Economy

Latvia has the fastest growing economy in Europe. It has had high GDP growth since 2000. In 2006, GDP growth was 11.9% and inflation was 6.8%. Unemployment was 8.8% in 2003, almost unchanged compared to the previous two years, falling to 6.5% by the end of 2006. Privatisation is mostly complete, except for some of the large state-owned utilities. On May 1, 2004, Latvia joined the European Union.

Latvia plans to introduce the Euro as the country's currency but, due to the inflation being above EMU's guidelines, this is unlikely to happen before 2010.

Economic History

For centuries under Hanseatic and German influence and then during its inter-war independence, Latvia used its geographic location as an important East-West commercial and trading centre.

Industry served local markets, while timber, paper and agricultural products supplied Latvia's main exports. Conversely, the years of Russian and Soviet occupation tended to integrate Latvia's economy to serve those empires' large internal industrial needs.

Since re-establishing its independence, Latvia has proceeded with market-oriented reforms, albeit at a measured pace. Its freely traded currency, the lat, was introduced in 1993 and has held steady, or appreciated, against major world currencies. Inflation was reduced from 958.6% in 1992 to 25% by 1995 and 1.4% by 2002. It increased to 6.8% in 2006.

After contracting substantially between 1991-93, the economy steadied in late 1994, led by recovery in light industry and a boom in commerce and finance. This recovery was interrupted twice, first by a banking crisis and the bankruptcy of Banka Baltija, Latvia's largest bank, in 1995 and second by a severe crisis in the financial system of neighbouring Russia in 1998. Since 2000, Latvian GDP has grown by 6-8% a year for 4 consecutive years.

Latvia's state budget was balanced in 1997 but the Russian financial crisis of 1998 resulted in large deficits which are being slowly reduced, from 4% of GDP in 1999 to 1.8% in 2003. These deficits are, however, smaller than in most of the other countries joining the European Union in 2004. Public debt was 11% of GDP in 2006.

Replacement of the centrally planned system imposed during the Soviet period with a structure based on free-market principles has been occurring spontaneously from below much more than through consistently applied structural adjustment. Official statistics tend to understate the booming private sector, suggesting that the Latvian people and their economy are doing much better than is reflected statistically. Two-thirds of employment and 68% of GDP is now in the private sector. Recovery in light industry and Riga's emergence as a regional financial and commercial center have offset shrinkage of the state-owned industrial sector and agriculture. The official unemployment figure has held steady in the 7%-10% range, and in 2006, stood at 6.5%.

Privatisation

Privatisation in Latvia is almost complete. Virtually all of the previously state-owned small and medium companies have been successfully privatised, leaving only a small number of politically sensitive large state companies. In particular, the country's main energy company, Latvenergo remains state-owned and there are no plans to privatise it. Government also holds minority shares in Ventspils Nafta oil transit company and country's main telecom company Lattelecom, but it plans to sell those. Despite a bad image based on loosely controlled privatisation efforts in the early days, as well as the difficulties of privatising the utilities, Latvian privatisation efforts have led to the development of a dynamic and prosperous private sector, which accounted for nearly 68% of GDP in 2000.

Foreign investment in Latvia is still modest compared with the levels in north-central Europe. A law expanding the scope for selling land, including to foreigners, was passed in 1997. Representing 10.2% of Latvia's total foreign direct investment, American companies invested $127 million in 1999. In the same year, the United States exported $58.2 million of goods and services to Latvia and imported $87.9 million. Eager to join Western economic institutions like the World Trade Organization, OECD, and the European Union, Latvia signed a Europe Agreement with the EU in 1995, with a 4-year transition period. Latvia and the United States have signed treaties on investment, trade, and intellectual property protection and avoidance of double taxation.