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Foreign Trade and the Balance of Payments
In the first quarter, Latvia's foreign trade turnover amounted to 789.5 million lats (a year-on-year increase of 14.4%). Exports rose by 11.0%, and imports, by 16.7% (for monthly changes in the above indicators, see Chart 7). The excess of imports over exports was 59.2% (51.4% in the first quarter of 2000). The foreign trade deficit reached 180.4 million lats. With imports growing, the trade deficit of mineral products, transport vehicles and products of the chemical and allied industries increased.
Chart 7
(year-on-year basis; %)
Exports
Imports
Latvia's principal export goods were wood and articles of wood (36.1% of total exports), textiles and textile articles (15.4%), base metals and articles of base metals (12.5%), products of the chemical and allied industries (6.2%), and machinery and mechanical appliances, electrical equipment (6.2%). The most significant year-on-year increases were in exports of textiles and textile articles (7.5 million lats), base metals and articles of base metals (5.4 million lats), machinery and mechanical appliances, electrical equipment (5.4 million lats), prepared foodstuffs (including alcoholic and non-alcoholic beverages and tobacco products; 5.2 million lats). At the same time, exports of products of the chemical and allied industries declined.
Latvia exported its goods mainly to the EU member states (65.3% of total exports; a year-on-year increase of 6.4%). As inflation and unemployment were higher than projected, growth in domestic demand was somewhat slow in the European Union, and this hindered Latvia's exports to these countries. Inflation in the European Union was mainly a result of high oil prices and growing food prices due to the spreading livestock diseases, while employment was negatively influenced by falling global demand, which mainly affected the industrial sector. The influence of the slowing growth in the US economy was stronger than projected. In the European Union, GDP growth is estimated at 2.9% in the first quarter (3.5% in the first quarter of 2000). GDP growth was 1.6% in Germany and 2.6% in the United Kingdom. GDP growth is likely to reach 3% in Finland, 2.4% in Sweden and 1.8% in Denmark. In the first quarter, fluctuations in foreign exchange rates were favourable for Latvia's exports to the European Union: compared with the previous quarter, the trade-weighted nominal and real effective exchange rates of the lats as measured against the currencies of Latvia's major trade partners that are developed countries (Germany, Denmark, Finland, the United Kingdom, Sweden and the Netherlands) decreased by 1.4% and 1.6%, respectively.
Exports to the CIS and other countries rose at a more rapid pace (in particular, exports to Lithuania, Estonia and Poland) because of expanding markets and relative stability in these economies. Although economic growth slowed down in the countries of this group (in the first quarter, GDP growth was estimated at 5.1% in Estonia, 2.8% in Lithuania and 4.4% in Russia), imports, retail trade turnover and wages and salaries continued to increase rapidly, confirming steady domestic demand in these markets. Fluctuations in foreign exchange rates were favourable for Latvia's exports to these countries: compared with the previous quarter, the trade-weighted nominal and real effective exchange rates of the lats as measured against the currencies of Latvia's major trade partners that are transition economies (Lithuania, Estonia, Russia and the Ukraine) decreased by 0.5% and 2.9%, respectively.
Latvia's major export partners were Germany (18.8% of total exports), the United Kingdom (14.2%), Sweden (11.3%), Lithuania (7.6%) and Denmark (6.4%). The most marked rises were recorded for exports to Germany (9.4 million lats; mainly, base metals and articles of base metals), Lithuania (5.2 million lats; machinery and mechanical appliances, electrical equipment) and Estonia (5.0 million lats; machinery and mechanical appliances, electrical equipment). At the same time, exports to the United States (base metals and articles of base metals), the United Kingdom (wood and articles of wood) and Ireland (wood and articles of wood) declined.
The principal import goods were machinery and mechanical appliances, electrical equipment (20.3% of total imports), mineral products (11.9%), products of the chemical and allied industries (11.0%), base metals and articles of base metals (8.3%) and transport vehicles (7.9%). Year-on-year growth was observed in all product groups, and the most pronounced increases were in imports of machinery and mechanical appliances, electrical equipment (10.0 million lats), transport vehicles (10.0 million lats; mainly passenger cars and tractors), and base metals and articles of base metals (8.6 million lats).
Latvia's major import partners were Germany (15.7% of total imports), Russia (10.5%), Finland (7.9%), Lithuania (7.8%) and Sweden (6.5%). The largest growth was observed in imports from the following countries: Germany (13.7 million lats; mainly transport vehicles, machinery and mechanical appliances, electrical equipment, and base metals and articles of base metals), Italy (5.8 million lats; machinery and mechanical appliances, electrical equipment, textiles and textile articles, vegetable products), Lithuania (5.8 million lats; machinery and mechanical appliances, electrical equipment, as well as prepared foodstuffs, including alcoholic and non-alcoholic beverages and tobacco products) and Russia (5.5 million lats; mineral products and products of the chemical and allied industries).
In 2000, the deficit in the balance-of-payments current account decreased by 79.0 million lats, totalling 296.0 million lats or 6.8% of GDP (9.6% in 1999). Moreover, the ratios of the balances of all current account components to GDP improved. With exports of goods increasing at a more rapid pace (by 12.6%) than imports (by 10.9%), the goods deficit decreased slightly.
As the balances of all services' components improved (by 77.1 million lats), the services surplus reached 273.7 million lats, covering 42.5% of the goods deficit. Services rendered increased more markedly than services received.
The balance on income turned positive, amounting to 15.8 million lats. This was determined by an increase in residents' income abroad and non-residents' low income on direct investment in Latvia, which could be explained with losses incurred by the non-bank sector in 1999.
The surplus on current transfers reached 58.4 million lats, covering 9.1% of the goods deficit.
The principal sources for financing the current account deficit were foreign direct investment and other long-term funds. The net inflow of direct investment amounted to 242.3 million lats, which covered 81.8% of the current account deficit. A net outflow of 203.5 million lats was observed for portfolio investment, while the net inflow of other investment reached 267.6 million lats.
In 2000, the inflow of foreign currency in Latvia was larger than needed to finance current account operations. Reserve assets increased by 9.9 million lats. Repayments under the IMF's Systemic Transformation Facility were made in the amount of 6.1 million lats.
Direct investment continued to be the largest item in Latvia's foreign liabilities (at the end of 2000, 34.0% of funds received from abroad). The largest part of direct investment was from Sweden (12.6% of direct investment in Latvia), Estonia (11.2%) and Germany (11.1%). Direct investments were mainly made in financial intermediation (22.6%), trade (20.4%), transport, storage and communications (19.1%) and manufacturing (16.6%). Foreign loans of enterprises declined to 340.4 million lats, of which 66.2% was long-term loans. In the fourth quarter of 2000, foreign direct investment increased by 6.4%, amounting to 1 275.4 million lats. Of this amount, 867.0 million lats was investment in equity and reinvested earnings.
In the fourth quarter, the foreign liabilities of the Latvian banking sector (excluding direct investment) increased by 14.6% compared with the previous quarter, reaching 1 435.0 million lats. Foreign deposits with banks totalled 1 118.1 million lats.
The foreign liabilities of the government did not change substantially compared with the third quarter (337.7 million lats or 9.0% of total foreign liabilities). Of this amount, 199.7 million lats was long-term loans, and the rest of the amount was government debt securities (mainly eurobonds).
