|
|
Latvia Country Brief 2003
Overview
Latvia is an upper middle income country with Gross National Income (GNI) per capita of US$ 3,480. It has a population of some 2.3 million, more than a third of whom live in the capital city of Riga. Latvia has very few natural resources and imports all its requirements of natural gas and oil, as well as half of its electricity. The country's geographic position places it strategically on the east-west trade and energy transit routes. Forests cover almost 40 percent of the country's territory.
Latvia’s overriding goal is to accede to the European Union (EU) in May 2004. Its focus on EU integration has had a strong positive effect on domestic policy by serving as a unifying force supporting political, economic and social reforms across a broad spectrum, and in large part serving as the country's comprehensive development framework.
The country has reached the final stages of transition to a market economy. It has recorded impressive economic growth in the past few years, with real GDP growth of 7.9 percent per annum in 2001, and 6.1 percent in 2002. Most markets have been liberalized, privatization is close to completion, and the needed improvements in legal reform, institutional development, and the social safety net are being implemented.
Nonetheless, unemployment - an important cause of Latvia's poverty - is hovering at about 13 percent, and is especially significant in the rural areas. In Riga, where new investment has led to economic growth and created new opportunities, some 10.8 percent of the population lives in poverty, while rural poverty stands at 28.5 percent. To promote growth, job creation, and poverty reduction, the country needs to go beyond maintaining macro-economic stability, and vigorously implement the remaining structural agenda.
Events since transition
Upon regaining independence in 1991, the Latvian economy experienced a sharp decline as its transition to a market economy began and economic links with the former USSR were lost. Real GDP during these years fell by 50 percent. The Government quickly realized that a comprehensive program was needed and began by introducing not only fiscal discipline on itself but by limiting subsidies to enterprises. The reform program also involved important steps toward liberalization and creating a competitive and open economic environment.
As a result, in 1999 Latvia was the second country from the former Soviet Union to join the World Trade Organization (WTO). Price liberalization took place in most of the markets early in the transition process, and restrictions on foreign exchange transactions have been very limited. Privatization of state owned enterprises began and has attracted significant FDI. Latvia has completed privatization of small and medium-sized enterprises and some larger companies (e.g., gas).
Recent economic performance
The Latvian economy achieved a remarkable recovery following the brief recession in the aftermath of the Russian crisis. Real GDP growth was 6.1 percent in 2002 and is expected to reach about 6.5 percent in 2003. Growth has been broad - based, with increasing demand for Latvia's exports in both the traditional markets of the Commonwealth of Independent States (CIS) and the new markets of the EU. A sound trade policy has also contributed to growth over the past three years.
However, following several years of small external current account deficits, the deficit in 2002 -- at about 8 percent of GDP -- is an area of concern. The situation is not expected to improve in 2003. Although foreign direct investment decreased in 2001 due to the economic slowdown in the world economy, the situation improved significantly in 2002, with inflows reaching about 5 percent of GDP.
Since its inception in 1994, Latvia's fixed exchange rate regime tied to its special drawing rights (SDR) has served the country well. After reaching 109 percent in 1993, consumer price inflation has been below 3 percent per annum in recent years, and was down to 1.9 percent in 2002. Due to generally good fiscal discipline, Latvia has low levels of public debt, and its credit ratings have improved, giving the country easier and less expensive access to international capital markets.The fiscal deficit has remained between 2 and 4 per cent of GDP since 2000 (2.5 % in 2002). However, the fiscal deficit for 2003 is expected to widen to about 3 percent of GDP, despite the rapid GDP growth.
Focus of World Bank Assistance
Latvia joined the World Bank in August 1992. The Government of Latvia has requested the Bank to take a lead role in key areas not explicitly covered by the acquis communautaire of the European Union. The World Bank Group and Government of Latvia have agreed on a proposed Country Assistance Strategy for the next three years (2002 - 2006) which focuses on :
- Creating a policy environment that encourages the growth of new enterprises and creates jobs
- Supporting crucial public sector reforms to make governance more efficient
- Achieving more balanced and sustainable development outside Riga, thus reducing poverty
- Making social sector programs and services of better quality available throughout the country
The strategy was based on extensive discussions with the Government of Latvia and a range of civil society groups. It reflects a declining demand by Latvia for World Bank lending and an increased demand for the Bank's analytical and advisory assistance.
Over the next three years, lending of $110-120 million is planned, which will focus on public sector management and strengthening governance, health, education, and housing. Analytic and advisory work is planned in areas including labor market reforms, a Country Economic Memorandum on prospects for growth and evaluating public sector reforms implemented to date, and on the knowledge economy.
Impact on the Ground
Governance revamped. Reforms have been promoted across the board including in public administration, the social and health sectors, privatization, the macroeconomic framework, and in the utilities. Reforms have been carried out under the Programmatic Structural Adjustment Loan (PSAL), and Latvia is the second country where the PSAL instrument has been used. The reforms have helped the country deal with the aftermath of the Russian crisis.
 Sustainable pension system established. A progressive 3-pillar pension system has been established in the country, with the assistance of the Bank. The system is financially sustainable in the long-term, with a privately funded and managed pillar which started to operate in July 2001. The funding scheme creates a direct link between individual contributions and old-age benefits.
Anti-corruption program developed. Reducing corruption is a critical requirements for EU accession. With the Bank's assistance under the PSAL, Latvia has adopted a package of new laws aimed at more transparent and accountable financing of political parties, and preventing conflicts of interest and illicit enrichment. A new independent bureau to fight corruption has also been established.
 Public administration strengthened. With Bank assistance, a package of laws strengthening public administration has been adopted. The laws include those dealing with the civil service, the quasi-autonomous agencies, the administrative framework and administrative procedures. The package of laws has laid the ground for building a professional corps of civil servants, and for building a more effective and accountable public administration. In addition, non-profit state enterprises that were created in an ad-hoc manner to escape controls are being converted into accountable agencies with clear objectives.
Civil society voice and participation increased. NGOs have been supported through the Bank's Small Grants Program and have been involved in the monitoring of projects. For example, an NGO has been monitoring the implementation of a Corruption Prevention Program and a key privatization process in the country. In recognition of the role of NGOs in civil society, the government has amended regulations to increase NGO participation in the drafting of legislation.
 Energy savings in schools promoted. Some 121 Latvian schools have been renovated and thermo-insulated in accordance with European standards, under the Education Project. Thermal energy savings in the renovated schools range from 30-75 percent, which is important for an energy-importing country like Latvia. These results have prompted the government and the municipalities to continue the scheme.
Rural activities diversified. Rural activities outside agriculture have been developed under the Rural Development Project. As a result, the percentage of the rural population engaged in farming has been reduced to a little more than one third (37%) in 2000, as compared to more than half (54%) in 1997. To support the development of rural activities outside agriculture, a new rural development policy has been drafted, an electronic land register developed, and a financing scheme for small credits established. In addition, over 1,500 small loans have been granted to small businesses.
Challenges Ahead
- Ensuring the country’s successful and timely integration into the European Union which would, in the longer term, raise living standards and incomes to EU levels.
- Sustaining Latvia’s economic growth, and maintaining macroeconomic stability and fiscal discipline, despite the slowdown of the world economy.
- Improving the performance of the public sector by strengthening public administration, the judicial system, and public expenditure management.
- Promoting regional development and raising the quality of social services.
- Completing the structural reform agenda and ensuring the competitiveness of the Latvian economy in the enlarged European Union.
World Bank Partners in Latvia
| SECTOR | LEAD NATIONAL AGENCY | PARTNERS |
| Education | Ministry of Education |  |
Environment, Urban Development
| Ministry of Environmental Protection and Regional Development | SIDA, PCF, GEF, EU, NIB, Government of Denmark |
|
| Ministry of Finance
Ministry of Economy | IMF |
Health, Social Protection
| Ministry of Welfare | SIDA / UNDP |
Law, Justice and Public Administration
| State Revenue Service | |
World Bank Lending to Latvia
Total IBRD/IDA Commitments from FY93 to FY03: US$ 416 million
(by fiscal year *,in nearest US$ millions)
| up to1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | Total |
| Commitments | 151 | 98 | 8 | 59 | 40 | 38 | 2 | 20 | 416 |
| Disbursements | 61 | 51 | 57 | 34 | 61 | 23 | 21 | 9 | 317 |
Total Commitments by Sector since 1993
(in nearest US$ millions)
* Fiscal year from July 1-June 30.
For more information please contact:
In Riga: Toms Baumanis phone: + ( 371 - 7) 22 - 07 - 44
E-mail: tbaumanis@worldbank.org
September 2003
|
|
|
|