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Friday 22.09.2017 | Name days: Maigurs, Mārica, Māris

Economic Diary. Maturity test for Latvia

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This week’s main event is undoubtedly the approval of the 2013 State Budget project by Saeima MPs. This is the first budget project in the last four years that was compiled without the help of international creditors.

Maturity test

54 MPs of the ruling coalition voted for the approval of the project in the first reading, 37 MPs of the opposition factions Harmony Centre (HC) and Greens’ and Farmers’ Union (GFU) voted against.

“Any departure from fiscal objectives or unjustified manipulations of the Treasury’s revenue projections will be definitely taken in by international markets as the country’s refusal to keep to its obligations and will cause fears regarding our country’s ability to secure financial stability,” – Latvian PM Valdis Dombrovskis said in his speech in the Saeima. Budget-2013 is a “maturity test” for Latvia’s political system: we cannot give in to euphoria and pre-election populism.

It is planned that the treasury’s deficit (calculated using European Commission’s methodology) will be 1.4% from GDP as opposed to 1.9% of GDP in 2011. According to the Finance Ministry’s projection, revenue of the general budget (government and municipalities) will decrease by 1.8% or 5.66 billion LVL in 2013, expenses will decrease by 1.3% or 5.82 billion LVL. Most of the revenue will come from taxes (3.66 billion LVL), the increase of which will be 3%. Grants will make up the bulk of expenses (2.75 billion LVL), as well as social benefits (1.2 billion LVL).

Doing Business in Latvia

According to the latest Doing Business rating of the World Bank, Latvia has dropped to 25th spot from the 21st. After an impressive last year’s leap by ten positions, Latvia dropped by four positions this year and allowed Estonia to take the lead in the Baltics. “Despite separate progress leaps, it can be concluded that we cannot improve the general business environment without sufficient progress in areas we failed to improve anything in the past,” – Economy Minister Daniels says.

Latvia’s weakest points remain the ineffective justice system and construction permit issue – Latvia is only on the 113th spot in the world. According to Doing Business, one needs to go through 21 procedures in Latvia to receive construction permits – an average of 203 days (68 days in Denmark).

Figures presented by the World Bank exceed the terms stated in Latvia’s regulations nearly two ties, said ex-manager of Economy Ministry’s construction policy department and lawyer of the LEXTAL law firm Andris Jekabsons. According to him, some municipalities, mainly in Riga, issue permits longer than it is required by the law: “Businessmen are often requested to provide stamps that are not actually required.”

Moody’s international rating agency also brought disturbing news: the agency kept the negative outlook of the development of the Baltic banking system. Moody’s calls the quality of assets of Baltic credit institutions the main problem. Bank still have impressive portfolios of troublesome loans – this mainly applies to Latvia and Lithuania.

How to convert advantages into money

Nevertheless, Latvia may yet become an international business-centre. Such was the conclusion of the recent “Why Latvia?” conference in Riga.

The topic of turning our country into an international hub for one or another industry is often mentioned on high political levels. There are conditions for this: by far not the highest taxes in Europe, geography, the growing competitiveness of enterprises, and a balanced budget. But, as the experts noted at the conference, in order to convert these advantages into real achievements, Latvia needs to complete a lot of homework. Among the tasks are – improving the justice system, higher and professional education, and simplification of some of the most important procedures for investors.

Zlata Elksnina-Zasirinska, partner of Pricewaterhouse Coopers, presented an interesting example: “Estonians attract business with announcements regarding the fact that enterprises in Estonia do not pay income tax. This is true, though partially: as soon as a company makes the decision to divide its profit, a corporate income tax of 21% immediately kicks in. But they successfully use the traits of their legislation to advertise their business environment.“ According to the specialist, additional opportunities open up for our country to organize capital deposits at the expense of the holding regime, the introduction of which will be carried out next year.

Small yet strong

In conclusion, the total turnover of small and medium size Latvian companies increased by 25% last year. The average turnover of firms reached 312.96 thousand LVL in 2011, as opposed to 251.02 thousand LVL in 2010, according to Lursoft. Representatives of insurance and finances are the most successful: their profit reached 50 thousand LVL on average in the last five years.


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