Country Brief 2007 Updated April 2008
Latvia is an upper middle-income country with a gross national income per capita of $9,840 in 2007 (GNI, Atlas method). More than one-third of a 2.3 million population is living in the capital city of Riga. Latvia has few natural resources and imports all of its natural gas and oil, as well as part of its electricity. The country is situated on vital east-west trade and energy transit routes. Forests cover almost 40 percent of the country's territory. Latvia’s GDP has grown at an average of over 9.0 percent since 2002, making it and the other Baltic countries, the fastest growing economies in Europe during this period. Latvia acceded to the European Union on May 1, 2004 and is a member of the North Atlantic Treaty Organization (NATO).
Since joining the World Bank in August 1992, Latvia has received the Bank’s support in social sector reforms, including in health, education, and public administration. The World Bank has supported nineteen projects in Latvia for a total amount of $415 million.
Latvia graduated from World Bank borrower status to that of donor partner on April 13, 2007.
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Economy
Developments Since Independence
Upon regaining independence in 1991, the Latvian economy experienced a sharp economic decline as it began its transition to a market economy and lost its economic links with the former Soviet Union (FSU). Real GDP during these years fell by half. The Government quickly realized that a comprehensive reform program was needed and introduced fiscal discipline as well as limits to enterprise subsidies. Thanks to early steps toward liberalization, Latvia became the second country from the FSU to join the World Trade Organization (WTO) in 1999.
The country has now reached the final stages of the transition to a market economy, having acceded to the European Union (EU) in May 2004. Most markets have been liberalized, privatization is close to completion, and vital strides in legal reform, institutional development, and the social safety net are being implemented. Price liberalization took place in most of the markets early in the transition and restrictions on foreign exchange transactions have been very limited. A clear focus on EU integration has had a strong positive effect on Latvia’s domestic policy by serving as a unifying force supporting political, economic, and social reforms across a broad spectrum.
Recent Economic Performance
Latvia has recorded impressive economic performance since the EU accession, with real GDP growth accelerating to over 12 percent in 2007. It has been almost entirely driven by robust domestic demand, both consumption and investment, rising strongly on the back of solid income growth, rapid credit expansion and stimulus from EU funds. The labor market has tightened significantly with unemployment rate declining steadily to 6 percent in 2007, from double digit levels before 2004. Moreover, since Latvia's entry into the EU in May 2004, labor out-migration has increased considerably adding to labor shortages and pushing up wages. This has brought some concerns about mounting macroeconomic imbalances as both current account deficit and inflation have reached very high levels. In 2007, after a period of overheating, the economy started to slow down and growth rate moderated to 10.3 percent, notably in the last months of the year. Against this background, moderation in private consumption and a return to more sustainable rates of economic growth are positive developments. However, the ongoing adjustment poses some risks and maintaining economic balance remains a challenge, given high levels of existing both internal and external imbalances.
Since its inception in 1994, Latvia's fixed exchange rate regime has tied the domestic currency, the lats, to special drawing rights. At the end of 2004, the lats was re-pegged to the euro to support the country’s entry into the euro zone. However, due to inflationary pressures, the initial 2008 target for euro adoption had to be postponed.
Challenges Ahead
Despite many achievements, the following issues still require attention:
- Bringing external and domestic macroeconomic imbalances under control and securing early euro adoption;
- Completing the structural reform agenda and ensuring the competitiveness of the Latvian economy in the EU;
- Becoming a competitive and innovative EU member with living standards and incomes at average EU levels in the long term;
- Improving public sector performance by strengthening public administration, the judicial system, and public expenditure management; and
- Promoting regional development and raising the quality of social services for poverty reduction and social inclusion efforts.
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Program to date
- Landmark Projects
- More projects
Latvia joined the World Bank in August 1992. Since then, the Bank has played an important role in supporting Latvia’s transition through lending, policy dialogue, and analytical and advisory assistance. The last active Bank financed investment project to improve solid waste management in Liepaja was closed in June 2007. Continued Bank assistance to Latvia concentrates on demand-driven analytical and advisory services, including in public finance management, establishing framework for Latvia’s participation in international emissions trading, assistance with PPP projects, and technical assistance on regional development of lagging rural areas.
Latvia also continues to benefit from a number of cross-country analytical and advisory activities, including a programmatic study of public finance reform issues in the EU8 group of countries, a social inclusion report, and EU8+2 Regular Economic Reports.
Impact On the Ground
Below are examples of results of the cooperation between the Government of Latvia and the World Bank:
Once a major polluter of the Baltic Sea, Liepâja now boasts clean sand beaches and water, thanks to its new wastewater treatment facility.
Read more- Structural reforms implemented. Reforms have been promoted across the board, including public administration, the social and health sectors, privatization, the macroeconomic framework, and the regulatory systems for the banking sector and utilities. These reforms were carried out under the Programmatic Structural Adjustment Loan (PSAL) and helped the country deal with the aftermath of the Russian financial crisis of 1998.
- Sustainable pension system established. A progressive three-pillar pension system was established in the country with World Bank assistance. The system is financially sustainable in the long term, with a privately-funded and managed pillar that started to operate in July 2001. The funding scheme creates a direct link between individual contributions and old-age benefits.
- Anti-corruption program developed. Reducing corruption was a critical requirement for EU accession. With the Bank's assistance under the PSAL, Latvia adopted a package of new laws aimed at more transparent and accountable financing of political parties and preventing conflicts of interest and illicit enrichment. A new independent anti-corruption bureau was also established to combat corruption and money laundering.
- Public administration strengthened. With the Bank’s assistance, a package of laws strengthening public administration was adopted. The laws include those dealing with the civil service, quasi-autonomous agencies, the administrative framework, and administrative procedures. The package of laws has laid the groundwork for a professional corps of civil servants and for building a more effective and accountable public administration.
- Energy savings in schools promoted. Some 121 Latvian schools were renovated and thermo-insulated in accordance with European standards under the education project funded by the Bank. Thermal energy savings in the renovated schools range from 30-75 percent, which is important for an energy-importing country like Latvia. These results have prompted the government and the municipalities to continue the renovations.
- Rural activities diversified. Rural activities outside agriculture were developed under the Rural Development Project. As a result, the percentage of the rural population engaged in farming has been reduced to a little more than one third (37 percent) in 2000, as compared to more than half (54 percent) in 1997. A new rural development policy was drafted, an electronic land registry developed, and a financing scheme for small credits established. In addition, over 1,500 small loans have been granted to small businesses.
- Civil society voice and participation increased. Non-governmental organizations (NGOs) were supported through the Bank's Development Marketplace and Small Grants Program. NGOs have been involved in the monitoring of projects, such as the Corruption Prevention Program and a key privatization process in the country. In recognition of the role of NGOs in civil society, the government has amended regulations to increase NGO participation in the drafting of legislation.
NB: Lending is per fiscal year, July 1-June 30
Active Portfolio by Sector as of June 2006
(US$ millions)
The Country Aggregate Report provides more lending data for Latvia
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Contact our regional office in Poland:
Ms. Malgorzata Dworzynska
mdworzynska@worldbank.org
Tel: (48 22) 520 8052
Fax: (48 22) 520 80 01
www.worldbank.org/lv
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