The reopening of the stock exchange...
A stock exchange has also been set up in Riga to trade shares in privatized companies. Latvia's stock exchange reopened on July 25, 1995, after being closed for 55 years following the country's annexation by the Soviet Union. The exchange originally listed five company shares. Trading takes place once a week on Tuesdays.
Recommendations for further structural reforms...
The World Bank has encouraged further structural reforms by encouraging growth in the private sector which reduces large budgetary deficits, the high ratio of expenditure to GDP (39%), and the large tax burden on businesses. "Further privatization of enterprises and property, the enforcement of financial discipline on banks and enterprises, and the improvement of the efficiency of the market through the adoption of cost recovery plans will play important roles in private sector development.". (World Bank, 1995). Structural reform in the public sector should focus on providing sufficient funding for maintenance and public investments, the reform of local finances to improve cost effectiveness of social services, the reform of intergovernmental fiscal transfers, the consolidation of small local government units, the reform of social insurance to lower costs and improved services, adoption of a regulatory framework for a privately managed pension system, improved tax administration through improved effectiveness in tax collection, and the strengthening of the institutional capacity for management of public finances through "improved management of public borrowing and monitoring of public expenditures"(World Bank, 1995).
Latvian Outlook...
Latvia's economic policy was restrained by the fiscal deficit inherited from the outgoing government, which amounted to $177 million by the end of the year.(IMF, 1995). IMF suggests that the government must continue with a program of large cuts, creating job loss and reducing infrastructure spending. Economic recovery will most likely continue at a slow pace due to reduced government spending, the banking crisis, and the fiscal deficit. Since 1994, the number of banks has shrunk from 64 to 39. In 1995 alone, another ten banks were shut down and a number are under criminal investigation. According to the 1995 audit, only 16 banks made a profit and among these, around six are believed to be viable and properly managed. "More banks will continue to disappear as more than half of the banks have been barred from taking deposits.". (IMF, 1995). Confidence will return slowly to the banking sector.
Sectoral reform
Efforts in the social sector include the "establishment of an affordable and equitable social security system that preserves work incentives, improvement in the delivery of health care services through more efficient and effective use of resources, and the adaptation of the education system, particularly to vocational education and adult retraining, to the needs of the market economy"(IMF, 1995).
Agriculture...
Agriculture is the second largest sector in the Latvian economy and has been one of the country's main sources of income, employment, and foreign exchange earnings. By the end of 1995, agriculture and agro-processing accounted for nearly 19% of the GDP, employed about 17% of the labor force, and produced 10% of all exports (IMF, 1995). After going through a major downsizing, the production in agriculture stabilized in 1995. "Agriculture has substantial potential to again become a reliable source of income and employment for most of the rural population.". (IMF, 1995). However, adjustments will need to continue through policy reforms, investment strategies, and market conditions. Latvia has already begun to redirect agricultural exports to markets outside the former Soviet Union. The Agricultural Development Project, the first investment project supported by the bank in the Baltic countries, was implemented to encourage agricultural development through the goals of land reform, extension services, and rural business development and marketing. "The primary challenge facing the sector, which currently accounts for 20% of GDP and 16% of employment in Latvia, is to increase its efficiency and export potential and ensure that output markets are competitive and prices are not artificially suppressed." (IMF, 1995).
Industry...
Under Soviet rule, the Latvian economy became deeply integrated with the rest of the USSR. Large industrial enterprises were created, many of them in heavy industry and defense, with production being almost completely dependent on imports of raw materials from Russia. Latvia, as a result, developed a near monopoly in a number of finished goods exports, supplying 93% of Soviet railway passenger carriages, 89% of radio sets, 79% of freezing equipment, 78% of buses, 72% of solid organic fertilizer spreaders, 70% of diesel engines and generators, 69% of tape and cassette recorders, and 66% of rubber footwear (EIU, 1995). Latvian's industry suffered heavily after independence as Russia started charging world prices for energy, resulting in an industrial production fall of 32% by 1992, with the main casualties being machine-building, steel works, food and light industry. Although the decline has slowed, figures showed a decline of another 38% in 1993 and another 20% in January of 1994 (EIU, 1995).
Industry currently accounts for nearly half of the GDP and less than one-third of employment in the economy. The privatization of municipally owned small enterprises has progressed significantly, with around two-thirds of all enterprises being sold. Privatization has been slowed in some cases due to requirements that new owners retain the entire work force and/or the same line of activities for a specific time period or the duration of the lease. Privatization of medium and large scale enterprises has proceeded at a slower pace due to delays in legislation enactment and the process of ministry reviews. It is interesting to note that there has been a 44% fall in state sector employment between 1990 and 1993. However, over half of all industrial production was still accounted for by state enterprises in 1993.
"Restrictions on foreign investment are being eased with preferential treatment being given under the latest tax system structure.".(EIU, 1995). An Anti-Monopoly Committee was also established to supervise monopoly tariffs and possibly recommend break-ups of large enterprises who have large market power. A regulatory body was put together to oversee the activities of the energy sector and to provide for disussion of tariff policies.
Energy...
Latvia currently must import all its natural gas and oil products and about half of its electricity needs. Despite substantial adjustments in energy prices, underpricing still persists, creating a substantial burden on the budget. "Industrial energy prices need to be adjusted to reach economic costs, and a program to eliminate household energy subsidies systematically should be introduced." (IMF, 1995). Latvia has very little domestic resources of energy, and is thus almost entirely dependent on imports from the USSR. This total dependence on Russian energy is a serious constraint on the Latvian economy. Almost 93% of all primary energy was imported in 1990, with 58.5% of imported energy consisting of oil and 33% consisting of natural gas (EIU, 1995). In 1992, Russian exporters demanded hard currency at market prices, as opposed to the before heavily subsidized prices. Imports of gas supplies continue to be disrupted due to Latvian unpaid bills to Russia.
Health Care...
The number of physicians in relation to the population is high in Latvia by international standards, however, the number of physicians to nurses and other paramedics is low. The IMF recommends that "the health care system needs to be restructured to achieve greater internal efficiency.". (IMF, 1995). The health status of Latvia's 2.6 million people (of which one million live in Riga) has continued to deteriorate since the beginning of the decade. At the end of 1993, life expectancy for men was 63 and for women 75. "Immediate concerns include the shortage of medical equipment, the poor condition of the facilities at the state and district institutions, the inadequate focus on redirecting limited resources from expensive curative impatient care to cost-effective public health programs, and inexperience in developing and implementing preventative programs to provide broad ranging primary health care services.". (IMF, 1995). The main challenge facing the current health sector reform is the coordination of a combination of measures to improve the effectiveness of health services and contain costs. Appropriate policies, strategies, and programs will have to be implemented to achieve these objectives. Short-term objectives are recommended to include "supporting the government in the reform of the health sector through technical assistance in policy and strategy formulation and the development of cost-effective programs"(IMF, 1995).
Education, Training, and Research...
Latvia has a rich history of educational developments, and in 1990 extensive reforms were introduced to bring the system more in line with the educational system in Western Europe. The education system should continue to be adapted, particularly in the areas of vocational education and adult retraining, to the needs of the market economy.
Environment...
Latvia's level of air pollution is considerably lower than most other countries in Central Europe. Many problems center around the inadequate attention given to environmental issues when developing urban areas. Problems with solid waste management are currently found throughout the country.
Transportation...
Transportation in Latvia consists of 2, 397 km of railway, of which a very small portion are electrically run. There are 20,500km of roads. The country has a national airline, Air Latvia, which is in the process of being privatized.
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