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 before the outbreak of the COVID-19 pandemic. According to the IMF estimates, real GDP grew 2.5% in 2022 (1.8% as per the EU Commission) underpinned by strong growth in private consumption. Given the carry-over effect of the decline in activity in the second half of the year, growth is expected to remain lacklustre in 2023, with the EU Commission expecting a 0.1% growth rate over the year, followed by an uptick in 2024 (+2.7%).

Latvia's macroeconomic indicators are generally positive, as the country pursues tax and labour reforms in accordance with its stability programme. In 2022, the budget deficit was estimated at 6.1% of GDP by the IMF as the government energy support measures cost EUR 445 million. No funds have so far been allocated for the heating season 2023/2024, while the one-off investments linked to national security should amount to 0.8% of GDP: overall, the IMF expects the budget deficit to shrink to 2.2% of GDP this year and 1.5% in 2024, as the government plans to reduce the structural deficit to 0.5% of GDP by 2025. The government debt-to-GDP ratio increased marginally to 46% in 2022 but is expected to follow a downward trend over the forecast horizon, reaching 43.7% by 2024. The government's interest payments will increase to 2.2% of revenue in 2023-24, from 1.3% of revenue in 2021 (Fitch Ratings). Driven by rapid energy price increases, inflation reached the record level of 16.5% in 2022 and is forecast to remain in double digits through most of the first semester of 2023, before easing gradually to an annual average of 8% and returning closer to the ECB’s target the following year (2.9%).

The unemployment rate stood at 7.4% in 2022. In 2023, the effects of inflation will cause negative real wage growth, and low consumer sentiment will likely shrink household consumption. Overall, the IMF forecasts an unemployment rate of 7.2%. Latvia has to face a strong emigration of skilled youth and the country has one of the lowest population growth rates in the EU (-0.8% in 2021 - World Bank, latest data available), with birth numbers declining continuously. The latest data published by the Central Statistical Bureau (CSB) show that 22.5% of the country’s population are at risk of poverty. The GDP per capita (PPP) was estimated at USD 38,124 in 2022 by the IMF.

 
Main Indicators 20222023 (E)2024 (E)2025 (E)2026 (E)
GDP (billions USD) 41.1746.6750.3554.0957.46
GDP (Constant Prices, Annual % Change) 2.80.52.63.23.2
GDP per Capita (USD) 21,94724,92926,95229,01030,877
General Government Balance (in % of GDP) -4.3-2.8-1.8-1.5-1.8
General Government Gross Debt (in % of GDP) 40.840.639.538.738.3
Inflation Rate (%) n/a9.94.23.32.4
Unemployment Rate (% of the Labour Force) 6.96.76.66.56.4
Current Account (billions USD) -1.93-1.39-1.19-1.19-1.24
Current Account (in % of GDP) -4.7-3.0-2.4-2.2-2.2

Source: IMF – World Economic Outlook Database, October 2021

Main Sectors of Industry

The agricultural sector contributes 4.1% of GDP and employs 7% 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. 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. At the end of 2021, there were 62.3 thousand agricultural holdings (-14.7% y-o-y), with an average size of 44.3 ha. In 2021, the harvested production of grain accounted for 3 million tonnes, which was 14.4% less than one year earlier (CBS - latest data available).

The industrial sector contributes 19.9% of the GDP and employs almost one-fourth of the active workforce (21%). 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 12% of the total GDP. Data published by the Central Statistical Bureau of Latvia (CSB) show that in 2022 industrial production output increased by 0.8% year-on-year. Output in manufacturing rose by 2.6 %, mining and quarrying dropped by 0.7 %, and electricity and gas supply fell by 11.5%. In fact, the country has to import all its energy products, mainly from Russia, and has been trying to diversify its sources following the Russian invasion of Ukraine and the resulting sanctions imposed by the EU.

The Latvian economy is driven by the services sector which contributes 63.7% 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 and a 6% contribution to GDP). Transportation, in particular, contributes around 7.3% of GDP and employs more than 8% of the workforce (official governmental figures). The banking sector comprises 16 banks, including 12 credit institutions registered in Latvia, and four branches of European institutions (European Banking Federation). Finally, in 2022 the number of foreign and resident visitors in Latvia reached 2.2 million, which is 66.2% more than the previous year, but still 23.9% lower than before the pandemic.

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 6.8 23.5 69.6
Value Added (in % of GDP) 5.1 20.9 62.1
Value Added (Annual % Change) 7.0 -2.7 4.2

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 2023

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