Latvia Economy

Subchapters:

Basic data
Public finances and the state budget
Banking system
Tax system

Basic data

Latvia is a small economy, largely dependent on a functioning trade exchange. Although Latvia entered 2022 with nearly exhausted resources to support its economy after a two-year slowdown due to the COVID-19 pandemic, experts predicted a quick recovery. However, at the end of February, the war conflict in Ukraine began, which affected Latvia on several levels. The consequences of anti-Russian sanctions began to fall on its economy, so the GDP growth forecast for 2022 had to be revised downwards from the originally predicted 4.6% to values below 2%. However, as soon as the Latvian manufacturers manage to connect the missing links of the supply chains, which could also be an opportunity for Czech suppliers, a growth period and the start of investments are expected again. Although high energy prices must be addressed in 2022 and inflation reaches up to 13% year-on-year (data from April 2022), by the end of 2022, according to the economists of the National Bank of Latvia, the situation should stabilize and in 2023 Latvia expects an inflation rate of up to 4%. Unemployment should hover around 8%. Check ebizdir for economical facts of Latvia.

One of the key sectors for the functioning of the Latvian economy is the area of agriculture and the related food industry, as well as the wood processing industry. Given the long-term development of the political and security situation, Latvia has approved a gradual increase in the defense budget up to 2.5% of GDP by 2025. In the years 2022-23, it plans to invest in the renewal of the energy distribution network, the development of transport infrastructure, construction projects, as well as the health and social sectors and education.

Pointer	2019	2020	2021	2022	2023
GDP growth (%)	2.1	-3.6	4.1	1.8	3.2
GDP/population (USD/PPP)	22,931.60	22,671.6	24,470.00	26,650.00	28,510.0
Inflation (%)	2.8	0.2	3.3	9.5	3.7
Unemployment (%)	6.3	8.1	7,8	8.1	7.1
Export of goods (billion USD)	14.5	13.6	18.4	18.6	19.4
Import of goods (billion USD)	17.2	15.8	22.8	23.2	24.4
Trade Balance (Billion USD)	-3	-1.7	-3.9	-4	-4.5
Industrial production (% change)	0.7	-1.8	4.1	3	3
Population (millions)	1.9	1.9	1.9	1.9	1.9
Competitiveness	40/63	41/63	ON	ON	ON
OECD export risk	ON	ON	ON	ON	ON

Source: EIU, OECD, IMD, Latvijas Banka

Public finance and state budget

Public finance	2021
State budget balance (% of GDP)	-7.3
Public debt (% of GDP)	49.7
Current account balance (billion USD)	14.74

Taxes	2022
AFTER	15% (micro enterprises 9%)
F.O	progressive tax 20 – 31.4%
VAT	5% / 12% / 21% depending on the type of goods

After overcoming the global crisis in 2007-2008, the Latvian economy was characterized by a relatively high deficit of the current account of the balance of payments, which, together with high inflation, became one of the main risks of economic development. The biggest influence on the growth of the negative balance of payments was the growing liability in foreign trade in goods (especially the lackluster Latvian exports on the one hand and the growing demand met mainly by imports, also growing, on the other). In the case of Latvia, this meant that before another deep crisis, this time associated with the COVID-19 pandemic, the majority of foreign loans were primarily used to finance domestic investments and support domestic consumption (construction of new shopping centers, etc.)

From a macroeconomic point of view, the high current account deficit of the balance of payments was caused by several factors:

rapidly increasing indebtedness
foreign capital was not used for investment in production, but was mainly directed to the real estate market
the goods for export were mostly goods with low added value
Latvian industry depended and still depends on import of large volume of semi-finished products

Latvia’s public debt was at 44.7% of GDP in 2010 and gradually decreased in the following years. Latvian institutions kept the trend for a long time – in 2017, the public debt was at the level of 39%, in the following years it decreased to 36%, or to 34% in 2019. In 2020, however, the crisis associated with the COVID-19 pandemic came and the state had to radically increase its debt compared to previous years to the current 49.7% (total data for the year 2021, which before the outbreak of the pandemic was expected to debt around 35%).

The state budget for 2022, which was prepared in December 2021, was built on 5% GDP growth and an average inflation of 2.4%. However, the year 2022 began with a radical increase in energy prices and, in particular, the war conflict in Ukraine, which will mean a significant slowdown of the economy and a necessary reassessment of state finances. The situation will probably bring with it further indebtedness of the country (already in the original budget for 2022 the total indebtedness was assumed to be 50%).

Banking system

There are currently a total of 13 banks operating in Latvia.

Approximately two-thirds of the banking capital in Latvia is owned by foreign owners, with Nordic banking houses leading among them. The central national bank is “Latvijas Banka” (Bank of Latvia), an independent financial institution. It applies a conservative monetary policy to ensure a stable and predictable environment in the country. However, its room for maneuver is limited by known facts, especially the involvement of Latvia in the EMU.

Contact: Latvijas Banka K. Valdemára iela 2a, Riga LV-1050, Latvija/Latvia Tel. 00371-7-022300, fax 7-022420 Web: http://www.bank.lv

In 2020, the banks reported a profit (unofficially) of EUR 198 million. Profit decreased by EUR 34 million (-15%) compared to the same period in 2019. The total assets of the banking sector reached EUR 23 billion, which means that the value of assets stabilized during 2020. It should be noted that since 2016, the value of gross assets of banks has gradually decreased. The reason for asset impairment is changes in banking strategies and business models, optimization of capital costs and cancellation of licenses. The effort of the Latvian state is still to reduce the share of foreign non-resident deposits in Latvian banks after the collapse of one of the largest banks in the country, ABLV bank (in early 2018, the bank was no longer able to withstand accusations that it covered money laundering and faced suspicions of involvement in corruption and execution of illegal financial transactions concerning, in particular Russia, Ukraine and North Korea). The Republic of Latvia has adopted the Law on Prevention of Money Laundering and Terrorist Financing in order to limit risky financial operations in the Latvian financial sector. More detailed information can be obtained from the below contacts of the Association of Latvian Commercial Banks or the Financial and Capital Market Commission (FKTK)

Association of Latvian Commercial Banks

Financial and Capital Market Commission

Tax system

The basic principles and rules of tax policy in Latvia are set out in the “Law on Taxes and Fees”, which entered into force in February 1995. After Latvia joined the EU, the tax system conforms to EU standards and recommendations of international financial organizations. The Taxes and Fees Act 1995 is continuously amended; tax administration is handled by the State Financial Office and the State Social Insurance Fund and municipal governments.

Due to the frequent changes and rather complex tax system in Latvia, it is recommended to look up the current information on the website of the Latvian Ministry of Finance (Taxes section) if necessary. VAT forms are available on the website of the State Tax Service.

Centrally levied taxes include (only the basic rates are given):

Personal income tax – progressive tax according to the amount of annual income (rate 20-40%)
Micro business tax – 25%
Corporate income tax – 15% (9% for micro-enterprises)
Property tax – 15% (9% for micro-enterprises)
Value added tax – 5-21% depending on the type of goods
Consumption tax – as a percentage of the value of the goods or rate per unit – an overview of the rates for individual products can be found on the State Tax Services page
Customs duty – single customs duty of the EU
Tax on natural resources
Lottery and gambling tax – 10% of ticket sales (lotteries) and according to the type of gambling
Social tax – 35.09% (of which 24.09% is paid by the employer, 11% by the employee)
Vehicle operating tax – according to the type of vehicle and its technical parameters
Company vehicle tax – rate determined by engine volume
Electricity tax
Solidarity tax – 25.5% (only for persons whose annual income exceeds the maximum amount of mandatory state social insurance contributions of EUR 62,800.
Tax on subsidized electricity – 10-15%