After two difficult years of Covid-19 the year 2022 commenced in Latvia with hopes for restoration of some order. This, unfortunately, never happened. Latvia’s Ministry of Finance presents a look at the passing year and a forecast for the upcoming 2023.
While the crisis caused by the pandemic was overcome by Latvia more successfully than initially expected, the situation after the 24th of February was dictated entirely by the Russian-Ukrainian war, termination of trade ties with the aggressor country, resettling of Ukrainian war refugees and the rapid rise of energy resources. The latter is already close to becoming a full energy crisis.
2023 will start off in Latvia with a technical or «temporary budget», because the budget law has yet to come into force in the country. The temporary budget does not provide any changes in policy, new initiatives or new solutions – the new government will propose political changes and new measures for next year. This is planned to submit to the Saeima on the 9th of February 2023.
While in Q1 Latvia’s GDP increased by 5.6% when compared with the same period of 2021, in Q2 economic growth slumped to 2.9%. In Q3, also compared with the same quarter of 2021, a drop of 0.6% was observed.
The decisive role in the GDP drop was played by the reduction observed in the construction and wholesale trade sectors.
The price increase hit the construction sector first, increasing costs and delaying work. The wholesale trade sector was affected the most by the cessation of dealings with Russia.
The war impacted the energy resource market the most directly. The rapid price rise and limited accessibility of resources caused gas and electricity prices to go up several times. In the second half of the year, following the rapid rise of food prices, inflation in Latvia reached the highest point since mid-90s, reaching 22.2% in September and stabilising at below 22% in October and November.
The situation was similar across all of Europe. Latvia, similarly to other European countries, provided support to residents and businesses to soften the impact of rapidly growing energy resource prices. EUR 836 million were diverted towards inflation dampening measures and measures to reduce costs of electricity and heating.
To limit the rapidly growing inflation, central banks commenced an interest rate increase cycle in 2022. The US Federal Reserve System was the first to increase interest rates (16th of March), followed by the European Central Bank (21st of July). The latter performed the first interest rate increase in the past 11 years. As energy prices and demand went down on the global market, inflation started stabilising in USA and Eurozone.
At the same time, the growing interest rates have started making loans more expensive and have started slowing global economic growth. The International Monetary Fund has downgraded global economic growth outlook for 2022 to 3.2% as compared with the previously predicted 4.4%. For 2023 economic growth is expected to slow down to 2.7%.
The economic growth outlook for USA was reduced from 4.0% to 1.6% for 2022 and from 2.6% to 1.0% for 2023. The European Commission prepared a similar outlook for 27 EU member states: for 2022 economic growth outlook was downgraded from 4.0% to 3.3% and for 2023 – from 2.8% to 0.3%.
In 2022 Latvia’s economy will have increased by 1.6%. Next year the country’s economy is expected to drop by 0.6%.
It is expected that starting with mid-2023 economic growth is expected to start recovering. In 2024 and 2025 the economy is expected to demonstrate positive dynamic and GDP growth is expected to reach 3.0%.
Looking at the competitiveness of Latvia’s tax system, the Ministry of Finance stresses that the tax burden level in Latvia is one of the lowest in the EU. According to data from Eurostat, in 2021 Latvias tax revenue proportion to GDP was 30.8% (31.2% in 2020), whereas the average in the EU was 41.7%.
Latvia was one of few OECD countries that also reduced its labour force tax burden in 2021. In the international tax competitiveness index for 2020 Latvia as the second most competitive tax system among OECD member states (index is composed by US Tax Foundation think tank).
Latvia’s economic freedom index in 2022 was 74.8, putting the country’s economy in 18th place in this year’s index.
In the European region Latvia is in 13th place among 45 countries. The country’s general index is above the region’s and world’s average index.
Also read: Ministries and independent institutions in Latvia request significant upping of funding for 2023