Latvia achieves medium overall compliance with international standards and codes, with a score of 52.5 out of 100 in our Standards Compliance Index. As a EU member country, Latvia has made remarkable progress in the standards regulating the macroeconomic fundamentals. It has achieved high compliance in data dissemination and monetary policy transparency and has recently enacted laws enhancing fiscal transparency. However, it does not fare as well in the market infrastructure area. Its financial supervision framework suffers from a lack of independent assessments after it created a new, unified financial sector supervisor, the Financial and Capital Market Commission. However, a more effective regulatory regime appears imminent. Latvia is also largely non-compliant in the areas of accounting, and the insolvency framework. Nonetheless, Latvia has in place most of the legal and institutional requirements of the anti-money laundering standard, and its payment system and corporate governance are largely compliant with international best practices.

Macroeconomic Policy and Data Transparency

Latvia has been a subscriber to the Special Data Dissemination Standard (SDDS) since November 1, 1996. According to the 2004 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC), Latvia fully observes SDDS requirements. Information posted on the IMF's Dissemination Standards Bulletin Board (DSBB) indicate that Latvia meets SDDS specifications for the coverage, periodicity and timeliness of data and for the dissemination of advance release calendars. The information on the DSBB also indicates that Latvia satisfies all requirements for access, and quality for all data categories; however with regards to the SDDS requirements for integrity, Latvia fails to clearly indicate identification of government access and ministerial commentary for a few data categories. More »

The authority responsible for monetary policy is the Bank of Latvia (BoL). According to the 2002 International Monetary Fund (IMF) Financial System Stability Assessment (FSSA) of Latvia, the BoL displays a high degree of transparency in its monetary policy. The responsibilities of the BoL for formulating and implementing monetary policy, as well as the authority to use monetary instruments, are clearly defined in legislation and publicly disclosed. Frameworks, targets and instruments of monetary policy are conveyed to the public through various means of disclosure. The Law on the Bank of Latvia (LBL 1992) ensures accountability to the Parliament. Annual financial reports, as well as quarterly and monthly financial statements, are regularly and timely disclosed to the public. The 2006 Article IV consultations noted that sustained inflation well in excess of the Maastricht criterion has delayed the timetable for euro adoption, which was initially planned for the beginning of 2008). In the absence of an official announcement of a revised planned entry date, market participants generally expect euro adoption in 2010 or later. More »

In 2001, the International Monetary Fund's (IMF) Report on the Observance of Standards and Codes (ROSC) - Fiscal Transparency Module, reported that Latvia had met basic expectations regarding fiscal transparency, but identified several steps that could lead to further improvement. Latvia has led the transitional economies of Europe and Central Asia (ECA) in improving its accounting and fiscal practices, and in making data regarding its fiscal activities available to the international financial markets. There are limitations in the coverage of budget and treasury data, but Latvia's authorities have committed to overcoming these and to undertake budget analysis that extends beyond a single year. Since 2001, Latvia has moved toward instituting comprehensive public administration reform, enlisting the support of the European Union (EU) and international financial institutions. However, the 2006 IMF Article IV Consultation cautioned that Latvia's authorities have been less responsive to IMF recommendations on appropriate fiscal policy. More »

Institutional and market infrastructure

According to the 2004 European Bank for Reconstruction and Development (EBRD) Insolvency Sector Assessment, which measured the compliance of insolvency legislation with international standards set by the World Bank, the Asian Development Bank, the International Monetary Fund (IMF) and the United Nations Commission on International Trade Law (UNCITRAL), the Latvian Law on the Insolvency of Undertakings and Companies, which governs bankruptcy and insolvency in Latvia, received an overall score of "low compliance." The EBRD assessment was based solely on the content of the insolvency law. The EBRD characterizes Latvia's Insolvency Law as deficient in many key areas. It fails to define "insolvency" clearly enough to prevent creditor abuse and confers inadequate powers to the courts for the supervision of restructuring. The most compelling concern is the problem of effective implementation. According to the EBRD's 2004 Legal Indicator Survey on Insolvency, Latvia's insolvency regime was deemed to be too slow, too expensive, unnecessarily complex, unpredictable, and lacking in transparency, for both debtor-initiated and creditor-initiated proceedings. More »

According to the 2005 World Bank Report on the Observance of Standards and Codes (ROSC) on Accounting and Auditing, Latvian Accounting Standards (LASs) were generally in line with European Union (EU) directives, but some fundamental differences with International Financial Reporting Standards (IFRSs) existed. LASs, which are required for the annual accounts of listed and non-listed companies, are developed based on IFRSs; however, the alternatives which contradict the Latvian accounting legislation are excluded, disclosure requirements for financial information are reduced and additional illustrations to the standards are added. In December 2006, the Latvian Association of Certified Auditors (LACA) reported that a Latvian version of IFRSs for small and medium-size enterprises (SMEs) was being developed. Latvia complies with the European Commission (EC) Regulation No. 1606/2002, which requires all EU listed companies to prepare their consolidated financial statements by using IFRSs endorsed by the EU from January 1, 2005. Moreover, in accordance with the option for the extended use of IFRSs provided for in the EC regulation, Latvia requires the application of IFRSs in the annual and consolidated accounts of banks, insurance companies, and other supervised financial institutions and permits the use of IFRSs for the consolidated accounts of all other companies. More »

According to the 2002 International Monetary Fund (IMF) Financial System Stability Assessment (FSSA) of Latvia, the corporate governance framework in Latvia either fully observed or largely observed the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance. Similarly, in 2004, Latvia achieved "high compliance" in the European Bank for Reconstruction and Development (EBRD) Corporate Governance Sector Assessment, which assessed corporate governance related "laws on the books" against the OECD Principles of Corporate Governance. Moreover, the 2005 EBRD Legal Indicator Survey, which tested how corporate governance legislation works in practice, rated Latvia "highly compliant." Nevertheless, the 2004 EBRD Corporate Governance Assessment of Latvia revealed weaknesses with regard to disclosure and transparency as well as the protection of shareholders. In addition, the 2005 EBRD Legal Indicator Survey claimed that case law did not always offer guidance to legal provisions, even though actions available to minority shareholders were provided for by the law. Also, the enforceability of judgments could be problematic, and courts and prosecutors appeared not to be well experienced and competent in corporate cases. More »

On May 17, 2006, Directive 2006/43/EC of the European Parliament and the Council came into force requiring all statutory audits of annual and consolidated accounts to be carried out on the basis of International Standards on Auditing (ISAs) as adopted by the European Commission (EC). European Union (EU) member states shall adopt and publish the provisions necessary to comply with this Directive before June 29, 2008. Member states may impose additional requirements relating to the statuary audits of annual and consolidated accounts for periods expiring on June 29, 2010. In Latvia, pursuant to the Law on Sworn Auditors, statutory audits must be carried out in accordance with auditing rules set by the Latvian Association of Certified Auditors (LACA), which have to comply with ISAs. Even though the quality of the standards was high, the World Bank in its 2005 Report on the Observance of Standards and Codes (ROSC) on Accounting and Auditing was concerned about the low quality of the actual statutory audits carried out in Latvia. Particularly, the World Bank recommended that Latvia should enhance enforcement mechanisms, improve systems of professional education and quality assurance, and increase public oversight of the audit profession. More »

The International Monetary Fund (IMF), in 2007, released a report on Latvia's Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regime and concluded that Latvia has in place most of the legal and institutional requirements of the FATF's Recommendations. However, the report also observes that Latvia's legal framework lacks clarity on some of the Special Recommendations (SR) relating to the financing of terrorism and more importantly the laws do not adequately cover all Designated Non-Financial Businesses and Professions (DNFBPs). The IMF notes that the Latvian authorities are in the midst of addressing the issue on DNFBPs and have in recent years made several amendments to laws and regulations so as to bring Latvia closer to full compliance with FATF requirements. The report also states that as of 2007, few amendments which are often minor are needed in the AML Law to achieve full compliance with the FATF Recommendations. The main laws governing AML/CFT in Latvia are the AML Law of 1998, the Financial and Capital Market Commission (FCMC) Regulation of 2006 and the 2005 Criminal Procedure Law. The Control Service serves as the Financial Intelligence Unit (FIU) of Latvia and the 2007 IMF report notes that the Control Service is effective in its function and is adequately staffed with competent personnel. More »

In 2002 the International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) of Latvia's payment systems in which it identified two systemically important payment systems (SIPS) namely SAMS and EKS, and found that both these SIPS largely complied with the Bank for International Settlement's Core Principles for Systemically Important Payment Systems (CPSIPS). Subsequently, in 2004 the Bank of Latvia conducted a self-assessment of its payment systems and defined only SAMS to be systemically important and EKS was categorized as systemically prominent. According to the results of the 2004 self assessment, SAMS, the real-time gross settlement (RTGS) system fully complies with all the Core Principles (CPs), except CP VIII and V. In the case of Core Principle VIII, SAMS fell short of full compliance since the maintenance costs for SAMS does not reflect the commission for the SAMS payment orders, and CP V is not applicable as SAMS is a gross settlement system. The Bank of Latvia's role in supervising the country's payment systems are outlined in "Bank of Latvia's Payment Systems Policy," according to a European Central Bank Blue Book report published in 2002. More »

Financial Regulation and Supervision

In 2002, the International Monetary Fund's (IMF) Financial System Stability Assessment (FSSA) determined that Latvia complied with the Core Principles to a high degree. At the level of individual principles, most were assessed as compliant. At the time of the report the legislative framework governing Latvia's financial sector was deemed generally consistent with international best practices and European Union (EU) directives. The prudential standards complied with international best practices in all areas. It should be noted, however, that the FSSA assessed the regulatory environment under the previous supervisory agency, the Bank of Latvia (BoL). Beginning July 1, 2001, the Financial and Capital Market Commission (FCMC) became responsible for the supervision of the banking system in Latvia. In a 2006 Selected Issues report, the IMF cautioned that Latvia's authorities needed to continue their commitment to maintaining a strong supervisory framework. However, there is insufficient information publicly available as to Latvia's compliance with the Core Principles since the inception of the FCMC as the banking sector supervisor. More »

In 2001, the International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) on Latvia's adherence to the Objectives and Principles of Securities Regulation promulgated by the International Organization of Securities Commissions (IOSCO). The IMF team concluded that Latvia had largely implemented the principles but recommended certain policy and legislative changes to further improve the country's securities regulation. These included stronger enforcement mechanisms, technical upgrades, and enhanced international cooperation. At the time of the assessment, the Latvian securities sector was regulated and supervised by the Securities Market Commission (SMC), which was replaced in 2001 by the Financial and Capital Market Commission (FCMC)--an integrated regulatory body responsible for banking, insurance and securities supervision. Combining supervision of all three sectors under one umbrella agency was thought to promote efficiency and consistency. The 2006 Article IV consultations confirmed these expectations, noting that the Latvian authorities have addressed many of the recommendations of the FSSA and that the establishment of the unified regulator was proceeding smoothly. However, a 2004 European Bank for Reconstruction and Development (EBRD) Securities Markets Legislation Assessment, published in 2005, found Latvia to be only in "medium compliance" with the IOSCO principles, showing major weaknesses in Self-Regulatory Organizations (SRO) legislation and Investment Service Provider areas. More »

In 2002, the International Monetary Fund (IMF) published a Financial System Stability Assessment (FSSA) assessing Latvia's compliance with the International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICPs) established in 2000. The assessment found that the country largely observed the international standards, but noted some shortcomings with respect to reinsurance and corporate governance practices of Latvian insurance companies. In addition, requirements for protecting the interests of policyholders and accountholders in financial institutions were viewed as inadequate. The FSSA was undertaken when Latvian insurance supervision was administered by the Insurance Supervision Inspectorate (ISI). That institution merged in 2001 into the Financial and Capital Market Commission (FCMC), a unified financial sector regulator overseeing insurance, banking and securities regulation. A self-assessment of Latvia's compliance with the ICPs, undertaken by the FCMC as a part of the IAIS self-assessment exercise, found that the agency "observed" twenty five of the twenty eight revised ICPs (effective as of October 2003) and "largely observed" the remaining three. Areas of less than full compliance included information, disclosure and transparency towards the market and group-wide insurance supervision. The FCMC self-assessment did not address the issue of compliance with the related legislation. More »

Legend:

Credit Ratings

Moody's A2/Stable

Fitch BBB+/Negative

Standard & Poor's BBB+/Negative

Macroeconomic Data

2007 GDP (Current Prices): 27.341 billion USD (IMF)

2007 GDP (Per Capita): 11,985 USD (IMF)

2008 GDP (Growth Forecast): 3.6% (IMF)

2008 Inflation (CPI): 15.3% (IMF)

2007 Unemployment: 5.9% (CIA)

2006 Foreign Direct Investment

FDI (Inward): 1.634 billion USD (UNCTAD)

FDI (Outward): 0.146 billion USD (UNCTAD)

2006 Official Development Assistance

ODA (Received): N/A million USD (OECD)

ODA (Disbursed): N/A million USD (OECD)