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Macroeconomic stabilisation remains the key objective given the depth of the ongoing recession in Latvia. This will require strict adherence to the International Monetary Fund (IMF)/EU programme, and implementation of the fiscal adjustment measures approved by parliament. Reviving bank credit to the private sector, in particular to small and medium-sized enterprises (SMEs), is a key challenge. This will require further efforts to strengthen banks’ capital bases and support the restructuring of debt, in particular that of households. More competition and private sector participation in the energy sector, public services and transport infrastructure will be important for further efficiency improvements once market conditions stabilise.
Liberalisation and privatisation
Over the past year Latvia has undergone a deep recession, and a number of initiatives to promote structural reform were taken. A number of important sectors still remain dominated by state-owned companies or require further liberalisation.
Business environment and competition
The main obstacle to doing business identified by Latvian firms were inadequately educated workforce, corruption, low rate of innovation and lack of adequate human capital.
Infrastructure – Power and energy
New incentives for further energy diversification were created in the past year and the regulatory framework for renewables was strengthened. Producers of renewable energy are therefore able to sell energy for a guaranteed price. The increased emphasis on alternative sources of energy, as well as measures to support greater energy market integration within the Baltic region, are necessary in view of the expected fall in electricity supply after the planned closure of the Ignalina nuclear power plant in Lithuania.
Infrastructure – Roads
The quality of the road network remains poor and the construction and maintenance of roads is still dominated by state-owned companies. A modern legal framework for public-private partnership (PPP) projects is being developed and should aid future private sector involvement in large infrastructure projects in general.
Following a sustained credit boom since 2000, growth of credit to the private sector began to decline in the second half of 2008.
To alleviate the consequences of the financial crisis, Latvian government nationalised a majority stake in Latvia’s largest domestic banking group, Parex, in the face of a surge in deposit withdrawals. The state injected large amounts of liquidity into the bank, announced a comprehensive restructuring plan, and the financial regulator imposed restrictions on deposit withdrawals. In line with wider EU anti-crisis measures, the deposit insurance limit has also been increased to sustain depositor confidence.
Last updated 21 April 2010