Economic situation

Since regaining its independence in 1991, Latvia has implemented a comprehensive economic programme that will develop an open market economy based on the principles of free trade and competition. As distinct from the Central Europe Free Trade Association (CEFTA) countries, Latvia began its economic transition from scratch.

The reform programme launched eight years ago continues; its aim remains the development of economic, political and cultural relations with Europe and the west. Latvia is ready to welcome international investment and can offer investors an attractive environment in which to live and trade.

Economic changes and the aspirations of the Government to stabilise the macroeconomic situation are important pre-conditions for attracting foreign investment. As investment can give considerable impetus to economic activity, Latvia is restructuring the national economy in order to provide favorable conditions for foreign investment.

Considerable progress in the creation of market economy has been achieved in eight years. Latvia has also gained important success in stabilising the economy. Macroeconomic stability has been achieved by implementation of a tight monetary and fiscal policy.

The currency of the Republic of Latvia - the lat (LVL), unofficially pegged to the SDR (1 SDR = 0.7997 LVL) is a particularly stable exchange rate which has not undergone essential fluctuations since its introduction in 1993. For instance, the average LVL exchange rate to the US$ was:

The stability of the LVL forms a firm basis for economic development and secures foreign investors' trust in the investment climate in Latvia. Inflation rates in 1994, 1995 and 1996 were the lowest of the three Baltic States (26.3 per cent, 25.0 per cent and 17.6 per cent). In 1997 the inflation rate was 8.4 per cent; for 1998, according to approximate calculations (not yet announced by the Central Statistical Bureau), it could be about 3.5 per cent. This has been one of the most important achievements of the economic reforms.

Economic changes during the transition to a market economy have been reflected in the dynamics of Gross Domestic Product (GDP) and in its structural changes. Since 1995 GDP has regularly increased year by year, showing stability of economic development. Forecasts of GDP growth in 1998 made by the Economist Intelligence Unit (EIU) is 4.5 per cent more compared with 1997. This may be attributed to the economic crisis in Russia.

In the last few years the level of officially registered unemployed has stabilised at about seven per cent of the economically active population. It is expected that, with the acceleration of the privatisation process and increased production efficiency, unemployment will slightly increase.

Latvia has entered into foreign trade transactions with more than 100 states, and taking into account the economic and geographical situation of the country, trade turnover should continue to grow.

Since mid-1994 exports have started to increase, particularly to the European Union (EU). Latvia's foreign trade balance is negative, but international reserves are positive. This means that the negative trade balance is compensated by factors that are more difficult to estimate, for example, export of services, capital investment and banking operations.

Current foreign investment

Latvia offers every foreign investor:

• a rapid and positive pace of reforms;
• a Government' firm resolve to improve the business climate for foreign investors;
• significant cost efficiencies;
• the high intellectual potential of its workforce;
• a business climate conducive to growth:
  * legal protection of foreign investors' interests:
  - no restricted sectors of activity,
  - no special permits needed,
  - free repatriation of profits and investment,
  - exemption from import duty and value-added tax (VAT) if goods are imported on a temporary basis for processing;
  * low corporate tax;
• a stable and convertible currency;
• a strategic location as a gateway to Russia, the European markets and a hub of transit corridors;
• an excellent transport infrastructure;
• three main seaports at Riga, Liepaja and Ventspils. Ventspils - 15th largest port in Europe by throughput and the largest in the Baltics;
• free ports and special economic zones;
• a rapidly developing international airport at Riga;
• Riga's position as 'the commercial capital' of the Baltic States;
• a 'one-stop-shop' service offered by the Latvian Development Agency (LDA) to foreign investors.

Latvia has signed a trilateral agreement with the other two Baltic States and free trade agreements with the EU, the Ukraine, the European Free Trade Agreement (EFTA) and the Czech Republic. In 1995 Latvia became an Associate Member of the EU.

Thanks to rapid and positive reform and macroeconomic stability, the last few years have been successful in attracting foreign investment. The volume of foreign direct investment (FDI) amounted to $679.2 million in 1996, $936.4 million in 1997 and $1013.1 million till June 1998. The first major investment came from the United States (US), a $25 million investment in 'SIA Kellogg's Latvia' in 1992. In its turn, the beginning of 1994 is associated with the biggest investment so far - 'SIA Lattelekom' communications, made by a consortium 'Tilts Communications', registered in Denmark which is formed by 'Cable and Wireless' (United Kingdom - UK) and 'Finnish Telecom'. Average foreign investments into the authorised capital of joint ventures registered in Latvia constituted 57.87 per cent, which testifies to the tendency of investors to keep the controlling block of shares in the company.

The most significant growth in investment in 1998 was in industry, transport warehouse services, communications and other public utilities, and social and personal services.

FDI stock by investing country (as at June 1998)

LDA - a 'one-stop-shop'

Foreign investment can take three main forms: 'green-field' investment in new companies; investment in joint ventures with existing companies; investment through the privatisation process.

To promote FDI in Latvia, in 1993 the Government established the LDA. The LDA has set up a 'one-stop-shop' system providing all necessary information and assistance for the potential investor. It maintains contact with business people around the world, helping them to understand the current economic situation in Latvia and the opportunities for investment.

The LDA is a non-profit state joint stock company. The council of the LDA consists of four Cabinet Ministers, the Director-General of the Latvian Privatisation Agency, the President of the Chamber of Commerce and Industry, the President of the Riga Stock Exchange and two other well-known, successful businessmen.

The LDA supports implementation of the national economic development programme by:

• providing information to potential investors;
• providing a 'one-stop-shop' service for foreign investors;
• promoting Latvian exports and developing export potential;
• encouraging the development of the capital market.

The role of the LDA is wide so that it can respond flexibly to opportunities and problems as they arise. This helps it to co-operate with the many public and private organisations that are also involved in national economic renewal. The main functions of the LDA are to offer a range of services to meet customer needs and to provide various resources to support them.

The LDA offers a wide range of services:

• inquiry and support services providing assistance to prospective investors and exporters;
• international promotion services including a programme of marketing, foreign sales and public relations;
• project development services including regional, industrial and commercial development schemes.

The LDA has nine representatives abroad - in Germany, Australia, the US, the Ukraine, the UK and Italy.

The LDA does everything possible to adapt its FDI and export promotion strategies to changing international market conditions. LDA activities are devoted exclusively to the needs of both local and foreign business people.