Macroeconomic situation and policy to support competitiveness

1. Macroeconomic situation and policy to support competitiveness

2. Factors Affected Economic Growth Seasonally adjusted data, 4th quarter of 2005 = 100 • External demand increase. Economic recoveryon the way, according to majority of international organizations (EC, IMF, WB, ECB) • Domestic demand decrease. Budget consolidation by LVL 500 million, decrease of disposable income, decrease of employment, increase of annual average unemployment

3. Manufacturing and Retail trade Seasonally adjusted data, December of 2005 = 100

4. Unemployment % from economically active persons Decline in demand for labour force will be observed also in the 1st half of 2010, but the situation will stabilise afterwards Labour market positive tendencies may be expected slightly later than the economic development. The increase of the number of employed persons will be much slower than growth, since the output growth will be based more on productivity growth.

5. Economic development trends 2004-2007Growth driver – domestic demand • 2008-2010Impact of the global financial crisis and imbalances • 2011-2015Growth driver – external demand • Inflow of foreign capital decreases in Latvia • Balancing of the current account • Domestic demand decreases • External demand decreases Global financial system recovery External demand increases Latvian exports grow Domestic demand increases Substantial inflow of capital Growing domestic demand Rapid growth • Emerging risks: • Internal imbalance • External imbalance GDP decreases GDP increases

6. Economic policy priorities aimed to change economic model Increase of productivity and competitiveness: • Increase efficiency of production/decrease production costs • Support in implementation of new products and technologies/support to innovations • Export promotion (attraction of FDI) • Access to finance • Support to business start-ups and micro-enterprises

7. Key directions for decrease of production costs Enterprise level: • Implementation/upgrade ofoptimal/efficient production methods • Focus on critical production processes/wider use of outsourcing State level: • Training programs in cooperation with industry associations, Employers’ Confederation and Chamber of Commerce and Industry • Reduction of administrative obstacles/burden (tax administration, construction, insolvency proceduresetc) • Limited support for purchase of equipment/technology

8. Promotion of innovation • Development and implementation of new products, production technologiesoncompanylevel • Statesupportin creatingenvironmentconducive to innovation • Cooperation betweeneducation, research and industry sector in development new products and technologies (Technology transfer contact points, Competence centers, programs to support development and implementation of new products and technologies) • Modernization of education (mainly vocational) system and research infrastructure

9. Exports – basis for the future growth of the economy • Instruments aimed at promotion of exports • LIDA’s support provider to entrepreneurs (dissemination of information, LIDA foreign offices) • EU funds program for access to international markets (participation in international trade fairs, trade missions) • Insurance of export trade receivables • Export-oriented FDI attraction • Launch of EU funds financed marketing campaigns to promote Latvia as tourism destination

10. Access to finance • Financial instruments to mitigate negative consequences of reduced value of collateral and to promote bank lending • Guarantees by Latvian Guarantee Agency to loans for purchase of equipment as well as working capital (still capacity to issue guarantees for at least Ls 150 million) • Loans and VC instruments • More than Ls 200 million are available since beginning of 2009 (primarily to manufacturing) • Increasingly relying on private financial intermediaries

11. Support to business start-ups Reduction of costs for business starters: • Business incubator network(providing appropriate business environment and business support services) • Start-up program • Grants andloans to micro companies/start ups • Training services provided within the program

12. Reduction of administrative barriers/costs(1) • Action Plan for Improvement of Business Environment for 2010(focusing on WB Doing Business) • 22 Activities (38 sub activities) • Areas of improvement and simplification • Business start-up • Tax administration • E-governance • Custom administration • Registration of property • Construction

13. Reduction of administrative barriers/costs(2) • Tax administration (from January, 2010): • VAT - “on cash basis” (for enterprises with turnover up to 70 000 LVL) • Taxation period – on quarterly basis to enterprises with turnover up to 35 000 LVL • Canceled invoices with SRS numbers • Accepted e-payments • Registration of property • Reduced time for registration at the Land Book • Resigned from requirement for the real estate tax payment approval • POS terminals installed at Land Book offices

14. Reduction of administrative barriers/costs(3) • Starting a business: Introduced from May 1: • E-registration certificates of companies • Reduced minimum capital requirement to register company • Reduced costs for registration and publication of enterprises • Reduced number of documents required for registration

15. Reduction of administrative barriers/costs(4) • E-government: • Formal electronic publication will be introduced from January, 2011 • Accepted action plan for improvement of electronic procurement system In process: • Insolvency law, Construction law • Tax administration: • Reduction of time for registration as a VAT payer • Simplification of tax declarations • Improve operational environment for transit and logistics sector

16. Main economic policy targets of Latvia for 2015 • Average GDP growth rate in 2013-2015: 5% • Unemployment: < 8% • Financing for R&D: 1.5% of GDP • Introduction of Euro in 2014

17. Thank you for your attention! Brīvības iela 55, Rīga, LV 1519Tel.: 67013101Fax: 67280882E-mail: pasts@em.gov.lvHomepage: www.em.gov.lv