Latvia: Economic Profile

Background:

Latvia’s economy has followed a roller coaster-like path in recent years. From 11% average annual GDP growth from 2005-07, the economy dramatically reversed course and contracted in 2008. The large external imbalances built up during the country's boom years are now unwinding. The economy contracted 18% in 2009.

In late 2008, Latvia reached agreement on a €7.5 billion EU- and IMF-led bailout package after the government rescued Parex Bank, the country’s second largest bank. The bailout reduced immediate fears that the exchange rate peg would not hold. Latvia currently pegs its currency to the euro within a ±1% fluctuation band.

Private consumption represents the largest individual component of GDP, at over 60%. Latvia is also a relatively open economy, with the share of exports and imports both more than 40% of GDP.

Latvia is one of three Baltic states that joined the European Union in 2004. In terms of size, the economy ranks 87th in the world, making it the EU’s second-smallest, behind only Estonia, according to World Bank 2009 GDP rankings. The population is just over 2 million.

Wood, in many different forms, is the country’s primary export, accounting for one-fifth of total exports. The neighboring Baltics—Estonia and Lithuania—are Latvia’s main trading partners, along with Russia. The EU is the main destination for Latvian exports, accounting for over two-thirds of outbound goods. The CIS is the second largest destination, with more than 10% of total exports. More than half of Latvian exports are intermediate goods, while just under a quarter are consumer good exports.

Due to Latvia’s economic crisis, euro adoption is not expected until 2014 at the earliest.