Economy

Since the re-establishment of independence each governments has consequently implemented economic reforms aimed at the creation of a functioning market economy. Latvia’s impressive progress proves the success and effectiveness of long-term oriented economic reforms and shows Latvia’s capacity to cope with competitive pressure.

Latvia stands on the path of stable, sustainable and balanced economic development.

Latvia has pursued a liberal foreign trade policy. Latvia is the first Baltic country to join the WTO. Exports have consistently grown faster than GDP. The export increased by 22% in 1998.

At the end of 1997, Latvia’s exports and imports to the EU comprised 49% and 53% of total exports and imports respectively, while in the first seven month of 1998 the EU share of Latvia’s total exports and imports grew to 52.7% and 55.6% respectively.

The current account deficit amounted to 6.3% of GDP, a normal Level for a rapidly developing transition economy. There is no cause for concern as long as deficit is generated by productive investment and financed by long term capital inflows (in 1997 94.7% of current account deficit were covered by FDI inflows).

Productivity has been growing much faster than wages have. Latvia has well-developed education system, that is one of the most important preconditions for productivity growth. The number of students at Universities and other institutions of higher education have increased from 46,000 in the 1990/1991 academic year to 65,000 in 1997/1998. According to preliminary data, a further increase of 5% was registered for the year of 1998/1999.

Privatisation of small and medium size enterprises and the majority of large enterprises has been completed in Latvia. 96% of all state enterprises have been assigned for privatisation. The private sector constitutes 63% of GDP and 67% of employment. The private sector contributes about 95% to the key industries of construction, agriculture and manufacturing.

The Cabinet of Ministers.

The restructuring of the economy was fuelled by growing volumes of FDI inflows. In 1997, these were especially abundant, amounting to 7.6% of GDP. The growth rate of foreign investments in Latvia in 1997 was higher than that in the other Baltic States. The total amount of direct foreign investment inflow up until 1997 constituted approximately USD 340 per capita.

Latvia has a stable financial system. 1998 is the third consecutive year marked by a stable and controlled growth in Latvia’s banking sector. Bank lending has increased by 74% in 1997. 94% of credit was issued to the private sector.

According to the estimates of the IMF the financial turmoil in Russia in August-September 1998 did not generate any major effect on the Latvian banking sector as a whole. This proves that Latvia has an effective banking supervision mechanism.

It is important to mention that on 9 September 1998 the international credit rating agency Fitch IBKA assigned Latvia the same credit rating as on June 1998 (before Russian crisis) BBB for long term liabilities in foreign currency and for long term liabilities in national currency. On 13 October also Standard & Poors reaffirmed the credit rating which it had assigned in May (BBB).

Latvia has a sound social system. Pension system reform is in its final stage. State funded pension system will be introduced in the year 2000.