At the beginning of 2014, Latvia realised its long-term strategy to adopt the euro. The road to monetary union has not been easy, however. Having been hit hard by the financial crisis, it seems the short-term pain caused by austerity measures has been worthwhile. Today, the country is one of Europe’s fastest growing economies and boasts a budget deficit of just 1.2%, comfortably within the Eurozone’s 3% rule.
- Official country name:
- Republic of Latvia
- euro (EUR)
- Official language:
- Latvian (sometimes referred to as Lettish)
- Capital city and financial centre:
- Time zone:
- 2,165,165 (July 2014 est)
- Population growth rate:
- -0.60% (2014 est)
- GDP per capita (USD equivalent):
- $23,900 (2014 est)
- GDP real growth rate:
- 2.7% (2014 est)
- Government type:
- parliamentary democracy
- Head of state:
- President Andris Bērziņš
- Political leader:
- Prime Minister Laimdota Straujuma
- Top export partners:
- Lithuania, Estonia, Russia, Germany, Poland, Sweden
- Top import partners:
- Lithuania, Germany, Russia, Poland, Estonia, Italy, Finland
Latvia’s economy has experienced several remarkable changes in fortune in the past decade. During the early years of the millennium, Latvia was in the midst of a colossal economic boom fuelled by capital inflows from abroad. The influx of capital into the country was largely directed into the property sector, however, resulting in a real estate boom. Latvia’s economy expanded by 50% between 2004 and 2007.
This exposure to the property sector was, however, to play a big part in the economy’s hardships thereafter. By 2007, the property market was crashing in Latvia, as it was the world over. In 2008, the country’s GDP plummeted by 18% and the country was hit disproportionately hard. Social unrest ensued and, in February 2009, the government led by Ivars Godmanis collapsed. Valdis Dombrovskis took over as Prime Minster but tough times still lay ahead as 2010 saw unemployment rise to 18.7%. The government also implemented major spending cuts in order to reduce the country’s deficit, but concerns were voiced over the severity of the cuts putting social infrastructure in danger.
Unlike some of the southern European nations, who faced similar debt problems at the time, Latvia’s austerity measures put the country back on the right course, and in a surprisingly short space of time, given the depth of the decline. It grew by about 5.5% in both 2011 and 2012, and the current account deficit – at 22% of GDP at its peak – returned to a virtual balance. Achieving this target, along with a reduction in inflation, also helped to bring the country in line with the Maastricht criteria for admission to the Eurozone.
In January 2014, Latvia finally achieved its long-held ambition and adopted the euro, becoming the 18th member of the single currency. The country’s new Prime Minister, Laimdota Straujuma also took office in that month.
The banking sector
Latvia is considered to have one of the most highly developed banking systems within Eastern Europe. The commercial banking sector is controlled by The Bank of Latvia (BoL), Latvia’s independent central bank, which is a participant in the European System of Central Banks. After the changeover from the lats to the euro, the functions of the BoL have not changed, but its sphere of activity has broadened, particularly regarding monetary policy decision. It now has an equal say – with the Eurozone’s other central banks – in deciding on common monetary policy for the currency union.
According to the latest available figures, there are 51 licensed credit institutions in Latvia, 17 of which are commercial banks. Certain Nordic banks have a strong presence in Latvia and although most of these will offer a full suite of cash management products, some banks only work in specialised areas of the market. Leaders in the commercial banking space include: Swedbank, SEB Banka, ABLV Bank, Rietumu Banka, Citadele Banka and DNB NORD. UniCredit and Danske Bank also have a strong presence in the country.
The Nordic banks provided liquidity and capital support to their subsidiaries during the crisis, which helped to limit the systemic crisis.
Payments and clearing
||Value dating rules
||Cut off times
||High-value and urgent payments in EUR
||Settlements in real-time with immediate finality
||Customer payments = 18:00 EET Interbank payments = 19:00 EET
|EKS (SEPA compliant)
||Multilateral net settlement
||Non-urgent, low-value payments in EUR with a maximum value of EUR 50,000
||Settlement on same day basis with end-of-day finality
||EUR payments = 15:00 EET
Credit transfers are the predominant method of making payments, in terms of volume and value, in particular for corporate payments. Both electronic and paper-based transfers are used. Normal value dates are the same day, if the payment is received before 1.30pm.
Payment cards. In terms of volume, there has been a rapid increase in the use of payment cards, notably in the retail sector. Cards are the second most popular payment instrument in Latvia and debit cards are far more popular than credit cards.
Direct debits are mostly used for public utilities and service settlements, but are not terribly common. Usage is increasing, however, with the total volume of the country’s direct debit transactions augmenting by 2.2% in the first half of 2014. Having joined the euro on 1st January 2014, Latvia was given one year to complete the migration to SEPA Direct Debit (SDD) after which the OpusCapita clearing system will cease processing such transactions.
E-invoicing. The application of electronic invoicing is still under development, some large enterprises, in the public sector however are pioneering its usage.
Cheques. The use of cheques is fairly non-existent in Latvia, and is declining according to recent analysis by the BoL. Cheques are truncated into electronic items and cleared via EKS.
Bank deposits are the most popular short-term investment instrument in Latvia. Time deposits are readily available across a range of maturities (from one day to 12 months and over).
Certificates of deposit. CDs are usually issued with maturities from one month to one year.
Treasury bills. Latvia stopped selling government bonds after the bailout in 2008. However, in June 2011, Latvia returned to the international bond market with a successful sale of $500m in government debt. Today, T-bills are issued by the Ministry of Finance, with maturities ranging between one and 12 months.
Commercial paper is issued with maturities ranging from overnight to 12 months.
Money market funds. As in the other Baltic states, these have increased in popularity in recent years.
Repurchase agreements. Repos have recently been made available in Latvia. Repos are made on T-bills issued by the Ministry of Finance and can be issued with maturities ranging up to two years.
Tax and legal considerations
There are no foreign exchange controls in place in Latvia.
Transactions over €10,000 between residents and non-residents must be reported directly to the BoL by companies and indirectly by banks.
Corporation tax is levied at 15% (2015 figure).
Since 1st July 2014, Latvia has not levied withholding tax on royalties or on interest payments, except those which are payable to recipients in blacklisted jurisdictions.