Bank: Estonia needs budget surplus

  • 2004-05-27
  • From wire reports
TALLINN - The Bank of Estonia said last week that risks for the economy had diminished now that the world economy was expecting to turn the corner, yet much work remains on accumulating reserves and maintaining a balanced budget.

"When economic conditions are favorable, one has to keep in mind the accumulation of reserves," Chairman Vahur Kraft told reporters. "For Estonia it would be appropriate to have external reserves in the amount of approximately 30 billion kroons (192 million euros)."
Kraft said that central bankers expected foreign trade to play an increasingly important role in Estonia's economic growth and improve the country's external balance. Considering that the country is currently running an account deficit, the present budget policy should not be changed and supplementary budgets should be avoided, Kraft said.
"Our proposal is that there should be a budget surplus of at least 0.1 percent per each percent of current account deficit, and 0.2 percent of a budget surplus from a 7 percent current account gap onwards," Kraft said.
"Thus the budget surplus should be at 2.4 percent given the estimated deficit of 12 percent," he said.
Kraft warned that since the recovery of the world economy would propel interest rates higher, consumers should also consider creating reserves and more conservatively evaluate their ability to borrow.
According to the Bank of Estonia, consumers' overly optimistic borrowing and consumption decisions are one of the economy's main risks, even though the country's banks are very well capitalized. The other major risk is that the anticipated European economic growth may fail to materialize, which could throw off the balance of the economy.