During 1994, Latvia's economy experienced a continued development in market mechanisms and principles while the direct participation of the state in economic processes decreased. Market forces alongside private initiative promoted structural changes in the economic system: ownership relations were transformed, and private capital gained significance in the economy, thus enhancing the share of the private sector in gross domestic product. Examining the structure of GDP, the share of agriculture and industry contracted, while the share of construction and services (especially trade and transport) increased. Changes also continued in foreign trade, affecting its trends and structure.
With the continuing structural transformations in the national economy, several macroeconomic indicators stabilized in 1994, and some tended to improve. Among those, the deceleration in the rate of inflation (to 26.3% versus 34.9% in 1993) and the rise in real household income were notable, as well as the fact that the rapid decline in GDP over the past years was stopped. Data provided by the Republic of Latvia State Statistics Committee show that GDP in 1994 had fallen by 2.2% when compared with 1993. However, according to other experts, GDP had increased by about 2%; the difference is attributable to the discrepancies in statistical data on the development of the private sector.
The budget deficit was quite small (2.4% of GDP) with over 90% of the deficit being financed with Government securities.
In order to overcome the difficulties caused by the economic transition processes, and support the recovery of the national economy, the Bank of Latvia's monetary policy was aimed towards ensuring a low level of inflation and currency stability.
As of February 1994, the exchange rate of the national currency to the SDR currency basket was stabilized, and the exchange rate of lats against the SDR remained unchanged throughout the year. Following the fluctuations in the SDR basket's component currencies' exchange rates in the world market, lats appreciated against the US dollar and the British pound, and simultaneously depreciated against the French franc, the Japanese yen, and the German mark. The increase in the Bank of Latvia's foreign reserves validated the objective assessment of lats exchange rate.
The stability of the national currency contributed significantly to stricter discipline in macroeconomic and fiscal policies, and promoted a significant decrease in interest rates. However, commercial bank lending rates declined more slowly than deposit rates.
In 1994, the Bank of Latvia furthered its supervision efforts by introducing new regulations for the licencing of credit institutions, and by supplementing the economic requirements for monitoring the activities of credit institutions, as well as further developing accounting procedures and statistics. The regulations were revised to gradually bring them into line with EU requirements for banking activities.
The monetary policy results presented in the Annual Report are derived from the monetary and banking statistics compiled by the Bank of Latvia. The economic situation in the country has been analysed utilizing data provided by the Republic of Latvia State Statistics Committee.