Latvia flag Latvia: Economic and Political Overview

The economic context of Latvia

Economic Indicators

For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.

Since its independence, Latvia has implemented market-oriented reforms. The country's economy has performed well due to steady growth in domestic consumption and the contribution of foreign investment. As a member of the EU since 2004 (and of the Eurozone since 2014), it has benefited from substantial European funding. The growth rate has been positive since 2011 and was among the highest in the EU countries. Following the economic downturn caused by the outbreak of the COVID-19 pandemic, the country’s GDP rebounded strongly in 2021 (+4.5%) thanks to sizeable government support measures and solid export performance coupled with higher levels of private consumption. The latter should be the main growth driver over the forecast horizon, supported by strong wage growth and extra savings accumulated in recent years. Overall, real GDP growth this year is forecast at 5.2%, whereas it should marginally slow to 4% in 2023 (IMF).

Latvia's macroeconomic indicators are generally positive, as the country pursued tax and labour reforms in accordance with its stability programme for the period 2018-21. Temporary stimulus measures taken to offset the effects of the COVID-19 crisis (estimated at around 5% of GDP) caused an increase in the budget deficit, which stood at 7.8% in 2021 (from a level of 1.8% before the pandemic). In 2022, the deficit is projected to decrease to 2% of GDP as per the IMF forecast (4.2% according to the EU Commission), with a further reduction in 2023 (1%). The government debt-to-GDP ratio increased from a pre-pandemic level of 37% to 47.6% in 2021 (IMF estimates) and is expected to follow a downward trend in the short term (47.1% and 44.9% in 2022 and 2023, respectively. The EU RRF grants are set to gradually increase from 0.1% of GDP in 2021 to 0.8% of GDP in 2023 (when the total EU fund inflows are expected to peak at 3.3% of GDP). Driven by rapid energy price increases, inflation reached 2.6% last year. The spike in energy prices in the second half of 2021 is set to carry over to 2022, translating into a 3.6% growth in inflation.

Supported by short-time work schemes and wage subsidies, unemployment stood at 7.7% in 2021. The pick-up in investment activity in the second half of the year should bring down unemployment to a level of around 7% over the forecast horizon. the Latvian economy is negatively impacted by a demographic challenge: The country has one of the lowest population growth rates in the EU (-0.6% in 2020 - World Bank, latest data available), with birth numbers declining continuously. Moreover, Latvia has to face a strong emigration of skilled youth. The latest data published by the Central Statistical Bureau (CSB) show that 23.4 % of the country’s population were at risk of poverty in 2020, 1.8 percentage points more than one year earlier.

 
Main Indicators 20202021 (e)2022 (e)2023 (e)2024 (e)
GDP (billions USD) 33.6238.9040.5942.9345.72
GDP (Constant Prices, Annual % Change) -3.84.52.51.63.4
GDP per Capita (USD) 1720212224
General Government Balance (in % of GDP) -3.1-6.5-6.1-2.2-1.5
General Government Gross Debt (in % of GDP) 43.345.746.044.643.7
Inflation Rate (%) 0.13.216.58.02.9
Unemployment Rate (% of the Labour Force) 8.17.67.47.27.1
Current Account (billions USD) 0.96-1.11-1.34-1.28-1.05
Current Account (in % of GDP) 2.9-2.9-3.3-3.0-2.3

Source: IMF – World Economic Outlook Database, October 2021

Note: (e) Estimated Data

Main Sectors of Industry

The agricultural sector contributes 3.8% of GDP and employs 7.3% of the active population (World Bank, latest data available). It is dominated by cattle breeding and dairy farming, in addition to the production of grain cereals (barley, wheat, rye and oats), sugar beets, potatoes and vegetables. Fishing and forestry are also important components of the primary sector. Apart from timber, which is largely exported, Latvia has almost no natural resources. The country has to import all its energy products, mainly from Russia. Almost 30% of Latvia’s territory is destined for agricultural use. Since the early 90s, the structure of land management changed significantly, with the liquidation of collective farms in favour of household farms and – to a greater extent - of private farms, which currently dominate the country’s rural sector. According to the latest figures from the EU Commission, total agricultural output rose 3.1% in 2020.

The industrial sector contributes to 19.2% of the GDP and employs almost one-fourth of the active workforce (23.7%). The construction, metallurgy, industrial food-processing, and mechanical engineering sectors are booming. Latvia is well-known as an important producer of railway equipment, radios, refrigerators, medicines, timber and steel by-products. The manufacturing sector is estimated to account for 10.8% of total GDP. Data by the Central Statistical Bureau (CSB) show that in 2021 industrial production output at constant prices rose by 6.5% (manufacturing increased by 7.3%, mining and quarrying by 4.7%, and electricity and gas supply by 2.9 %).

The Latvian economy is driven by the services sector which contributes 64% of GDP and employs 69% of the active population. Thanks to its attractive fiscal regulation, Latvia has developed a large financial services sector. Transportation and ICT are also important activities for the country’s economy (with more than 6,900 companies operating in the latter sector). Transportation, in particular, contributes 7.3% of GDP and employs more than 8% of the workforce. The banking sector comprises 16 banks, including 13 credit institutions registered in Latvia, and three branches of European institutions (European Banking Federation).

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 7.3 23.7 69.0
Value Added (in % of GDP) 3.8 19.2 64.0
Value Added (Annual % Change) 1.8 0.1 -4.8

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:
72,3/100
World Rank:
30
Regional Rank:
17

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

Business environment ranking

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:
6.70/10
World Rank:
36/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2020-2024

 

Country Risk

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Latest Update: November 2022

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