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- GDP (PPP):
- $49.1 billion
- 2.7% growth
- 3.7% 5-year compound annual growth
- $24,712 per capita
- Inflation (CPI):
- FDI Inflow:
The increasing dynamism of Latvia’s economy has been facilitated by openness to global trade and investment. Supported by efficient business regulations that promote entrepreneurial activity, the overall commercial environment has become conducive to business creation and risk-taking. Fiscal consolidation in recent years has kept government spending under control and ensured macroeconomic stability.
Continued institutional reform to enhance transparency will be indispensable to ensuring the emergence of a more profitable private sector. Poor governance and inefficiency in state-owned enterprises remain problems. Corruption increases the overall cost of doing business and undermines government integrity and judicial effectiveness.
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 resigned in December 2015 after proving unable to maintain the solidarity of the ruling coalition government. Maris Kucinskis of the centrist Liepaja Party (part of the Union of Greens and Farmers), who replaced her in February 2016, heads a three-party coalition that includes the Unity party, the National Alliance, and the Union of Greens and Farmers. The pro-Russian Harmony party is the biggest party despite not gaining power. Implementation of pro-market reforms has improved Latvia’s economic standing and credit rating. Latvia joined the eurozone in 2014.
The World Bank’s Doing Business survey reports that Latvia has made contract enforcement and property transfers easier by restructuring its courts and introducing other new procedures. Although judicial independence is generally respected and property rights are protected, the public distrusts the judicial system, which it views as inefficient, politicized, and corrupt. There are significant concerns regarding accountability for corruption.
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 27.8 percent of total domestic income. Government spending has amounted to 37.7 percent of total output (GDP) over the past three years, and budget deficits have averaged 1.3 percent of GDP. Public debt is equivalent to 34.8 percent of GDP.
The overall regulatory framework is relatively efficient. In general, rules regarding the formation and operation of private enterprises are easy and not burdensome. The nonsalary cost of employing a worker is relatively high, and dismissing an employee can be difficult. In 2016, the government told the IMF that it is making progress on governance reforms in state-owned enterprises and plans to liberalize the natural gas market in 2017.
Trade is extremely important to Latvia’s economy; the value of exports and imports taken together equals 119 percent of GDP. The average applied tariff rate is 1.5 percent. Foreign investment in some sectors is restricted, and state-owned enterprises distort the economy. The financial sector is dominated by banks and has undertaken significant regulatory adjustments since early 2009. Capital markets are not fully developed.