Latvia flag Latvia: Economic and Political Overview

The economic context of Latvia

Economic Indicators

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. According to data compiled by the Central Statistical Bureau (CSB), Latvia experienced a 0.3% decrease in its GDP in 2023. At current prices, the GDP for 2023 amounted to EUR 40.3 billion. A significant slowdown in private consumption and exports was observed, while investment and public consumption expenditure exhibited robust growth.  Overall, the EU Commission predicts that economic activity will rebound in 2024 with a growth rate of 1.7%. In 2025, growth is expected to accelerate further to 2.7%, primarily propelled by domestic demand. Investments are anticipated to remain robust, buoyed by inflows from EU funds and improved financial conditions. Moreover, export growth is forecasted to increase, aligning with the general improvement in demand from key trading partners.

Latvia's macroeconomic indicators are generally positive, as the country pursues tax and labor reforms in accordance with its stability program. The IMF estimated the fiscal deficit at below 3% of GDP in 2023, down from 4.6% in 2022, driven by stronger-than-expected tax revenues and reduced spending on support initiatives. Although energy support measures are expected to be nearly fully phased out in 2024, increased spending on education and healthcare wages, along with higher defense and interest expenses, will likely maintain expenditure/GDP at a relatively stable level. The projections indicate that the general government deficit will hover below 2% of GDP throughout 2024-2025, representing a departure toward wider deficits compared to pre-pandemic levels (with an average deficit of 0.5% between 2015-2019), primarily due to the escalation of medium-term expenditure constraints. The government debt-to-GDP ratio decreased marginally to 40.6% in 2023 and is expected to follow a downward trend over the forecast horizon, reaching 38.7% by 2025 (IMF). Fitch Ratings projects that the government's interest payments will rise to 2.4% of revenues in 2024 and further to 3.0% in 2025, up from an anticipated 1.9% in 2023. In the latter half of 2023, HICP inflation experienced a swift deceleration, primarily due to the decrease in energy prices. Nonetheless, the transmission of elevated energy costs to other sectors, notably services, accelerated throughout the year. Despite this, headline inflation maintained an elevated average level of 9.9% throughout 2023. The IMF expects the rate to decline to 4.2% this year and 3.3% in 2025.

The labor market remained resilient, marked by wage growth surpassing inflation rates and thereby supporting real disposable incomes. The unemployment rate was estimated at 6.7% in 2023, with a marginal decrease expected over the forecast horizon (IMF). Latvia has to face a strong emigration of skilled youth and the country has one of the lowest population growth rates in the EU (-0.3% in 2022 - 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 is at risk of poverty. The GDP per capita (PPP) was estimated at USD 39,956  in 2022 by the World Bank.

 
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 5% 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 favor of household farms and – to a greater extent - of private farms, which currently dominate the country’s rural sector. According to provisional data from the Central Statistical Bureau, in 2023, an 8.1% decrease was noted in the volume of agriculture, forestry, and fishing, primarily due to a 7.8% drop in crop and livestock production and a 9.2% decline in forestry and logging. Conversely, there was a 2.2% increase observed in the fishery sector.

The industrial sector contributes 21.6% of GDP and employs almost one-fourth of the active workforce (24%). 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 13% of the total GDP. Data published by the Central Statistical Bureau of Latvia (CSB) show that industrial production output decreased by 4.5% year-on-year in 2023. Output in manufacturing decreased by 4.5%, in electricity and gas supply by 0.8%, and in mining by 19% over a year. 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 61.7% of GDP and employs 70% 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 nearly 7% 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). In 2023, the value added of services increased by 0.8% y-o-y (CSB). The information and communication sector experienced a 3% increase. The largest sub-sectors, computer programming and consultancy, grew by 9.7%, and the provision of information services saw a 7% rise. However, telecommunication services witnessed a decline of 9.9%.

 
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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Sources of General Economic Information

Ministries
Ministry of the Economy
Ministry of Finance
Ministry of Foreign Affairs
Ministry of the Environment
Ministry of Transport and Communications
Statistical Office
Central Statistics Bureau
Official Statistics Portal
Central Bank
Central Bank of Latvia
Stock Exchange
Nasdaq Nordic
Economic Portals
Economic portal - The Baltic Times
 

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Latest Update: March 2024