Latvia had been experiencing stable economic growth rates exceeding the EU average until the COVID-19 pandemic. From 2013 to 2019, GDP grew by 2.9% per year on average.
The COVID-19 pandemic has had a significant impact on economic development for the global economy and Latvia was not the exception. In 2020, GDP shrank by 2.3%. Nonetheless, the extensive government and EU funds support measures, as well as the improvement of the epidemiological situation in 2021, contributed to the recovery of Latvia’s economy, and GDP grew by 4.3%.
The recovery of Latvia's economy from the COVID-19 pandemic crisis was interrupted by the large-scale aggression of Russia against Ukraine. On 24 February 2022, when Russia invaded Ukraine, the geopolitical situation and prospects for economic development deteriorated. Energy and food prices rose significantly, intensifying the inflation pressure at a time when the cost of living around the world had already skyrocketed as the world was recovering from the pandemic. The global economy was also affected by disruptions in raw material supply chains due to the war. In 2022, GDP grew by 2.8%, i.e., the lowest growth since 2017, excluding the drop of 2020 due to the COVID-19 pandemic. However, despite the war in Ukraine, the decline in GDP was better than predicted due to strong private consumption and export growth.
Further economic development in the medium term depends on the situation in the external environment and progress in reforms. The highest risk to the growth of Latvia is related to global economic development, in particular the geopolitical situation. Further development of the EU’s economic performance is equally important. In the medium term, economic advantages of Latvia are mainly based on the achieved macroeconomic stability, as a result of which Latvia’s credit ratings have improved, as well as on the efficiency of planned aid programmes of the EU funds and on the improvements in the business environment. Latvia owes its economic competitiveness to technological factors, improvements in production efficiency, increased innovation, and to a lesser extent cheap labour and low resource prices. In the medium term, Latvia’s growth rates may reach a 4-5% increase per year. If the war in Ukraine continue, the pace of economic recovery might be slower.
In Latvia, 99.8% of economically active merchants and commercial companies are SMEs, 91.1% of which are micro-enterprises.
In 2022, SMEs in Latvia continued their recovery, with SME value added growing by 7.9% and SME employment increasing by 1.7%. However, as value added growth is not adjusted for inflation, in the high-inflation environment of 2022, growth in real terms has been lower (SME value added growing by 6.7% and SME employment increasing by 0.7%).
As economic operators are experiencing the effects of the large-scale aggression of Russia against Ukraine, including supply chain disruptions, market shocks, uncertainty, and inflation, the government has developed solutions to overcome the crisis and stabilise the market by offering various financial instrument programmes.
Currently, state support programmes are introduced via the JSC Development Finance Institution Altum (henceforth – Altum), a state-owned development finance institution offering aid and financial tools to various target groups. Altum develops and implements state aid programmes to compensate for market shortcomings that cannot be resolved by private financial institutions.