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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.

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