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Introduction
In 2000, rapid economic growth, which was related to a marked increase in exports and foreign investment, was reflected in principal economic indicators. Economic reforms enacted and macroeconomic policy implemented by the Government, as well as the Bank of Latvia's monetary policy, reinforced the positive trends; and therefore, results were better than projected and were above the average level in the region.
The Bank of Latvia's monetary policy fostered a decrease in the annual rate of core inflation (to 0.3%), and the average annual rate of inflation remained at a low level (2.6%). Inflation was mainly associated with an increase in administratively regulated prices in Latvia and rising world market prices of oil. The Bank of Latvia's net foreign assets as at the end of a year increased by 3.6% compared with the previous period.
Expansion in the service sector, along with growth in the goods-producing sector, provided for GDP growth (6.6%). The unemployment rate continued to follow a downward trend (7.8% in December).
Economic growth ensured larger tax revenues and a decrease in the fiscal deficit of the general government consolidated budget. The fiscal deficit did not exceed 2.8% of GDP and was 34.0 million lats smaller than in 1999. This confirmed positive trends in the Latvian economy.
Favourable economic environment in Latvia facilitated growth in foreign investors' interest and an increase in direct investment. The deficit in the balance of payments current account declined, as growth in exports of services lessened the impact of the goods deficit on the current account. The share of the EU Member States reached 64.6% of Latvia's exports.
Events decisive for the government securities market were the first issue of 3-year bonds in January and the first issue of 5-year bonds in March. The weighted average yields of bonds were lower than projected, and this was a sign of market participants' optimistic outlook for the Latvian economy.
The Bank of Latvia used monetary policy instruments so as to maintain the stability of the national currency and promote a downward trend in money market rates. The national currency was backed by gold and convertible foreign currencies. The stability of the exchange rate of the lats was maintained through fixing it to the SDR basket of currencies. Foreign currencies fluctuated against the lats in line with their movements in the global foreign exchange market. Global trends were also reflected in the depreciation of the lats against the US dollar and its appreciation against the euro in the period until December 2000, and a reversal of these trends at the end of the year.
The Bank of Latvia's quality management system, which covered such fields of the Bank's activity as monetary policy, foreign exchange operations and supervision of credit institutions, was assigned ISO 9002 certification in accordance with the quality management and quality assurance standard ISO 9002.
In 2000, indicators of the Latvian banking sector continued to grow. Credit institutions' assets increased by 40.5%. Loans to domestic enterprises and private persons grew by 37.8%. With purchasing power and confidence in the banking system growing, deposits received from domestic enterprises and private persons increased (by 36.9%). Lending rates continued to fall, and the share of medium- and long-term loans expanded. Banks' profit exceeded 2.1 times the 1999 level. The increasing share of foreign capital reinforced confidence in Latvian banks.
To create a legislative framework for the change in supervision of the financial and capital markets, in June 2000 the Saeima of the Republic of Latvia adopted the Law "On the Financial and Capital Market Commission", which laid down that, with the aim of conducting supervision of market participants, the Financial and Capital Market Commission would be established on July 1, 2001.
The accession to the EU continued to be the main priority of Latvia's foreign and economic policies; therefore, the Bank of Latvia further improved normative documents and processes within its competence, harmonizing them with EU requirements. In 2000, the harmonization of Latvian banking regulations and requirements with EC banking directives and the Basle Core Principles for Effective Banking Supervision was in fact completed. To provide for rapid and secure interbank settlements, the Bank of Latvia launched the Automated Interbank Payment System. This will enable Latvia to join the Trans-European Automated Real-Time Gross Settlement Express Transfer System after its accession to the EU.
Another important event in 2000 was the Annual Meeting of the Board of Governors of the European Bank for Reconstruction and Development, which took place in Riga at the end of May. Numerous banking and financial experts and businessmen from different countries arrived to participate in the Annual Meeting. The acclaimed organization of the Meeting was an indication of Riga's potential to become the financial centre in the Baltic.
The rating agencies Moody's, Fitch IBCA and Standard & Poor's reiterated the previously assigned ratings and confirmed the country's good future growth prospects.
The macroeconomic indicators achieved in 2000, the course of the structural reforms in the economy, development trends in the financial sector and the activity of the private sector are certain to foster Latvia's long-term economic growth.
