Commission Report (2002): Latvia

2.2. Summary of economic developments since 1997

Macroeconomic development has been favourable in most respects. GDP growth has been strong, steady and broad-based, underpinned by both domestic and external demand. Only in 1999 did development deviate from this trend, as the economy was hit by the Russian crisis, but the economy succeeded in recovering rapidly. However, strong private consumption and investment have lead to a large current account deficit. It has, nonetheless, been covered by FDI to a large extent. In 2001, FDI fell considerably but that was due to a single transaction by a domestic enterprise and it should not be too emphasised. Despite strong domestic demand, inflation has remained moderate and stable. The general government deficit has varied somewhat over the years, with a peak in 1999. Since then, however, it has decreased every year. Recent economic developments have, by and large, confirmed these trends, although the weakening of external demand has started to influence exports. The budget law for 2002 provides for an increase in the budget deficit to 2.75% of GDP. So far, however, the actual deficit has been much lower than that and in agreement with the IMF, the target for the year has been set to 1.8% of GDP.

Structural reforms have strengthened the performance of the economy, even if the implementation of the reforms can be a challenge. An ambitious work to improve the business environment began in 1999. An essential element was the systematic involvement of the business community in the programming of structural reforms, which has paid off in terms of a wide range of actions undertaken. Legal certainty has been strengthened in the land market and in the business sector. The privatisation process is almost completed, but the process has gone much slower during the last years than initially planned. Progress was made during the last year, but some large enterprises are still awaiting their privatisation. With the introduction of a mandatory funded pillar in 2001, the pension reform is now largely completed. The financial sector has undergone substantial progress. Although financial intermediation is still relatively limited, restructuring and consolidation of the sector have gone far. Supervision of the financial sector has also been significantly strengthened.

The transition to a market economy, and subsequent restructuring, has contributed to a rise, though geographically uneven, of incomes. GDP per capita in PPS reached 33.1% of the EU average in 2001. This measure shows good progress made since the Opinion in the process of catching up to income levels seen in the EU. However, growth has not been evenly distributed, but largely concentrated to a few areas. This is reflected both in terms of GDP, and in terms of unemployment. The Riga region reached close to half the EU level in 1999, whereas some inland rural areas have significantly lower levels. However, this measure, GDP per capita, do not fully reflect income per capita, and should therefore be treated cautiously. The economic activity rate, around 68%, and the employment rate, around 59% have been overall fairly stable. The unemployment rates in some eastern districts are more than five times higher than in Riga city. Unemployment rates for men are, by about 3 percentage points, higher than those of women and have, unlike that for women not fallen over the past years.

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