Estonia's GDP takes a plunge

  • 1999-06-17
  • Anna Hanks

TALLINN – The Estonian Finance Ministry announced preliminary figureslast week showing a 5.8 percent drop in GDP for the first quarter of 1999.
This plunge in GDP is especially startling when compared with the corresponding quarter of 1998, when the Estonian economy saw a 9.8 percent increase.
One of the key problems caused by the decrease in GDP is strongly tied to the projected shortfall in the Estonian budget. By the end of this month the shortfall may equal 6.6 percent of the total budget.
According to Maris Lauri, a macroeconomist at Hansapank, the primary problem with the budget deficit is that it does not reflect well on Estonia.
"It is a question of image. If the government shows an ability to cope with this problem, then it will not be so bad. If a government has to resort to loans, this will be a bad sign for foreign investors," said Lauri.
The effects of the budget gap may be immediately felt in the business community as representatives from two international rating agencies – Standard and Poor's and IBCA – are coming to Estonia later this month.
Both of these firms rate countries according to the current opinion of the credit worthiness of an obligator. Currently IBCA's web site shows that Estonia has a short-term rate of F3 and a long term rate of BBB - the same ratings shared by Greece, Hungary and Latvia.
According to Lauri, the budget deficit started to grow last year with the compensations to agriculture. This outflow of funds was contributed to by an optimistic national budget taken at the end of 1998. Thus government expenditures for this quarter took place under an economic plan conceived during a more robust economic period.
A handful of experts blamed the projected first quarter downturn on two factors - a soft foreign demand for Estonian goods and an internal restructuring of the energy production industry.
These two key problems lead to a soft domestic economy. And the soft domestic demand is complicated by increased excise taxes that have led to a flourishing black market that prevents the government from collecting excise and turnover taxes, especially those on alcohol.
According to Aivar Soerd, director general of the National Board of Taxes, excise taxes comprise 22.9 percent of the national budget.
Immediately following the release of these figures, Mai Talvik, a macroeconomist with the Finance Ministry, said the decline in exports is due to soft demand in both Europe and Russia.

"For the most part this figure is due to external shocks. If we weren't so dependent on outside factors, this wouldn't happen," said Talvik.
"Russian exports are down by 40 percent from last year," said Andras Saarniit with a unit of central banking policy.
The structural changes in the energy sector have also contributed to the decrease in both the GDP and the budget.
"In Soviet times, Estonia was very energy consuming," said Lauri. He said restructuring in the energy sector is a natural progression in privatization.
At present, Estonia gets a majority of its energy from oil shale burning, a process that is fairly inefficient, but the industry is undergoing restructuring. The oil shale mining company Essti Polevkivi has proposed to close its Sompa mine as of July 1.
The company's council refused to approve the closure, as it is estimated that many of the 358 people who work in the mine would lose their jobs if it were closed.
Taken together, these factors of decreased demand for export products and the long-term restructuring of the oil shale industry mean that there is no simple solution to ensuring a return to positive GDP growth in Estonia. However, news agency reports indicate that Finance Minister Siim Kallas predicted a GDP growth of 2 percent to 2.2 percent for this year.