Economy of Latvia

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Until the middle of 2008 Latvia had the fastest developing economy in Europe. In 2003, GDP growth was 7.5% and inflation was 2.9%. Unemployment was 9% in 2003 - 2005; however, in 2009 it rose to 23% and is the highest in the European Union.[3] Privatization is mostly complete, except for some of the large state-owned utilities. On May 1, 2004, Latvia joined the European Union.


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 center. Industry served local markets, while timber, paper and agricultural products were 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.

After reestablishing its independence, Latvia proceeded with market-oriented reforms, albeit at a measured pace. Its freely traded currency, the lat, was introduced in 1993 and 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. However by 2007, inflation was 16% – the highest inflation rate in the European Union. 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. After 2000, Latvian GDP grew by 6–8% a year for 4 consecutive years. Latvia's state budget was balanced in 1997 but the 1998 Russian financial crisis resulted in large deficits, which were reduced from 4% of GDP in 1999 to 1.8% in 2003. These deficits were smaller than in most of the other countries joining the European Union in 2004.[citation needed]

The centrally planned system of the Soviet period was replaced with a structure based on free-market principles. Two-thirds of employment and 60% of GDP is now in the private sector.[citation needed] Recovery in light industry and Riga's emergence as a regional financial and commercial center offset shrinkage of the state-owned industrial sector and agriculture. The official unemployment figure held steady in the 7%-10% range.


Privatisation in Latvia is almost complete. Virtually all of the previously state-owned small and medium companies have been privatized, 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 privatize it. The government also holds minority shares in Ventspils Nafta oil transit company and the country's main telecom company Lattelecom but it plans to sell those.

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