 
force. The unemployment rate declined to 6.4% in 
2019 
long-term 
unemployed  and  young  people  also  continue  to 
benefit from the steady improvement in the labour 
market,  but  regional  and  skills  level  disparities 
persist.  Unemployment  is  forecast  to  fall  further 
over  the  coming  years,  mainly  because  the  labour 

in  2018.  The 

supply  is  expected  to  continue  shrinking  due  to 
population decline. 

in 

labour  supply 

is  driving  rapid 
Declining 
increase 
labour  cost,  but  risks  remain 
limited.  Over  the  past  six  years  Latvia  has  had 
some of the highest increase in labour cost among 
the  EU  countries.  They  are  primarily  a  result  of 
declining labour supply stemming from population 
ageing and emigration. The growth in labour costs 
has  far  outpaced  productivity  growth  in  recent 
years, 
raising  concern  about  Latvia’s  cost 
competitiveness. Yet, so far Latvia has managed to 
expand  its  export  market  shares  and  with  the 
current  account  broadly  balanced  and  low  credit 
growth,  the  risk  of  overheating  is  contained.  On 
the positive side, the rising incomes may help stem 
the emigration, which has been the major driver of 
the population decline in the first place.  

Latvia’s  main  economic  objective  remains 
steady 
the  EU 
income  convergence  with 
average. Latvia’s income per capita has increased 
by 22% over the past  five  years  with productivity 
growth being the main driver. Yet, in 2018 it stood 
at only 69% of EU average and income difference 
with 
the  EU  remains  a  powerful  driver  of 
emigration.  Therefore,  continued  convergence 
remains  Latvia’s  key  challenge  both  in  terms  of 
improving  its  population’s  living  standard  and  of 
halting  emigration.  Productivity  growth  has  been 
solid  throughout  the  post  crisis  period.  However, 
concerns about sustained convergence with the EU 
average persist due to Latvia’s rising infrastructure 
costs  resulting  from  declining  population,  poor 
innovation  performance  and  underinvestment  in 
human capital.  

income  distribution 

Inequality in income and opportunities remains 
significant.  The 
is  more 
unequal  in  Latvia  than  in  the  EU  on  average,  and 
the situation  worsened in 2018. The redistribution 
through  taxes  and  social  transfers  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.  Notably,  the  elderly  and  people  with 
disabilities 
rates. 
Moreover, access to healthcare is more difficult for 
low-income  groups,  and  the  quality  of  education 
remains unequal between larger urban and smaller 
rural schools. Furthermore, there are large regional 
disparities  in  income  levels,  with  the  poorest 

experience  high  poverty 

3 

regions  enjoying  only  around  half  of  the  income 
level enjoyed in Riga. 

Skills shortages and mismatches are among the 
main obstacles to business investment and limit 
productivity  growth.  Limited  labour  supply  has 
led  to  shortages  of  skilled  workers.  At  the  same 
time,  low-skilled  workers  are  less  in  demand  and 
face  higher  unemployment.  Strong  growth  in  the 
construction  sector  absorbs  some  of  the  low  and 
medium-skilled  workforce,  while  upskilling  and 
adult  learning  had  little  impact  in  reducing  skills 
mismatches. The low level of digital skills among 
the 
the  use  of  digital 
technologies  by  businesses  and  the  potential  for 
innovation.  Moreover, 
job  opportunities  are 
labour 
concentrated 
mobility  from  less  dynamic  areas  is  hampered  by 
the  availability  of  affordable  housing  and  poor 
transport connections.  

in  urban  centres  while 

labour 

limits 

force 

Public  expenditure  growth  is  being  restrained 
following  the  recently  enacted  tax  cuts.  The 
labour and corporate tax cuts over 2018-2020 have 
revenue-
only  been  partly  compensated  by 
increasing measures. As a result, both government 
revenue  and  expenditure  shares  in  GDP  are 
expected to decline between 2018 and 2020.  

The  size  of  the  shadow  economy  has  declined, 
but  remains 
to  other  EU 
large  relative 
countries.  The  large  informal  economy  reduces 
government’s  revenue  and  its  spending  capacity, 
as  well  as  distorts  competition  and  resource 
allocation. Firms involved in informal activity stay 
small  and  ready  to  close  down  once  detected. 
Banks  are  reluctant  to  lend  to  such  firms.  While 
their share is decreasing, many employees are still 
partially  or  fully  undeclared,  facing  lower  social 
protection. 

Latvia can boost its long-term growth potential 
by  focusing  private  and  public  investments  on 
capital  and 
innovation,  human 
regional 
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 
increasingly 
knowledge-intensive 
on 
activities.  Latvia’s  weakest  point  has  been 
innovation, which requires investments in research 

rely 

Executive summary 

developing 

development, 

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, 
identifying 
green 
technologies,  sustainable  solutions,  and  securing 
adequate  funding  will  be  key  to  deliver  on  the 
climate  and  energy  objectives  and  shape  a  new 
growth model. 

investments 

investment 

needs 

in 

Latvia  has  made  some  progress  in  addressing 
the 2019 country-specific recommendations.  

Substantial 
strengthening the anti-money laundering system. 

been  made 

progress 

has 

in 

There  has  been  some  progress  in  the  following 
areas:  

 The tax wedge on labour has been reduced and 
is closer to the EU average. 

 Taking  steps  to  address  social  exclusion  by 
improving  the  guaranteed  minimum  income, 
minimum  pensions  and  income  support  for 
persons  with  disabilities 
in  2020.  The 
adequacy of benefits, however, remains low. 

the 

accountability 

 Improving 
the 
efficiency of public administration. Latvia has 
launched a reform of territorial administration 
aiming  to  improve  to  the  governance  of 
municipalities. 

and 

 Efforts  to  improve  accessibility,  quality  and 
system 
cost-effectiveness  of 
continue. However, public financing for health 
is set to decline as a share of GDP in 2020. 

the  health 

to 

resources 

for 
consolidate 
 Measures 
education, including the large school network, 
while  improving  quality  and  efficiency  have 
been  delayed.  Reforms  to  improve  vocational 
education  and  training  are  ongoing,  but  their 
attractiveness  remains  low.  There  are  no  new 
improve  provision  of  adult 
measures 

to 

 

 

 

 

 

4 

 
Executive summary 

learning.  Plans  to  develop  a  comprehensive 
skills strategy are ongoing. 

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

Latvia's  performance  on  the  indicators  of  the 
Social  Scoreboard  supporting  the  European 
Pillar  of  Social  Rights  point  to  a  number  of 
employment  and  social  challenges,  but  also 
some  positive  outcomes.  Latvia’s  labour  market 
performance  has  been  solid  in  recent  years. 
Employment  levels  have  reached  historic  highs 
and  the  gender  employment  gap  is  among  the 
lowest  in  the  EU.  Nevertheless,  disparities  in 
levels 
employment  across  regions  and  skills 
persist.  In  addition,  growth  has  not  been  fully 
inclusive,  as  inequality  remains  high.  The  risk  of 
poverty  or  social  exclusion  has  slightly  increased 
as  the  situation  continues  to  worsen  for  people 
with disabilities, older people and the unemployed. 
Access to affordable healthcare is a challenge and, 
although  self-reported  unmet  needs  for  medical 
care are decreasing, they remain high. 

 

targets  under 

 Latvia  is  likely  to  meet  most  of  its  2020 
targets  except  investment  in  research  and 
development. Regarding progress  towards its 
national 
the  Europe  2020 
strategy,  Latvia  has  attained  its  employment 
rate target and renewable energy target. It met 
its targets on preventing early school leaving, 
tertiary  education  attainment  in  2016,  and  is 
progressing well containing its greenhouse gas 
emission  growth.  At  the  same  time,  with  its 
energy consumption continuing to increase, it 
is  at  moderate  risk 
its  energy 
efficiency  target.  However,  it  is  far  from  its 
public  research  and  development  investment 
target,  which are  unlikely  to  be  met by 2020. 
Moreover,  due  to  an  increase  in  relative 
poverty,  Latvia  has  moved  away  from  its 
poverty target. 

to  miss 

Latvia is progressing well on most United Nations’ 
Sustainable  Development  goals  with  slower 
progress 
innovation  and  reducing 
inequalities (1).  

in  health, 

(1)  Within the scope of its legal basis, the European Semester 
can help drive national economic and employment policies 
towards 
the  United  Nations’ 
Sustainable  Development  Goals  (SDGs)  by  monitoring 
progress  and  ensuring  closer  coordination  of  national 
efforts.  The  present  report  contains  analysis  of  Latvia’s 

the  achievement  of 

 

 

 

5 

of 

are 

labour 

revenue 

 Latvia’s tax revenue share in GDP has been 
reduced  by tax cutting  measures.  The  main 
sources 
and 
consumption  taxes,  while  the  share  of  capital 
taxes  is  low  and  has  been  further  reduced  by 
the  corporate  tax  reform.  Property  taxation 
remains  based  on  outdated  values,  which 
reduces  revenue  from  recurrent  property 
taxation  over  time.  The  low  government 
revenue  share  in  GDP  limits  the  capacity  to 
finance  public  spending  on  social  protection 
and healthcare,  which are lower than in other 
Member States.  

 While  mortgage lending is  boosted by state 
support,  overall,  credit  growth  remains 
low.  While  total  credit  growth  has  picked  up 
over  the  past  year  or  so,  it  follows  a  long 
period  of  negative  growth.  Measured  over 
medium  term,  it  has  remained  substantially 
below  nominal  GDP  growth  rate.  State 
support  for  home  buying  to  families  has 
boosted the mortgage lending somewhat but it 
remains  substantially  below  the  mortgage 
growth  in  the  other  Baltics.  Credit  growth  is 
constrained  by  the  prevalence  of  the  shadow 
economy and the legacy of the 2009 financial 
crisis,  which  damaged  many  households’ 
credit  history.  At  the  same  time,  Latvia’s 
banking sector remains financially sound. 

 Latvia has reduced the flow of risky money 
through  its  banks  and  overhauled  its  anti-
money laundering system. Latvia has taken a 
number  of  major  steps  to  ensure  its  financial 
system  is  not  used  for  money  laundering  and 
terrorist  financing.  By  banning  the  servicing 
of  non-resident  shell  companies,  Latvia  has 
substantially reduced the flow of risky money 
through 
it  has 
its  banks.  Furthermore, 
amended  a  number  of  laws  to  improve  the 
governance  and  clarify  responsibilities  of 
main stakeholders. Finally, it has strengthened 
the  capacity  of  key  supervisory,  financial 
intelligence and law enforcement institutions. 

progress towards the SDGs. Annex E presents a set of SDG 
indicators for Latvia. 

 
                                                           
                                                                                   
 
  Latvia's 

labour  market  performance 

is 
positive overall, but upskilling of the labour 
force is weak. While overall unemployment is 
less  skilled,  older  workers,  ethnic 
low, 
minorities  and  those  living  in  rural  areas  still 
face higher unemployment. Their participation 
in adult learning and in measures that facilitate 
return to employment is low. Digital skills are 
also  below  the  EU  average.  Sectoral  level 
bargaining 
strengthened,  but  overall 
capacity of social partners remains limited.  

is 

  Latvia’s education system performs well in 
terms  of  basic  skills  proficiency,  but 
improving  efficiency  and  ensuring  quality 
for  all  remains  a  challenge.  Student 
outcomes are above the EU average, however, 
urban  schools  on  average  outperform  rural 
schools.  The  government  faces 
twin 
the 
challenges  of  streamlining 
large  and 
the 
inefficient  school  network,  and  to  renew  the 
improving 
teaching  workforce  by 
the 
attractiveness  of 
teaching  profession. 
Reforms  in  these  areas  have  not  yet  brought 
improvements.  The 
about 
government has taken steps to consolidate and 
improve  higher  education,  but  the  system 
remains 
fragmented  and  not  sufficiently 
competitive  at  international  level.  While  the 
tertiary  education  attainment  rate  is  high,  the 
proportion of science, technology, engineering 
and mathematics graduates is low. Vocational 
education  and  training  are  being  modernised, 
but  the  share  of  students  in  this  type  of 
education is below the EU average. 

the  desired 

the 

 

 Measures  to  address  the  high  risk  of 
poverty  or  social  exclusion  are  limited. 
Poverty is prevalent among the elderly, people 
with disabilities, and the unemployed. Tax and 
benefit  policy  changes  over  the  period  2008-
2018  have  had  made  little  difference.  The 
minimum  income  level,  minimum  pensions 
and support for persons  with  disabilities  have 
increased  from  2020,  but  less  than  initially 
expected. Meanwhile, unemployment benefits 
have  been  reduced.  Moreover,  there  are  gaps 
in  social  protection  for  self-employed  and 
non-standard  workers.  Low-income  groups 
have  poor  housing  conditions  and  access  to 
social housing is limited.  

Executive summary 

 Low  public  spending  for  healthcare  and 
unhealthy  lifestyle  choices  constitute  the 
main  reasons  for  the  population’s  poor 
health.  Reforms  to  boost  efficiency  and 
quality  in  healthcare  have  been  initiated,  but 
remain  at  early  stages.  Health  workforce 
shortages,  especially  in  regions  outside  Riga 
and  in  the  nursing  sector  in  general,  hinder 
access to health services and pose risks to the 
implementation of health reforms. An increase 
in  public  financing 
in  recent  years  has 
improved  the  availability  of  health  services 
and  reduced  the  waiting  times.  However, 
public  spending  for  health  is  set  to  remain 
well  below  the  EU  average  in  the  coming 
years.  Investments  would  be  needed  in  order 
to  and  quality  of 
to  ameliorate  access 
healthcare, 
geographical 
improve 
availability  of  health  services  and  implement 
the planned reforms. 

the 

it  will  need 

 Reducing  energy  consumption  in  transport 
and housing are Latvia’s key climate policy 
challenges. Latvia’s greenhouse gas emissions 
per  capita  are  among  the  lowest  in  the  EU. 
This  is  because  its  energy  consumption  per 
capita  is  lower  than  the  EU  average  and  the 
share  of  renewable  energy  is  among  the 
highest in the EU. However, in order to meet 
its  2030  target  for  greenhouse  gas  emissions, 
it  will  need  to  break  the  current  trend  of 
increasing  energy  consumption  in  transport 
to 
and  housing.  Moreover, 
continue  increasing  the  share  of  renewables, 
which it has successfully done in  heating and 
power generation sectors, but has struggled to 
do  in  transport.  In  addition,  it  will  need  to 
boost  its  circular  economy  performance  and 
improve  the  sustainability  of  its  agricultural 
and  forestry  practices.  The  Commission’s 
proposal  for  a  Just  Transition  Mechanism 
financial 
under 
framework for the period 2021-2027, includes 
a  Just  Transition  Fund,  a  dedicated  just 
transition  scheme under InvestEU, and a new 
public  sector  loan  facility  with  the  EIB.  It  is 
designed  to  ensure  that  the  transition  towards 
EU  climate  neutrality  is  fair  by  helping  the 
most affected regions in Latvia to address the 
social  and  economic  consequences.  Key 
priorities  for  support  by  the  Just  Transition 
Fund,  set  up  as  part  of  the  Just  Transition 
in  Annex  D, 
identified 
Mechanism,  are 

next  multi-annual 

the 

 

 

6 

 
 

 

 

building  on  the  analysis  of  the  transition 
challenges outlined in this report. 

little 

invests 

faces  a 

in  research  and 
 Latvia 
innovation  and 
shortage  of 
researchers.  In  2018,  Latvia  invested  0.64% 
of GDP in research and innovation, which was 
among  the  lowest  in  the  EU.  Moreover,  the 
investment is highly dependent on EU funding 
and has not noticeably increased for more than 
a  decade.  The  serious  underfunding  of  the 
system  hinders 
its 
attractiveness to researchers, especially young 
researchers.  Moreover,  the  system  suffers 
from  governance 
the 
positive  side,  Latvia  has  a  vibrant  start-up 
innovation 
community,  which  boosts 
output somewhat against a backdrop of rather 
weak performance on other fronts. 

its  effectiveness  and 

fragmentation.  On 

its 

is 

a  major 
undertaking 
 Latvia 
administrative  territorial  reform  aiming  to 
improve  the  functioning  of  municipalities. 
Latvia  has  begun  work  to  consolidate  its  119 
municipalities  to  less  than  40.  The  reform 
aims  to  increase  the  municipalities’  capacity 
to  foster  development  and  provide  better 
quality  services.  The  larger  municipalities, 
however,  will  need  to  make  infrastructure 
investments  to  ensure  quality  public  services 
are  accessible  to  citizens  living  further  away 
from the centres of the  new  municipalities.  A 
participatory  approach  with  involvement  and 
commitment of all stakeholders is important to 
ensure 
swift 
sustainability 
implementation of the reform.  

and 

the 

of 

the 

quality 

against 

justice  system 

is  taking  steps  to 

improve  the 
 Latvia 
effectiveness  of  its  justice  system  and  the 
corruption.  However, 
fight 
improving 
public 
procurement  remains  a  challenge.  The 
quality  of 
is  being 
the 
improved,  particularly  by 
introducing  a 
unified  complaints  portal  and  evening  out 
workload.  It  is  also  progressing  well  on 
fighting corruption as evidenced by gradually 
improving corruption perception figures and a 
reinforced  capacity  to  investigate  corruption, 
including high  profile  cases.  However,  in 
European  comparison  corruption  perception 
remains high. Shortcomings remain as regards 

Executive summary 

the  oversight  of  implementation  of  anti-
corruption  actions.  Transparency  in  public 
procurement  could  be  improved,  considering 
that  the  negative  perception  among  business 
of the fairness of procurement process remains 
high. This in turn could enhance competition.  

7 

 
1.  ECONOMIC SITUATION AND OUTLOOK 

growth  in  2020  is  set  to  benefit  slightly  from  the 
good  harvest  of  2019.  However,  this  will  not  be 
enough  to  compensate  for  the  drag  on  growth 
coming from weakening external demand. Overall, 
growth  is  forecast  to  reach  2.3%  in  2020  and 
increase slightly to 2.4% in 2021.  

Consumption 

the 

slowdown 

Despite 
in  2019,  private 
consumption is set to remain strong on the back 
of  robust  growth  in  real  disposable  income.  In 
2019,  household  consumption  is  forecast  to  have 
grown  by  3.2%,  somewhat  lower  than  the  4.2% 
growth in 2018. The slowdown was primarily due 
to  lower  employment  growth  and  higher  inflation 
which  both  restrained  disposable  income  growth. 
However,  with  the  labour  market  set  to  remain 
tight,  robust  wage  growth  combined  with  abating 
inflation  are  expected  to  ensure  solid  growth  of 
income  and  by  extension  –  private 
real 
consumption.  Consumer  confidence  remains  high, 
providing further support for private consumption.  

Investment 

their  peak 

funds  approach 

Investment is set to gradually slow as inflows of 
EU 
in  2020. 
However,  the  beginning  of  the  Rail  Baltica 
project is expected to boost investments in 2021. 
In  2019,  investment  is  forecast  to  have  grown  by 
4.5%  -  notably  less  than  the  double-digit  growth 
rates  seen  in  2017  and  2018.  Due  to  EU  fund 
inflows  levelling  off,  public  investment  growth 
declined  significantly  while  the  momentum  in 
private  investment  held  up  better.  In  2020,  public 
investment  is  expected  to  decline  slightly  while 
moderate  growth in private investment should put 
the total growth rate  in low positive territory. The 
construction related to the Rail Baltica project (see 
Section 3.4) is expected to begin at the end of 2020 
and  should  boost  the  investment  growth  rate  in 
2021.  

GDP growth 

In 2019, growth slowed as the investment cycle 
matured  and  external  demand  weakened.  At 
the  same  time,  continuously  strong  private 
consumption  helped  sustain  a  healthy  growth 
rate.  GDP  growth  is  expected  to  have  reached 
2.1%  in  2019. The  growth  rate  of  all  components 
slowed compared to 2018, with investment seeing 
the sharpest decline. The slowdown of investment 
and  construction,  in  particular,  led  to  lower 
employment growth, which in turn had a knock-on 
effect 
consumption.  While 
weakening  external  demand  weighed  on  exports, 
they  maintained  solid  growth  thanks  to  dynamic 
services export. The falling labour supply ensured 
that  the  unemployment  rate  continued  to  decline 
despite 
in  employment. 
Inflation accelerated somewhat compared to 2018, 
notably  due  to  an  increase  in  food  and  utilities 
price growth. 

less  buoyant  growth 

household 

on 

Graph 1.1:  GDP growth and contribution of components 

Source: European Commission 

The  Commission's  Winter  Forecast  projects 
growth to remain broadly constant in 2020 and 
2021  as  slightly  stronger  domestic  demand  is 
expected  to  compensate  for  falling  export 
growth. Private consumption is set to benefit from 
rapid  wage  growth  and  slowing  inflation,  thus 
being  the  main  growth  driver.  Investment  growth 
meanwhile  is  expected  to  decelerate  further  in 
2020 before recovering somewhat in 2021. Export 

8 

  
1. Economic situation and outlook 

Graph 1.2: 

Investment growth and contributions, % 

inflation 

therefore  slow 
this  year  and  next. 
Inflation is forecast at 2.5% in 2020 and at 2.3% in 
2021. 

Graph 1.3:  HICP inflation and contributions, % 12-month 
average year-on-year change 

Source: European Commission 

Labour market 

investment  growth  projected 

At 6.4% in 2019, the unemployment rate edges 
closer to its record low as wage growth remains 
high.  In  2019  the  unemployment  rate  dropped  to 
6.4% from 7.4% in 2018. The unemployment rate 
continued falling despite a forecast 0.4% decline in 
employment — this was due to the declining active 
population. Employment was down in trade, while 
in  construction  it  continued  to  grow.  However, 
to  slow, 
with 
employment  demand  from  the  construction  sector 
should  also  fall.  Nonetheless,  a  continued  decline 
of  the  labour  force  is  expected  to  keep  the 
falling 
unemployment 
employment — it is forecast to remain at 6.4% in 
2020  and  2021.  The  continued  decline  of  the 
working  age  population 
to  ensure  a 
dwindling  active  population.  Altogether,  this  will 
ensure  the  labour  market  remains  tight  over  the 
forecast  horizon,  exerting  upward  pressure  on 
wages.  

rate  constant  despite 

is  set 

Source: European Commission 

Trade 

Exports slow amid weakening external demand 
while  decelerating  investment  curbs  import 
growth.  In  2019,  exports  are  forecast  to  have 
grown  by  2.7%,  down  from  4.0%  in  2018.  The 
slowdown  is  partly  due  to  a  drop  in  re-exports. 
However, there was also a slowdown in growth in 
exports  of  domestically  produced  merchandise, 
most  notably  wood  products,  after  the  boost  from 
high  timber  prices  of  previous  years.  On  the 
positive  side,  services  export  growth  improved 
compared  to  2018  thanks  to  the  especially  strong 
performance  of  business  and  IT  services  exports, 
which outweighed the languishing transport sector 
— Latvia’s biggest services export sector. Over the 
coming years, export growth is unlikely to improve 
significantly  given  the  weakening  demand  from 
the country’s main export markets.  

Inflation 

Inflation  reaches  its  peak  in  2019  as  food  and 
utility  prices  drove  it  past  the  3  per  cent 
mark. HICP  inflation  reached  3.1%  in  2019,  up 
from  2.6%  in  2018. The  pick-up  in  inflation  was 
due to hikes in the prices of several utilities at the 
beginning  of  the  year,  a  pick-up  in  inflation  for 
industrial goods and a spike in the growth of food 
prices,  which was partly the result of the previous 
year’s  poor  harvest.  Services  price  growth  at  the 
same time remained stable, hovering around  3 per 
cent.  It  is  expected  that  the  acceleration  in  utility 
and food prices will have been temporary and will 

9 

-3.00-2.00-1.000.001.002.003.004.005.002009201020112012201320142015201620172018Processed foodUnprocessed foodIndustrial goodsEnergyServicesTotal  
  
1. Economic situation and outlook 

Graph 1.4: 

Selected labour market indicators 

Graph 1.5:  Wages, productivity and unit labour costs, 

index 2000=100 

Source: European Commission 

Labour  supply  is  expected  to  continue  falling 
and  skills  mismatches  have  emerged.  The 
reduced  labour  supply  –  the  outcome  of  natural 
population  decline  and  emigration  –  has  led  to 
emerging labour shortages and a tightening labour 
market. In addition, skills mismatches prevail with 
large  and 
the 
unemployment  rates  of  different  skills  groups 
(Section 3.3.1).  

increasing  differences  among 

Wages and productivity 

Rapid  wage  growth  drives  unit  labour  cost 
appreciation.  Nominal  wages  grew  by  8.5%  in 
2019, up from 7.6% growth in 2018. Wages have 
been increasing at a brisk pace for some time now 
with the average wage growth over the past 5 years 
reaching 7.9%, substantially above the EU average 
of  1.6%.  Productivity  growth  has  also  been  fairly 
rapid  with  3.0%  growth  in  2019,  slightly  higher 
than the 2.8% average growth rate over the past 5 
years.  Wage  growth,  however,  has  outpaced 
productivity  growth by  some  margin,  leading to a 
significant appreciation in unit labour costs, which 
grew by 5.3% in 2018 and the three-year growth of 
14.7%  is  above  the  macroeconomic  imbalance 
procedure  threshold  of  12%.  In  2019,  unit  labour 
cost growth is expected to have slowed along with 
slowing  wage  growth.  However,  looking  forward, 
the  tight  labour  market  is  set  to  continue  driving 
swift  wage  growth,  which  may  lead  to  elevated 
unit labour cost growth. 

Source: European Commission 

Income level 

In  2018,  Latvia’s  GDP  per  capita  stood  at 
nearly 70% of the EU average. In 2018, Latvia’s 
GDP  per  capita  increased  by  5.4%  —  among  the 
highest  growth  rates  in  the  EU.  It  was  driven  in 
equal  parts  by  productivity  growth,  which 
increased  by  3.0%  and  by  growth  in  the  share  of 
the  employed  population,  which  increased  by 
2.4%.  In  purchasing  power  parity  terms,  it  was 
69.3% of the EU average, more than 3 percentage 
points higher than the year before. However, there 
are  significant  regional  differences  in  GDP  per 
capita  within  the  country  —  in  2016,  in  Riga  it 
stood at 165% of the national average, while in the 
other  regions  it  was  below  the  national  average 
with  the  poorest  region  —  Latgale  —  producing 
only 51% of the national average. The differences 
in  wage levels are smaller,  with the Riga region’s 
wages  being  113%  compared  with  Latgale’s  69% 
of the national average.  

Social developments 

While severe material deprivation has declined, 
relative poverty has worsened and both remain 
above  the  EU  average.  In  line  with  the  gradual 
improvement in labour market indicators, the share 
of people living in low-work  intensity  households 
has been falling for a number of years and reached 
7.6  %  in  2018,  down  from  10  %  in  2013.  This 
however,  has  not  been  sufficient  to  alleviate 

10 

0102030405060708090051015202530354020002001200220032004200520062007200820092010201120122013201420152016201720182019Activity 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)701201702202703203704204705202000200120022003200420052006200720082009201020112012201320142015201620172018LVNominal compensation per employeeReal productivity per personNominal unit labour cost 
  
 
  
1. Economic situation and outlook 

limited 

Unequal  opportunities  in  access  to  education 
and  healthcare  persist.  According  to  the  OECD 
Programme  for  International  Student  Assessment 
(PISA),  the  education  system  is  rather  equitable, 
socioeconomic  background  exerting  a 
with 
relatively 
learning 
influence 
achievement  in  reading.  At  the  same  time,  access 
to  quality  education  remains  dependent  on  the 
place  of  residence,  and  urban  schools  outperform 
rural  ones  (Section  3.3.4.).  A  similar  urban-rural 
divide  exists  in  access  to  healthcare.  Moreover, 
low-income  groups  report  significantly  more 
unmet  needs  for  medical  services  than  high-
income groups (Section 3.3.3.).  

on 

External position 

The  current  account  remains  close  to  balance. 
In  2019,  the  current  account  is  forecast  to  have 
recorded  a  deficit  of  0.8%  of  GDP,  similar  to  the 
previous  year.  The  main  forces  at  work  in 
determining the current account balance are (i) EU 
fund inflows,  which are partly  spent on importing 
investment  goods,  and  (ii)  household  savings 
growth  in  excess  of  domestic  investments,  which 
need  to  find  an  investment  outlet  outside  of  the 
country.  Consequently, 
international 
investment position  has continued  to improve and 
stood  at  minus  50%  of  GDP  at  the  end  of  2018, 
from  minus  83%  of  GDP  in  2010.  While  still 
relatively  high,  the  associated  economic  risks  are 
limited,  because  this  net  investment  position  is 
mostly  composed  of  foreign  direct  investment, 
while the investment position excluding equity was 
close to balance at the end of 2018.  

the  net 

poverty,  due  to  the  presence  of  high  in-work 
poverty in the low work intensity households. The 
at-risk-of-poverty  rate,  a  measure  of  relative 
poverty, increased to 23.3 % in 2018 from 19.4 % 
in  2013,  above  the  EU  average  of  17.1 %. 
Meanwhile,  severe  material  deprivation  showed  a 
marked  decline  from  24%  in  2013  to  9.5%  in 
2018, but remains somewhat above the EU average 
of  5.9%  (see  Graph  1.6).  In  2018,  the  overall  at-
risk-of-poverty-or-social-exclusion  rate  of  28.4% 
also masked large differences between age groups, 
with  the  elderly  (65+)  facing  a  much  higher  risk 
compared  to  children  or  those  of  working  age 
(49%  as  opposed 
to  22.5%  and  23.5  % 
respectively) (Section 3.3.2). 

Graph 1.6: 

Selected social inclusion indicators, % of 
population 

Source: European Commission 

Income  inequality  remains  well  above  the  EU 
average.  While  reducing  inequality  is  one  of  the 
main goals of Latvia’s national development plan, 
Latvia  is  unlikely  to  achieve  its  national  target  to 
bring inequality down to the EU average by 2020. 
Income inequality as measured by the S80/S20 has 
risen  in  the  post-crisis  period  and  is  among  the 
highest  in  the  EU.  In  2018,  the  ratio  stood  at  6.8 
compared  with  the  EU  average  of  5.2.  While 
income  inequality  before  taxes  and  benefits  is 
below  the  EU  average,  inequality  after  taxes  and 
benefits,  remains  high,  due  to  its  relatively  small 
role  in  redistributing  income.  A  key  driver  is  the 
low  income  of  elderly  households  whose  median 
income  level  is  less  than  three  quarters  of  that  of 
the general population.  

11 

05101520253035404550At-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households  
1. Economic situation and outlook 

Graph 1.7:  Current account and its components, % of 

GDP 

challenges  (SDG 12,  see  Section 3.5).  Finally, 
while  Latvia’s  economic  performance  has  overall 
been  good,  as  its  income  per  capita  growth  over 
the past decade has been  remarkable (SDG 8, see 
Sections 1 and 3.4), its innovation performance is 
poor  and  has  seen  little  progress  in  recent  years 
(SDG 9, see Section 3.4).  

Source: European Commission 

Public finances 

The  general  government  balance 
improved 
slightly in 2019. The general government deficit is 
forecast  to  have  been  0.6%  of  GDP  in  2019, 
slightly  better  than  the  0.7%  of  GDP  deficit  in 
2018.  The  government  balance  is  set  to  remain 
broadly  stable  in  2020  and  2021,  while  the 
government debt is expected to continue falling to 
reach  32.9%  of  GDP  in  2021.  The  Commission 
estimates  that  the  output  gap  will  remain  positive 
but will be shrinking throughout 2019-2021.  

Key sustainability challenges 

in  health, 

labour  market 

Latvia  progresses  well  on  most  United  Nation’s 
Sustainable  Development  goals  with  slower 
innovation  and  reducing 
progress 
inequalities.  Latvia  has  among  the  highest  shares 
of renewable energy among EU countries (SDG 7, 
see  Section 3.5),  it  scores  above  EU  average  on 
indicators 
most  education  and 
(SDGs  4  and  8,  see  Section  3.3.4).  However, 
inequality  in  Latvia  is  high  and  has  seen  little 
progress  over  medium  to  long  term  (SDG10,  see 
Section  3.3.3).  This  is  also  reflected  in  Latvia’s 
health  outcomes  (SDG 3,  see  Section  3.3.3)  and 
social  protection 
(SDG 1,  see  Section 3.3.2) 
remaining below EU average, as these sector have 
significantly  underfunded.  Furthermore, 
been 
breaking  the  trend  of  rapidly  growing  energy 
consumption  and  improving  the  recycling  rates 
the  key  environmental  sustainability 
remain 

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)  
1. Economic situation and outlook 

Table 1.1: 

Key economic and financial indicators - Latvia 

(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: Source: Eurostat and ECB as of 9-1-2020, where available; European Commission for forecast figures (Autumn forecast 
2019) 

13 

 
  
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

of 

on 

all 

95% 

some 

Since  the  start  of  the  European  Semester  in 
2011, 
country-specific 
recommendations  addressed  to  Latvia  have 
recorded at least ‘some progress’. In 2019, work 
advanced 
long-standing 
recommendations,  with  ‘some  progress’  made  in 
improving 
the  adequacy  of  minimum  social 
benefits  and  public  administration  reform  has 
helped 
improve  governance  of  municipalities. 
Moreover,  the  taxation  of  low  wages  (the  tax 
wedge)  has  been  notably  reduced  over  the  years 
past  few,  bringing  it  in  line  with  the  benchmark 
against other EU countries in 2020. However, this 
reduction in the tax on labour has been only partly 
compensated  by  other  tax  measures,  showing 
‘limited  progress’  over  time  (Graph 2.1).  Latvia 
has  achieved  ‘substantial  progress’  and  ‘full 
implementation’ in introducing a fiscal governance 
framework,  reforming  the  pension  system  a  few 
the  anti-money 
years  ago  and  strengthening 
laundering system more recently.  

Graph 2.1:  Overall multiannual implementation of 2012-

2019 CSRs to date 

(1) The overall assessment of the country-specific 
recommendations related toon fiscal policy exclude 
compliance with the Stability and Growth Pact. 
(2) The multiannual CSR assessment of the country-specific 
recommendations looks at their implementation since from 
the CSRs time they were first adopted until the February 2020 
Country report. 
Source: European Commission 

Latvia  is  committed  to  fiscal  discipline  and  the 
tax  wedge  for  low  wages  has  been  reduced. 
Latvia  corrected  its  excessive  government  deficit 
in  2012  and  since  then  has  strived  to  maintain 
government borrowing within the limits set by the 
well-established fiscal governance framework. The 
increase  in  the  income-dependent  basic  allowance 
in  2020  should  reduce  the  tax  wedge  for  low 
wages,  thus showing a substantial progress in this 
respect.  However,  Latvia  has not ensured revenue 
neutrality  of  the  recent  tax  changes  with  the  tax 

to  Latvia.  Tax  compliance 

revenue  from  capital  and  property  declining, 
contrary  to  what  has  been  recommended.  This 
limits  its  capacity  to  address  the  social  reforms 
is 
recommended 
gradually improving, but  more  could still be  done 
by  closing  tax  policy  loopholes,  like  the  micro-
enterprise  tax  regime,  and  by  tackling  more 
decisively shadow activity in several sectors of the 
economy.  

Some  progress  has  been  made  in  carrying  out 
social policy reforms, but their implementation 
is  limited  by  the  low  level  of  public  funding. 
Ambitious government plans to raise the minimum 
income  level  announced  in  2014  have  been 
shelved  up  to  now  due  to  a  lack  of  funding.  In 
2020, the minimum social assistance benefits have 
been somewhat increased, but less than planned for 
2020-2021,  due 
to  funding  constraints.  The 
adequacy  of  the  minimum  social  benefit  remains 
low  and  more  effort  is  needed.  The  low  level  of 
public  financing  for  health  has  limited  people’s 
access  to  quality  and  timely  care  for  years. 
in  2017-2019, 
Healthcare  financing 
reaching an estimated 3.8% of GDP, but it is set to 
decline in 2020, as funding commitments are only 
partly  satisfied.  Efforts  to  increase  the  efficiency 
and  quality  of  the  health  system  continue,  while 
major  reforms  of  the  hospital  and  primary  care 
networks  are  still  at  an  early  stage,  despite  being 
on the reform agenda for some years now. 

increased 

some  progress 

Education reforms have shown ‘some progress’ 
since 2012, but a greater effort could be done in 
order  to  improve  the  quality  and  efficiency  of 
the  education  system,  while  expanding  adult 
in 
learning.  Latvia  made 
developing  a  quality-rewarding  financing  model 
for  higher  education  and  setting  up  an  external 
quality assurance agency for higher education over 
2012-2015. However, the amount of performance-
based  funding  remains  limited,  and  the  higher 
education  system  remains  fragmented,  with  too 
many 
education 
programmes 
institutions.  The  intentions  of  streamlining  the 
school  network,  given  the  declining  number  of 
students,  has  not  proceeded  as  planned  in  recent 
years, thus delaying gains in quality and efficiency 
improve 
in  general  education.  Reforms 
vocational education and training are ongoing, but 
the  share  of  students  in  this  type  of  education 
remains low. Participation in adult learning is low, 

study 

and 

to 

14 

5%78%15%2%Limited ProgressSome ProgressSubstantial ProgressFull Implementation  
2. Progress with country-specific recommendations 

Latvia has made ‘some progress’ in addressing 
the 2019 country-specific recommendations (see 
Table 2.1). ‘Substantial progress’ has been made in 
strengthening  the  anti-money  laundering  system 
and  reducing  the  flow  of  risky  money  through 
Latvia. The shifting of the tax burden from labour 
to  other  less  detrimental  tax  sources  has  been 
partly achieved, as the measures were not revenue 
neutral. Social and healthcare plans for 2020 have 
had  their  financing  restricted,  resulting  in  ‘some 
progress’. Environmentally  sustainable investment 
policies 
still  being  designed.  Public 
administration  reforms  have  advanced,  while  the 
system  to  prevent  conflict  of  interest  showed 
mixed developments. 

are 

request 

from  a  Member  State, 

the 
Upon 
Commission can provide tailor-made expertise via 
the Structural Reform Support Programme to help 
design  and  implement  growth-enhancing  reforms. 
Since 2017, Latvia has received support for a total 
of  32  projects.  In  2019,  several  projects  were 
implemented,  including  the  development  of  a 
framework  for  assessing  performance  of 
the 
the  provision  of  a 
healthcare  system  and 
methodology  for  innovative  public  service  reform 
projects. Moreover, the Commission has supported 
the  authorities  in  implementing  the  mid-term  tax 
strategy  by,  among  other  things,  supporting  the 
development  of  VAT  gap  analysis  methods  and  a 
compliance-risk  management  strategy.  In  2019, 
work  started  on  reviewing  system  for  assessing 
disabilities  and  on  enhancing  the  integration  of 
people with disabilities in the labour market. 

especially  for  the  low-skilled,  due  to  personal 
reasons and insufficient non-financial and financial 
incentives  for  employers  to  invest  and  support 
adult learning for their employees.  

the 

Despite low national financing, ‘some progress’ 
has  been  achieved  in  investing  in  innovation, 
infrastructure,  while 
transport  and  digital 
housing  and  environmentally  minded  policies 
have not yet been established. Since 2012, Latvia 
has  been  recommended  to  expand  its  investments 
in  R&D,  but  funding  plans  have  not  materialised. 
research 
Nevertheless,  consolidation  of 
institutions  has  been  achieved  and  establishing 
a unified governance body planned. Transport and 
digital infrastructure have been developed with the 
EU’s  support,  but  broadband  coverage  in  rural 
to  develop  an 
low.  Plans 
areas 
remains 
environmentally 
and 
sustainable 
transportation  network  have  not  yet  been  devised. 
However,  the  development  of  Rail  Baltica  should 
support  the  shift  to  transport  that  is  less  carbon 
intensive. Investments in housing are hampered by 
lengthy  and  cumbersome  planning  processes,  as 
well  as  outdated  rental  laws,  with  no  progress  on 
proposed changes since 2018. 

energy 

Public  governance  reforms,  one  of  the  reform 
‘some 
priorities  since  2012,  have  shown 
progress’  in  recent  years.  The  reduction  in  the 
length  of  court  proceedings  in  general  has  been 
achieved,  while  the  role  of  the  Council  for  the 
Judiciary  has  been  strengthened.  Public  oversight 
of insolvency administrators  has been established. 
Public  administration  reform  for 
the  central 
government  is being implemented over  the period 
2017-2020 and reform of local governments is set 
to  be  rolled  out  from  2021.  Moreover,  corporate 
governance  of  state  and  municipal  companies 
already  started  to  improve  before  the  country’s 
accession to the OECD in 2016 and has continued 
to  improve  since  then.  ‘Some  progress’  has  been 
made in preventing conflict of interests over time, 
remain.
but 

shortcomings 

certain 

15 

2. Progress with country-specific recommendations 

Table 2.1: 

Summary table of 2019 CSR assessment * 

(1) The assessment of CSR1 does not include an assessment of compliance with the Stability and Growth Pact. 
Source: European Commission 
*  The  assessment  of  CSR3  does  not  take  into  account  the  contribution  of  the  EU  2021-2027  cohesion  policy  funds.  The 
regulatory framework underpinning the programming of  the 2021-2027 EU cohesion policy funds has not yet been adopted 
by the co-legislators, pending inter alia an agreement on the multiannual financial framework (MFF)”. 

16 

 
 
 
  
 
2. Progress with country-specific recommendations 

(Continued on the next page) 

17 

 
 
 
   
 
2. Progress with country-specific recommendations 

Box (continued) 

18 

 
   
 
 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

borrowing.  Current  expenditure  is  planned  to 
decrease  by  1 percentage  point  of  GDP  (mostly 
government  purchases  and  transfers)  and  capital 
expenditure  by  0.5 percentage  points  of  GDP 
between  2018  and  2020.  At  the  same  time  the 
government  sector  wage  bill  and  social  payments 
are  expected  to  expand,  in  view  of  discretionary 
increases  and 
to  wage  and  price 
developments in the economy.  

indexation 

Graph 3.1.2:  Expenditure growth and the discretionary 

fiscal effort 

3.1.1.  FISCAL POLICY 

Latvia’s  fiscal  stance  is  estimated  to  have 
tightened  in  2019  and  2020.  Latvia  ran  a  fiscal 
expansion  in  2017  and  2018  during  a cyclical 
upturn  in  the  economy.  This  was  marked  by  an 
increase  in  government  borrowing  and  annual 
expenditure  growth  rates  of  around  10%.  It  is 
projected  that  in  2019  and  2020,  the  structural 
deficit will be reduced in parallel with a slowdown 
in  economic  growth  and  a  narrowing  positive 
output  gap 
(Graph 3.1.1).  The  expansionary 
revenue effort resulting from tax-cutting measures 
being  implemented  as  of  2018  has  been  offset  by 
a contractionary  expenditure  effort,  as  nominal 
expenditure growth is restrained at around 3.5% on 
average in 2019 and 2020 (Graph 3.1.2). 

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 – 2019 Autumn Forecast 

3.1.2.  FISCAL FRAMEWORK AND EXPENDITURE 

REVIEW 

The  fiscal  framework  guides  the  fiscal  targets 
with  a  margin  of  interpretation.  Budgetary 
targets  are  set  on  the  basis  of  the  fiscal  rules 
established in the Law on fiscal discipline and are 
monitored  by  the  independent  Fiscal  Discipline 

Source: European Commission – Autumn 2019 forecast 

to 

The government revenue and expenditure share 
in  GDP  has  declined  due 
tax-cutting 
measures. The cuts in effective tax on labour and 
corporate  profits  and  dividends  adopted  in  2017 
and being implemented from 2018 have only been 
revenue-increasing 
partly 
measures.  It 
the  ratio  of 
that 
government  revenue  to  GDP  will  decline  by 
1 percentage  point  of  GDP  between  2018  and 
2020.  This  will  lead  to  a  contraction  of  the 
government 
the 
government  is  committed  to  reducing  government 

by 
is  estimated 

ratio,  while 

compensated 

expenditure 

19 

2014201520162017201820192020-2-1012-101234Change in structural primary balanceOutput gapCounter-cyclical tighteningCounter-cyclical expansionPro-cyclical tighteningPro-cyclical expansion-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)  
  
3.1. Public finances and taxation 

profits  more  than  initially  planned.  Moreover,  the 
decision to postpone the property value update for 
property tax from 2020 to 2022 limits revenue the 
potential of taxes on capital.  

in 

tax 

effectiveness 

Latvia has moved towards a greener tax system 
and  of  all  Member  States  now  has  one  of  the 
highest shares of environmental taxes. Taxes on 
energy,  transport,  pollution  and  use  of  resources 
amounted  to  3.4%  of  GDP  in  2018  (EU  average 
2.4%).  Nevertheless,  some  tax  exemption  remain, 
decreasing 
changing 
environmentally  harmful  consumption  patterns. 
Reduced  VAT  and  excise  duty  rates  on  energy 
(heating and fuel used in agriculture) accounted for 
0.3% of GDP in tax expenditure in 2017 (Ministry 
of  Finance,  2018).  Moreover,  VAT  deductibility 
for  the  purchase  price  and  operating  costs  of 
company  cars  subsidises 
the  private  use  of 
company  cars.  Latvia’s  draft  energy  and  climate 
plan intends to review and to reduce tax subsidies 
on  fossil  fuels,  aligning  taxation  based  on  CO2 
emissions,  while  household investments in energy 
efficiency  could  be  incentivised  by  temporary 
Increasing 
tax 
VAT  or  property 
in  achieving 
environmental 
taxes  can  help 
environmental  objectives.  At 
time 
distributional  effects  and  respective  compensatory 
measures  for  the  most  vulnerable  households 
should  be 
(European 
into 
Commission, 2019c).  

the  same 

account 

reliefs. 

taken 

increased 

the  monthly 

The taxation of low wages has been brought  in 
line  with  other  Member  States.  The  budget  for 
2020  further 
income-
dependent  basic  allowance  to  EUR 300  and  its 
minimum  threshold  to  EUR 500,  exceeding  the 
previously  adopted  plans.  As  a  result,  the  tax 
wedge  for  wages  at  50%  of  average  wage  would 
decrease  to  35%  in  2020  —  broadly  in  line  with 
levels in other Member States (Graph 3.1.3). While 
the  measure  is  targeted  at  low  wage  earners,  it  is 
estimated to benefit more middle income groups in 
the  population-wide  income  distribution  (Graph 
3.1.4). This is explained by a low work intensity of 
income  groups  and  already  existing 
lower 
allowances  that  partly  or  fully  exempt  low  wages 
from  personal 
transfers 
generally considered to be better suited to reaching 
the  poorest  households  (see Section 3.2.3).  At  a 
cost similar to the 2017 tax reform, a reform of the 
minimum income level, with a tapered transition to 
labour  income,  could  close  the  gap  with  the  EU 

tax.  Social 

income 

Council.  However, 
the  Latvian  budgetary 
authorities exercise interpretation when setting the 
targets,  frequently  resulting  in  higher  structural 
balances than what is allowed by the national fiscal 
framework, as noted in the Surveillance Report by 
the Fiscal Discipline Council (2019). In particular, 
the authorities treat part of the tax reform costs as 
one-off  measures,  relaxing  the  structural  balance 
requirement  under  the  national  fiscal  framework, 
which 
the  Fiscal  Discipline 
Council. The Commission also does not recognise 
such one-off measures, and the authorities take that 
into account for compliance with the Stability and 
Growth Pact. 

is  contested  by 

The 

review 

brought 

The expenditure review in 2019 analyses health 
and  education  expenditure,  but  does  not  re-
evaluate  spending  priorities  across  government 
sectors. 
forward 
improvements  in  budget  preparation,  analysed 
spending  on  education  and  health  and  presented 
some  savings  for  reallocation.  However, 
the 
expenditure  review  does  not  assess  the  relevance 
of existing spending amounts. Any savings in one 
government  sector  are  expected  to  be  used  in  the 
same  sector  first,  while  reallocations  among 
government  functions  are  limited.  Sectors  with 
established 
historically 
stronger 
a 
indexation  mechanisms 
negotiation position in the government discussions 
(defence,  social  protection).  However,  sectors 
relying  on  discretionary  decisions  need  political 
support  from  other  ministers  to  be  agreed.  For 
example,  the  baseline  budgetary  plans  for  the 
healthcare sector do not account for the underlying 
demographic  and  cost  pressures,  undermining  its 
starting positon in the budget negotiations.  

larger  budgets 
are 

and 
in 

3.1.3.  TAXATION 

Latvia’s  tax  revenue  share  in  GDP  has  been 
reduced  by  tax-cutting  measures.  The  ratio  of 
tax revenue to GDP is set to decline from 31½% in 
2017  to  30½%  in  2020,  which  is  well  below  the 
EU average of 39%. The main sources of revenue 
are  labour  and  consumption  taxes.  The  share  of 
capital  taxes  was  already  low  compared  to  other 
Member States and has been further reduced by the 
corporate  tax  reform.  The  transition  to  the  new 
corporate income tax regime, where only dividend 
withdrawals  are 
in  higher 
temporary costs in 2019 and lower revenue  in the 
medium-term, as companies appear to be retaining 

resulted 

taxed, 

20 

3.1. Public finances and taxation 

average  in  terms  of  poverty  and  inequality  while 
improving 
(Ivaškaitė-
incentives 
Tamošiūnė et al., 2018). 

to  work 

Graph 3.1.3:  Estimated tax wedge on labour in 2020, 

compared to relatively high and relatively low 
levels in other EU countries 

Source: European Commission 

Graph 3.1.4:  Effect on income distribution of the increase in 

the basic allowance presented in the budget 
for 2020 

Source: European Commission (Euromod) 

Despite  increased  labour  tax  progressivity,  the 
tax system could do more to reduce inequalities. 
Since  2018,  Latvia  has  adopted  a  progressive  tax 
schedule  and  has  increased  the  income-dependent 
basic allowance, making personal income taxation 
more  progressive.  Nevertheless,  tax  progressivity 

a 

tax 

strong 
revenue,  which 

in Latvia remains lower than in other EU Member 
States.  Moreover, 
on 
consumption 
typically 
contributes  little  to  redistribution,  and  low  capital 
taxation  limit  the  distributional  effect  of  the  tax-
benefit  system  and  its  effectiveness  in  reducing 
income inequalities. 

reliance 

Property  taxation  remains  based  on  outdated 
values.  Latvia  has  a  potential  to  increase  revenue 
from  property  taxation.  Recurrent  property  tax 
accounted for 0.7% of GDP in 2019, below the EU 
average of 1.6% of GDP in 2017. While real estate 
cadastral  values  which  are  used  to  calculate 
property tax are meant to follow the market values, 
the  Latvian  government  has 
consecutively 
postponed  updating  the  cadastral  values.  The 
planned  update  in  2020  has  been  postponed  to 
2022,  as  increasing  property  taxation  is  highly 
unpopular. This postponement is estimated to cost 
around  0.1%  of  GDP  on  top  of  around  0.3%  of 
GDP  forgone  in  revenue  due  to  the  previous 
postponements of valuation updates. 

the 

Proposed  changes  to  property  taxation  would 
narrow 
tax  base.  The  draft  cadastral 
methodology  presented  in  2019  envisages  to 
standardise site areas used for buildings and to cut 
a  number  of  building  classification  types,  thus 
addressing the valuation difficulties and sources of 
inconsistencies. However, the planned introduction 
of special values for taxation of individual housing 
sites  would  make  their  taxation  more  detached 
from the market values. Furthermore, a proposal to 
tax  only  primary  residences  valued  more  than 
EUR 100 000  would  exempt  a  majority  of 
households  from  paying  the  tax  and  would  cost 
some 0.2% of GDP in tax revenue. 

shadow 

The share of the shadow economy still appears 
to  be  high.  Based  on  surveys  of  company 
economy  was 
managers,  Latvia’s 
estimated  at  24%  of  GDP  in  2018,  exceeding 
estimates  for  Estonia  (17%)  and  Lithuania  (19%) 
(Sauka  &  Putnins,  2019).  The  under-reported 
business  income  in  Latvia  (35%  of  the  shadow 
economy) and ‘envelope’ wages (22%) account for 
most  of  the  difference  with  other  Baltic  states. 
Among  sectors,  construction  (36%)  and  retail 
(25%) had the highest share of shadow activity in 

21 

25303540455050% of averagewage67% of averagewageaverage wageRelatively highRelatively lowLatvia0.00.10.20.30.40.50.60.70.80.91.012345678910% change in eq. disp. income decile of equivalised disposable income  
 
  
3.1. Public finances and taxation 

increase 

1.3 percentage  points  of  GDP  between  2018  and 
2070,  assuming  a  fall  in  pension  spending  and  a 
limited 
in  healthcare  spending.  The 
average  public  pension  benefit  is  projected  to 
decline  relative  to  the  average  wage,  though  this 
would  be  partly  compensated  by  the  increasing 
size  of  the  mandatory  private  pension  schemes. 
The health expenditure-to-GDP ratio is expected to 
increase  from  3.7%  in  2016  to  4.3%  in  2070,  in 
view  of  the  projected  demographic  changes.  This 
would still be  one of the lowest in the EU. These 
assumptions  might  be  politically  and  socially 
unsustainable,  thought,  in  view  of  the  currently 
low  adequacy  of  pensions  (see  Section 3.3.2)  and 
underfunding 
(see 
public 
Section 3.3.3). 

healthcare 

of 

If  Latvia  converges  with  the  EU  average 
indicators  for  pension  adequacy  and  health 
spending,  risks  to  fiscal  sustainability  appear 
higher.  Assuming  that  healthcare  costs  converge 
with the EU average, Latvia’s healthcare and long-
term  care  spending  is  projected  to  increase  by 
some 3% of GDP by 2070. Maintaining the current 
levels  of  the  pension  benefit  ratio  up  to  2070 
would  cost  around  2%  of  GDP  annually. 
Moreover,  raising  the  pension  benefit  ratio  to  the 
EU  average  would  cost  10%  of  GDP.  Such 
assumptions  would  lead  to  higher  risks  to  fiscal 
sustainability  in  the  medium  and  long  run  than 
current policies suggest.  

2016-2018 on average. The VAT gap (2) in Latvia 
is  estimated  at  15%  in  2017  exceeding  the  EU 
average of 11% (CASE, 2019). The State Revenue 
Service  of  Latvia  shares  similar  VAT  gap 
estimates  and  expects  the  gap  have  narrowed  in 
2018.  However,  VAT  fraud  remains  widespread. 
The  World  Bank 
several 
recommendations on this to the Latvian authorities 
and  organised  training  for  the  staff  of  the  State 
Revenue  Service 
improve  VAT 
in  order 
collection (3). 

prepared 

has 

to 

improved 
Tax  compliance  has  gradually 
through  variety  of  measures.  In  2019,  the 
authorities continued expanding use of data-driven 
risk  assessments,  increasing  communication  with 
the  taxpayers  through  the  electronic  declaration 
system and implementing sector specific measures. 
In  the  construction  sector,  the  implementation  of 
the  collective  agreement  (see  Section 3.3.1)  and 
tightening  of  electronic  employee  registration  on 
large construction sites are expected to reduce the 
high share of shadow activity in the sector. Illegal 
online  gambling  has  been  restricted  by  more 
efficient blocking of access to unlicensed gambling 
sites  and  by  involving  payment  service  providers 
in  policing  unlicensed  activities.  The  State 
Revenue  Service  is  also  improving  its  analytical 
capacity in using large data sets and in identifying 
suspicious  operations.  Tax  revenue  gains  from 
these  measures  can  be  expected  in  the  medium 
term, but it requires a continuous effort to monitor 
tax compliance and to react to the signs of evasion. 

3.1.4.  DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

The  risk  to  Latvia’s  fiscal  sustainability  is 
assessed to be low in the medium and long term, 
assuming  current  policies  continue.  The  low 
risks  to  fiscal  sustainability  are  assessed  on  the 
basis  of  the  low  initial  debt  level  and  on  the 
assumption  that  the  costs  related  to  the  ageing 
population will be contained (see Annex B). Under 
the  baseline  scenario  of  the  2018  Ageing  Report 
total  ageing-
(European  Commission,  2018a), 
related  expenditure  is  projected  to  decline  by 

(2)  The  VAT  gap  represents  the  difference  between  expected 
VAT revenue based on the tax law and respective tax bases 
and the VAT revenue actually collected. 

(3)  Project of the European Commission and the World Bank 
"Technical  Assistance:  Supporting  the  Implementation  of 
the Mid-Term Tax Strategy of the Government of Latvia". 

22 

                                                           
3.2.  FINANCIAL SECTOR 

Financial stability  

The Latvian banking sector remains profitable, 
well-capitalised  and  overall  sound  despite  the 
decline  of  the  non-resident  segment.  Average 
profitability  has  remained  relatively  stable  despite 
the  shrinking  of  non-resident  banks’  operations. 
Return on equity increased slightly to 10.1% in the 
first  half  of  2019  while  the  return  on  assets  was 
1.1%  at  the  end  of  the  first  half  of  2019.  As  a 
result, banks are on average well capitalised with a 
total capital ratio of 22.6, which is well above the 
EU average and the prudential minimum set by the 
regulator.  According  to  a  stress  test  done  by  the 
Bank of Latvia, the shock absorption capacity at a 
systemic  level  is  good.  Local  deposits  are  still 
outpacing  credit  growth,  contributing  to  a  falling 
loan-to-deposit  ratio,  which  reached  74%  at  the 
end  of  Q2  of  2019.  The  liquidity  risk  of  credit 
institutions  is  limited,  as  liquid  assets  make  up  a 
large share of total assets (30%).  

Table 3.2.1: 

Financial soundness indicators 

(1) * ECB aggregated balance sheet: loans excluding to 
government and monetary financial institutions / deposits 
excluding from government and MFI  
** For comparability only annual values are presented 
Source: European Central Bank CBD2 
The  banks  formerly  servicing  non-resident 
clients  are  in  the  process  of  finding  a  viable 
alternative  for  their  former  business  model. 
substantially 
Non-resident 
downsized 
the  back  of 
tightened anti-money laundering rules (see below) 
and transformed their business models. As a result, 
their  business  volumes  and  deposits  shrunk 
notably.  A  part  of  the  credit  institutions  servicing 
to  offer  new 
foreign  customers  has  started 
financial  products  and  collect  household  deposits 
improves  the 
via  web  platforms.  While  this 

have 
their  operations  on 

banks (4) 

(4)  The banking sector is composed of two segments  – banks 
servicing residents or “domestically active banks” (80% of 
total  assets)  and  banks  servicing  non-residents  or  foreign 
clients  (20%  of  total  assets).  The  latter’s  share  has  been 
falling. 

maturity  composition  of  their  financing,  it  may 
pose refinancing and liquidity risks in the medium 
term,  given  the  likely  outflow  at  maturity.  Other 
credit  institutions  have  seen  the  quality  of  their 
foreign  loan  portfolio  deteriorate,  a  large  part  of 
which consists of unlikely-to-pay loans (NPL) not 
past  due.  The  average  non-performing  loan  ratio 
for  households  and  non-financial  corporations 
amounted  to  7.5%  in  Q2  2019,  but  trends  in  the 
NPL-ratio of credit institutions servicing domestic 
customers  and  foreign  customers  considerably 
differ (4.2% and 31.4% respectively).  

for 

funding 

The  main  risks  to  financial  stability  are 
associated  with  housing  market  developments 
in 
the  Nordic  countries  and  anti-money 
laundering  in  Latvia.  Although,  the  significance 
of  Nordic  parent  bank 
their 
subsidiaries  in  Latvia  has  shrunk  considerably, 
risks  related  to  the  housing  market  in  Sweden 
could  impact  Latvia  via  trade  and  confidence 
channels.  Moreover,  following  the  transformation 
of  Luminor  Bank  from  a  subsidiary  into  a  branch 
of  the  Estonian  entity,  the  transmission  of  shocks 
coming from other Baltic states to Latvia could be 
accelerated. While measures have already been put 
in place to mitigate the risks of money laundering 
and  terrorist  financing,  potential  ramifications  in 
the financial sector could be wide and uncertain in 
case of adverse events. 

Anti-money laundering  

laundering  and 

its  commitment  to 
Latvia  has  reaffirmed 
fighting  money 
terrorism 
financing  as  key  to  preserve  trust  and  stability 
of  its  financial  system.  Following  the  ABLV 
case (5), Latvia took immediate steps to reduce the 
flow  of  risky  assets  through  its  financial  system 
(European  Commission,  2019a)  In  July  2018, 
Moneyval  concluded  that  the  effectiveness  of 
Latvia’s  anti-money  laundering  (AML)  system 
was  only  moderate  and  put  it  under  enhanced 
monitoring by the Financial Action Task Force (6) 

(5)  In  early  2018, 

financial  crime 
the  United  States 
enforcement  network  (FinCen)  implicated  Latvia's  then 
third biggest bank ABLV to conducting large scale money 
laundering. The European Central bank revoked its licence 
and the ABLV bank went into self-liquidation. 

(6)  Financial Action Task Force is an inter-governmental body 
established by members of OECD in 1989. The objectives 
of  the  FATF  are  to  set  standards  and  promote  effective 
legal,  regulatory  and  operational 
implementation  of 
terrorist 
measures  for  combating  money 

laundering, 

23 

2014q42015q42016q42017q42018q42019q2Non-performing loans9,76,56,35,65,35,4o/w foreign entities8,35,55,24,02,83,0o/w NFC & HH sectors12,110,89,88,57,47,5o/w NFC sector12,011,111,110,49,19,4o/w HH sector12,310,47,95,95,24,9Coverage ratio39,937,735,335,933,032,5Return on equity(1)10,210,714,37,69,210,1Return on assets(1)1,01,21,50,91,21,1Total capital ratio20,221,820,420,622,322,6CET 1 ratio17,519,017,318,420,320,2Tier 1 ratio17,519,017,318,420,320,2Loan to deposit ratio67,359,962,460,670,774,0 
                                                           
                                                           
3.2. Financial sector 

to share knowledge and supervisory practices.  All 
supervisors  have  now  developed  sectoral  risk 
assessments 
risk-based 
supervision.  However,  Latvia  should  continue  its 
efforts  to  implement  risk  based  supervision  in 
practice. 

and  guidelines 

for 

type  of 

servicing  particular 

De-risking  and  rebuilding  the  reputation  of 
Latvia’s financial sector has been a critical part 
of Latvia’s anti-money laundering strategy. One 
of  the  FCMC's  main  objectives  is  to  closely 
monitor the change of business model of the banks 
(formerly)  servicing  foreign  clients.  Due  to  de-
risking measures taken by banks, amplified by the 
ban  on 
shell 
companies,  the  share  of  non-EU  deposits  has 
in 
decreased  from  35.6% 
September  2019.  The  value  of  non-resident 
deposits  has  shrunk  from  €8.1  bn  in  2017  to €3.2 
bn  in  September  2019  (39.7%  to  19.5%  in  total 
deposits).  De-risking  actions  taken  in  respect  of 
other 
foreign-owned 
companies) include improved transparency of legal 
persons (7).  Nevertheless,  Latvia  should  increase 
its  understanding  of  underlying  risks  of  money 
laundering  and  terrorist  financing,  in  particular  in 
relation  to  accountants,  lawyers,  tax  advisors  and 
other 
company 
formation. 

professionals 

to  6.6% 

high-risk 

in  2015 

involved 

areas 

(e.g. 

in 

The  government  has  also  strengthened  the 
dialogue  between  the  financial  sector,  the 
supervisor  and  the  law  enforcement  bodies.  In 
2018 a coordination group led by the  FIU was set 
the  stakeholders’ 
up  and  helped 
improved 
understanding  of  money 
risks. 
laundering 
Moreover, thanks to the feedback by the Financial 
Intelligence Unit to obliged entities, the quality of 
suspicious transaction reports has improved and its 
quantity  reduced,  although  it  remains  rather  high. 
Cross-border 
suspicious 
transaction  reports  has  improved.  Latvia  should 
continue 
the  cross  border 
dissemination of suspicious transaction reports.  

its  efforts  on 

dissemination 

of 

(7)  Around 97% of companies (or some 135000) established 
in  Latvia  have  disclosed  their  beneficial  owners  since 
the 
introduction  of  the  Enterprise  Register.  The 
remaining  3%  have  had  their  rights  to  trade  terminated 
because  of  non-compliance  with  the  UBO  reporting 
requirements.  Around  86%  of  all  legal  persons  have 
revealed  their  beneficial  owners.  Since  December  2017, 
there is no possibility to register a new legal person without 
disclosure of beneficial owner information. 

(FATF). The FATF  will assess the progress  made 
by  Latvia  at  its  next  plenary  meeting  in  February 
2020.  Following  Moneyval’s  report,  Latvia  has 
declared shoring up its AML system a priority and 
has  worked  on  many  fronts  to  strengthen  its  anti-
money 
laundering  system.  In  January  2020, 
Moneyval has taken stock of Latvia’s progress and 
11 
improved 
recommendations,  and  Latvia  is  now  “compliant” 
or 
all  FATF’s 
compliant”  with 
recommendations.  Measures  to  improve  the  fight 
against  money  laundering  would  contribute  to 
advancing towards SDG 16. 

country’s 

“largely 

ratings 

the 

on 

enforce 

framework 

strengthened 

sanctions  was 

financial  supervisory  agency  – 

Latvia  has  updated  its  anti-money  laundering 
legal 
the 
and 
supervisory  and  law  enforcement  institutions. 
Latvia  updated  its  anti-money  laundering  law,  the 
law  on  credit  institutions  and  the  law  governing 
Latvia’s 
the 
Financial  and  Capital  Markets  commission 
(FCMC).  The  list  of  authorities  with  competence 
expanded. 
to 
Implementation  of 
is 
among  the  FCMC’s  top  priorities  for  the  coming 
years.  As  of  29  June  2019, 
the  Financial 
Intelligence  Unit  (FIU)  is  the  chief  authority 
responsible  for  AML/CFT  issues.  Its  staff  was 
increased and its independence and autonomy were 
bolstered.  The  extent  to  which  the  Financial 
Intelligence  Unit  (FIU)  of  Latvia  can  effectively 
execute  and  leverage  its  new  powers  will  be 
essential  given  its  central  role  in  AML/CFT 
framework. 

international  sanctions 

also 

Latvia  has  increased  the  financial  supervisor’s 
staff and invested in its analytical capacity. The 
number  of  staff  dealing  with  AML  supervision 
increased  markedly.  FCMC  developed  new  tools 
to  better  identify  beneficial  owner  groups  and 
transaction connections. The FCMC also increased 
the number of on-site inspections and strengthened 
its supervision of money services providers, which 
have  emerged  in  the  wake  of  shell  companies 
closing down. Over 2019, the FCMC has imposed 
enforcement actions (monetary and other) on  four 
banks  and  four  administrative  investigations  are 
ongoing. A new supervisors’ coordination platform 
allows  a  common  understanding  of  money 
laundering and terrorist financing risks and is used 

financing  and  other  related  threats  to  the  integrity  of  the 
international financial system.  

24 

                                                                                   
                                                           
3.2. Financial sector 

deferral of corporate income tax tax for reinvested 
profits, which was introduced from 2018. 

the 

Slow  credit  growth  is  due  to  both  demand  and 
supply  factors.  Banks’  standards  for  lending  to 
small  and  medium-sized  enterprises  remain  tight. 
High credit risk (bad track records, weak borrower 
collateral  and  equity),  shortcomings  in  the  legal 
framework,  and 
shadow  economy  are 
important  supply-side  constraints  to  corporate 
lending. On the demand side, the share of finance-
constrained  firms  appears  to  be  higher  in  Latvia 
than  in  other  Member  States  (EIB  Investment 
Survey  2019).  Rejected  loan  application  rates 
remain high — according to SAFE survey data, the 
percentage  of  rejected  loan  applications  by  small 
and  medium-sized  enterprises  (SMEs)  has  further 
increased, reaching the fourth highest share in the 
EU.  At  the  same  time,  the  availability  of  bank 
loans  for  large  corporates  with  sound  financial 
indicators  is  good.  However,  their  demand  is  low 
and  volatile.  Smaller 
investments  are  often 
financed with internal resources.  

Additional macro-prudential measures aimed at 
limiting  the  growth  of  loan-to-value  ratios  are 
under way. Bank of Latvia has expressed concern 
about  the  loan-to-value  ratios  which  are  rising 
because of the state guarantee programme helping 
families  buy  their  first  property  by  guaranteeing 
part  of  their  down-payment.  About  half  of  all 
mortgages  are  granted  under  the  state  support 
programme.  In  the  first  half  of  2019,  new  loans 
with  a 
ratio  exceeding  90% 
accounted  for  one  third  of  all  new  mortgages. 
Besides  the  lower  down  payment,  a  discount  on 
stamp  duties  for  loans  granted  through  the  state 
additional 
support  programme  provides 
incentive  to  apply  for  support.  Bank  of  Latvia 
wishes  to  make  the  90%  ceiling  on  the  loan-to-
value  ratio,  which  is  already  effective  for  banks, 
also binding for non-bank lenders. 

loan-to-value 

an 

Alternative financing 

in  the 
There  has  been  a  steady  increase 
availability  of  venture  capital  in  recent  years 
and this trend is expected to continue. Access to 
finance  is  supported  by  the  national  development 
institution  Altum,  which  plays  a  major  role  by 
supplementing  bank  and  other  market-based 
financing  to  mainly  small  and  medium-sized 
to 
enterprises. 

loan  guarantees 

It  provides 

The  law  enforcement  authorities’  capacity  to 
handle money laundering cases still needs to be 
strengthened.  Guidelines  on  investigation  have 
been updated and training has been provided to all 
judicial  stakeholders  to  improve  the  quality  and 
effectiveness  of  prosecuting  money  laundering 
cases.  Data  show  that  the  number  of  prosecutions 
and  criminal  proceedings  has  increased  and  that 
assets  are  being  confiscated  (8).  However,  efforts 
could  continue  to  ensure  that  money  laundering 
investigations  are  prioritised  and  effective  and 
dissuasive  sanctions  for  persons  convicted  of 
money laundering.  

Credit growth 

in  mortgages 

Mortgage  lending  has  been  boosted  by  a  state 
support programme, but credit growth remains 
sluggish  overall.  After  prolonged  deleveraging, 
the  annual  growth  rate  of  mortgage  loans  turned 
positive  in  2018,  reaching  1.9%  (year-on-year)  in 
August  2019.  The  growth 
is 
underpinned  by  an  improvement  in  the  financial 
situation  of  households,  low  interest  rates  and  the 
state  programme  to  support  house  purchases.  The 
increase  in  lending  to  non-financial  corporations 
(3.5%  growth  year-on-year  in  the  first  half  of 
2019)  is  to  a  large  extent  linked  to  a  few  large 
long-term loans.  At the end of 2018 bank lending 
to  the  domestic  non-financial  sector  stood  at  34% 
of GDP, remaining among the lowest in the EU. At 
the  same  time,  the  role  of  non-bank  financial 
institutions   in  domestic  lending  continues  to 
strengthen. At the same time, the role of non-bank 
financial 
lending 
continues  to  grow.  At  the  end  of  2019,  non-bank 
lenders  accounted  for  17%  of  all  loans  granted  to 
households  and  non-financial  corporations.  The 
growth in household leasing provided by the non-
bank  financial  sector,  in  particular,  accelerated 
from  5.9%  in  2018  to  8.2%  in  Q2-2019.  By 
to  non-financial 
contrast,  growth 
companies  decreased  from  10%  in  Q4-2018  to 
3.2%  in  Q2-2019.  This  can  be  explained  by  the 

institutions (9) 

in  domestic 

leases 

in 

(8)  The number of criminal proceedings for money laundering 

has risen from 93 in 2018 to 164 in 2019.  

(9)  In  Q2-2019,  the  non-bank  financial  sector  represented 
roughly  30%  of  the  financial  sector  in  Latvia  (40% 
compared to banking sector assets). The bulk (50%) of the 
non-bank  financial  sector  is  composed  of  pension  funds, 
25%  leasing  companies  and  the  rest  is  fragmented  among 
insurance,  investment  funds,  alternative  investment  funds 
and other non-bank intermediaries. 

25 

                                                           
3.2. Financial sector 

in  Riga 

affordable 
(Swedbank,  2019).  The 
volatility  of  construction  demand  has  fuelled 
rapidly rising labour costs. Moreover, lengthy and 
cumbersome processes for obtaining planning and 
building permits have also contributed to the high 
cost  of  construction.  As  a  result,  the  market  for 
new dwellings is concentrated mainly in Riga and 
the  surrounding  area,  because  lower  purchasing 
power  in  places  further  away  makes  new  housing 
commercially  unviable  (European  Commission, 
2019a).  Streamlining  building 
is 
essential  to  remove  a  range  of  supply-side  factors 
that impede the ability of the construction sector to 
respond  to  a  growing  demand  for  affordable 
housing.  

regulations 

Graph 3.2.1:  House prices / wages ratio, index, 2006=100 

Source: European Commission 

Shortages  of  skilled  workers  are  a  major 
bottleneck in the construction sector. There is a 
particular  need  for  construction  managers,  water 
and  wastewater  engineers  and  roofers.  Latvia 
adopted  a  construction 
industry  development 
strategy  for  2017-2024  to  address  industry  issues, 
which  include  ensuring  a  qualified  workforce; 
increasing  productivity;  reducing  administrative 
barriers; and improving the quality of construction 
services.  In  addition,  the  volatility  of  investment 
demand  exacerbates  the  capacity  constraints  and 
price  pressures 
sector 
(European Construction Observatory 2019). 

the  construction 

in 

is 

but 

ICT 

established  companies  and  direct  funding  to  start-
ups  for  seed,  acceleration  and  expansion  phases. 
The  sectoral  distribution  of  venture  capital 
and 
diversified, 
investments 
manufacturing  stand  out.  There 
is  a  strong 
concentration of venture capital in the Riga region, 
where  most  high-growth  enterprises  are  located. 
According  to  the  start-up  ecosystem  mapping 
completed  in  2019,  between  2012  and  2018  the 
amount of venture capital attracted by 178 Latvian 
start-ups  totalled  €122.2 million.  Venture  capital 
constitutes the main form of financing for start-ups 
or  46%.  Other  investors  like  banks  and  financial 
institutions  represent  23%  of  the  total  investment, 
with  financing  also  coming  from  business  angels 
(6%),  enterprises  (5%)  and  crowdfunding  (1%). 
Despite  increasingly  positive  trends,  the  venture 
capital  market 
is  still  developing 
relatively  slowly.  It  is  focused  on  the  rather  early 
stages  of  financing  and  remains  dependent  on 
public co-funding (European Commission, 2019e). 
In  August, 
the  Baltic 
the  continuation  of 
Innovation  Fund  initiative  was  ensured  with  the 
signature  of 
Innovation  Fund  2 
Agreement by  the European Investment Fund and 
the  three  Baltic  states.  Over  the  next  5  years,  the 
Baltic Innovation Fund 2 (€156 million) will invest 
in  private  equity  and  venture  capital  funds  that 
focus on the Baltic states, with the goal of further 
developing  equity  investments  in  SMEs  to  boost 
growth in the region. 

the  Baltic 

in  Latvia 

Housing market 

The growth in residential real estate prices does 
not  pose  systemic  risks  to  financial  stability. 
Nominal  house  prices  have  grown  on  average  by 
8-9%  annually  in  recent  years.  The  increase  in 
house  prices  has  been  supported  by  the  steady 
wage  growth of recent years and the state  support 
programme for house purchase that was introduced 
at  the  beginning  of  2015  and  expanded  in  2018. 
Since  the  burst  of  the  housing  bubble  in  2009 
when house prices fell by 45%, their recovery has 
not  exceeded  wage  growth.  In  fact,  since  2010 
when  house  prices  were  at  their  most  depressed 
level,  wage  growth  has  exceeded  house  price 
growth  by  some  10  percentage  points,  as 
evidenced  in  the  continuously  declining  house 
price  wage  ratio  (see  Graph  3.2.1).  A  housing 
affordability index compiled by one of the Baltics’ 
leading commercial banks shows that, of the three 
remain  most 
Baltic  capitals,  house  prices 

26 

405060708090100110120EstoniaLatviaLithuania  
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

3.3.1.  LABOUR MARKET 

and 

labour 

shortages 

in  2018),  on 

Labour market performance is overall positive; 
skills 
however, 
mismatches have emerged. The employment rate 
continues  its  upward  trend  (77.4%  in  Q3-2019; 
76.8% 
the  back  of  declining 
unemployment  (6.2%  in  Q3-2019;  7.4%  in  2018) 
and  a  growing  activity  rate  (77.7%  in  2018).  The 
long-term  unemployed  and  young  people  also 
continue  to  benefit  from  the  steady  improvement 
in  the  labour  market.  Nonetheless,  unemployment 
rates  continue  to  differ  depending  on  the  region 
and  level  of  skills,  highlighting  the  need  for 
significant  investment.  Unemployment  is  forecast 
to  fall  further  over  the  coming  years,  mainly 
because  the  labour  supply  is  expected  to  continue 
falling  due  to  a  natural  decline  in  the  population 
and emigration (see Section 1). Between 2000 and 
2016, Latvia lost about 287 000 people (12.1% of 
the initial population) to net migration, with skilled 
labour accounting for more than two thirds of this 
loss (Hazans M., 2018). The limited labour supply 
has led to emerging labour shortages and exposed 
skills  mismatches.  In  Q2-2019,  vacancies  reached 
a  historic  peak  of  30 500,  with  an  increase  of 
almost 24% compared to the same period in 2018 
(CSB,  2019).  Compared  to  other  Member  States, 
Latvia  still  faces  relatively  low  labour  shortages 
with 15.5% of the firms facing difficulties finding 
suitable  workers  (EU-BCS,  2019).  However,  the 
indicator  has  increased  substantially  since  2013 
(by around 7.7 pps). 

are 

convergence 

and  moderate 

improving  with 

Conditions 
return 
migration and immigration from other non-EU 
countries on the rise. In 2018, international long-
still  negative  at 
term  net  migration  was 
4.9 thousand  people.  However,  this  is  the  lowest 
level  recorded  in  the  past  20 years.  The  ongoing 
income 
labour 
shortages  provide  positive  conditions  for  return 
migration.  Coupled  with  more 
flexible 
immigration  regulations,  they  have  also  led  to  an 
increase in immigration from non-EU countries. In 
2018,  about  4 000  work  permits  were  issued, 
mostly 
the 
Commonwealth  of  Independent  States  (CIS), 
which  is  comparable  with  the  number  of  return 
migrants  (Krasnopjorovs,  2019).  Nevertheless, 
assessing the full extent of non-EU workers in the 
Latvian  labour  market  remains  a  challenge  due  to 
the  multiple  entry  channels,  absence  of  proper 

from  Ukraine  and 

for  workers 

monitoring tools and fragmented oversight.  While 
increasing, the limited size of return migration and 
immigration cannot compensate for the shortage of 
skilled  labour  caused  by  emigration  over  the  past 
years  (Hazans  M.,  2018).  It  could,  however, 
alleviate some short-term labour market pressures.  

level: 

to  differ  by  skill 

A  large  share  of  the  unemployed  are  low-
skilled, while there is a shortage of high-skilled 
labour. In the short term, the strong growth in the 
construction  sector  absorbs  low  and  medium-
skilled workers, with little effort for upskilling and 
adult  learning (10).  Nevertheless,  unemployment 
rates  continue 
the 
unemployment  rates  of  high,  medium  and  low-
skilled  workers  stood  at  3.7%,  8.5%  and  16.5%, 
respectively  (2018)  (Graph 3.3.1).  Labour  market 
shortages  have  emerged  for  high-skilled  labour  in 
particular.  At  the  same  time,  the  supply  of  low-
skilled  workers  exceeds  their  declining  demand, 
leading  to  a  high  unemployment  rate  for  this 
group, with the gap expected to continue widening 
over  the  medium  and  long  term  (Ministry  of 
Economics,  2019a).  Increasing  training  of  low-
skilled and unemployed could help to progress on 
European  Pillar  of  Social  Rights  principle 1, 
thereby also contributing to advancing towards the 
United  Nations’  Sustainable  Development  Goal 4 
and 8. 

Graph 3.3.1:  Unemployment rate by education attainment 

Source: European Commission 

(10)  According  to  the  benchmarking  on  adult  skills  and  adult 
the 

the  EU  conducted  within 

learning  systems 
Employment Committee. 

in 

27 

051015202530352000200120022003200420052006200720082009201020112012201320142015201620172018% of labour force (aged 20-64)Low skilledMedium skilledHigh skilled  
 
                                                           
3.3. Labour market, education and social policies 

28 

 
 
  
 
 
3.3. Labour market, education and social policies 

in  recent  years.  Training  for 

spending  0.6%  in  2017  on  active  labour  market 
policies, the list of such policies has expanded and 
diversified 
the 
unemployed  has  had  a  positive  effect  on  labour 
market  outcomes;  effectiveness  has  been  further 
boosted when combined with other measures, such 
as support for regional mobility. However, the role 
of these measures is limited by the low registration 
of jobseekers with the public employment service, 
with  only  around  half  of  all  unemployed 
registered,  and  relatively  low  participation  rates 
(6.8  per  100  persons  wanting  to  work,  2017). 
Many  unemployed  persons  therefore  cannot  be 
reached to help them search for a job or participate 
in 
2019b). 
Cooperation between public employment services, 
social  services  and  educational  institutions  is 
insufficient,  resulting 
in  poor  monitoring  of 
school-to-work  transitions  and  limited  integration 
in the labour market.  

activation  measures 

(OECD, 

higher 

attainment 

educational 

While  the  employment  rate  of  women  is  high, 
imbalances in the labour market persist. Latvia 
has  one  of  the  lowest  gender  employment  gaps 
(4.2 pps in Latvia, 11.6 pps EU average, 2018) and 
a  gender  pay  gap  around  EU  average  (15.7% 
versus  16.0%  in  the  EU,  2017).  While  women 
have 
(see 
Section 3.3.4),  they  are  also  more  likely  to  study 
social sciences and humanities and work in sectors 
with  lower  wages,  such  as  healthcare,  social  care, 
education  and  tourism.  Around  21.8%  of  women 
and 19.4% of men earn  minimum  wages or lower 
(CSB,  2019).  Access 
flexible  working 
arrangements is lower in Latvia than in the EU as a 
whole and around two thirds of women (68%) and 
men  (63%)  are  unable  to  change  their  working 
time  arrangements  (EIGE,  2019).  Latvia  is  taking 
steps  to  progress  on  European  Pillar  of  Social 
Rights  principle 2,  thereby  also  contributing  to 
advancing  towards  the  Sustainable  Development 
Goal 5,  to  achieve  gender  equality  also  through 
national planning documents, such as the Plan  for 
Stimulating  Equal  Rights  and  Opportunities  for 
Women and Men 2018-2020.  

to 

earnings 

The  prevalence  of  completely  or  partially 
informal employment is high. While the share of 
undeclared 
slowly  decreasing, 
is 
estimated 41% of all employees had an undeclared 
earning  share  of  at  least  10%  in  2016.  More  than 
4%  of  employees  were  working  entirely  in  the 
informal  economy,  with  the  highest  incidence 

and 

youth 

unemployment 

Low-skilled, 
ethnic 
older  workers 
minorities  have  limited  access  to  the  labour 
market.  While 
has 
decreased,  unemployed  young  people  often  lack 
work  experience  and  basic  skills,  and  youth 
employment (33.1% for young people aged 15-24) 
is  lower  than  the  EU  average  (35.4%,  2018).  As 
many  as  half  of  the  registered  unemployed  aged 
15-29  are  low  skilled,  which  reflects  the  overall 
high  unemployment  of  the  low-skilled  in  the 
country 
(Graph 3.3.1).  Unemployment  among 
older  workers  (aged  55-74)  is  decreasing  at  a 
slower rate than for other age groups, which can be 
linked to their poor health and low participation in 
adult  learning  (3%  in  2018)  (CSB,  2019).  The 
employment  rate  for  ethnic  minorities  is  some 
12 pps  lower  than  for  the  ethnic  majority,  and 
unemployment  among  non-EU  nationals 
is 
consistently  higher  than  among  nationals  in  every 
age group. This is partly linked to the insufficient 
public  supply  of  general  and  professionally 
oriented  Latvian  language  courses  for  the  adult 
population  (OECD,  2019a).  Improving  labour 
market  access  for  these  groups  and  unlocking  the 
internal labour market reserves, could ease some of 
the tensions in the labour market.  

Employment  conditions  differ  across  regions 
and  internal  mobility  remains  a  challenge.  The 
unemployment rate, youth unemployment rate and 
share  of  long-term  unemployed  vary  considerably 
across regions. While densely populated Riga and 
the  surrounding Pieriga region exhibits the  lowest 
levels  of  unemployment  (6.7%  and  4.7%  in  2018 
respectively),  Latgale  has  both 
the  highest 
unemployment  rate  (11.8%  in  2018)  and  lowest 
activity  rate  among  Latvia's  NUTS-3  regions 
(CSB, 2019). A regional  mobility support scheme 
reimbursing 
for 
4 months (capped at EUR 600) is having a positive 
effect  on  job  uptake  and  has  the  potential  to  be 
scaled  up  in  a  targeted  way  (OECD,  2019b). 
However, rental costs relative to incomes are high 
in Riga and the surrounding region of Pieriga, thus 
discouraging  regional  mobility.  The  absence  of  a 
national housing policy also limits the provision of 
housing 
(see 
Section 3.3.2.). 

to  more  vulnerable  groups 

transport  or  housing  costs 

Spending  on  and  participation  in  active  labour 
market  policies  remain 
the 
activation  of  those  furthest  away  from  the 
labour  market.  While  Latvia  has  low  public 

limiting 

low, 

29 

3.3. Labour market, education and social policies 

the  social  partners’ 

While  sectoral  collective  bargaining  has  been 
strengthened, 
limited 
capacity  restricts  their  role  in  social  dialogue. 
As of November 2019, the collective agreement in 
the construction sector entered into force, setting a 
minimum  wage  for  the  sector  at  EUR 780  and 
reducing  a  surcharge  for  overtime  work  to  50%. 
This  agreement  is  a  novelty  for  Latvian  industrial 
relations and a step towards strengthening sectoral 
collective  bargaining,  which  is  currently  weak. 
While  EU  funds  provide  financial  support  to 
extend  sectoral  bargaining,  collective  bargaining 
coverage remains low and it takes place mainly at 
company  level  (Müller  T.  et  al.,  2019).  The 
national  setting  for  involving  social  partners  in 
reforms  and  policy  formation  is  well  established; 
however,  the  social  partners’  limited  capacity 
restricts their meaningful and timely involvement. 

3.3.2.  SOCIAL POLICIES 

Poverty  remains  high  and  is  increasing,  while 
spending on social protection is low. The risk of 
poverty  and  social  exclusion  slightly  increased 
(28.4%,  2018),  driven  by  an  increase  in  monetary 
poverty (23.3%, 2018), and is reported as ‘critical’ 
in  the  Social  Scoreboard  (Box 3.3.1).  Elderly 
people and people with disabilities are particularly 
affected  (Graph 3.3.2).  The  share  of  people  who 
are currently poor and were poor during two out of 
the  three  previous  years  is  high  and  increasing. 
This  indicates  that  people  live  with  a  low  income 
for  long  periods,  as  opposed  to  people  who  face 
transitory  poverty.  In  2018,  1  in  5  Latvians 
experienced  material  and  social  deprivation.  In 
2018,  Latvia  spent  11.6%  of  GDP  on  social 
payments,  well  below  the  EU  average  of  20.4%. 
The  budget  for  2020  targets  an  increase  in  social 
expenditure  to  11.7%  of  GDP (11).  This  mostly 
reflects the annual indexation of pensions, as well 
as  discretionary  increases  in  minimum  social 
benefits.  However,  significant  investment  needs 
remain to address Sustainable Development Goal 1 
to  end  poverty  and  foster  the  active  inclusion  and 
social  integration  of  vulnerable  groups,  which 
includes  providing  these  groups  with  supporting 
social services.  

(11)  Draft Budgetary Plan of Latvia, 2020. Retrieved from:  
https://ec.europa.eu/info/sites/info/files/economy-

finance/2020_dbp_lv_en.pdf 

among  skilled agricultural and  manual  workers as 
well  as  the  low-skilled.  Moreover,  a  typical 
‘envelope’  wage  receiver  had  low  or  middle 
income and faced difficulties in making ends meet 
(estimates  based  on  EU-SILC  microdata). 
According  to  a  special  Eurobarometer  survey 
carried  out  in  September  2019,  36%  of  Latvians 
know  someone  who  worked  without  declaring  all 
or  part  of  their  income.  One  in  five  Latvians  also 
said  they  have  purchased  goods  or  services  that 
could  involve  undeclared  work  in  the  past  year. 
The  high prevalence of the informal economy has 
adverse  effects  on  the  social  protection  of  the 
affected  workers.  It  further  contributes  to  the 
under-reporting of accidents at work and heightens 
occupational risks (European Commission, 2019b). 
to 
Several  measures  are  being 
improve the compliance (see Section 3.1.3.); at the 
same  time  the  capacity  of  the  State  Labour 
Inspectorate  to  tackle  undeclared  work  remains 
limited, due to the high staff turnover and unfilled 
vacancies,  especially 
(State  Labour 
Inspectorate, 2019).  

implemented 

in  Riga 

Wages  are  catching  up  with  the  EU  average, 
but the share of low-wage earners remains high. 
The  average  monthly  wage  (reflected  in  nominal 
compensation  per  employee)  grew  by  6.2%  in 
2019  (8.4%  in  2018),  reaching  67%  of  the  EU 
average  (in  purchasing  power  standards).  At  the 
same time, some 27% of employees earned wages 
up  to  two  thirds  of  the  median  wage  in  2018, 
which  is  a  higher  share  than  in  other  Member 
States. The national monthly minimum wage stood 
at  EUR 430  in  2019  —  at  47%  of  the median 
wage.  When  comparing 
the  net  disposable 
household income of minimum wage earners to the 
at-risk-of-poverty threshold in 2018, the minimum 
wage did not provide sufficient income to be out of 
poverty for a single  worker  working full-time,  for 
single  parents  with  a  child,  nor  for  dual-earners 
couple with two children (all earning the minimum 
wage).  The  net  earnings  in  purchasing  power 
standards for a single person are among the lowest 
in the EU and reported as ‘weak but improving’ in 
the  Social  Scoreboard  (Box 3.3.1).  Furthermore, 
Latvia faces a risk of in-work poverty, at 8.1% in 
2018  (7.6%  for  men  and  8.5%  for  women).  This 
risk  is  particularly  high  for  older  workers  (aged 
55+)  with  10.5%  at  risk  of  in-work  poverty  in 
2018  and  significantly  higher  for  temporary  and 
part-time  workers  (30.9%  and  22.7%  in  2018, 
respectively).  

30 

                                                           
3.3. Labour market, education and social policies 

income  scheme  are  very  low (12).  From  2020,  the 
guaranteed  minimum  income  tops  up  monthly 
income  to  EUR 64  (from  EUR 53  in  2019).  The 
amount of the  benefit is still  well below the costs 
of living and the poverty threshold, which stood at 
EUR 409  in  2018.  In  2018,  around  1%  of  the 
population  (20 878  persons)  were  guaranteed 
minimum  income  recipients,  out  of  which  20% 
were  children,  16%  people  with  disabilities  and 
14%  older people. The  increase  will  result  in  less 
than  5 000  additional  people  eligible  for  the 
benefit.  The  effect  of  the  guaranteed  minimum 
income on poverty reduction is very small (1 pp in 
2017),  and  the  effect  of  the  housing  benefits  is 
equally  low,  underlining  the  poor  adequacy  of 
Latvia’s social safety nets (European Commission, 
2019b). 

been 

have 

pensions 

the  average 

slightly 
Minimum 
increased,  but 
the  adequacy  of  pensions 
remains  low.  In  2018,  the  aggregate  replacement 
ratio  for  pensions  in  Latvia  stood  at  only  40 %, 
among  the  lowest  in  the  EU.  In  2018,  11.5 %  of 
newly allocated pensions were minimum pensions 
at  an  average  amount  of  EUR 83  per  month.  The 
average monthly pension stood at around EUR 360 
in 2019, which is below the poverty threshold. The 
gap  between  pensions  and  wages  in  the  economy 
has  widened. The average  inflation-adjusted gross 
wage  increased  by  33%  between  2014  and  2019, 
while, 
inflation-adjusted  old-age 
pension  increased  only  by  15%over  the  same 
period.  To  improve  the  situation  for  pensioners, 
the  income  tax  allowance  was  increased  in  2019 
and  more  favourable  indexation  rules  have  been 
applied to cover inflation and for those with longer 
service  periods.  On  1 January  2020, 
the 
government also raised the minimum pension base 
rate  from  EUR 64  to  EUR 80  with  higher  rates 
applied  for  more  years  worked.  Those  who  have 
worked less than 15 years will not benefit from the 
increase, as they are only entitled to a state social 
security  old-age  allowance  that  has  remained 
unchanged  at  EUR 64  since  2006.  Consequently, 
the adequacy improvements are limited and a large 
proportion of older people (46%, 2018, EU-SILC) 
remains below the poverty threshold.  

(12)  According  to  the  EU  benchmarking exercise  in  the  Social 
Protection  Committee.  See  the  draft  Joint  Employment 
Report 2020 for details. 

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

(1) The at-risk-of-poverty rate is the share of people with an 
equivalised disposable income below the at-risk-of-poverty 
threshold, which is set at 60% of the national median 
equivalised disposable income. 
Source: European Commission 

Poverty rates are markedly different among age 
groups,  and  tax  and  benefit  policies  have  not 
changed  significantly  the  situation  of  the 
poorest  households.  In  2018,  the  overall  at-risk-
of–poverty-or-social-exclusion 
rate  of  28.4% 
masked  large  differences  between  different  age 
groups,  with  older  people  (aged  65+)  facing  a 
more  than  double  risk  compared  to  children  or 
those  of  working  age 
(49%  versus  23%, 
respectively). According to EUROMOD estimates, 
the  tax  and  benefit  policy  changes  between  2008 
and 2018 increased, on average, disposable income 
(the  Gini 
and 
coefficient 
(European 
Commission,  2019b).  Middle-income  groups  and 
the  poorest  10%  are  estimated  to  have  benefited 
the  most.  However,  the  overall  poverty  rate  has 
remained broadly unchanged, as the poverty line of 
60%  of  median  income  has  increased,  covering  a 
similar  share  of  people  as  before.  Policy  changes 
have been more targeted at reducing child poverty 
(by  2.9 pps),  while  the  poverty  rate  for  older 
people has increased (by 4.1 pps). 

inequality 
about  1%) 

fell  by 

reduced 

income 

The  adequacy  of  social  assistance  benefits 
slightly 
low  and 
contributes  little  to  alleviating  poverty.  The 
adequacy  and  the  coverage  of  the  minimum 

improved,  but  remains 

31 

010203040506020052006200720082009201020112012201320142015201620172018%Children (<18y)Working age (18-64)Elderly (65+)Total  
                                                           
3.3. Labour market, education and social policies 

is  decreasing.  Prejudices 

overall  needs.  Despite  improvements,  Latvia  still 
has a high number of people living in institutional 
settings  (5 010  in  2019).  With  a  delay  of  2 years, 
the  transition  from  institutional  to  community-
based care started in 2018 for three priority groups: 
adults  with  mental  disorders,  children  with 
functional  disorders  and  children  in  out-of-family 
care.  As  a  result,  the  number  of  children  in 
institutions 
towards 
adults  with  mental  disabilities  remain  a  challenge 
though, and continuous communication efforts are 
needed.  The  EU  funds  support  community-based 
care services as well as infrastructure, such as day 
care centres and group apartments, but these funds 
succeed  in  covering  only  a  part  of  the  overall 
needs.  The  capacity  of  municipalities  to  develop 
community-based  services  has  been  strengthened, 
but  shortages  of  social  workers  pose  a  risk  to  the 
successful implementation and sustainability of the 
programme.  In  2018,  36%  of 
the  country’s 
municipal  social services did not comply  with the 
minimum  requirement  set  by  law  to  provide  one 
social work specialist per 1 000 inhabitants.  

Access  to  childcare  facilities  is  low  and  the 
provision  of  services  and  support  measures  is 
unequal.  In  2018,  27%  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  35% 
(EU-SILC).  While  Latvia 
guarantees  a  free  public  early  education  and  care 
place  for  every  child  from  as  early  as  one  and  a 
half  years,  around  17%  of  women  and  men  in 
Latvia  report  unmet  needs  for  formal  childcare 
services.  Lone  mothers  are  more  likely  to  report 
higher  unmet  needs  for  formal  childcare  services 
(24%),  compared  to  couples  with  children  (17%) 
(EIGE,  2019).  The  number  of  public  and  private 
care facilities has increased mainly in Riga and the 
surrounding  area,  but  decreased  in  other  regions. 
Nevertheless, the availability of the legally entitled 
place in a public pre-school is a challenge in Riga 
and other larger cities. Available support measures, 
eligibility  criteria  as  well  as  the  amount  of  co-
financing for children in private pre-schools due to 
the  absence  of  publicly  funded  places  varies 
among  the  municipalities,  thus  increasing  the 
inequalities in access to early childhood education 
and care.  

rate 

at-risk-of-poverty 

The unemployed are at high risk of poverty, in 
particular when the duration of unemployment 
increases.  The 
of 
unemployed  persons  is  high,  at  60%  (2018),  and 
rising.  Despite  this,  as  of  2020,  unemployment 
benefits  are  paid  only  for  the first  8 months  of 
unemployment  (previously  9 months)  and  are 
gradually  reduced  during  these  months.  This 
change is expected to have a limited impact on the 
incentive  to  seek  work,  as  there  is  already  low 
benefit dependency and about half of the recipients 
exited the benefit scheme within 6 months (OECD, 
insurance 
2019b).  Moreover, 
contributions result in low unemployment benefits. 
As  there  is  no  minimum  level  of  unemployment 
benefits,  vulnerable  groups  may  require  social 
assistance.  Therefore  cooperation  between  public 
employment  and 
services  could  be 
enhanced.  The  average  unemployment  benefit 
stood  at  EUR 356  per  month  (September  2019, 
national  data),  below  the  poverty  threshold  of 
EUR 409 (2018). Moreover, seasonal workers and 
the  self-employed  are  not  covered  by  insurance 
against  unemployment  and  have  limited  social 
protection coverage.  

social 

social 

low 

Measures are being taken to improve the weak 
social  protection  for  persons  with  disabilities. 
The  share  of  persons  with  disabilities  at  risk  of 
poverty  or  social  exclusion  in  Latvia  is  43.6 %, 
one of the highest in the EU (EU average 28.7 %; 
2018). In 2018, Latvia had one of the highest gaps 
in  the  EU  between  the  at-risk-of  poverty–and-
social-exclusion rate  for persons  with and  without 
disabilities  (22.4 pps  vs. 
the  EU  average  of 
9.5 pps).  On  1 January  2020,  the  state  social 
security  benefit,  which  serves  as  a  basis  for 
calculating the invalidity pension, was raised from 
EUR 64  to  80  EUR.  But  for  persons  with  a 
disability  since  childhood,  the  amount  has  been 
increased  from  EUR 106.72  to  EUR 122.69  and 
will  be  further  indexed  depending  on  the  severity 
of  the  disability.  Furthermore,  the  special  care 
allowance  for  children  and  adults  with  severe 
disability since childhood was increased on 1 July 
2019, by EUR 100, amounting to EUR 313.43 per 
month. While the measure increases the disposable 
income  of  this  group,  the  amounts  are  still  below 
the poverty threshold, and more could be achieved 
by providing community-based services.  

The transition from institutional to community-
based care has started, but only covers a part of 

Access  to  adequate  housing,  particularly  for 
low-income  groups, 
is  a  challenge,  and 
homelessness is not addressed at national level. 

32 

3.3. Labour market, education and social policies 

activity)  are  responsible  for  around  51%  of  all 
deaths in Latvia, far above the EU average of 39%. 
The authorities are putting increasing emphasis on 
promoting  health  and  a  series  of  measures  have 
been  taken  in  recent  years.  Nonetheless,  the 
spending on public health and prevention in Latvia 
remained  at  2.4%  of  the  health  budget  in  2017, 
below  the  EU  average  of  3.1%  (OECD/European 
Observatory  on  Health  Systems  and  Policies, 
2019).  

Low public financing for health limits access to 
quality  and  timely  care,  negatively  affecting 
health  outcomes.  Health  coverage  is  nominally 
universal,  but  coverage  gaps  exist.  Restricted 
access  to  state-paid  health  services  leads  to  long 
waiting  times,  high  unmet  needs  for  care  with 
significant  disparities  between  income  groups 
(12.8%  for  the  poorest  20%  of  the  population 
versus 1.7% for the richest 20% of the population), 
high  levels  of  out-of-pocket  payments  for  health 
services  (41.8%  of  the  total  health  spending  in 
2017) and financial hardship for vulnerable groups 
such  as  pensioners  and  low-income  households 
(European  Commission,  2019a).  In  2017,  the  rate 
of  treatable  mortality  in  Latvia  was  the  third 
highest in the EU, pointing to a need and scope to 
invest  in  improving  access  to  and  the  quality  of 
for  healthcare 
healthcare.  Public 
increased  from  3.4%  of  GDP  in  2017  to  around 
3.8% in 2019 (14). This increased the availability of 
some health services and innovative medicines and 
in  some  areas. 
reduced 
Moreover,  the  rise  in  health  spending  is  expected 
to  have  a  positive  effect  on  GDP  and  public 
finances  in  the  long  run  by  increasing  the  size  of 
the working age population. 

the  waiting 

financing 

times 

Nevertheless,  spending  on  health  in  Latvia 
remains  among  the  lowest  in  the  EU.  Health 
expenditure  in  Latvia,  both  in  terms  of  per  capita 
and  as  a  proportion  of  GDP,  remains  well  below 
the  EU  average  (OECD/European  Observatory  on 
Health  Systems  and  Policies,  2019).  Latvia's 
public spending on health stood at 3.4% of GDP in 
2017,  well  below  the  EU  average  of  7.8%.  The 
spending share increased in 2018 and 2019, but is 
estimated  to  decline  to  3.5%  of  GDP  in  2020,  as 
discretionary  spending  increases  lag  behind  GDP 
growth (see Section 3.1.2). Significant investments 

In  2018,  14.9%  of  the population  and  every  fifth 
person  at  risk  of  poverty  experienced  severe 
housing  deprivation,  significantly  above  the  EU 
average  of  3.9%  and  9.4%  respectively.  The 
proportion  of  people  who  found  it  difficult  to 
adequately  warm  their  homes  decreased  to  7.5% 
(2018),  while  the  proportion  of  those  with  arrears 
in  utility  bills  remains  high  (11.6%,  2018)  (see 
Section  3.5).  The  lack  of  a  common  approach  for 
providing  housing  benefits 
in  municipalities 
creates  unequal  access  to  the  service.  The  social 
housing  stock  is  low  and  often  not  fit  for  living, 
while the  waiting period can reach up to 25 years 
(BISS, 2019). Between 2009 and 2017, the number 
of  homeless  people  using  shelter/night  shelter 
services 
increased  almost  fourfold 
reaching  6 877  persons,  of  whom  80%  are  men. 
The  service  provision  for  the  homeless  remains 
underdeveloped 
across  various 
and  differs 
municipalities (Lāce T., 2019). Moreover, there  is 
to  address 
no  national  strategy 
homelessness  and  housing  exclusion  specifically 
nor has any social housing policy been developed 
in general.  

in  Latvia 

in  Latvia 

The social economy is still a new concept with a 
potential  for  growth.  There  were  75 registered 
social enterprises by the end  of 2019 (MoW  data, 
2019 (13)).  However,  it  is  estimated  that  up  to 
200 social  enterprises  operate  in  Latvia.  Most  are 
relatively  new  and  usually  do  not  employ  more 
than  10  people.  While  there  is  a  Law  on  Social 
Enterprises (2018) and a grant programme, limited 
recognition  by  the  market  and  society,  as  well  as 
poor  entrepreneurial  skills  constrain  the  creation 
and  growth  of  the  social  economy  in  Latvia. 
(European  Commission,  2018b).  Furthermore, 
while  civil  society  organisations  have  many 
opportunities  for  participation  in  policy  making, 
their  impact  is  moderate  due  to  their  limited 
capacity. 

3.3.3.  HEALTHCARE 

Unhealthy  lifestyles  constitute  one  of  the  main 
reasons  for  poor  health  outcomes.  The  rate  of 
preventable  mortality  in  Latvia  was  the  second 
highest  in  the  EU  in  2017.  Lifestyle-related  risk 
factors (including tobacco smoking, dietary habits, 
alcohol  consumption  and  low  levels  of  physical 

(13)  Statistics, 

Ministry 

of 

Welfare, 

2019 

(14)  Financing  from  the  government  schemes  based  on  the 

http://lm.gov.lv/upload/Stat-SU-05112019.pdf 

System of Health Accounts.  

33 

                                                           
                                                           
3.3. Labour market, education and social policies 

from 

technical  support 

system  is  introduced  in  the  hospital  sector.  The 
authorities are assessing whether the hospitals have 
enough resources to provide services in accordance 
with  their  assigned  level.  The  results  of  the 
assessment may lead to revisions of the hospitals’ 
levels.  A  hospital  collaboration  model  has  been 
developed,  with 
the 
European  Commission’s  Structural  Reform 
Support  Programme,  and  will  be  piloted  in  one 
region  to  test  aspects  such  as  the  rotation  of 
specialists  and  the  use  of  telemedicine  tools.  The 
pilots  of  multi-disciplinary  health  centres  for  the 
primary  care  reform  have  not  been  launched  yet. 
This  will  take  place  in  2020  with  five  pilots.  The 
pilot cases will help to detail plans for the primary 
care  reform,  such  as  the  number  and  location  of 
health  centres  across  the  country  and  the  related 
investments needs.  

Access  to  long-term  care  provision  is  limited. 
Public expenditure on long-term care was 0.4% of 
GDP  in  2016 —  significantly  lower  than  the  EU 
average  (1.6%).  The  coverage  of  the  long-term 
care system in Latvia is moderate: in 2013, 20% of 
the  potentially  dependent  population  was  covered 
and only 1% of the total population were long-term 
care  recipients.  In  2016,  38%  of  households  in 
need were affected by an unmet need for homecare 
services  due  to  financial  reasons  (the  EU  average 
was  32%).  Out-of-pocket  payments  are  estimated 
to  be  particularly  high —  100%  of  care  user’s 
disposable  income  in  case  of  moderate  needs  and 
more  than  200%  in  case  of  severe  needs  (OECD, 
2019c).  The  demand  for  long-term  care  and 
integrated services is estimated to be on the rise in 
Latvia, and access to these  services is particularly 
important for older people.  

Workforce  shortages  are  hindering  access  to 
healthcare  and  challenging  the  implementation 
of  health  reforms.  The  situation 
is  more 
pronounced  in  areas  outside  Riga,  where  the 
density  of  practising  doctors  is  much  lower  (see 
Graph 3.3.3), resulting in an urban-rural divide for 
access to healthcare. Low remuneration has been a 
deterrent  for  young  health  workers  and  nurses  in 
particular.  The  authorities  are  taking  measures  to 
improve  the  recruitment  and  retention  of  health 
workers,  including  a  commitment  to  increase  the 
wages  of  medical  practitioners  by  20%  each  year 
over  2019-2021  (European  Commission,  2019a). 
However, the increase in the budget for 2020 only 
results in a wage rise of some 10% on average. 

are required in a number of specific areas in order 
to  enhance  the  quality  of  healthcare  and  improve 
access  in  the  context  of  Pillar  principle 10  and 
the 
Sustainable  Development  Goal 3.8: 
for 
implementation 
reforms, 
planned 
the 
of 
improvement  of  the  geographical  availability  of 
health  services,  disease  prevention,  strengthening 
of  primary  care,  eHealth,  integration  of  care,  and 
for the health workforce. 

A new health insurance system will replace the 
two-basket system, which posed risks for access 
to  healthcare  for  part  of  the  population.  The 
government  decided  to  postpone  until  2021  the 
introduction  of  the  two-basket  health  insurance 
system,  which  was  meant  to  come  into  effect  in 
January 2019. In the meantime, the authorities plan 
to  develop  and  launch  a  new  health  financing 
model  based  on  compulsory  national  health 
insurance.  It  is  expected  that  this  new  model  will 
be  based  on  the  principle  of  a  single  basket  of 
health  services  for  all  Latvian  residents.  The 
authorities  aim  to  present  this  new  model  to  the 
Parliament in the spring of 2020.  

following  hospital  admission 

Latvia  has  taken  a  number  of  measures  to 
improve the quality and efficiency of the health 
system and increase access to it. Actions taken in 
the  domain  of  cancer  care  have  resulted  in 
improved  outcomes,  such  as  five-year  survival 
rates  after  diagnosis,  comparable  to  those  in  most 
EU  countries.  On  the  other  hand,  progress  in 
certain  areas,  such  as  reducing  the  high  mortality 
rate 
for  acute 
myocardial  infarction  and  stroke  is  contingent  on 
completing the restructuring  of the  hospital  sector 
and  enhancing  the  collaboration  among  hospitals. 
The  government  approved  an  action  plan  to 
combat  anti-microbial  resistance  and  promote 
a prudent 
by  medical 
practitioners,  veterinary  professionals  and  animal 
to  offer 
farmers.  The  authorities  also  plan 
screening  programmes  and  diagnostic  services  for 
mental  disorders  in  children  at  primary  care 
settings,  in  order  to  increase  access  to  such 
services,  given  the  lack  of  child  psychiatrists. 
Furthermore,  patient  pathways  are  being  designed 
and  will  be  implemented  for  diseases  of  high 
prevalence and for cases where long waiting times 
exist.  

antibiotics 

use 

of 

Plans  to  restructure  the  hospital  and  primary 
care sectors are still at an early stage. A 5-level 

34 

3.3. Labour market, education and social policies 

in 

increase 

fragmented 

while  improving  the  quality  and  efficiency  of 
the  system  and  aligning  it  to  labour  market 
needs.  The  higher  education  sector  has  benefited 
investment  and 
from  a  gradual 
incremental  changes  in  quality  assurance,  but 
not 
remains 
sufficiently 
competitive  at 
level.  Vocational 
education and training is being modernised, but the 
share of students in this type of education is below 
the  EU  average.  The  low  level  of  digital  skills 
among  the  labour  force  limits  the  use  of  digital 
technologies  by  businesses  and  the  potential  for 
innovation. 

and 
international 

the 

level  observed 

School  education  in  Latvia  produces  good 
results  in  terms  of  proficiency  in  basic  skills, 
while  urban  schools  outperform  rural  schools 
on average. In 2018, Latvian student performance 
was  broadly  stable  in  science  but  worsened  in 
reading  compared  to  2015,  although  it  remains 
in  2000,  while 
above 
performance  in  maths  increased  (OECD  PISA, 
2019d). Overall, the proportion of low achievers in 
all  three  domains  is  lower  than  the  EU  average 
(9.2%  vs  12.6%).  Female  students  outperform 
males  in  reading  (by  33  score  points)  and  to  a 
lesser  extent 
(8 points),  but  are 
outperformed by boys in maths by 7 points. Urban 
schools performed better than rural schools, with a 
difference  of  52 score  points  in  reading  (roughly 
equivalent  to  1 year  of  schooling).  The  system  is 
rather  equitable,  with  a  pupil’s  socioeconomic 
background  exerting  a  relatively  limited  influence 
on learning achievement in reading. The difference 
between 
the  most 
the  most  advantaged  and 
disadvantaged  students  was  65 score  points,  as 
compared to the EU average of 95.  

in  science 

As the number of school children decreases, the 
consolidation  of  Latvia’s  large  and  inefficient 
school network is a priority for the government. 
Streamlining  of  the  school  network  has  been 
planned from 2017 by setting the minimum criteria 
for the quality and the number of students per class 
in  general  upper-secondary  education  institutions. 
This has also been linked with changes to teachers’ 
pay  and  reform  of  the  education  content.  The 
minimum criteria is set to be effective from August 
2020, however their actual definition is still being 
discussed (Box 3.4.1).  

Low statutory salaries and long working hours 
contribute to making teaching unattractive and 

Graph 3.3.3:  Density of practising doctors across regions of 

Latvia 

Source: Statistical yearbook of health care in Latvia, 2018 

needs 

recommends 

Policies  pursued  for  the  healthcare  workforce 
have  not  achieved  the  expected  results,  so  far. 
The issues,  which have long been identified, have 
not  changed  since  2006,  according  to  a  recent 
report  on  human  resources  in  healthcare  (State 
Audit  Office,  2019). The  report  concludes  that  (i) 
the number of health professionals employed in the 
health sector is declining; (ii) there is a shortage of 
certain  specialist  doctors  and  (iii)  regions  are 
experiencing a shortage of medical practitioners in 
almost  all  specialties.  It  also  estimates  that  the 
sector requires at least 3 598 additional nurses. The 
report 
the  planning  and 
that 
forecasting  methodology  for  human  resources  in 
healthcare 
and 
complemented  by  actions  to  boost  the  number  of 
healthcare  professionals;  ensure  the  capacity  of 
to  offer  appropriate 
educational 
training  programmes  and  support  continuous 
professional education. The Ministry of Health has 
prepared 
the 
recommendations  in  the  State  Audit  Report  by 
2022.  Measures  include  the  creation  of  new 
educational programmes for nurses. Specifically, a 
concept  for 
is  being 
developed, which will propose wider competencies 
for nurses and the establishment of a  new nursing 
role  responsible  for  general  care  from  2022.  In 
addition, the current two-tier system for education 
of  nurses  will  be  replaced  by  a  new  unified  four-
year university programme. 

the  nursing  profession 

time  plan 

institutions 

implement 

improved 

be 

to 

to 

a 

3.3.4.  EDUCATION AND SKILLS 

Latvia’s  education  system  performs  well  in 
terms  of  learning  achievements,  but  faces  the 
challenge  of  streamlining  the  school  network, 

35 

 
3.3. Labour market, education and social policies 

subjects, compared to the previous one, and allows 
students  to  dedicate  30%  of  school  time  to 
specialised  in-depth  learning  of  selected  subjects. 
The implementation of the new curriculum will be 
gradual starting with pre-school level in 2019/2020 
and  ending  with  upper  grades  in  2022/2023.The 
share  of  young  adults  with  tertiary  education 
decreased  in  2018  compared  to  the  previous 
year, but remains above the EU average. 42.7% 
of  30-34  year-olds  had  a  tertiary  qualification  in 
2018,  down  from  43.8%  in  2017.  The  decrease 
was  more  pronounced  for  men  (from  32%  to 
30.6%),  further  widening  an  already  significant 
gender  gap  (24.6  pp).  Graduates  in  science, 
technology, 
and  mathematics 
represented  21%  of  all  graduates  in  2017,  well 
below  the  EU  average  of  26%.  In  addition,  the 
proportion  of  graduates 
in  natural  sciences, 
mathematics  and  statistics  was  the  lowest  in  the 
EU (3.1% against an EU average of 7.6% in 2016). 
On  a  positive  note,  the  employment  rate  for 
graduates  in  the  20-34  age  group  rose  sharply  in 
2018  (84.1%,  up  from  78%  in  2017)  and  now 
exceeds  the  EU  average  of  81.6%.  Graduate 
tracking  is  being  implemented,  with  the  first  data 
from  the  Register  of  Students  and  Graduates 
expected at the end of 2019. 

engineering 

New  measures  to  reduce  fragmentation  of  the 
higher  education  system  and  to  develop  higher 
quality  study  programmes  are  being  planned, 
with support from EU funds. While this is a step 
in the right direction, it remains to be seen whether 
Latvia’s  higher  education 
institutions  can  be 
motivated  to  reduce  the  scope  and  number  of 
programmes as they compete for students. Overall, 
available  research  funding  in  the  country  is  still 
low, and the amount of performance-based funding 
for  higher  education  institutions  is  limited.  The 
success  of  these  measures  will  largely  depend  on 
more resources for academic research being  made 
available, on better governance of higher education 
institutions  and  on  the  ability  of  the  government 
agency  responsible  for  quality  assurance  and 
accreditation  of  study  programmes  to  conduct  a 
rigorous evaluation of the quality offered by higher 
education  institutions.  Several  factors  will  play  a 
key  role,  including  the  quality  of  the  new  higher 
education  programmes  to  be  developed  and  the 
availability of qualified academic staff.  

Despite 
participation 

the 

ongoing 

efforts, 
in  vocational  education  and 

reform 

reforms  have  not  yet  resulted  in  the  desired 
improvements. The proportion of Latvian teachers 
who believe that teaching is a valued profession in 
society  is  higher  than  the  EU  average  (23%  vs. 
18%) (OECD TALIS, 2019e). However, only 65% 
of teachers say that if they could decide again, they 
would still choose to become a teacher (78% in the 
EU on average). Income reliability and job security 
appear to be strong influencing factors in choosing 
teaching  as  a  profession.  The  new 
teacher 
remuneration  scheme  introduced  in  2016  has 
gradually  increased  the  minimum  monthly  salary 
rate  from  EUR 680  on  1 September  2016  to 
EUR 750  on  1 September  2019.  However,  this 
monthly salary rate is still less than half of the EU 
average  monthly  salary  for  teachers  (European 
Commission/EACEA/ Eurydice, 2018c). 

Renewing the teaching workforce is a challenge, 
as  young  graduates  are  not  attracted  to  the 
profession  and  teacher  shortages  are  becoming 
apparent,  especially  in  science  and  maths.  In 
2015, less than 1% of 15-year-olds aspired to work 
as  a  teacher  (only  0.2%  among  boys)  (European 
Commission, 2018c). According to the Ministry of 
Education and Science, out of approximately 1 000 
education graduates per year, currently only about 
350-400  actually  start  working  as  teachers.  The 
Ministry  has  updated  regulations  on  the  financing 
of  higher  education  institutions,  to  ensure  they 
receive  performance-based  funding  according  to 
how  many  of  their  education  graduates  enter  the 
shortages  are 
teaching  profession.  Teacher 
increasingly being reported. In September 2018, a 
survey  of  200  school  leaders  conducted  by  the 
Society for Independent Education found that 65% 
of schools had a shortage of teachers. In 2018, the 
plans  were  set  out  to  redesign  teacher  study 
programmes  matching  the  new  competency-based 
learning  standards  in  schools.  Along  with  the 
changes 
full-time  pedagogical  study 
study 
programmes,  a  one-year  work-based 
programme for professionals with academic degree 
in other fields has been launched in 2020.   

the 

to 

The  new  standard  curriculum  for  all  levels  of 
general education has been adopted and will be 
phased  in  over  the  period  2019-2023.  The 
competence-based 
learning  standards  for  pre-
school  and  basic  education  were  adopted  in  2018 
and  those  for  general  secondary  education  were 
passed in September 2019. The new curriculum in 
upper  secondary  education  reduces  the  number  of 

36 

3.3. Labour market, education and social policies 

schedule  or 

conflict  with  working 
family 
responsibilities  (CSB,  2018).  Insufficient  non-
financial and financial incentives for employers to 
their 
invest  and  support  adult 
employees  also  limit  the  provision  of  the  adult 
learning (OECD, 2019a). 

learning  for 

Latvians  are  lacking  digital  skills  at  all  levels, 
from  basic  to  advanced,  and  the  low  share  of 
ICT  specialists 
in  the  workforce  hampers 
digitisation  and  productivity.  No  significant 
progress  has  been  made  to  improve  the  level  of 
digital  skills  that  are  below  the  EU  average  (see 
Box 3.3.1). Only 43% of Latvians between 16 and 
74  years  old  have  basic  digital  skills  (58%  in  the 
EU as a whole), an indicator recorded as ‘critical’ 
on  the  Social  Scoreboard  (Box 3.3.1),  and  ICT 
specialists  represent  a  low  share  of  the  workforce 
(1.7% compared to 3.9% in the EU). Bridging the 
gender gap in digital is an important element, since 
women ICT specialists account for a mere 0.5% of 
women’s  employment,  below  the  EU  average  of 
1.4%.  However,  Latvia  is  successful  in  producing 
ICT graduates: there has been a constant increase, 
well above the EU average (to 5% of all graduates, 
compared to 3.6% in the EU). 

Measures  to  improve  access  to  adult  learning 
are  being  supported  with  EU  funds  and  there 
are plans for state-financed adult learning after 
2022. Latvia lacks a clear framework or agreement 
on  how  to  sustainably  share  the  costs  of  funding 
lifelong  learning  between  government,  employers 
and  individuals  (OECD,  2019a).  State  funding  of 
adult  learning  has  been  postponed  until  2022  and 
currently  mainly  EU  funds  are  being  used  to 
improve  access  to  adult  learning.  So  far  16 800 
adult employees, including 3 481 employed with a 
low  level  of  education,  were  involved  in  adult 
learning. Work is planned to develop a regulatory 
framework for state funding for adult learning that 
is  to  enter  into  force  by  the  end  of  2022.  The 
National Skills Strategy project, which is receiving 
OECD  support,  is  in  its  action  phase,  and  it  is 
during this phase that Latvia’s national strategy for 
education  and  skills  for  2021-2027  will  be 
developed and approved.  

teacher 

(VET)  remains 

training 
low.  Latvia  has 
undertaken  several reforms to strengthen the  VET 
system, such as curriculum reform, development of 
education  standards  and  qualifications,  modular 
training  and  closer  co-
programmes, 
operation  with 
employers.  Labour  market 
outcomes for VET students have improved, but the 
employment rate of recent VET graduates remains 
below the EU average (75.8% vs. 79.5% in the EU 
in 2018). Despite these efforts, the participation in 
VET remains stagnant with less than 40% students 
opting  for  this  form  (48%  in  the  EU  in  2018). 
Measures  supported  by  the  European  Social  Fund 
to  reduce  the  high  drop-out  rate  of  students  in 
vocational  education  and  training  (19%  in  upper 
secondary  vocational  education  in  2017/2018)  are 
in  place.  Graduate  tracking  is  organised  only  at 
school  level  and  the  development  of  a  centralised 
approach should be finalised by the end of 2020.  

for  VET 

During  2019,  Latvia  continued  to  support 
implementation  of  work-based  learning  via  a 
number  of  projects.  These  projects  included 
cross-border  mobility 
students, 
continuous  professional  development  for  teachers 
of  vocational  education  and  training  and  in-
company  trainers,  and  support  to  businesses  in 
implementing  work-based  learning  and  practices. 
With the Employers’ Confederation in the lead, the 
work-based learning approach is being introduced. 
By  October  2019,  29  out  of  38  vocational 
education and training schools and 469 companies 
least  one  work-based 
were 
learning 
students 
participating.  There  is  scope  to  further  strengthen 
the  implementation  of  work-based  learning  and 
increase 
and 
employers,  as  well  as  better  align  the  work-based 
learning offer with labour market needs. 

the  participation  of 

programme  with 

implementing  at 

schools 

2 011 

The  level  of  adult  participation  in  learning 
remains relatively low and further steps to raise 
awareness  and  reduce  barriers  are  planned.  In 
2018,  6.7%  of  adults  participated  in  learning, 
which  is  below  the  EU  average  of  11%  and  the 
learning 
target  of  15%.  The  adult 
national 
participation  rate  for  the  low-skilled  in  2018  was 
even  lower  at  only  2.5%  (4.3%  in  the  EU  on 
average).  This  is  partially  explained  by  the  low 
awareness  and  barriers  in  access —  in  2016  more 
than 35% of adults neither participated nor wanted 
to  participate  in  adult  learning.  The  main  barriers 
to  participation  were  reported  to  be  the  costs, 

37 

3.4. COMPETITIVENESS REFORMS AND INVESTMENT 

3.4.1.  INVESTMENT AND PRODUCTIVITY  

Labour productivity and unit labour costs 

Labour  productivity  growth  more  than  halved 
in  Latvia  in  2018  compared  to  2017,  but 
remains  well  above  the  EU  average.  In  2018, 
hourly labour productivity growth slowed to 2.3%, 
compared with 4.7% the previous year. Despite the 
slowdown,  it  still  grows  substantially  above  the 
EU  average  –  over  the  past  five  years  Latvia’s 
average productivity growth was 3.1%, while EU’s 
average  growth  was only 1.0%. Over the  medium 
term,  however,  the  appreciation  of  unit  labour 
costs may hurt Latvia’s export competitiveness and 
therefore  hurt  its  productivity  growth.  Moreover, 
the  declining  population  is  set  to  continue  putting 
strain  on  the  efficiency  of  Latvia’s  infrastructure 
thus  potentially  being  a  drag  on  the  overall 
productivity  growth.  Following  the  2016  Council 
the 
Recommendation,  Latvia has 
University  of  Latvia  think  tank  LV  PEAK  as 
National  Productivity  Board  in  October  2019. 
Measures  to  ensure  continued  convergence  with 
the  EU  average  would  contribute  to  advancing 
towards SDGs 8 and 9. 

appointed 

industry has been the fastest over the past 5 years, 
but in level terms it remains some 20% below that 
of  Estonia  and  Lithuania.  In  market  services, 
Latvia’s  productivity  growth  falls  between  the 
other Baltics (Graph 3.4.2). 

Graph 3.4.2:  Average productivity growth 2013 - 2018, % 

Source: European Commission 

Graph 3.4.1:  Labour productivity growth, annual % change 

Cost competitiveness  

the 

above 

in  unit 

Unit  labour  cost  growth  remains  among  the 
in  the  EU,  raising  concern  about 
highest 
Latvia’s  cost  competitiveness.  In  2018,  unit 
labour  cost  growth  accelerated  again  to  5.3%, 
bringing  the  three-year  growth  rate  to  14.7%, 
macroeconomic 
considerably 
imbalances  scoreboard  threshold  of  9%.  The 
growth 
in  Latvia  has 
labour  costs 
considerably  exceeded  the  euro-area  average  and 
Latvia’s real effective exchange rate based on unit 
labour  costs  has  appreciated  by  7.1%  between 
2015  and  2018.  However,  the  unit  labour  cost 
growth  has  been  slow  to  pass  on  to  prices  as 
evidenced  by  the  mere  1.3%  increase  in  the  real 
effective  exchange  rate  based  on  the  harmonised 
index of consumer prices over the past 3 years. The 
rise  in  wage  costs  relative  to  Latvia’s  trading 
partners  carries  the  risk  of  making  the  country’s 
exports  too  expensive  to  compete  in  foreign 
markets.  However,  the  growth  of  export  market 
share has remained healthy so far — over the past 
5  years  it  has  increased  by  8.6%.  This  is  notably 
below  other  catching-up  economies  at  a  similar 
income  level,  like  Poland  or  Romania  whose 
market  shares  have  increased  by  more  than  20% 

Source:  

Productivity  growth  in  manufacturing  has  been 
roughly  twice  as  fast  as  in  market  services  in 
Latvia.  Slow  productivity  growth  in  non-tradable 
services  is  partly  due  to  Latvia’s  small  domestic 
market,  which  limits  economies  of  scale  that  can 
be  achieved.  Also,  the  decline  in  the  population 
has  put  an  additional  strain  on  the  productivity  of 
domestically  focused  sectors.  Compared  to  the 
other Baltic States, Latvia’s productivity growth in 

38 

-2.0-1.00.01.02.03.04.05.06.07.08.0201020112012201320142015201620172018EUEstoniaLatviaLithuania0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%IndustryMarket servicesEstoniaLatviaLithuania  
  
3.4. Competitiveness reforms and investment 

over  the  past  5  years.  However,  Latvia’s  export 
market  share  growth  rate  is  highest  among  the 
Baltics  —  in  Lithuania  it  was  below  5%,  and  in 
Estonia it barely changed at all.  

is 

Wage  growth  spurred  by 
labour  market 
tightening  is  the  primary  driver  of  unit  labour 
cost growth. The breakdown of the growth in unit 
labour  costs  shows  that  the  average  productivity 
growth  over  the  past  3  years  has  been  among  the 
fastest in the  EU. However,  Latvia’s annual  wage 
growth of around 7.9% in the past 5 years has been 
much  higher  than  the  EU  average  of  1.6%, 
therefore  driving  the  relative  increase  in  unit 
labour  costs.  The  driver  of  the  recent  fast  wage 
growth 
labour  supply  and  an 
investment-led increase in labour demand. Labour 
supply  is  set  to  continue  declining  due  to  the 
demographic  situation.  Conversely,  rapid  wage 
growth  may  alleviate  the  pressure  of  a  falling 
labour  supply  if  the  country  manages  to  stem 
outward migration. Further relief to the shortage of 
workers  could  come  from  policies  facilitating 
better 
adult 
participation  in  learning,  improving  the  labour 
market relevance of training of the low-skilled and 
improving health outcomes. 

internal  mobility, 

the  falling 

increasing 

in  other  asset 

which  saw  real  increase  in  investment  of  nearly 
35% between 2016 and 2019. The spurt was driven 
primarily by EU-funded public investment, helped 
also  by  private  sector  investments  in  retail  spaces 
and  office  buildings  to  accommodate  the  rapidly 
growing  business  and  IT  services  industry.  Over 
the  longer  term,  however,  real  investment  growth 
in Latvia has been meagre — over the past 5 years 
it has increased at roughly the same pace as the EU 
average.  Moreover,  it  has  mostly  been  driven  by 
non-residential  construction  and  machinery,  while 
the  growth 
types  has  been 
significantly lower than in the other Baltics or the 
EU  average.  EU-funded  infrastructure  projects 
form  a 
significant  part  of  non-residential 
construction  and  have  therefore  been  instrumental 
in carrying Latvia’s investment growth. Lacklustre 
residential  investment  growth  is  linked  to  a 
number  of  factors  —  relatively  high  construction 
costs 
cumbersome 
lengthy 
administrative  procedures,  slow  mortgage  lending 
and  a  declining  population.  Finally,  poor 
investment  in  intellectual  property  is  linked  to  a 
relatively  weak  digitalisation  drive 
across 
economic sectors (see graph 3.4.4). 

and 

due 

to 

Graph 3.4.4:  Average real investment growth 2013 - 2018, % 

Graph 3.4.3:  Unit labour cost growth and its components, % 

Source: European Commission 

Investment  

Despite a recent surge, investment levels remain 
only 
the  EU  average. 
Investment growth slowed in 2019, ending a spurt, 

somewhat  above 

Source: European Commission 

Firm  surveys  show  that  uncertainty  about 
demand  holds  back 
investment.  Private 
investment  remains  subdued,  largely  driven  by 
uncertainty  regarding  external  demand  conditions, 
but to some extent also by structural barriers. One 
quarter of Latvian firms consider they had invested 
too  little  over  the  last  few  years,  which  is  among 

39 

-15-10-50510152025303504050607080910111213141516171819*20*Rate of change y-o-y (%)Inflation (GDP deflator growth)Real Compensation per EmployeeProductivity Contribution (negative sign)Nominal unit labour costULC in EU28-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%10.0%12.0%EUEstoniaLatviaLithuania  
  
3.4. Competitiveness reforms and investment 

industry  links  remain  key  challenges  (European 
Commission,  High  Growth  Enterprises  Factsheet 
Latvia).  Latvian  start-ups  and  SMEs  also  lag  in 
to  other  EU 
innovation  capacity  compared 
Member  States.  To  address  this,  in  2018  Latvia’s 
technology  transfer  programme  was  amended  to 
improve 
the 
innovation activities of SMEs. 

innovation  voucher  support  for 

Human capital imbalances are holding back the 
development  of  the  Latvian  research  and 
innovation  system.  Demographic 
trends  and 
underfunding  make  it  difficult  for  Latvia  to  keep 
up  with  the  EU  average  in  terms  of  numbers  of 
researchers, PhD students and graduates in science, 
technology, engineering and mathematics. Even if 
the  situation  is  advancing,  there  is  still  ample 
scope  for  further  improvement,  e.g.  for  reaching 
the  national  goal  of  7 000  researchers  in  2020. 
Several  changes  are  underway,  including  changes 
to the academic career system, study programmes, 
and  higher  education  governance.  In  cooperation 
with  the  European  Commission,  a  Horizon  2020 
Policy  Support  Facility  activity  is  aiming  to 
for 
develop 
attracting  and  retaining  talents  in  scientific  and 
technological  careers  as  well  as  in  the  business 
sector. 

recommendations 

policies 

on 

the 

from 

recommendations 

The  fragmentation  of  the  governance  of  the 
research & innovation system  still represents a 
challenge  for  Latvia  but  is  being  addressed. 
the 
Following 
European  Commission’s  Horizon  2020  Policy 
Support  Facility  activity (15), 
the 
government  approved  a  new  strategy  for  the 
institutional  consolidation  of  the  Latvian  science 
science  policy 
policy 
enforcement  body 
its 
activities in 2020. This reform has the potential of 
reinforcing the research and innovation system and 
increasing administrative capacity. 

in  Latvia  should  start 

system.  A  unified 

in  2019 

Digitalisation 

Latvia  has  made  substantial  improvements  in 
digital public services and is well above the EU 
average in this area. Progress has been driven by 
the  use  of  e-government,  the  availability  of  pre-
filled  forms  and  the  availability  of  open  data 

(15)  See  the  Final  Report  of  this  Policy  Support  Facility  — 
https://rio.jrc.ec.europa.eu/en/library/specific-support-
latvia-final-report-–-latvian-research-funding-system-0. 

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 
(EIB  Investment  Survey  2019).  The  cost  and 
availability  of  external  financing  and  the  stability 
and complexity of tax legislation are also cited as 
possible 
(Flash 
to 
Eurobarometer 459 ‘Investment in the EU’). 

investment 

obstacles 

Research and innovation 

innovation 

in  research  and 

Investment 
in 
Latvia  recently  increased,  supported  by  EU 
funds, but remains low overall. In 2018, research 
and development expenditure relative to GDP was 
up 0.64% (0.51% in 2017). More than half of this 
is  public  spending.  European  funds  constitute 
41.5%  of  all  public  investment  in  research  and 
innovation.  Despite  the  increase  in  spending,  it  is 
insufficient  to  tackle  the  significant  underfunding 
of  the  entire  research  and  innovation  system.  The 
share of investment in research and development is 
considerably below the EU average (2.1% of GDP 
in  2018)  and  is  also  far  below  Latvia’s  target  of 
1.5% of GDP for 2020. The underfunding hinders 
the effectiveness of the research and development 
system, its attractiveness to researchers, especially 
young  researchers,  and  is  limiting  its  added  value 
for  the  economy.  Moreover,  the  coverage  of 
innovation 
sustainability-related 
topics  is  limited.  The  share  of  publications  in  top 
journals  has  slightly 
remains 
relatively low in international comparison. 

increased  but 

research  and 

the  EU  average, 

Latvia  boasts  a  vibrant  start-up  community, 
but  the  supply  of  IT  specialists  is  limited  and 
research-industry  links  are  weak.  While  the 
employment  share  of  high  growth  enterprises  is 
slightly  above 
the  country 
performs below the EU average in terms of access 
to  finance  and  other  framework  conditions  (e.  g. 
human capital, regulation and innovation), with the 
skills, 
notable  exception  of  entrepreneurial 
reflected 
start-up 
community.  The  highest  share  of  high-growth 
enterprises  is  found  in  knowledge-intensive  and 
medium-high 
industries, 
particularly in ICT and machinery and equipment, 
but also in some medium-low tech sectors such as 
rubber and plastic products. The development of a 
is 
technology-oriented 
promising.  However,  skills  shortages  and  having 
still  relatively  few  research-industry  and  intra-

tech  manufacturing 

steadily  growing 

ecosystem 

start-up 

the 

in 

40 

                                                           
3.4. Competitiveness reforms and investment 

their ICT skills, a figure that is significantly below 
the  EU  average  of  23.9%.  The  shortage  of  ICT 
specialists  is  also  evident  in  employment  figures, 
as  their  share  of  total  employment  is  significantly 
below  the  EU  average  —  1.7%  compared  with 
3.9%  (see  Section  3.3).  This  is  potentially  an 
obstacle  to  investment  and  innovation  and  might 
also  limit  the  spread  of  productivity-enhancing 
digital solutions among businesses. The shortage is 
likely to become worse in the future due to rapidly 
growing demand.  

initiatives  aim 

to  boost  digital 
Several 
innovations  and  promote  the  use  of  digital 
technologies. Eight Competence Centres, set up in 
the  areas  of  Latvia’s  smart  specialisation  strategy 
for an overall investment of €67 million, cover 175 
projects  and  138  enterprises  and  are  EU-funded. 
They  promote  innovation  in  Latvia  through  the 
joint  development  of  products  and  processes  by 
companies  and  scientific  institutions.  Latvia  also 
set a Single Technology Transfer Centre, as part of 
the  Investment  and  Development  Agency  of 
Latvia,  to  foster  industry-science  cooperation  and 
the commercialisation of public research. 

Business environment and entrepreneurship 

Latvia  has  a  favourable  business  environment, 
but  the  shadow  economy  remains  a  challenge. 
Latvia  ranked  19th  out  of  190  in  the  2019  World 
Bank  Doing  Business  Review,  unchanged 
compared  to  the  previous  year.  Latvia  ranks  high 
in  most  of  the  sub-indicators,  except  for  getting 
electricity,  which  is  still  a  relatively  lengthy  and 
costly  process.  Insolvency  cases  and  dealing  with 
construction  permits  also  score  low.  According  to 
the  European  Commission’s  SME  Policy  Review, 
the  biggest  challenge  for  Latvia  in  creating  a 
favourable environment for entrepreneurship is the 
lack  of  skills  and  innovation.  In  addition,  while 
Latvia is among the leaders in the EU in terms of 
the  time  needed  to  start  a  business  (1  day)  and 
greatly reducing the related costs, the bureaucracy 
and payments related to closing a company create 
a  burden  that  may  discourage  entrepreneurs  from 
starting  another  business  in  the  future.  Moreover, 
the 
structural 
constraint,  but  several  measures  are  being 
implemented  to  improve  tax  compliance  (see 
Section 3.1).  

shadow  economy 

remains  a 

further  to  the  launch  of  the  national  data  portal, 
making it possible to access  public administration 
data sets and metadata directly and to link to other 
data  sets. The country is slightly less advanced in 
e-government services for business. Further efforts 
are  being  made  to  increase  the  effectiveness  of 
public  administration  through  the  efficient  use  of 
cloud  computing  services  in  order  to  reduce 
administrative  burden 
a  more 
favourable business environment for entrepreneurs 
and SMEs.  

create 

and 

Latvia  continues  to  invest  in  getting  more 
people  to  use  e-government  services.  83%  of 
internet users (compared to 67% in the EU) used e-
government  services.  Results  have  been  achieved 
thanks to an extensive communication and training 
programme  called  —  ‘My  Latvija.lv!  Do 
it 
digitally!’  that  involves  training  for  at  least  6,000 
national  and  local  government  officials,  teachers, 
their 
librarians  and 
knowledge  of  digital  solutions,  so  they  can  help 
people make the transition from on-site services to 
digital 
services.  The  programme  provides 
information and video tutorials of more than 500 e-
services  and  brings  together  over  30  government 
institutions in a cooperative effort. 

journalists, 

improve 

to 

in 

Latvian  business  does  not  fully  exploit  its 
digitisation potential. Latvia is lagging behind the 
EU  average  and  has  not  made  any  significant 
progress 
technologies. 
integrating  digital 
Latvian  enterprises  continue  to  underexploit  the 
potential  of  online  selling  of  goods  and  services, 
remaining  considerably  below  the  EU  average  in 
e-commerce  among  SMEs  and  related  levels  of 
turnover. Only 11% of SMEs sell online, below the 
EU  average  of  17.5%.  The  percentage  of  SMEs 
selling cross border remains below the EU average 
(only 6.6% of total SMEs, against 8.4% in the EU 
as a  whole) and only an average  of 5.3% of SME 
segment. 
turnover  comes 
Businesses  make  only  limited  use  of  electronic 
information  sharing,  e-cloud  services  and  social 
media and only 7.7% of companies use big data.  

the  online 

from 

Improvements  in  the  integration  of  digital 
services by businesses is limited by the shortage 
of  high-skilled  professionals.  Almost  half  of  all 
Latvian  enterprises  that  want  to  recruit  ICT 
specialists 
their 
vacancies.  Additionally,  17.7%  of  enterprises 
provide staff with training to develop and upgrade 

report  difficulties 

filling 

in 

41 

Latvia’s  start-up  environment  is  dynamic  and 
rapidly  growing.  Latvia’s  start-up  ecosystem 
consists  of  more  than  400  registered  start-ups,  a 
pool of institutional investors and business angels, 
a  diverse  range  of  modern  co-working  spaces, 
dozens  of  business  incubators  funded  by  the 
government,  academia  and  private  individuals,  as 
well  as  numerous  events.  The  capital  city  Riga 
hosts  important  conferences,  such  as  The  Digital 
Freedom Festival, iNovuss, Deep Tech Atelier and 
TechChill.  A  unique  Start-up  Law  and  a  Start-up 
Visa (‘temporary residence permit’) aim to provide 
targeted  support  to  help  start-ups  face  their  main 
initial  challenges,  namely  employee  wages  and 
taxes.  The  criteria  for  support  under  the  Start-up 
Law  were  further  simplified  in  2019  to  make  it 
easier for start-ups to apply and reduce the time it 
takes to receive support to develop their business. 

Public procurement 

and 

restrictions 

Transparency  and  competition  in  procurement 
procedures  remain  problematic.  According  to 
the  2019  Flash  Eurobarometer,  71%  of  Latvia’s 
businesses  believe 
that  competition-excluding 
specifications  is  a  widespread  practice  in  their 
country (compared to the EU average of 58%) and 
80%  believe 
that  favouritism  and  corruption 
hamper business competition (compared to the EU 
average  of  71%).  The  share  of  single-bidder 
contracts  remains  high  (around  30%  in  2018,  EU 
average  of  24%),  with  most  of  these  contracts 
being  in  the  healthcare  area,  due  to  limitations  of 
by 
the  market 
imposed 
manufacturers.  Moreover, 
the  percentage  of 
directly  negotiated  procedures  was  12%  in  2018 
(EU  average  4%).  The  Procurement  Supervision 
transparency  by 
Bureau 
publishing information on low-value procurement, 
as well as on the real value of the contracts (versus 
the  initial  ones)  in  their  electronic  procurement 
system.  To  professionalise  the  staff  involved  in 
procurement,  more  than  500  persons  have  been 
trained  in  various  topics,  including  fraud  and 
corruption.  The  bureau  carries  out  preliminary 
tendering 
controls 
documentation  and  investigations  based  on  a  risk 
matrix.  Information  received  from  whistleblowers 
or  complainants  constitute  an  important  source  of 
information for the bureau. 

the  quality  of 

to  check 

increase 

intends 

to 

3.4. Competitiveness reforms and investment 

3.4.2.  SINGLE MARKET INTEGRATION 

Single market for goods and services 

Latvia  is  a  very  open  economy  and  well 
integrated  in  EU  markets.  Overall  Latvia  scores 
well in the Single Market Scoreboard. With goods 
trade comprising 94.5% of GDP and services trade 
trade 
comprising  28.3%  of  GDP,  Latvia’s 
integration  is  above  the  EU  average.  About  two 
thirds  of  exports  of  goods  are  going  to  other  EU 
Member  States.  Latvia’s  main  export  markets  are 
and  Sweden. 
Lithuania,  Estonia,  Germany 
Regulatory  restrictions  in  the  services  sector  are 
overall  lower  than  the  EU  average.  Latvia  has  an 
efficient customs system and is among the best EU 
information  availability  and 
performers 
advanced 
(European 
on 
Commission, 2019e). The use of e-commerce and 
e-business is increasing, but there still seems to be 
further scope for improvement.  The  percentage of 
SMEs  intra-EU  online  exporters  remains  well 
below  the  average  with  only  4.7%.  Most  Latvian 
producers  (65%)  are  still  concentrated  in  low-
technology  industries,  such  as  basic  wood  and 
metal processing. A higher number of notifications 
of  draft  technical  regulations  under  the  Single 
Market Transparency Directive could help prevent 
potential  barriers  in  the  internal  market  for  goods 
and information society services. 

for 
rulings 

customs 

Digital single market 

lack  of 

infrastructure,  and 

Most  urban  areas  in  Latvia  have  excellent 
digital 
fixed 
broadband access in rural areas is compensated 
by  mobile  broadband.  The  country’s  main 
strengths are the broad coverage of fast and ultra-
fast broadband (with 93% and 88% of households 
covered,  respectively),  both  of  which  are  among 
the  best  in  the  EU.  Also,  the  take-up  of  fast 
internet subscriptions is above the EU average and 
growing  rapidly  (44%  and  38%  of  homes 
subscribe 
fast  and  ultrafast  broadband 
respectively). However, the overall subscription to 
fixed broadband services is stagnating at 60% and 
remains below the EU average. This is largely due 
to  low  fixed  broadband  coverage  in  rural  areas. 
Although,  extensive  EU-funded  investments  in 
extending fixed broadband to rural areas have been 
made,  investments  in  last-mile  connections  have 
not  followed  due  to  lack  of  commercial  viability. 
However, the missing progress in fixed broadband 
coverage  is  partially  compensated  by  a  rapid 

to 

42 

3.4. Competitiveness reforms and investment 

begin in 2020. In its first phase,  which is  planned 
to  be  completed  by  2023,  314  km  of  track  would 
be  electrified,  increasing  the  share  of  electrified 
track  from  14%  to  30%.  Secondly,  Latvia  is 
investing  in  new  trains,  which  will  increase  the 
attractiveness of rail commutes and therefore  help 
increase  the  share  of  public  transport  usage  for 
currently 
commuting.  Moreover,  Latvia 
developing a new transport model that it hopes will 
help direct public investments where they can have 
the  most  impact.  Finally,  Rail  Baltica  is  also 
expected  to  support  the  modal  shift  to  rail  from 
more carbon intensive modes of transport.  

is 

Despite recent improvements, the quality of the 
road infrastructure remains well below the EU 
average. Road transport performance, measured as 
a ratio between accessibility and distance (Dijkstra 
et al, 2019) is below the EU average in all regions 
except  Riga,  where  it  is  close  to  the  EU  average 
(80.4 versus 81.9). Moreover, Latvia is among the 
few  EU  countries  without  motorways.  Lack  of 
suitable  ring-roads  has  led  to  heavy  lorry  traffic 
passing  through  major  inhabited  areas,  adding  to 
congestion  and  air  pollution.  To  address  that, 
Latvia  has 
first  public-private 
partnership  project  to  design  and  construct  the 
Kekava  bypass  on  the  European  Route  E67.  This 
project is expected to move lorry traffic away from 
residential areas and increase traffic flow.  

launched 

its 

Energy 

Latvia, together with the other Baltic countries, 
is  progressing  well  towards  synchronisation 
with  continental  Europe’s  electricity  grids,  a 
key  priority  for  the  coming  years.  The  ongoing 
Baltic  Synchronisation  Project,  scheduled  for 
completion by the end of 2025, is key to ensuring 
security of supply of the whole Baltic region. The 
June  2019  implementation  roadmap  includes  the 
following  milestones  —  building  the  necessary 
infrastructure to reinforce the internal  grids of  the 
three  Baltic  states,  establishing  a  high-voltage 
direct  current  line  between  Lithuania  and  Poland, 
and carrying out optimisation measures. All of the 
above  actions  will  require  significant  investments 
in the coming years. 

to 

Latvia  continues 
the  key 
electricity  infrastructure  projects  that  form 
part of the implementation of the Baltic energy 
market interconnection plan. In September 2019, 

implement 

increase  in  mobile  broadband,  thanks  to  data 
bundles being widely available at affordable prices 
and high 4G coverage. Latvia is prepared for early 
5G deployment in the 3.4-3.8 GHz band. However, 
in  the  medium  to  long  term,  access  to  and  the 
renting  of  property  in  order  to  install  the  many 
base  stations  required  for  5G  might  hinder  5G 
deployment. 

Transport 

The Rail Baltica project is crucial to integrating 
the Baltics with the core European rail network. 
Currently, Latvia is well connected with its eastern 
neighbours  via  wide  gauge  rail,  but  it  does  not 
have  any  standard  gauge  rail  lines,  limiting  it 
international accessibility from the rest of the EU. . 
The  construction  of  the  Rail  Baltica  project, 
linking  the  three  Baltic  countries  to  Poland  and 
therefore  the  rest  of  the  European  rail  network,  is 
crucial to address that shortcoming. The project is 
not  progressing  as  planned.  The  State  Audit 
Offices of the Baltic countries have estimated Rail 
Baltica  is  experiencing  delays  of  more  than  2 
years. This is due to the fact that an agreement on 
interoperability 
technical 
between  the  participating  EU  Member  States  has 
been  delayed,  the  project  is  facing  management 
challenges,  and  in  Latvia  due  to  the  fact  that  the 
scope of works has increased, higher- than-planned 
costs  may  occur.  Going  forward,  the  outcome  of 
the  decision-making  process  on  the  future  model 
of  infrastructure  management  will  be  decisive  for 
realising the full market potential of Rail Baltica. 

specifications 

for 

Improving  transport  infrastructure  within  and 
around  Riga  would  both  facilitate 
labour 
mobility  and  help  curb  growing  energy 
consumption  from  passenger  cars.  As  the  main 
generator  of  GDP,  Riga  is  a  crucial  transport  hub 
for both passengers and cargo. Enhancing mobility 
presumes  an  integrated  approach  to  transport. 
Improving  regional  rail  connections  and  transit 
points  would  facilitate  more  environmentally 
friendly commutes. The growing use of passenger 
cars is among the chief reasons for growing carbon 
emissions in the transport sector (see Section 3.5). 
Therefore,  switching  commuters  from  cars  to 
public transport is an essential part of the effort to 
curb  energy  consumption  and  emissions  in  the 
transport  sector.  Two  major  investment  projects 
are  expected  to  help  this  cause.  Firstly,  a  major 
EU-funded rail electrification project is planned to 

43 

3.4. Competitiveness reforms and investment 

growth in the regions has been much more modest. 
For example,  GDP per head in the  Latgale  region 
rose  only  13%,  from  20%  in  2000  to  33%  in  the 
same period. In terms of wages, Latgale region has 
the lowest average gross salary of €701 per month, 
while  the  average  monthly  salary  in  Riga  was 
€1,129.  The  pay  gap  between  the  capital  region 
and  the  rest  is  around  1.6  times.  Finally,  the 
poorest  regions  have  also  experienced  more  rapid 
depopulation  —  while  the  population  in  Riga  and 
its suburbs has increased, the population in Latgale 
has declined by 29% since 2001.  

tends 

The competitiveness of other regions than Riga 
is  low  (17).  There  are  almost  93  entities (18) 
registered per 1,000 persons in Riga while only 61 
in  Latgale.  Riga  region  is  also  increasingly  more 
engaged  in  business  services  where  added  value 
per  employee 
to  be  higher,  while 
manufacturing  remains  much  more  significant  in 
the regions. These differences are mainly linked to 
the  ability  to  attract  investments.  The  capital 
region  has  a  better  economic  performance. 
Therefore  it  can  offer  higher  wages  and  better 
employment  and  career  opportunities,  while  the 
other  regions  are  not  able  to  provide  sufficiently 
well  paid  and  attractive  jobs.  The  share  of  the 
employed population to total  population  was 68% 
in  Riga  while  only  56%  in  Latgale  in  2018,  with 
corresponding differences also in other areas such 
as levels of unemployment and poverty. 

is 
A  balanced  development  of  all  regions 
essential  for  the  sustainable  growth  and  social 
cohesion  of  Latvia.  However,  the  continuing 
negative  trend  of  depopulation  will  have  major 
consequences  for  the  long-term  sustainability  and 
quality  of  public  services  to  the  population  in  the 
more  rural,  more  sparsely  populated  areas  in 
Latvia. The average size of a municipality in 2018 
was  8,460,  in  2040  it  is  expected  to  be  7,200  (-
15%).  The  per  capita  cost  of  public  services  like 
education,  social  services,  and  administration  are 
higher  in  small  municipalities  than  in  large  ones 
(Bank of Latvia, 2019). Their small size also limits 
their  capacity  to  attract  investments  and  manage 

(17)  Annoni,  P.,  and  Dijkstra,  L.  (2019)  The  EU  Regional 
Competitiveness Index, DG REGIO Working Paper Series. 
The  index  varies  between  0  and  100  (best performing  EU 
region). . 

(18)  Number  of  economically  active  statistical  units  per  1,000 
population  in  the  market  sector  (number,  RAIM  apr.) 
https://raim.gov.lv/lv/node/38. 

the third and last phase of the ‘Kurzeme ring’ was 
commissioned,  strengthening  the  western  part  of 
Latvia’s grid and allowing for a further integration 
of renewables and robustness of the grid in view of 
synchronisation.  Key  projects,  such  as 
the 
construction  of  an  internal  330  kV  power-line 
‘Riga  TEC-2  —  Riga  HES’  and 
third 
interconnector  between  Latvia  and  Estonia,  are 
expected  to  be  finalised  by  2020  and  alleviate 
congestion  at  the  border  between  these  two 
Member States. 

the 

the  way 

Work on developing the common gas market is 
complete  and  it  is  operational  since  1  January 
2020.  It  is  the  first  bidding  area  in  Europe  to 
encompass  three  countries.  Gas  transmission 
system operators from Latvia, Estonia and Finland 
signed  a  memorandum  of  understanding  on 
12 October  2018 
towards 
to  pave 
integrating  the  natural  gas  markets  of  the  three 
countries  in  2020.  On  14 February  2019,  all  three 
gas transmission system operators signed the inter-
transmission 
compensation 
agreement  which  sets  the  rules  for  the  common 
market  area  between  the  three  countries  as  of 
January  2020.  In  practice,  the  agreement  removes 
gas  transmission  tariffs  on  the  borders  between 
Finland, Estonia and Latvia and imposes an equal 
entry fee on all the import points. Discussions are 
ongoing  to  enlarge  the  regional  gas  market  to 
include Lithuania as well.  

operator 

system 

Latvia is expected to achieve full unbundling of 
its  domestic  gas  market  by  early  2020. 
Following  the  opening  of  the  gas  market  in  April 
2017, Latvia  still needs to  finalise  the  unbundling 
of  its  transmission  system  operator  Conexus. 
Certification  of  the  transmission  system  operator 
was  conditionally  granted  by  the  Regulator  (in 
September 2018), and needs to be accomplished by 
January 2020.  

3.4.3.  REGIONAL DISPARITIES 

Important  economic  and  social  differences 
persist  in  the  country,  mainly  between  the 
capital  region  and  the  rest.  Disparities  between 
the capital and the other regions remain among the 
highest in EU. While the capital region of Riga has 
a  GDP  per  head  higher  than  the  EU  average (16), 
rising  from  60%  in  2000  to  106%  in  2016,  the 

(16)  The EU average is set to 100. 

44 

                                                           
                                                           
3.4. Competitiveness reforms and investment 

large-scale  projects  due  to  lack  of  available 
specialists. 

45 

 
3.4. Competitiveness reforms and investment 

46 

 
 
 
 
 
  
 
 
3.4. Competitiveness reforms and investment 

Justice  has  proposed  creating  a  special  court  for 
economic  crimes.  However,  the  Council  for  the 
Judiciary  issued  two  opinions  against  establishing 
a  separate  ‘economic  court’,  stating  lack  of 
evidence  it  would  bring  improvements  in  quality 
and  efficiency,  and  calling  for  criminal  procedure 
reform  instead,  among  other  things.  State  Control 
has  launched  an  audit  of  the  factors  affecting  the 
effective investigation and adjudication of criminal 
cases  for  economic  and  financial  offences  and  it 
will  cover  a  two-year  period.  An  examination  of 
the  data  in  different  courts  is  envisaged,  with  the 
objective  of  finding  solutions  to  even  out  the 
workload  and  reduce  the  need  for  transfers  of 
cases.  The 
is 
continuously 
insolvency 
through  appropriate 
administrators, 
sanctions.  It  reported  a  number  of  irregularities, 
such  as  the  failure  to  observe  auction  procedures, 
the delay of payments to creditors, the racking  up 
of  unreasonable  costs,  as  well  as  the  failure  to 
submit reports. 

Insolvency  Control  Service 

supervising 

including 

Corruption and conflict of interest prevention 

Latvia’s  score  on  corruption  control  indicators 
is  slowly  improving.  In  the  2019  Worldwide 
Governance  indicator  for  control  of  corruption, 
Latvia  ranks  20th  among  EU  countries  (Latvia 
ranked  21st  in  2018). However,  Latvia’s  score  has 
tended  to  slowly  improve  over  time  (see  Graph 
Flash 
3.4.5).  According 
to 
Eurobarometer,  77%  of  businesses 
in  Latvia 
believe  that  corruption  is  widespread  in  their 
country  (14%  more  than  the  EU  average,  but  9% 
less  than  in  2017).  However,  only  19%  consider 
corruption  to  be  a  problem  when  doing  business 
(compared to the 37% EU average, the same as last 
year). 

2019 

the 

3.4.4.  QUALITY OF GOVERNANCE 

State-owned enterprises 

is 

to 

taking 

improve 

the 
steps 
Latvia 
governance  of  municipality-owned  enterprises. 
While  common  corporate  governance  principles 
have  applied  to  state-owned  enterprises  since 
2014,  municipality  enterprises  had  so  far  been 
exempt  from  these  requirements.  However,  as  of 
2020,  the  municipality  enterprises  will  have  their 
management separated from the elected officials of 
to 
municipalities  and 
comprised  of 
establish 
independent  members.  Moreover, 
enhanced 
transparency  and  reporting  standards  will  apply. 
This  is  expected  to  improve  the  enterprises’ 
economic performance and accountability.  

they  will  be  required 

supervisory  boards 

Justice system 

judges,  with 

for 
objective 

framework 
the 

The  quality  and  independence  of  the  justice 
system are being further strengthened. In order 
to  improve  the  quality  of  the  justice  system,  all 
complaints concerning the justice  system received 
through  different  channels  have  been  grouped 
together  under  a  new  unified  portal  under  the 
control  of  the  judiciary  (Judicial  Qualification 
Board).  This  portal  provides  information  on  the 
examination of the complaints and their follow-up. 
Moreover,  Latvia’s  Council  for  the  Judiciary  is 
selecting 
discussing  a  new 
candidate 
of 
strengthening the independence of the appointment 
process.  The  new  framework  would  increase  the 
profession’s role in selecting new judges. It would 
also reduce the influence of individual assessors by 
making  use  of  commissions  composed  of  several 
judicial 
judges.  While 
independence 
it 
decreased  among 
(2020  EU  Justice 
judges 
Scoreboard,  forthcoming).  However,  the  Council 
for  the  Judiciary  faces  capacity  constraints  in  its 
efforts to improve the quality of the justice system, 
while  the  Court  Administration,  with  almost  one 
hundred employees, remains under the authority of 
the  Ministry  of  Justice.  The  Council  issued  an 
opinion  that  the  draft  law  on  the  remuneration  of 
judges does not adequately implement the relevant 
Constitutional Court decision.  

increased  among  businesses, 

the  perception  of 

Discussions  are  ongoing  on  the  appropriate 
ways  to  increase  the  quality  and  efficiency  of 
handling  financial  crime  cases.  The  Ministry  of 

47 

 
3.4. Competitiveness reforms and investment 

2019,  the  Parliament  approved  another  set  of 
amendments  allowing  certain categories  of  public 
servants  to  combine  their  functions  with  outside 
activities  as  long  as  they  are  not  remunerated. 
complicate 
These 
the 
implementation  of 
law.  Special  attention 
should be given to political advisors (both paid and 
non-paid),  whose  statute  is  uncertain,  an  issue 
which has also been flagged up by the  Council of 
Europe’s Group of States against Corruption.  

amendments  may 

the 

some 

The  verification  of  asset  declarations  still 
shortcomings.  Approximately 
present 
68,000  asset  and 
interest  declarations  are 
submitted annually by all public officials in Latvia. 
Their verification is carried out by KNAB and the 
State  Revenue  Service,  based  on  a  risk-based 
approach.  In  2018  KNAB  has  found  irregularities 
in more than one third of the verified declarations 
(783  declarations  inspected  out  of  878  assessed), 
which is a relatively high percentage. According to 
civil  society  representatives,  administrative  fines 
for  irregularities  in  the  declarations  are  quite  low, 
which  may  not  be  dissuasive  enough  to  prevent 
further  misstatements.  Declarations  are  not 
published  in  open  data  format,  which  may  hinder 
the  control  exercised  by  civil  society  and  the 
media, and assets of spouses are not declared.  

of 

up 

setting 

internal 

The  anti-corruption  legal  framework  has  been 
strengthened,  but  a  law  regulating  lobbying 
activities  is  still  missing.  The  Whistleblowing 
Law entered into force in May 2019. According to 
the  State  Chancellery,  public  bodies  are  in  the 
process 
reporting 
mechanisms  for  whistleblowers.  Moreover,  a 
website  providing  all  relevant  information  and 
form for submitting complaints has been set up. In 
the  space  of  only  a  few  months,  the  Chancellery, 
the  State  Revenue  Service  and  KNAB  each  have 
received  more  than  40  complaints.  A  working 
group  has  been  set  up  by  a  parliamentary 
committee 
the 
lobbying  activities  of  members  of  Parliament.  A 
code  of  ethics  for  politically  appointed  persons  is 
still  missing,  this  has  also  been  flagged  up  by  the 
Group of States against Corruption. 

issue  provisions  regulating 

to 

Graph 3.4.5:  Control of Corruption indicator 

(1) The indicator is a composite of different indicators from 
various sources. Worldwide mean is set at zero with higher 
score meaning better control of corruption. 
Source: World Bank 

The  Corruption  Prevention  and  Combatting 
Bureau  (KNAB)  has  been  effective  in  opening 
up 
investigations.  KNAB’s  effectiveness  has 
increased  since  its  current  head  was  appointed  in 
2017.  As  of  31  December  2019,  the  Bureau 
operates  at  near  its  full  capacity,  with  135  out  of 
150  posts  filled.  Its  reorganisation  led  to  an 
improved  cooperation  between  the  departments  in 
charge of prevention and repression of corruption. 
Forty-seven new criminal proceedings were started 
in 2019, with several high-profile investigations in 
vulnerable  sectors  such  as  procurement  at 
municipal  level  or  cartels  in  the  construction 
industry.  However,  court  proceedings  remain 
lengthy, in many cases pending in court for several 
years.  The  implementation  of  certain  measures  in 
the anti-corruption plan has been delayed. Gaps are 
more  frequent at local and  municipal level,  where 
KNAB’s prevention efforts need to be stepped up. 
the 
Moreover,  KNAB’s  monitoring 
implementation  of  the  anti-corruption  action  plan 
needs to be strengthened. 

on 

The law on the prevention of conflict of interest 
has  been  strengthened  over  the  past  years,  but 
certain categories of officials remain exempted. 
The amendments proposed last year, which would 
have  exempted  approximately  14,000  civil 
servants  with  control  and  supervision  functions 
from declaring their assets have been currently put 
on  hold  in  Parliament.  However,  in  November 

48 

-0.4-0.200.20.40.60.811.21.41.619961998200020022003200420052006200720082009201020112012201320142015201620172018EstoniaLithuaniaLatvia  
3.4. Competitiveness reforms and investment 

49 

Box 3.4.2: Investment challenges and reforms in LatviaSection 1. Macroeconomic perspective  In 2018 the investment rate in Latvia was 22.5% of GDP, somewhat above the EU average of 20.4%, and about the same as the average investment rate since 2010. Compared to the pre-crises average, the investment rate in Latvia is 7½ percentage points of GDP lower, of which 5 percentage points are due to lower investment in machinery and equipment. This pattern holds for all key investment sectors, industry, trade and transport, and reflects a slowing convergence process as Latvia becomes richer. Investment in equipment and non-residential construction are significantly above the EU average, reflecting the sizeable role of financing from EU funds (see 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 and is partly linked to the declining population (see Section 3.2). Lending is expected to remain below nominal GDP growth for the foreseeable future, thus the household debt ratio is expected to continue shrinking. 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 the reluctance of banks to lend for projects outside of Riga. However, housing investment outside Riga is important 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 of hiding some of their transactions to avoid paying taxes, even if their financial situation would allow them to obtain credit (see 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 is on offer to boost R&D investments, they are not fully utilised due to a 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 an important policy lever 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). Regulatory/ administrative burdenTaxationPublic administrationCSRAccess to financePublic procurement /PPPsCooperation btw academia, research and businessJudicial systemFinancing of R&D&IInsolvency frameworkBusiness services / Regulated professionsCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionWages & wage settingDigital Economy / TelecomEducation EnergyTransportNo barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/Business environmentLabour market/ EducationSector specific regulationFinancial Sector / TaxationR&D&I 
 
  
 
 
3.5.  ENVIRONMENTAL SUSTAINABILITY 

Key climate and environmental challenges  

Greenhouse gas emissions 

is  among  EU’s  top  performers 

Latvia 
in 
renewable  energy  but  more  effort  is  needed  to 
improve  its  energy  efficiency.  Latvia’s  share  of 
renewable energy is among the highest in the EU, 
contributing to some of the lowest greenhouse gas 
emissions  per  capita  in  the  Union.  However, 
Latvia’s energy consumption continues to increase 
driven  primarily  by  the  transport  and  residential 
sectors. While around half of energy consumption 
in  the  residential  sector  comes  from  renewable 
sources, the share of renewables in transport is still 
low.  Therefore,  investment  in  public  transport, 
energy  efficiency  of  buildings  and  infrastructure 
for  electric  cars  could  help  alleviate  Latvia’s 
growing emissions. Furthermore, Latvia’s share of 
recycled  waste  is  low  and  stagnating  leading  to 
high  landfilling  rates.  To  address  this,  investment 
in  sorting  facilities  and  a  better  alignment  of 
incentives of stakeholders are needed. 

European climate action 

reduction 

Under  the  Paris  Climate  Agreement,  the  EU 
and  its  Member  States  have  committed  to  a 
significant 
in  greenhouse  gas 
emissions (19). The strategy to achieve those goals 
relies  on  two  main  instruments  -  European-wide 
carbon pricing through Emissions Trading System 
(EU-ETS)  (20)  and  binding  targets  for  individual 
Member  States.  In  the  EU-ETS  sectors,  a  limited 
and  declining  amount  of  emission  allowances 
ensure  that  the  emissions  reduction  is  driven  by 
market  forces.  Meanwhile,  emissions  reduction  in 
the  remaining  greenhouse  gas-emitting  sectors 
(buildings,  transport,  agriculture  and  waste)  falls 
under  the  responsibility  of  individual  Member 
States who have committed themselves to binding 
targets.  In  2010,  Latvia  committed  to  not  let  its 
greenhouse  gas  emissions  from  non-ETS  sectors 
increase  by  more  than  17%  by  2020  compared  to 
their  2005  level.  For  2030,  Latvia  has  agreed  to 
reduce  greenhouse  gas  emissions  from  non-ETS 
sector by 6% compared to their 2005 level.  

(19)  The  European  Union  has  set  out  to  reduce  its  greenhouse 
gas  emissions  by  40%  by  2030  compared  to  1990.  The 
European Commission’s Green Deal initiative presented in 
December  2019  has  proposed  to  increase  the  emissions 
reduction  target  to  at  least  50%  and  set  an  ambition  to 
reach carbon neutrality by 2050. This has yet to be agreed 
by Member States. 

(20)  Carbon  pricing  through  emissions  trading  system  (ETS) 
applies  to  power  and  heat  generation,  energy-intensive 
industry, and commercial aviation sectors. 

energy 

Latvia  is  about  to  achieve  its  2020  emission 
reduction target but additional measures will be 
necessary  to  achieve  its  2030  target.  In  2018, 
overall emissions have more than halved compared 
with  their  1990  levels  and  remained  about  the 
same  compared  with  2005.  However,  the  decline 
since 1990 has come mainly from the ETS sectors, 
notably 
production.  Meanwhile, 
greenhouse  gas  emissions  in  non-ETS  sectors  has 
increased by 7.5% compared with their 2005 level. 
Therefore,  Latvia  will  very  likely  meet  its  2020 
target, however, to reach its 2030 target Latvia will 
have  to  break  the  current  trend  of  increasing 
emissions  (see  graph  3.5.1).  Latvia's  target  for 
emissions  reduction  of  6%  is  considerably  below 
the EU's target of 30% reduction. However, this is 
because  Latvia's  emissions  per  capita  were  less 
than half of the EU average (21), to begin with.  

Graph 3.5.1:  Greenhouse gas emissions, index, 1990=100 

Source: European Commission 

The  increase  in  greenhouse  gas  emissions  in 
non-ETS sectors is driven mainly by increasing 
use  of  passenger  cars.  According  to  estimates  of 
Latvia’s Ministry of Economics (2019b) estimates, 
in  2017,  emissions 
sectors 
accounted  for  roughly  4/5  of  all  greenhouse 
emissions. Among those, transport and agriculture 

from  non-ETS 

(21)  In 2005, Latvia emitted 5.2 tonnes of greenhouse gases per 
capita compared with the European Union average of 10.8 
tonnes of greenhouse gases per capita. In 2018, the number 
had risen to 6.4 tonnes greenhouse gas emissions per capita 
in  Latvia  compared  to  a  European  Union  average  of  8.6 
tonnes per capita. 

50 

0.020.040.060.080.0100.0120.0EUEstoniaLatviaLithuania                                                           
  
                                                           
3.5. Environmental sustainability 

achieved  good  progress  in  electricity  and  heating 
sectors,  with  a  share  of  renewables  close  to  55%, 
some  of  the  highest  in  Europe.  At  the  same  time, 
the share of renewables in transport is low at 2.5% 
Overall,  Latvia  is  on  track  to  achieve  its  2020 
renewable energy objective of 40%. However, the 
existing support scheme for renewable energy has 
proved  to  be  expensive  (European  Commission, 
2018d).  The  government 
is  working  on 
modernising  the  scheme  to  ensure  that  Latvia 
achieves its 2030 renewable  energy target of 50% 
in  a  sustainable  and  cost-effective  manner 
(European  Commission,  2019a).  Latvia  aims  to 
boost its renewable energy production in energy by 
tapping  the  potential  of  both  on-shore  and  off-
shore wind energy and solar energy. In heating, it 
plans  to  increase  the  use  of  biomass  and  solar 
energy  and  further  modernise  district  heating.  In 
the  transport  sector,  it  is  set  to  focus  on  boosting 
the use of advanced biofuels and electric mobility. 
increase 
investments  are  expected 
These 
Latvia’s share of renewables to 50% by 2030. 

to 

Energy efficiency 

its 

target, 

however, 

Latvia  is  on  track  to  achieve  its  2020  energy 
efficiency 
energy 
consumption  is  on  the  rise,  driven  by  the 
transport and residential sectors. Latvia has put 
in  place  a  number  of  energy  efficiency  measures, 
but  they  have  mainly  focused  on  the  residential 
sector,  while  there  have  been  few  initiatives  to 
reduce energy consumption in the transport sector. 
As  a  result,  energy  consumption  is  on  the  rise, 
driven  by  the  transport  sector  (see  graph  3.5.3) 
Currently,  the  investment  in  energy  efficiency 
measures  mainly  comes  from  European  Structural 
and  Investment  fund-financed  programmes,  with 
private 
being 
underdeveloped. The government plans to renovate 
2000  apartment  buildings  by  2030,  which  is  too 
low  to  achieve  the  ambitious  energy  saving 
objective. Additional financial instruments  would 
be needed to attract private investments in addition 
to  public  funding.  Latvia’  Long  Term  Renovation 
Strategy, which is due by March 2020, will set out 
the strategy to improve the energy performance of 
its building stock. 

opportunities 

investment 

improving 

were  the  largest  contributors  to  total  greenhouse 
gas (GHG) emissions and, responsible for 30% and 
25% of all emissions, respectively. Moreover, over 
the  past  5  years  the  transport  sector  has  seen  the 
fastest increase in energy consumption. Given that 
it  relies  almost  exclusively  on  fossil  energy,  its 
contributions  to  the  increase  of  GHG  emission  is 
broadly  proportional  to  its  increase  in  energy 
consumption.  Conversely, 
transport 
sector’s energy efficiency has the largest potential 
to  reduce  greenhouse  gas  emissions  among  all 
sectors.  In  the  agricultural  sector,  investing  in 
drainage systems and emissions capture for animal 
farming  as  well  as  improving  the  efficiency  of 
fertiliser usage offer the best rewards for reducing 
the  emissions.  Improving  the  energy  efficiency  of 
heating  also  offers  potentially  significant  cuts  in 
greenhouse  gas  emissions.  Finally,  while  Latvia 
landfills  most  of 
its  waste,  waste  sector’s 
contribution  to  greenhouse  gas  emissions  is  only 
3.5.2).  However, 
graph 
about 
improvements  in  recycling  rates  would  contribute 
to  other  important  environmental  sustainability 
objectives. 

(see 

5% 

Graph 3.5.2:  Greenhouse gas emissions by sector, million 

tonnes of CO2 equivalent 

Source: European Commission 

Renewable energy 

Latvia  boasts  among  the  highest  shares  of 
renewables in the EU and is on track to achieve 
its renewable energy target of 40% for 2020. In 
2017,  the  share  of  renewable  energy  in  Latvia’s 
final  energy  consumption  was  39%.  Latvia  has 

51 

-5,000.000.005,000.0010,000.0015,000.00Waste managementLand use and forestryAgricultureIndustrial processes and product useOther energy  besides transportTransportTotal  
3.5. Environmental sustainability 

Graph 3.5.3:  Energy consumption by sector, million tonnes 

Transport 

of oil equivalent 

for 

in  Latvia  with  30% 

The transport sector is the largest consumer of 
energy 
in  2017  and 
the  biggest  contribution  of 
accounts 
greenhouse gas emissions from non-ETS sectors 
with  36.3%  in  2017.  Further  measures  and 
policies  are  needed  to  reduce  emissions  from 
transport (European  Commission,  2019f). In  order 
to  act  on 
the  Latvian 
government  is  drafting  a  new  law  –  Transport 
Energy Law. It will include regulatory measures to 
ensure that Latvia achieves the 2020 target of 10% 
renewable  energy  share  in  the  transport  sector. 
Electric  mobility  is  picking  up  slowly  as  the 
development  of  charging  infrastructure  picks  up 
pace.  

transport  area, 

the 

Source: European Commission 

Energy poverty in Latvia has decreased overall, 
but  remains  a  challenge  for  vulnerable  groups. 
The overall share of people who found it difficult 
to  keep  their  homes  warm  decreased  to  7.5% 
(2018),  below  the  EU  average.  However,  as 
recently  as  2016,  22.7%  of  households  at  risk  of 
poverty  could  not  afford  to  keep  their  homes 
warm.  Moreover,  11.6%  of  the  population  in 
Latvia  had  outstanding  debts  and  delayed 
payments for their utility bills, which are typically 
paid  as  monthly  instalments.  Targeted  measures 
such as introduction of lower electricity tariffs for 
most vulnerable groups have had a positive impact 
on  increasing  indirect  income  for  these  groups 
(Baltic Institute of  Social Sciences (BISS), 2019). 
Still,  other  measures  could  be  considered  to 
alleviate 
the  financial  burden  for  vulnerable 
groups.  While  the  state  has  defined  the  income 
level  for  granting  a  poor  family  status  (€128  per 
person per month), the income level for granting a 
low-income  status  varies  among  municipalities. 
These  differences  create  an  unequal  access  to  the 
support  measures,  such  as 
tariffs  for 
electricity  and  housing  benefits.  Furthermore, 
housing conditions for low-income households are 
targeting 
poor 
renovation  of  multi-apartment  buildings  can  also 
help alleviating energy poverty.  

3.3.2.).  Measures 

(Section 

lower 

The  growing  use  of  passenger  cars  is  a  major 
driver  of  increasing  energy  consumption.  At 
about 80% of all trips made, the share of passenger 
car  usage  for  transport  is  among  the  highest  in 
Europe. Over the past four years the car-kilometres 
driven by passenger cars have increased by nearly 
30%.  At  the  same  time,  the  number  of  cars  per 
inhabitant  and  car  kilometres  per  capita  remain 
relatively low. The share of renewable energy used 
in  road  transport  is  only  3.5%  and  even  lower 
among passenger cars. The number of electric cars 
is negligible.  

Agriculture 

The  agriculture  sector  accounts  for  almost  a 
quarter of greenhouse gas emission in Latvia. In 
2017,  emissions  from  agriculture  accounted  for 
24.6% of total greenhouse gas emissions with 60% 
of  emissions  coming  from  agricultural  soils 
(Ministry of Economics, 2019b). Emissions related 
to  livestock  account  for  the  remaining  40%  of 
emissions.  With  only  7%  of  utilised  agricultural 
area  managed  by  high-intensity  farms,  Latvia  is 
among  the  EU  countries  with  the  least  fertiliser-
intensive  agricultural  practices 
the  EU. 
Moreover,  the  share  of  agricultural  area  used  for 
organic  farming  is  among  the  highest  in  the 
EU (22).  However,  the  low  share  of  drained 
farmlands  contributes  to  lower  crop  yields  and 
higher  emission  gas  leakage.  Latvia’s  National 

in 

(22)  Share  of  organic  farming  is  one  of  the  key  indicators  for 
sustainable  development  goal  2  on  sustainable  food 
production  systems  and 
resilient 
agricultural practices. 

implementation  of 

52 

  
                                                           
3.5. Environmental sustainability 

Energy and Climate Plan23 foresees improving the 
fertilising  efficiency, 
in  drainage 
systems, and better animal feed as chief  means of 
reducing  the  greenhouse  gas  emissions  in  the 
agriculture sector. 

investment 

municipalities’  incentives  with  national  targets. 
The planned administrative and territorial reform is 
an opportunity to draw municipalities more closely 
into  sound  waste  administration.  Furthermore,  the 
waste data quality could be improved. 

Land use and forestry 

the 

term,  however, 

Emission  absorption  from  forestry  is  declining 
due  to  forests’  increasing  age.  In  2017,  changes 
in  land  use  subtracted  around  15%  from  Latvia’s 
emissions  balance,  the  sector’s  contribution  has 
been  highly  volatile  (see  graph  3.5.2).  Over  the 
long 
sector’s  negative 
contributions  to  Latvian  emissions  have  declined 
primarily  due  to  the  doubling  of  the  logging 
volumes.  The  ageing  of  the  forests  is  the  primary 
driver of the rapid growth in logging volumes. To 
a  lesser  extent,  deforestation  has  also  contributed 
to  the  decline  in  sectors’  declining  negative 
emissions  contribution.  Latvia’s  National  Energy 
and  Climate  Plan  foresees  investment  in  drainage 
systems  and  improving  the  forest  quality  as  the 
main  means  to  improve  their  productivity  and 
therefore 
their  emissions  absorptive 
capacity.  

increase 

Circular economy 

investment 

Latvia  falls  significantly  behind  its  re-use  and 
recycling  targets  as  the  lack  of  incentives  for 
municipalities  holds  back 
in 
separate  collection.  In  2018,  the  rate  of  Latvia’s 
municipal  waste  recycling  (including  composting) 
reported  to  Eurostat  was  only  25%,  while  its 
landfilling rate was 59%. Latvia will miss the 2020 
recycling target of 50 %. Substantial stepping up in 
effort will be necessary to meet the 55% recycling 
in  sorting  and 
target  for  2025.  Investment 
recycling, as well as, in waste prevention is needed 
to 
rate  substantially. 
recycling 
However,  while  the  landfill  tax  has  been  rising 
steadily, it has not ensured  investment in separate 
collection  infrastructure  by  the  municipalities.  
This  is  largely  due  to  the  fact  that  municipalities  
are  not  in  charge  of  reaching  national  recycling 
targets.  Infrastructure  for  separate  collection  is 
particularly poor in the capital Riga, where around 
half of country’s waste is generated. Therefore,  it 
align 
especially  worthwhile 
could  be 

increase 

the 

to 

23   The  Commission  will  assess,  in  the  course  of  2020,  the 
final  National  Energy  and  Climate  Plan  submitted  by 
Latvia on 3 February 2020.     

for 

identify 

The  adoption  of  the  circular  economy  strategy 
and  action  plan  could  help  Latvia  bring  about 
the  necessary  systemic  change.  Latvia 
is 
currently  discussing  a  circular  economy  strategy 
with  its  adoption  planned  later  in  2020.  An 
overarching  circular  economy  strategy  will  help 
Latvia  bring  about  the  necessary  systemic  change 
and 
strategic 
specific  needs 
investments  on  circular  economy  in  the  country. 
Green  Public  Procurement  has  a  key  role  in 
delivering  circular  economy  objectives.  In  2018, 
Green  public  procurement 
terms 
reached  18.3  %  from  all  public  procurements  in 
Latvia,  up  from  12  %  in  2017.  However,  the 
proportion  of  Green  public  procurement  is  highly 
dependent  on  projects  financed  by  EU  funds. 
Furthermore,  many  public  procurers  still  hesitate 
to  introduce  green  requirements  in  their  tender 
specifications  due  to  perceived  complexity  and 
higher  costs.  Although  Latvia  is  one  of  the 
countries with most complete national action plans 
the  practical 
on  Green  public  procurement, 
in  public 
implementation  of  green  aspects 
procurement can be further improved.  

in  financial 

Biodiversity 

Latvia  could  benefit  from  a  comprehensive 
approach 
to  better 
to  ecosystem  services 
preserve  its  natural  habitats.  According  to  the 
report  recently  submitted  by  Latvia  on 
the 
conservation status of habitats and species covered 
by the Habitats Directive for the period 2013-2018 
(EEA,  2020),  the  share  of  habitats  in  good 
conservation  status  in  2018  was  only  of  10%  and  
the  previous 
it  has  decreased  compared 
reporting  period  (2007-2012).  According  to  this 
report, 5 out of 12 forest habitats of EU importance 
have  bad  conservation  status.  As  indicated  by 
the  main  pressures  are  agricultural, 
Latvia, 
industrial and urban pollution and changes in land 
use.  In  addition,  the  intensified  urban  sprawl 
reduces  the  extent  of  natural  areas  and  causes 
landscape  fragmentation.  Latvia  would  benefit 
biodiversity 
from 
conservation  and  sustainable  use  in  other  areas, 
notably forestry, agriculture, fishery and tourism. 

the  mainstreaming 

of 

to 

53 

                                                           
3.5. Environmental sustainability 

social dialogue, including collective bargaining, in 
ensuring  decent  work  and  in  forecasting  skills 
needs  and  employment  challenges,  and 
in 
training, 
designing  adequate  and  continuous 
among others. 

Just transition analysis 

Greenhouse  gas  emissions  from  wetlands  and 
peat  extraction  constitute  14.5%  of 
total 
greenhouse  gas  emissions  (LEGM,  2019).  Bog 
areas  cover  645  100  ha  or  10%  of  Latvia's 
territory.  Peat  extraction  takes  place  in  4%  of  the 
total  bog  area.  On  average,  1800  workers  are 
employed  in  peat  extraction,  increasing  to  2500 
during  the  season.  The  transition  to  a  climate 
neutral  economy  could  impact  two  regions  the 
most – Vidzeme, where most peat extraction takes 
region’s 
due to 
place, 
disadvantaged 
(see 
socio-economic 
section  3.4.3).  Approximately  50  000  hectares  of 
land  in  Latvia  can  be  identified  as  peatlands  that 
have  been  degraded  by  peat  extraction.  Ensuring 
the sustainable production of peat, innovative ways 
of  using and  restoring  wetlands  would  reduce  the 
overall greenhouse gas emissions of Latvia, as they 
are efficient carbon storage systems.  

the 
situation 

and  Latgale 

Adapting the peat industry to a climate friendly 
and  carbon  neutral  economy  would  require 
investments  in  SMEs,  innovation  and  human 
capital. For sustainable land use and management, 
testing  and  implementing  innovative  approaches 
will be necessary. Diversifying regional economic 
activities  and  creating  new  business  opportunities 
within  the  framework  of  a  smart  specialisation 
strategy  will  be  essential  for  making  the  shift 
towards a more diversified, competitive and green 
economy.  This  transition  would  also  lead  to 
changing employment patterns, inducing needs for 
re- and upskilling.  

The  Just  Transition  Fund,  as  proposed  by  the 
European  Commission,  could  contribute  to  the 
development  of  new  and  innovative  solutions  for 
the  reclamation  of  peatlands  and  wetlands,  the 
reskilling  of  employees,  etc.,  thus  limiting  the 
potential  impact  of  energy  transition  on  local 
communities.  Dedicated  investment  guidance  for 
the Fund is in Annex D.  

Climate investment needs 

The  green  transition  in  Latvia  would  require 
investments  in  transport,  buildings,  renewable 
energy,  and  related  education  and  skills. 
Latvia’s  has  high  potential  for  wind  energy 
deployment,  especially  off-shore  wind  energy, 
providing  a  cost-efficient  path  to  further  increase 
its share of renewable energy. In order to curb the 
rapid  growth  of  fossil  energy  consumption  in  the 
transport  sector,  investments  in  public  transit 
systems  and  infrastructure  for  electric  vehicles 
would  be  required.  Further  efforts  to  increase  the 
energy efficiency of buildings and district  heating 
systems are needed to address the growing energy 
consumption  in  heating.  Finally,  investments  in 
research  and  innovation  would  be  important  to 
support  the  clean  transition  in  Latvia.  In  its 
National Energy and Climate Plan Latvia estimates 
that the total investment needs up to 2030 amount 
to  EUR  550  million  for  energy  efficiency  and 
renewable  energy  measures  in  heating,  around 
EUR 1.7 billion  for renovation of buildings, EUR 
1  billion  to  decarbonise  the  transport  sector,  and 
EUR  130  million  to  bio  methane (Ministry  of 
Economy,  2019).  Overall,  investments  needed  to 
reach  the  emission  reduction  targets  in  Latvia 
correspond 
to  about  2%  of  GDP (European 
Commission, 2019d).  

Labour market and skills 

Going  forward,  the  transition  to  a  climate 
neutral  economy  will  create  further  need  for 
investment  in  skills.  In  Latvia,  climate  action  is 
expected  to  support  mid-  and  high-skilled  job 
creation, indicating future needs for reskilling and 
upskilling. Supply of jobs related to installation of 
clean technologies, industrial production, different 
infrastructure  aspects  and  energy  production 
services  will  increase.  Therefore,  education  and 
adult learning policies may need to be adapted. In 
particular,  the  workforce  for  the  building  sector 
needs appropriate training to ensure they  have  the 
necessary  skills 
jobs 
to  perform 
(European  Commission,  2019c).  A  special  focus 
on the gender dimension of a just transition might 
be  needed  to  ensure  that  women  equally  benefit 
from  arising  opportunities.  Since  new  green  jobs 
are  expected  in  sectors  with  traditionally  limited 
3.3.1), 
female 
education  and  skills  need  to  be  strengthened  to 
mitigate  pre-existing  gender  inequalities. Social 
partners  can  have  a  key  role  through  all  forms  of 

(see  Section 

representation 

these  new 

54 

 
ANNEX A 

Overview Table 

Commitments 

Summary assessment (24) 

2019 country-specific recommendations (CSRs) 

Latvia has made some progress in addressing 
CSR 1: 

CSR 1:  Ensure  that  the  nominal  growth  rate  of  net 
primary  government  expenditure  does  not  exceed 
3.5%  in  2020,  corresponding  to  an  annual  structural 
adjustment  of  0.5%  of  GDP.  Reduce  taxation  for 
low-income  earners  by  shifting  it  to  other  sources, 
particularly  capital  and  property,  and  by  improving 
tax compliance. Ensure effective supervision and the 
laundering 
enforcement 
framework. 

anti-money 

the 

of 

Ensure  that  the  nominal  growth  rate  of  net  primary 
government expenditure does not exceed 3.5% in 
to  an  annual  structural 
2020,  corresponding 
adjustment of 0.5% of GDP. 

The  assessment  of  compliance  with 
the 
Stability and Growth Pact  will be  included in 
the  spring  when  final  data  for  2019  will  be 
available. 

Reduce taxation for low-income earners by shifting it 
to other sources, particularly capital and property, 
and by improving tax compliance. 

Some progress: The tax wedge for low wages 
in 2020 is estimated to have been reduced 
in  line  with  the  benchmark  against  other 
Member States. However, this reduction is 
not offset by other tax revenue sources, in 
particular  capital  and  property.  Tax 
compliance  is  improving  in  some  areas, 
but  policy  and  compliance  gaps  remain 
high. 

Ensure  effective  supervision  and  the  enforcement  of 

the anti-money laundering framework. 

Substantial 

has 
progress: 
strengthened 
laundering 
its  anti-money 
system  and  the  flow  of  risky  money 

Latvia 

(24)  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 

and 
and 

law 
has 

through  the  country  has  been  reduced. 
Latvia  has  increased  the  capability  of 
enforcement 
supervisory 
established 
institutions 
information  sharing  and  a  cooperation 
group  involving  competent  authorities.  A 
number  of  sanctions  have  been  applied  in 
2019.  The  number  of  investigations  and 
amount of funds frozen increased in 2019, 
but  a  large  amount  of  deposits  in  ABLV 
bank still needs to be scrutinised during its 
liquidation.  Latvia  should  continue  its 
efforts  to  ensure  effective  supervision  and 
enforcement  of  its  anti-money  laundering 
framework.  

Latvia has made some progress in addressing 
CSR 2: 

the  adequacy  of  minimum 

CSR 2:  Address  social  exclusion  notably  by 
improving 
income 
benefits,  minimum  old-age  pensions  and  income 
support  for  people  with  disabilities.  Increase  the 
quality  and  efficiency  of  education  and  training  in 
particular  of  low-skilled  workers  and  jobseekers, 
including  by  strengthening 
in 
vocational education and training and adult learning. 
cost-
Increase 
effectiveness of the healthcare system. 

accessibility,  quality 

the  participation 

and 

the 

Address  social  exclusion  notably  by  improving  the 
adequacy of minimum income benefits, minimum 
old-age  pensions  and  income  support  for  people 
with disabilities. 

Some  progress:  Minimum  social  benefits 
have  been  increased  for  2020,  except  for 
those who have worked less than 15 years. 
The  increases  are  lower  than  planned, 
leading  to  partial  implementation,  and  the 
adequacy of benefits remains low. Further 
action  would  be  required  to  address  the 
high risk of poverty or social exclusion as 
well as income inequality. 

Increase  the  quality  and  efficiency  of  education  and 
training  in  particular  of  low-skilled  workers  and 
jobseekers, 
the 
participation in  vocational education and training 
and adult learning. 

including  by 

strengthening 

56 

to 

to 

the 

reforms 

including 

Some progress: While improving quality and 
consolidate 
efficiency,  measures 
resources, 
large  school 
network,  have  been  delayed.  At  the  same 
improve  vocational 
time, 
education and training are ongoing and are 
planned to be finalised by the end of 2021, 
but  the  share  of  students  in  vocational 
education  and  training  remains  low.  An 
EU-funded  adult 
is 
ongoing,  but  overall  participation  in  adult 
learning  remains  low,  especially  for  the 
increase 
low-skilled,  and  measures 
uptake  have  been  adopted.  Work  on  a 
national  skills  agenda  with  support  from 

learning  project 

to 

A. Overview Table 

the OECD is ongoing and in 2020 Latvia’s 
national  strategy  for  education  and  skills 
for  2021-2027  will  be  developed  and 
approved. 

Some  progress:  Public 

initiated 

spending 

for 
healthcare  is  set  to  decline  as  a  share  of 
GDP in 2020. The level of unmet needs for 
medical care and the level of out-of-pocket 
payments remain high. The introduction of 
the  two-basket  health  insurance  system, 
which posed risks for access to healthcare, 
has  been  postponed.  Healthcare  network 
reforms 
in  previous  years 
continue,  but  are  still  at  an  early  stage.  In 
particular, 
the  multi-
the  pilots  of 
disciplinary  health  centres  for  the  primary 
care  reform  have  not  been  launched  yet. 
Efforts  have  been  made  to  combat  anti- 
microbial  resistance,  to  improve  mental 
healthcare  and  to  support  the  nursing 
profession.  However,  workforce  shortages 
persist and access to affordable healthcare 
remains  a  challenge  for  parts  of  the 
population. 

Latvia has made some progress in addressing 
CSR 3: 

Some  progress.  Latvia  will  not  meet  its 
national target for investments in R&D by 
2020,  as  national  financing  has  not  been 
increased as initially planned. Latvia relies 
on  the  support  from  the  Horizon  2020 
Policy  Support  Facility  and  has  advanced 
in  creating  a  unified  coordination  body  in 
2020 
fragmented 
tackle  currently 
governance. 

to 

Limited  progress:  Affordable  housing  in  the 
centres of economic activity is a bottleneck 
for  labour  mobility  and  economic  growth. 
Lengthy  and  cumbersome  processes  for 
obtaining  planning  and  building  permits 
are  hampering  new  housing  construction. 
landlords 
protection 
The  weak 
discourages  more  investment  into  rental 
housing. The draft rental law has not made 

of 

Increase 

the 

accessibility,  quality 

and 

cost-

effectiveness of the healthcare system. 

CSR 3: Focus investment-related economic policy on 
innovation,  the  provision  of  affordable  housing, 
transport,  in  particular  on  its  sustainability,  resource 
efficiency 
energy 
interconnections and digital infrastructure, taking into 
account regional disparities. 

efficiency, 

energy 

and 

Focus 

investment-related  economic  policy  on 

innovation. 

the provision of affordable housing. 

57 

A. Overview Table 

any progress in the Parliament since 2018. 
The plans for energy-efficiency renovation 
of apartment buildings are unambitious. 

the  authorities’ 

is  growing,  while 

Some  progress:  Transit  and  major  transport 
connections  are 
first 
priority, while a large share of  local roads 
are  of  poor  quality.  The  use  of  passenger 
cars 
the  share  of 
passenger  transport  by  bus  or  train  is 
declining.  The  transport  sector  is  a  major 
source of greenhouse gas emissions, while 
renewable  energy  use  in  road  transport  is 
low.  Regulatory  changes  and  a  better 
organisation of public transport to improve 
environmental sustainability are at an early 
stage.  However,  the  development  of  Rail 
Baltica  should  support  the  shift  to  less 
carbon 
transport  once 
rail 
finished. 

intensive 

the 

Some  progress:  Regional  gas  market  with 
Finland and Estonia became operational on 
January  2020.  The  Baltic  grid 
1 
internal 
synchronisation  project, 
electricity  grid  reinforcement  project  and 
construction  of  the  third  interconnector 
with  Estonia  are  all  well  on 
track. 
However,  the  final  National  Energy  and 
Climate Plan detailing the investment plan 
aimed  at 
the  resource  and 
energy efficiency is still to be submitted by 
Latvia.  The  government  has  adopted  its 
2030  Strategy  on  Latvia’s  adaptation  to 
Climate  Change  with  a  view  to  develop 
infrastructure  and  buildings,  taking  into 
consideration  the  potential  climate  risks. 
The  Strategy 
the  Low-Carbon 
Development  until  2050  is  expected  to  be 
approved in 2020.  

increasing 

for 

Some  progress:  Latvia  is  among  the  EU’s 
front-runners  for  the  deployment  of  very 
high-speed 
infrastructure. 
However,  last  mile  connections  are  an 
issue in rural areas. 

internet 

Latvia has made some progress in addressing 

CSR 4:  

Public  administration  reform  for  the  central 
implemented. 
government 

being 

is 

transport, in particular on its sustainability. 

resource  efficiency  and  energy  efficiency,  energy 

interconnections 

and digital infrastructure, taking into account regional 

disparities. 

CSR 4:  Strengthen  the  accountability  and  efficiency 
of the public sector, in particular with regard to local 
and  municipal 
State-owned 
authorities 
enterprises and the conflict of interest regime. 

and 

58 

A. Overview Table 

reform 

to  be  adopted 

Administrative-territorial 
for 
consolidating  local  authorities  and  improving 
their  services  was  presented  in  2019  and  is 
in  mid-2020. 
expected 
Corporate  governance  of  state  and  municipal 
companies  has  been  improved  by  requiring 
disclosure  of  company  reports  to  the  same 
extent  as  for  listed  companies.  Moreover,  the 
uncompetitive 
of  municipal 
behaviour 
companies  and  entities  is  prohibited  and  the 
Competition  Council 
charged  with 
monitoring  the  situation.  The  capacity  to 
cases  has  been 
investigate 
strengthened,  but  shortcomings  remain  as 
regards  the  oversight  of  implementation  of 
anti-corruption  actions,  a  lack  of  clarity  as 
regards  the  applicable  regime  on  conflicts  of 
interests, the application of sanctions for asset 
disclosure irregularities and the lack of a legal 
framework regulating lobbying activities. 

corruption 

is 

Europe 2020 (national targets and progress) 

Employment rate: 73% 

R&D: 1.5 % of GDP 

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) 

59 

The  employment  rate  (for  the  20-64  age 
group)  increased  further  to  76.8%  in  2018 
from 74.8% in 2017.  

R&D expenditure was 0.64% of GDP in 2018, 
up from 0.51% of GDP in 2017. Latvia is not 
on track to meet its target. 

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 therefore been achieved. 

In  2018,  Latvia’s  share  of  renewable  energy 
was  40.3%,  thus  reaching  its  2020  target. 
However, maintaining the renewables share at 
this level will remain a challenge. 

In 2018, Latvia’s primary energy consumption 
increased to 4.7 from 4.5 Mtoe in 2017. Final 
increased  from 
energy  consumption  also 
4.0 Mtoe to 4.2 Mtoe. Given the current trend, 
Latvia  is  at  some  risk  of  missing  its  2020 

 
 
A. Overview Table 

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. 

energy  efficiency  target,  particularly  for  final 
energy consumption. 

leavers  from 
The  share  of  early  school 
education and training decreased from 8.6% in 
2017 to 8.3% in 2018. 

The  already  high  tertiary  attainment  rate 
decreased  slightly  in  2018  reaching  42.7% 
from  43.8% 
in  2017.  Gender  disparities 
remain strong, with the tertiary attainment rate 
at 30.6% for men and 55.2% for women. 

After having reached its target in 2017, Latvia 
has again fallen below it in 2018. The number 
of  people  living  at  risk  of  poverty  and/or 
living  in  jobless  households  reached  471 000 
in  2018,  resulting  in  a  reduction  of  104 000 
compared to 2008, less than the target. 

60 

ANNEX B 

DSA statistical annex 

61 

ANNEX C 

Standard Tables 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2019. Includes not only banks but all monetary financial institutions excluding central banks. 
(2) Latest data Q2 2019. 
(3) Quarterly values are annualised 
* Measured in basis points.. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

62 

201420152016201720182019Total assets of the banking sector (% of GDP)(1)130.4130.7117.4105.678.272.9Share of assets of the five largest banks (% of total assets)63.664.566.573.580.8-Foreign ownership of banking system (% of total assets)(2)52.547.449.751.667.165.7Financial soundness indicators:(2)              - non-performing loans (% of total loans)9.76.56.35.65.35.4              - capital adequacy ratio (%)20.221.820.420.622.322.6              - return on equity (%)(3)10.210.714.37.69.210.1Bank loans to the private sector (year-on-year % change)(1)-4.5-0.16.3-0.63.32.3Lending for house purchase (year-on-year % change)(1)-3.4-3.3-0.50.20.82.2Loan-to-deposit ratio(2)67.359.962.460.670.774.0Central bank liquidity as % of liabilities(1)0.31.01.01.00.20.1Private debt (% of GDP)82.280.480.576.970.3-Gross external debt (% of GDP)(2) - public36.530.432.830.329.630.5    - private38.739.640.439.444.841.3Long-term interest rate spread versus Bund (basis points)*134.546.844.451.750.660.7Credit default swap spreads for sovereign securities (5-year)*99.676.562.048.941.248.0 
  
 
 
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 and/or living in households with zero or very low work intensity. 
(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) Gross disposable household income is defined in unadjusted terms, according to the draft 2019 joint employment report. 
(4) 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). 
(5) Average of first three quarters of 2019 for the employment rate, unemployment rate and gender employment gap. 
Source: Eurostat 

63 

201420152016201720182019 5Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)8.59.910.08.68.3:Gender employment gap (pps)4.64.12.94.34.23.6Income inequality, measured as quintile share ratio (S80/S20)6.56.56.26.36.8:At-risk-of-poverty or social exclusion rate(1) (AROPE)32.730.928.528.228.4:Young people neither in employment nor in education and training (% of population aged 15-24)12.010.511.210.37.8:Dynamic labour markets and fair working conditionsEmployment rate (20-64 years)70.772.573.274.876.877.2Unemployment rate(2) (15-74 years)10.89.99.68.77.46.4Long-term unemployment rate (as % of active population)4.64.54.03.33.12.8Gross disposable income of households in real terms per capita(3) (Index 2008=100) 91.798.4103.8107.7115.2:Annual net earnings of a full-time single worker without children earning an average wage (levels in PPS, three-year average)8670934810082:::Annual net earnings of a full-time single worker without children earning an average wage (percentage change, real terms, three-year average)4.967.047.40:::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction(4)21.517.621.621.919.1:Children aged less than 3 years in formal childcare21.622.928.328.427.4:Self-reported unmet need for medical care12.58.48.26.26.2: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) Long-term unemployed are people who have been unemployed for at least 12 months. 
(2) 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 10 or more employees, without restrictions for age and hours worked, are included. 
(3) PISA (OECD) results for low achievement in mathematics for 15 year-olds. 
(4) Impact of socio-economic and cultural status on PISA (OECD) scores. 
(5) Average of first three quarters of 2019. Data for youth unemployment rate is seasonally adjusted.  
Source: Eurostat, OECD 

64 

Labour market indicators201420152016201720182019 5Activity rate (15-64)74.675.776.377.077.777.3Employment in current job by durationFrom 0 to 11 months14.714.513.515.014.6:From 12 to 23 months11.310.110.210.010.3:From 24 to 59 months20.119.120.120.520.0:60 months or over53.856.256.154.555.1:Employment growth* (% change from previous year)-1.31.4-0.30.01.6-0.3Employment rate of women(% of female population aged 20-64)68.570.571.872.774.875.4Employment rate of men (% of male population aged 20-64)73.174.674.777.079.079.0Employment rate of older workers* (% of population aged 55-64)56.459.461.462.365.467.1Part-time employment* (% of total employment, aged 15-64)6.87.28.57.77.28.0Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)3.33.83.73.02.73.2Transition rate from temporary to permanent employment(3-year average)50.257.157.9:::Youth unemployment rate (% active population aged 15-24)19.616.317.317.012.213.0Gender gap in part-time employment4.35.54.85.85.05.3Gender pay gap(2) (in undadjusted form)17.317.017.015.7::Education and training indicators201420152016201720182019Adult participation in learning(% of people aged 25-64 participating in education and  training)5.65.77.37.56.7:Underachievement in education(3):21.4::::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)39.941.342.843.842.7:Variation in performance explained by students' socio-economic status(4):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: Eurostat, OECD  

65 

 
   
 
 
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 
Please be aware that the indicator values from 2003 to 2013 are comparable, however the methodology has considerably 
changed in 2018 and therefore past vintages cannot be compared with the 2018 PMR indicators! 
8 Simple average of the indicators of regulation for lawyers, accountants, architects and engineers. 
9 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). 

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 including international aviation (kgoe) divided by 
gross value added in transportation and storage sector (in 2010 EUR). 
Transport carbon intensity: GHG emissions in transportation and storage sector divided by gross value added in transportation 
and storage sector (in 2010 EUR).  
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels. 
Aggregated supplier concentration index: Herfindahl index covering 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. Smaller values indicate arger diversification. 
* European Commission and European Environment Agency - 2018 provisional data. 
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). 

67 

Green growth performance201320142015201620172018MacroeconomicEnergy intensity kgoe / €0.220.220.210.200.200.20Carbon intensity kg / €0.560.540.530.520.50-Resource intensity (reciprocal of resource productivity)kg / €1.241.161.211.051.131.20Waste intensity kg / €-0.13-0.12--Energy balance of trade % GDP-5.6-4.7-3.5-2.5-3.0-3.4Weighting of energy in HICP%15.9315.4215.1014.2713.8313.86Difference between energy price change and inflation p.p.-1.7-1.74.4-6.8-1.41.2Real unit of energy cost% of value added23.722.723.123.5--Ratio of environmental taxes to labour taxesratio0.160.140.130.120.12-Environmental taxes% GDP3.23.33.53.63.53.4Sectoral Industry energy intensity kgoe / € 0.190.190.190.180.180.19Real unit energy cost for manufacturing industry excl. refining% of value added20.620.020.621.3--Share of energy-intensive industries in the economy% GDP8.578.358.518.949.11-Electricity prices for medium-sized industrial users€ / kWh0.110.120.120.120.120.10Gas prices for medium-sized industrial users€ / kWh0.040.040.030.030.030.03Public R&D for energy % GDP0.010.010.010.010.010.01Public R&D for environmental protection% GDP0.010.010.020.010.010.01Municipal waste recycling rate%25.927.028.725.224.825.2Share of GHG emissions covered by ETS*%23.220.720.419.418.222.1Transport energy intensitykgoe / €0.510.520.590.560.550.54Transport carbon intensitykg / €1.091.161.391.241.251.24Security of energy supplyEnergy import dependency%55.940.651.247.244.1-Aggregated supplier concentration indexHHI47.223.141.930.239.7-Diversification of energy mixHHI30.329.430.131.634.632.3 
   
 
ANNEX D 

Investment Guidance on Just Transition Fund 2021-2027 for 
Latvia 

Building  on  the  Commission  proposal,  this  Annex  (25)  presents  the  preliminary  Commission  services’ 
views on priority investment areas and framework conditions for effective delivery for the 2021-2027 Just 
Transition  Fund  investments  in  Latvia.  These  priority  investment  areas  are  derived  from  the  broader 
analysis  of  territories  facing  serious  socio-economic  challenges  deriving  from  the  transition  process 
towards a climate-neutral economy of the  Union by 2050 in  Latvia, assessed in the report.  This Annex 
provides  the  basis  for  a  dialogue  between  Latvia  and  the  Commission  services  as  well  as  the  relevant 
guidance  for  the  Member  States  in  preparing  their  territorial  just  transition  plans,  which  will  form  the 
basis for programming the Just Transition Fund. The Just Transition Fund investments complement those 
under  Cohesion  Policy  funding  for  which  guidance  in  the  form  of  Annex  D  was  given  in  the  2019 
Country Report for Latvia (26). 

In Latvia, greenhouse gas (GHG) emissions from wetlands and peat extraction constitute around 14.5% of 
total GHG emissions (27). Peat extraction leads to the degradation of wetlands, which are efficient carbon 
storage  systems.  Ensuring  sustainable  production  of  peat  and  restoring  peatlands  and  wetlands  can 
significantly reduce emissions. On average 1,800 workers are employed in peat extraction (28), increasing 
to 2,500 during the season. Vidzeme and Latgale are two regions where the transition to a climate neutral 
economy  would  have  a  significant  socio-economic  impact.  Based  on  this  preliminary  assessment,  it 
appears warranted that the Just Transition Fund concentrates its intervention on these regions. 

In line with ambitious climate goals and transition to a carbon neutral economy, the emissions from the 
GHG-intensive  industries  in  the  priority  regions  would  need  to  be  reduced  as  much  as  technologically 
feasible, and potential negative social and economic impacts resulting from this transition mitigated. For 
example,  adapting  the  peat  industry  to  become  more  environmentally  sustainable,  climate  friendly  and 
carbon neutral would lead to employment shifts in the affected regions. The smart specialisation strategies 
(29)  provide  an  important  framework  to  set  priorities  for  innovation  in  support  of  economic 
transformation.  Diversifying regional economic activities and creating new business opportunities would 
therefore  be  essential  for  making  the  transition  towards  a  more  diversified,  competitive  and  green 
economy. This also implies the need for new skills of those people currently employed in the  peat sector 
and its value chain.  

In  order  to  tackle  these  transition  challenges,  priority  investment  needs  have  been  identified  for 
diversifying  and  making  the  regional  economies  more  modern  and  competitive,  and  for  alleviating  the 
socio-economic costs of the transition. Key actions of the Just Transition Fund could target in particular: 

• 

• 

• 

productive  investments  in  SMEs,  including  start-ups,  leading  to  economic  diversification  and 
reconversion; 

investments in the creation of new firms, including through business incubators and consulting 
services; 

investments  in  research  and  innovation  activities  and  fostering  the  transfer  of  advanced 
technologies; 

(25)  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  Just  Transition  Fund  2021-2027  (COM(2020)  22)  and  the  EC  proposal  for  a  Regulation  of  the  European 
Parliament and of the Council laying down common provisions on the European Regional Development Fund, the European 
Social Fund Plus, the Cohesion Fund, and the European Maritime and Fisheries Fund and financial rules for those and for the 
Asylum and Migration Fund, the Internal Security Fund and the Border Management and Visa Instrument (COM(2020) 23) 

(26) SWD(2019) 1013 final 
(27)  GHG 

emissions 

inventory, 

Latvian 

Center 

for 

Environment, 

Geology 

& 

Meteorology, 

https://www.meteo.lv/fs/CKFinderJava/userfiles/files/Vide/Klimats/Majas_lapai_LVGMC_2019_seginvkopsavilkums.pdf 

(28) Source: Latvian Peat Association 
(29) As defined in Article 2(3) of Regulation EU1303/2013 (CPR) 

68 

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

• 

investments in the deployment of technology and infrastructures for affordable clean energy, in 
greenhouse gas emission reduction, energy efficiency and renewable energy. 

• 

upskilling and reskilling of workers. 

In order to increase the resilience of the affected regions, investment needs have also been identified for 
improving the attractiveness of the local economy. Key actions of the Just Transition Fund could target in 
particular: 

• 

investments  in  regeneration  and  decontamination  of  sites,  land  restoration  and  repurposing 
projects. 

69 

ANNEX E 

Progress towards the Sustainable Development Goals (SDGs) 

 Assessment of Latvia’s short-term progress towards the SDGs (30) 

Table E.1 shows the data for Latvia and the EU-28 for the indicators included in the EU SDG indicator 
set used by Eurostat for monitoring progress towards the SDGs in an EU context (31). As the short-term 
trend at EU-level is assessed over a 5-year period, both the value at the beginning of the period and the 
latest available value is presented. The indicators are regularly updated on the SDI dedicated section of 
the Eurostat website. 

Table E.1: 

Indicators measuring Latvia’s progress towards the SDGs 

(Continued on the next page) 

(30)  Data  extracted  on  9  February  2020 

from 

the  Eurostat  database 

(official  EU  SDG 

indicator 

set; 

see 

https://ec.europa.eu/eurostat/web/sdi/main-tables).  

 (31) The EU SDG indicator set is aligned as far as appropriate with the UN list of global indicators, noting that the UN indicators are 
selected for global level reporting and are therefore not always relevant in an EU context. The EU SDG indicators have strong 
links with EU policy initiatives. 

70 

 
                                                           
 
 
 
E. Progress towards the Sustainable Development Goals (SDGs) 

Table (continued) 

(Continued on the next page) 

71 

 
 
 
  
 
E. Progress towards the Sustainable Development Goals (SDGs) 

Table (continued) 

(Continued on the next page) 

72 

 
 
 
  
 
E. Progress towards the Sustainable Development Goals (SDGs) 

Table (continued) 

(Continued on the next page) 

73 

 
 
 
  
 
E. Progress towards the Sustainable Development Goals (SDGs) 

Table (continued) 

Source: Eurostat 

74 

 
  
 
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