Wayzata World Factbook 1996

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U.S. DEPARTMENT OF STATE LATVIA: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES BUREAU OF ECONOMIC AND BUSINESS AFFAIRS LATVIA Key Economic Indicators (Millions of U.S. dollars unless otherwise noted) 1992 1993 1994 Income, Production and Employment: 1/ Real GDP (1993 prices) 2/ 2550.5 2171.2 2171.2 Real GDP Growth (pct.) -33.8 -15.0 0.0 GDP (at current prices) 1125.2 2171.2 3457.0 3/ By Sector: Agriculture/Forestry 181.05 230.16 345.70 Energy/Water 15.45 148.30 155.57 Manufacturing 296.56 454.49 594.60 Construction 52.99 83.77 183.22 Rents 27.64 73.77 79.52 Financial Services 44.14 80.73 117.53 Other Services 67.54 360.41 1169.50 Government/Health/Education 69.66 205.84 380.27 Net Export of Goods & Services 34.94 53.90 -34.67 Real Per Capita GDP (USD) 2/ 976 846 855 Labor Force (000s) 1,502 1,458 1,450 Unemployment Rate (pct.) 2.3 5.6 8.4 4/ Money and Prices: (annual percentage growth) Money Supply (M2) 1/ 169.2 684.4 1054.9 5/ Base Interest Rate 120 27 27 Personal Savings Rate N/A N/A N/A Retail Inflation 959 35 23 Wholesale Inflation N/A 36.3 24.0 Consumer Price Index N/A N/A N/A Exchange Rate (USD/Lat) Official --- --- --- Market (average) 0.892 6/ 0.676 0.568 Balance of Payments and Trade: 1/ Total Exports (FOB) 641.4 7/ 999.9 7/ 2005.0 3/ Exports to U.S. 2.4 22.6 52.8 Total Imports (CIF) 606.5 946.0 2039.7 3/ Imports from U.S. 15.8 89.5 100.0 Aid from U.S. 6.0 9.0 10.6 Aid from Other Countries 41 27 48 External Public Debt 67.2 236.4 387.2 Debt Service Payments (paid) 1.8 11.6 18.1 Gold and FOREX Reserves ?/ 86.8 564.3 688.7 5/ Trade Balance 34.9 53.9 -34.7 3/ Trade Balance with U.S. -13.4 -66.9 -47.2 N/A--Not available. 1/ Average exchange rate used (except for Real GDP):1992 - USD 1 equals 0.893 Lat; 1993 - USD 1 equals 0.676 Lat; 1994 - USD 1 equals 0.568 Lat. 2/ Real GDP for 1992-1994 at 1993 prices converted at average 1993 exchange rate. 3/ Ministry of Finance estimate. Sector estimates based on 1994 nine months data (January-September, 1994). 4/ National Employment Service estimate. 5/ As of September 31, 1994. 6/ Latvia's currency, the Lat, was not put into circulation until March 1993. The 1992 exchange rate is expressed in Lats converted from Latvian rubles at the official 200/1 ruble-to-lat rate. 7/ Data has not been corrected to reflect fuel imported by Latvia for re-export. 1. General Policy Framework When Latvia re-established independence in 1991, it also abandoned the Soviet command economic system. Though still in transition, the Latvian economy to a great extent operates on free-market principles. The private sector accounts for over fifty percent of GDP. Privatization has so far been most successful in the agriculture and agribusiness sphere, followed by very small scale manufacturing and retail trade previously under the direction of local governments. The government has pursued monetary and fiscal policies in compliance with IMF guidelines. Consequently, the currency (the Lat), which is fully convertible, is very stable. The government's budget deficit this year is projected to be within two percent of GDP. The decline in GDP, which saw production levels fall to half of the pre-independence level, ended this year. Flat growth is expected in 1994; three to five percent growth in the next several years. Inflation has been brought down from nearly one thousand percent in the first year of independence to thirty five percent in 1993 followed by a gradual decline to about 25 percent in 1994. Trade policy: A GATT observer since 1992, Latvia submitted a Foreign Memorandum in June 1994 in preparation for accession to the GATT. Latvia follows a liberal trading regime, though its recently promulgated customs tariff law is more protective of the domestic agricultural market. However, the new tariff levels probably do not negatively affect potential U.S. agricultural exports. Latvia signed a free trade agreement with the European Union, which reduces tariffs on most industrial products to zero and sets out a schedule of tariff reductions over the course of three years for certain agricultural products. Latvia has already concluded free trade agreements with the Nordic countries, Switzerland and Liechtenstein. In April, 1994, a free trade agreement on industrial goods with its Baltic neighbors came into force. A further agreement on agriculture is expected shortly, as are negotiations on a customs union. MFN status with Russia was granted as the result of an exchange of official letters earlier this year. However, as it is not governed by treaty, the arrangement may not be binding. Latvian fiscal policy is prudent and financial management, in light of the difficulties of adjusting to independent, western-style accounting, is sound. The Finance Ministry is in the process of implementing the general budget law which was passed in April 1994. According to that law, the budget for the next fiscal year is to be presented to the Parliament by October 1. However, submission has been delayed by the government crisis in the summer, which was not resolved until September. In 1994 the government expects a 75 million dollar deficit, about four percent of the total budget, or two percent of GDP. The deficit is caused by increases in pensions and government salaries, and defaults on government backed loans. It is financed primarily by the sale of treasury bills to commercial banks. Difficulties in tax collection and a low tax base constrain revenue development. The independent central bank also pursues a very conservative policy, with its chief aims being stability of prices and currency. Earlier this year, an inflow of foreign exchange, which the central bank purchased to keep the currency from appreciating (and thereby further eroding export potential) helped to swell the money supply. However, for a number of reasons the flow has stabilized. The bank's main monetary instruments, which are still being developed, are treasury bill sales and cash reserves auctions. One consequence of the tight monetary policy has been the persistence of very high interest rates, which are an impediment to new business activity. Though the rates have fallen over the past year, the average rate for three to six month credit is around fifty percent. 2. Exchange Rate Policy Though the Bank of Latvia has loosely pegged the currency to the SDR at the rate of 0.7997 Lats to the SDR in order to maintain stability, the exchange rate is largely determined by market forces. The Lat is fully convertible and there are no restrictions on the import, export, exchange or use of foreign currencies inside the country. 3. Structural Policies The Latvian government has made great strides, but is still in the process of developing the laws and institutions and regulatory framework to support a market economy. While Latvia passed bankruptcy legislation in 1991, administrative mechanisms and procedures are not yet functioning well in that the law does not establish criteria for initiating bankruptcy procedures or provide a mechanism for rehabilitating enterprises on the brink of bankruptcy. Price Policies: The Latvian government almost completely decontrolled farm procurement and retail food prices in December 1991 and removed restrictions on the pricing of industrial goods in January 1992. To safeguard producers, indicative prices were set for the procurement of cereals, sugarbeets, flax, meat, milk, and poultry. However, the mechanism has not been effective as farmgate prices have tended to exceed support prices. Moreover, the government has neither the mechanisms to enforce indicative prices nor the resources to compensate farmers for lower prices. Less than eight percent of goods and services remained subject to control, including energy, telecommunications, rents and other public services. Tax Policies: Latvia is in the process of implementing a modern tax structure, which will include a value-added tax (VAT), a profit tax, a graduated personal income tax, excise and property taxes, customs duties, land and natural resource taxes, and a social security tax. Under the draft law, which is expected to be passed shortly, the variable profit tax of 25 to 45 percent will be replaced by a corporate income tax of 25 percent. Until a true VAT is implemented, the government is collecting an 18 percent turnover tax on most goods and services. The existing law on foreign investment provides for tax reductions for up to five years for qualifying foreign investments, but the new law may repeal these tax breaks. The social security tax is collected on all wages, fees, royalties and rewards for work; the general social security tax rate is 37 percent for employers and one percent for employees. The agricultural sector is exempt from many of these taxes, or taxed at a reduced rate. According to the new law on customs tariffs, import duties on some agricultural products are as high as 55 percent (for countries without MFN status). However, duties on industrial products are minimal or zero for countries in a free trade agreement. Latvia collects an export duty on timber, metals, leather, paper and a few other products. Regulatory Policies: Latvia is only beginning to create a modern system to regulate economic activity. The Bank of Latvia is responsible for regulating the banking industry and has created a supervisory structure. An antimonopoly committee supervises monopolies and examines the tariffs set by public utilities. It can recommend the break-up of large enterprises with high market power and can investigate claims of unfair competition and false advertising. A regulatory body has been set up to oversee the activities of the energy sector and provide rate arbitration for district heating services, electricity and natural gas, which are still provided by monopolies. Privatization: Privatization of large state enterprises, which has lagged behind other reform measures, has begun to accelerate with the creation of the Latvian Privatization Agency in April 1994. This entity assumed responsibility for all privatization procedures, previously disbursed among various ministries. In early 1995, the first wave of enterprises will be offered for "mass" privatization, i.e., auctioning of shares for privatization certificates (vouchers). This event will also kick-off full operation of the Riga Stock Exchange. 4. Debt Management Policies As of October 15, 1994, the Government of Latvia's external debt was 329 million dollars, and could increase to 387 million by the end of 1994. G-24 credits constitute 55 million dollars. Latvia has concluded a second standby agreement with the IMF (SDR 22.9 million) and two structural transformation facility agreements (SDR 45.7 million). Latvian compliance with IMF programs has been strong, though a minor problem with budget financing led to temporary suspension of disbursement of the second tranche of standby credits. On September 30, 1994, Latvia's official foreign exchange and gold reserves were valued at 688.7 million dollars, covering nearly six months of exports. The ratio of debt service to exports is a very modest 1.50 percent. 5. Significant Barriers to U.S. Exports The main barriers to U.S. exports to Latvia are structural. While considerable improvement has occurred over the last year, Latvia's business, banking and legal infrastructures have not yet attained Western standards. Under the 1991 Investment Law, the laws of the Republic of Latvia apply equally to domestic and foreign investors. However, there are some restrictions on foreign investment. Acquisition of controlling shares in a Latvian enterprise with assets exceeding one million dollars must be approved by the Cabinet of Ministers. Foreign investors may engage in, but not obtain control over enterprises engaged in activities related to national defense; the manufacture and sale of narcotics, weapons and explosives, securities, banknotes, coins and stamps; the mass media; national education; acquisition of renewable and nonrenewable national resources; internal fisheries; hunting; and port management. Latvia does not restrict the repatriation of profits. The Bank of Latvia must approve the establishment of a foreign bank branch. The United States and Latvia signed a bilateral investment treaty in January 1995. Latvia requires a license for the import of grain and sugar to protect domestic production. In the case of grain, the importer is required to demonstrate purchases from domestic producers. The sugar licensing restrictions poses problems for foreign (or domestic) producers of high quality food products which use sugar, as the domestic product is considered to be of inferior quality. A special permit granted by the Cabinet is required for the import or transit of weapons, explosives or pornographic materials. Latvia is still formulating food safety standards. Meat imports are subject to inspection by the state veterinary department for infectious diseases. As of June 1, 1994, imported food products are required to have conformity certificates to guarantee quality and wholesomeness of food products. 6. Export Subsidies Policies The Latvian government does not currently provide export subsidies. However, the Ministry of Agriculture intends to use state funds allocated for improvement in animal husbandry to subsidize the export of butter, cheese and rye. (Export subsidies for rye is intended to be a temporary measure to get rid of excess stocks.) 7. Protection of U.S. Intellectual Property The Government of Latvia is committed to attaining a level of protection for intellectual property rights comparable to that provided under international conventions. Pursuant to that commitment, the Latvian Parliament in 1993 passed legislation to protect copyrights, trademarks and patents. While the legal basis for intellectual property rights has been established, Latvian law has not defined penalties for violation of these rights nor established a judicial or administrative mechanism through which foreign owners may seek effective redress for violation of their intellectual property rights. In July 1994, President Clinton signed an Agreement on Trade Relations and Intellectual Property Rights Protection with Latvia. Latvia has been a member of the World Intellectual Property Organization since January 1993 and signed the Paris Convention in September 1993. Latvia will accede to the Madrid, Nice and Budapest Conventions in December 1994. Latvia also intends to become party to the Bern Convention not later than December 31, 1995. Unauthorized reproductions of copyrighted video recordings imported from Russia are widely distributed in Latvia. To halt the use of pirated films imported from Russia by private Latvian television stations, the Latvian Radio and Television Board on October 27, 1992, adopted a ruling under which the license of any domestic television company would be revoked if it is unable to show that it has legally acquired the rights to the films it broadcasts. The board does not apply this ruling to signals from the Russian television stations that are rebroadcast directly by Latvian television. Latvia's intellectual property practices have not had an serious impact on U.S. trade outside the film and video industry. 8. Worker Rights a. The Right of Association Latvia's law on trade unions mandate that workers, except for uniformed military, have the right to form and join labor unions of their own choosing. About 50 percent of the work force belongs to unions; union membership is falling as workers leave soviet-era unions that include management or are laid off as soviet-style factories fail. The Free Trade Unions Federation of Latvia, the only significant labor union confederation in Latvia, is non-partisan, although some leaders ran as candidates for various smaller parties that failed to enter Parliament in the 1993 elections. Unions are free to affiliate internationally and are developing contacts with European labor unions and international labor union organizations. The law does not limit the right to strike, but few strikes were actually held in 1994. On September 2, 1994, the majority of Latvia's teachers participated in a one-day strike to protest low wages. Although many state-owned factories are on the verge of bankruptcy and seriously behind in wage payments, workers fear dismissal if they strike and non-citizens fear striking may affect their residency status. While the law bans such dismissals, the government's ability to enforce these laws is marginal. b. The Right to Organize and Bargain Collectively Large unions have the right to bargain collectively and are largely free of government interference in their negotiations with employers. The law prohibits discrimination against union members and organizers. Some emerging private sector businesses, however, threatened to fire union members; these businesses usually paid higher salaries and greater benefits than were available elsewhere. No export processing zones exist in Latvia. c. Prohibition of Forced or Compulsory Labor Forced or compulsory labor is banned and is not practiced. d. Minimum Age for Employment of Children The statutory minimum age for employment of children is 15, though 13-year-olds can work in certain jobs outside school hours. Children are required to attend school for nine years. Child labor and school attendance laws are enforced by state authorities through inspections. The law restricts employment of those under 18, such as by banning night shift or overtime work. e. Acceptable Conditions of Work The labor code provides for a mandatory 40-hour maximum work week with at least one 24-hour period of rest, four weeks of annual vacation, and a program of assistance to working mothers with small children. In October 1994, the minimum monthly wage was set at about 50 dollars (28 Lats). Latvian laws establish minimum occupational health and safety standards for the workplace, but these standards seem to be frequently ignored. f. Rights in Sectors with U.S. Investment The only significant U.S. investment is in the manufacture of food and related products. Conditions do not differ from those in other sectors of the economy. (###)