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- GDP (PPP):
- $48.2 billion
- 2.4% growth
- 2.7% 5-year compound annual growth
- $23,707 per capita
- Inflation (CPI):
- FDI Inflow:
The Latvian economy has made a notable recovery from the severe shock of the recent global financial crisis. Particularly since mid-2010, with determined budget-cutting measures, the political leadership has demonstrated solid commitment to reform, and Latvia is now better positioned than many other countries in the region to sustain resilient economic growth.
Economic Freedom Snapshot
- 2016 Economic Freedom Score: 70.4 (up 0.7 point)
- Economic Freedom Status: Mostly Free
- Global Ranking: 36th
- Regional Ranking: 17th in Europe
- Notable Successes: Trade Freedom and Business Freedom
- Concerns: Corruption and Labor Freedom
- Overall Score Change Since 2012: +5.2
Latvia’s ongoing transition to a more dynamic and market-oriented economy has been facilitated by the efficiency of business regulations designed to promote entrepreneurial activity. However, lingering corruption exacerbated by a relatively inefficient judicial system could become a growing challenge to long-term competitiveness if left unaddressed.
Latvia regained its independence from the Soviet Union in 1991 and joined the European Union and NATO in 2004. Prime Minister Laimdota Straujuma of the conservative Union Party returned to power after the October 2014 elections. She heads a three-party coalition that also includes the National Alliance and the Union of Greens and Farmers. The pro-Russian Harmony party is the biggest party despite not gaining power, although its total vote share fell by 5 percent. Latvia’s economic standing and credit rating have improved following pro-market reforms. Low productivity remains a problem, and there is a large underground economy. Latvia joined the eurozone in 2014.
Although it is a crime under Latvian law to offer or accept a bribe or to facilitate an act of bribery, corruption exists at every level of government, and very few officials have ever been prosecuted and convicted. Judicial independence is generally respected, and property rights are protected, but the public is still distrustful of a judicial system that it views as inefficient, politicized, and corrupt.
The individual income tax rate is a flat 23 percent, and the corporate tax rate is a flat 15 percent. Other taxes include a value-added tax and excise taxes. The overall tax burden equals 27.7 percent of total domestic income. Government spending amounts to 37.2 percent of GDP. The budget deficit has been declining in recent years, and public debt is about 40 percent of GDP.
The regulatory framework is relatively efficient, and the business start-up process has been streamlined. The labor market lacks flexibility; non-salary costs of employing workers are high, and restrictions on work hours are rigid. Inflation is expected to remain low, partly reflecting the sharply lower global oil price forecast and the absence of fuel subsidies, but the ongoing liberalization of electricity tariffs will be felt by businesses and consumers.
EU members have a 1 percent average tariff rate. Trade agreements are currently being negotiated with countries that include the United States and Japan. State-owned enterprises operate in several sectors. The financial sector has undergone regulatory adjustments since early 2009, with the government providing capital injections. Banking remains stable, and the number of non-performing loans is declining.