Latvia economy briefing: The strategy of Latvia to overcome the economic crisis of Covid-19 – Institute of Economics
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Home » News » Latvia economy briefing: The strategy of Latvia to overcome the economic crisis of Covid-19

Latvia economy briefing: The strategy of Latvia to overcome the economic crisis of Covid-19

In the last months, the economics of Latvia has been facing various challenges due to the global pandemic. Taking into account the negative impact of Covid-19 on Latvia’s economic growth and the support measures introduced by the Latvian government to reduce the impact of the crisis the report from the Ministry of Finance states that the economics of Latvia could experience approximately 7% reduction of gross domestic product in 2020. [1] For this reason, the main priority for the Latvian government regarding economics is to focus on the development of a short-term economic development to reduce the effects of the fall of gross domestic product. 

The economic prognosis of the Year 2020

The current economic prognosis of the Year 2020 shows that the economy of Latvia will be facing numerous of difficulties. Besides the decrement of gross domestic product, it is seen that the average salary will experience 3% reduction.[2]  Additionally, the employment levels for the Year 2020 are quite alarming and is proceeded to increase from 6.3% in 2019 to 11.2% in the Year 2020 reaching the level of unemployment rates in 2014.[3] And it is foreseen that with the support measures introduced by the government of Latvia to reduce the impact on crisis the unemployment levels could gradually fall for 2.6% reaching 8.6% in the Year 2023.  It is forecasted that the exports will decrease by 9% in 2020 comparatively to 2019 and the overall import levels will experience fall by 10%. Although it is seen that in the Year 2020 the economics of Latvia will face recession currently it is prognosed that by the end of the Year 2021 the growth of gross domestic product will reach 2.4 % therefore overcoming the economic recession.  Latvia prioritizes short-term economic development      To assimilate the consequences of the Covid-19 crisis the government of Latvia has prioritized the short-term economic development activities.  During the April 2020, the Economic Development Work Division accepted the plan of action to reduce the economic consequences of Covid-19 crisis.   The current strategy of the Ministry of Economics is to make structural changes in the economy focused on productivity and export of knowledge-intensive goods and services. Priority directions of the strategy are to stabilize the economy, to change the structure of the economy and to develop companies with high export capacity. Entrepreneurs already have several support programs available both for attracting working capital and retaining the workforce. However, in order to ensure stability in the internal sector, the proactive involvement of not only state institutions, but also local governments are currently important, purposefully ensuring the implementation of public procurement, for example, in improving the quality of infrastructure and housing and energy efficiency of buildings. These types of activities will contribute to the recovery of both domestic consumption and production and service provision. Although there have been already made some enforcements to stimulate the development of economics on a regional level such as increasing the municipal borrowing limit by 150 million euros for local investment projects it is seen that in the upcoming months new support policies will be enforced.

Currently the government of Latvia has prioritized the development of a short-term economic development program so that it would be clear to entrepreneurs how, taking into account all safety measures, they can continue working now or resume as soon as possible and what support instruments the state can currently offer and what support is needed so that after overcoming the Covid-19 crisis the capacity of the enterprises of Latvia would be strengthened.

Renovation of apartment buildings – an effective support mechanism for rapid mitigation of the economic consequences of Covid-19

To continue to stimulate the economics, Latvia has developed new projects to solve the increasing unemployment rates and other issues. Measures to promote the energy efficiency of buildings can become an effective tool for restoring economic activity, helping entrepreneurs and the Latvian economy to overcome the effects of the Covid-19 pandemic, as well as helping residents to manage their housing stock and reduce heating costs. Therefore, in order to facilitate the overcoming of the crisis caused by the Covid-19 pandemic as soon as possible and the resumption of Latvia’s economic activity, the Ministry of Economics offered the Cabinet of Ministers to decide on the allocation of additional funding of 75 million Euros for the implementation of measures to promote the energy efficiency of buildings.       Renovation of apartment buildings is an effective support mechanism for rapid mitigation of Covid-19 consequences, as it will allow solving several problems simultaneously: at least 150 million euros will flow into the Latvian economy and construction sector, which will create new jobs, 67% of house renovation money remains in Latvia.[4] Investments in housing insulation are also an important source of support for Latvian building material producers. In addition, by reducing the consumption of natural gas in heat supply, Latvia’s trade balance will be improved. The house renovation program is especially important because it will promote economic activity in the regions, as so far, the most active projects in the program for housing renovation have been submitted from the regions of Latvia.

Travel industry has been deeply affected by the Covid-19 crisis

Although mostly all the private sector fields have been deeply affected by the Covid-19 crisis, the travel industry has experienced massive drop in income levels. The crisis caused by the Covid-19 virus in the industry has now caused almost a 100% drop in turnover in all tourism sectors, to the detriment of both travel agents and operators and the accommodation and catering sectors. All this has directly affected more than 3,000 small and medium-sized enterprises, as well as created a catastrophic situation in the workforce – more than 25 thousand employees have been affected.[5] At the end of March and April, there is an almost 100% drop in turnover in all tourism sectors, causing losses of 10 million Euros per month. It is important to note that there are a large number of small and micro enterprises in the sector, which are often a source of livelihood for one family.       To prevent the ongoing crisis in tourism industry various solutions have been looked at. During April 2020, the Ministry of Economics prepared various solutions for special support mechanisms for the enterprises in tourism industry such as to introduce a reduced value added tax rate of 5% for the catering and tourist accommodation sectors, to evaluate and implement a balanced voucher system for solving the situation of complex tourism services of tour operators and agencies, support measures for the development of local tourism in order to receive special support for local tourism companies and stimulate local demand within the coming season, including implementing an information campaign for the development of local tourism, attracting new foreign tourists after the Covid-19 crisis, providing support especially for the development of business tourism, in addition, specific health safety guidelines for tourism service providers and travelers are planned.

Latvia, Lithuania, Estonia, and Finland agree on a roadmap for regional gas market integration

The process of regional gas market integration began at the political level in December 2015, when the Prime Ministers of the Baltic States approved an action plan for the development of the regional gas market and invited Finland to participate in this process. The aim of this agreement is to create a single regional gas market in Estonia, Finland, Latvia and Lithuania in order to improve market liquidity, integration and competition by providing affordable gas prices and high-quality services, thus ensuring the attractiveness of existing and new entrants. During April 2020, all partner countries agreed on a roadmap for regional gas market integration. The common regional gas market will be the first of its kind, with the merger of four countries’ cross-border gas markets into the European Union. This will strengthen security of supply in the region, increase market liquidity and foster competition, thus ensuring affordable gas prices and high-quality services for all consumers in these countries.

Conclusion

It is forecasted that during the Year 2020 the fall of import and exports levels and all the safety precautions taken will impact the decrement of employment levels by 4,9% and fall of gross domestic product by 7%. Because of the Covid-19 crisis the government of Latvia has prioritized short-term economic development prioritizing stabilization and restructuring of the economy and to develop companies with high export capacity. To stimulate the economy the Ministry of Economics offered the Cabinet of Ministers to decide on the allocation of additional funding of 75 million Euros for the implementation of measures to promote the energy efficiency of buildings, which will not only ensure new finance sources for construction field but will also allow to save the money of Latvian citizens since the  consumption of natural gas in heat supply will be reduced. During April 2020 more focused has been paid on travel industry as majority of travel related enterprises are facing financial difficulties and as there are a large number of small and micro enterprises in the sector, which are often a source of livelihood for one family.

[1]https://www.fm.gov.lv/lv/sadalas/tautsaimniecibas_analize/tautsaimniecibas_analize/galvenie_makroekonomiskie_raditaji_un_prognozes/

[2]https://www.fm.gov.lv/lv/sadalas/tautsaimniecibas_analize/tautsaimniecibas_analize/galvenie_makroekonomiskie_raditaji_un_prognozes/

[3]https://data1.csb.gov.lv/pxweb/lv/sociala/sociala__nodarb__aktivitate__ikgad/NBG040.px/table/tableViewLayout1/

[4] https://em.gov.lv/lv/jaunumi/27825-daudzdzivoklu-maju-renovacija-efektivs-atbalsta-mehanisms-atrai-covid-19-radito-ekonomisko-seku-mazinasanai

[5] https://em.gov.lv/lv/jaunumi/27833-vitenbergs-jarod-specifiski-atbalsta-risinajumi-visiem-turisma-nozares-uznemumiem