Economy of Latvia

The economy of Latvia is an open economy in Europe and is part of the European Single Market. Latvia is a member of the World Trade Organization (WTO) since 1999, a member of the European Union since 2004, a member of the Eurozone since 2014, and a member of the OECD since 2016. Latvia is ranked the 14th in the world by the Ease of Doing Business Index prepared by the World Bank Group. According to the Human Development Report 2011, Latvia belongs to the group of very high human development countries. Due to its geographical location, transit services are highly developed, along with timber and wood processing, agriculture and food products, and manufacturing of machinery and electronic devices. Privatization is mostly complete, except for some of the large state-owned utilities. Export growth contributed to the economic recovery; however, the bulk of the country's economic activity is in the services sector.

Top Sectors in Latvia

Agriculture in Latvia

In 2018, Latvia produced 1.4 million tons of wheat; 426 thousand tons of potatoes; 306 thousand tons of barley; 229 thousand tons of rapeseed; 188 thousand tons of oat; 81 thousand tons of rye; 80 thousand tons of beans; and smaller quantities of other agricultural products.

Tourism in Latvia

Tourism in Latvia is an emerging industry in the nation. 2.8 million visitors were recorded in 2018, an increase of 8% compared to 2017. In 2016, tourism contributed 4.5% of Latvia's GVA and accounted for 1.3 million euros in export revenue. Tourism-related industries accounted for 8.5% of total employment, or 77,100 jobs in total. This was accompanied by significant growth in the number of hotels and accommodations in Latvia, rising 37% from 607 in 2018 to 831 in 2018, according to a 2020 OECD report. Most tourists in Latvia come from neighboring countries, primarily Russia, Germany, Estonia, and Lithuania. Most tourists stayed in Riga, the national capital.

Energy in Latvia

Most of Latvian electricity is produced with hydroelectricity. The largest hydroelectric power stations are PÄ¼aviÅ†as Hydroelectric Power Station, Riga Hydroelectric Power Plant, and Ä¶egums Hydroelectric Power Station. In 2017, about 4,381 GWh were produced in hydro power and 150 GWh in wind power. There are plans to increase wind electricity production under the 2021-2030 energy plan.

Transport in Latvia

Latvian Railways is the main state-owned railway company in Latvia. Its daughter companies both carry out passenger services as well as carry a large quantity of freight cargo, and freight trains operate over the whole current passenger network, and a number of lines currently closed to passenger services. Riga International Airport is the only major airport in Latvia, carrying around 5 million passengers annually. It is the largest airport in the Baltic states and has direct flights to over 80 destinations in 30 countries. It is also the main hub of airBaltic.

Services in Latvia

In 2022, the sector with the highest number of companies registered in Latvia is services with 71,692 companies followed by Retail Trade and Finance, Insurance, and Real Estate with 15,300 and 10,287 companies respectively.

Latvia - Key Economic Indicators

Exports and Imports

Latvia’s economy heavily relies on trade, with exports playing a significant role. As of the latest available data, Latvia's exports were valued at approximately $15.2 billion, with key export commodities including wood and wood products, machinery and equipment, food products, and metals. Meanwhile, imports totaled around $18.4 billion, comprising mostly machinery and equipment, chemicals, fuels, and vehicles. Major trading partners include Germany, Lithuania, Estonia, and Russia.

Infrastructure

Latvia boasts a relatively well-developed infrastructure system. The country has invested significantly in its road network, with approximately 71,000 kilometers of roads, including highways and local roads. Additionally, Latvia maintains several modern bridges and has made efforts to improve its transportation infrastructure to facilitate trade and connectivity within the Baltic region.

Balance of Trade

Latvia generally experiences a trade deficit, meaning that its imports exceed its exports. The trade deficit fluctuates based on global economic conditions, currency exchange rates, and domestic demand. However, despite the trade deficit, Latvia's economy remains resilient due to its diversified export base and competitive industries.

Fiscal Policy

Latvia follows a prudent fiscal policy aimed at maintaining sustainable economic growth and fiscal stability. Government spending is focused on infrastructure development, education, healthcare, and social welfare programs. Taxation is relatively competitive, with corporate tax rates at 20% and personal income tax rates ranging from 20% to 31.4%, depending on income levels.

Monetary Policy

The Bank of Latvia, as the country's central bank, implements monetary policy to ensure price stability and support economic growth. It sets interest rates, manages foreign exchange reserves, and regulates the banking sector. The bank closely monitors inflation and economic indicators to adjust monetary policy as needed.

Trade Agreements

Latvia is a member of the European Union (EU) and participates in various trade agreements negotiated by the EU, such as the Comprehensive Economic and Trade Agreement (CETA) with Canada and the EU-Japan Economic Partnership Agreement. Additionally, Latvia benefits from its membership in the Eurozone, which facilitates trade and financial transactions within the currency union.

Environmental Regulations

Latvia has implemented environmental regulations to protect its natural resources and promote sustainable development. The country has adopted EU environmental directives and standards, focusing on reducing pollution, conserving biodiversity, and promoting renewable energy sources. Additionally, Latvia has made efforts to address environmental challenges such as air and water pollution, deforestation, and waste management.

Tax System in Latvia

Capital Gains Tax: Latvia imposes a flat rate of 20% on capital gains, which are profits earned from investments such as stocks, bonds, real estate, and other assets.
Corporate Tax Rate: Latvia has one of the lowest corporate tax rates in the European Union (EU). The standard corporate tax rate is 20%, which applies to the profits of both resident and non-resident companies.
Sales Tax (Value Added Tax - VAT): Latvia applies a standard VAT rate of 21% on most goods and services. However, there is a reduced VAT rate of 12% for certain goods and services, such as books, pharmaceuticals, and medical equipment.
Property Tax: Property tax in Latvia is levied by local municipalities. The tax rate varies depending on the location and type of property. Generally, residential properties are subject to lower tax rates compared to commercial properties.
Payroll Tax: Payroll taxes in Latvia fund social security programs and healthcare. The social security contribution rate for employees is 11%, while the employer contributes an additional 24.09% of the employee's gross salary.
Tax Deductions and Credits: Latvia offers various tax deductions and credits to individuals and businesses to reduce their tax liability. These may include deductions for education expenses, mortgage interest, donations to charities, and incentives for investments in certain industries.
Tax Compliance: The efficiency of tax collection in Latvia has improved in recent years, thanks to advancements in technology and enforcement measures. The country has been working to combat tax evasion and improve compliance through digitalization and stricter enforcement measures.
Tax Burden: The overall tax burden in Latvia is relatively moderate compared to other EU countries. However, the distribution of the tax burden among different income groups and sectors may vary. Overall, Latvia aims to maintain a competitive tax environment to attract investment and promote economic growth while ensuring sufficient revenue for public services and social welfare programs.

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