TALLINN - Both the Finance Ministry and the Bank of Estonia announced this week that there was little chance of Estonia joining the eurozone on Jan. 1, 2007 due to the country's high inflation.
Bank and ministry officials were at odds as to when the Baltic state might qualify for adopting the euro. Finance Minister Aivar Soerd said Estonia could meet the inflation requirement by as early as the second quarter of 2007.
After joining the Exchange Rate Mechanism II in 2005, Estonia had been hoping to become one of the first new EU member states to welcome the common currency.
However, stellar economic growth and high energy prices conspired to propel annual inflation to 4.1 percent last year, significantly higher than the approximate requirement of 2.5 percent.
If Estonia fails to receive an invitation to the eurozone this fall, it can ask for a new evaluation in the first half of 2007 if by that time inflation is under control.
Presenting the Finance Ministry's spring forecast of key economic indicators on March 21, Soerd said it was quite unlikely that Estonia would meet the inflation criterion this year.
The government has yet to seal a final decision on whether Estonia will cease end-preparations for adopting the euro, Soerd said. The Finance Ministry agrees that it makes no sense to go on with preparations, he added, given the bleak outlook for meeting inflation criterion.
The minister explained that for Estonia to meet the inflation criterion, world fuel prices should stay at their present level and the Baltic state would again have to put off a hike in tobacco and alcohol excise duties.
According to the Finance Ministry's forecast, inflation should slow to 3.7 percent this year.
The Bank of Estonia agreed with the ministry's assessment, saying that, for the past six months, inflation has surpassed forecasts. Bank governor Andres Lipstok said a short-term postponement would not cause any substantial problems for the economy, provided that the country maintains a reliable economic policy.
Lipstok praised the planned government surplus in 2006, which, according to the Finance Ministry's forecast, will amount to 1.8 percent of GDP. Fitch Rating, an international rating agency, said that Estonia would likely wait one year before adopting the euro currency, which backsets the date to Jan. 1, 2008.
"Fitch now views January 2008 as a more central forecast. It regards the adoption of the euro as an important rating issue for Estonia and would expect to upgrade the country's FCIDR [foreign currency issuer default rating] following a positive decision by the EU Council," it said. The Finance Ministry also announced this week that it was forecasting economic growth of 8.2 percent this year and 7.7 percent in 2007.
In its previous forecast, issued in August 2005, the ministry said the economy was expected to keep growing at an annual rate of a little more than 7 percent over the next few years.
The ministry said economic growth was due to continued improvements in the external environment and an increase in exports. Exports grew by nearly one-fifth last year, and the real growth rate of export this year is seen to end up in the region of 13 percent.
The other main driving force is domestic demand and investments, while the third contributor is the entire real estate field, said Andrus Saalik, head of the department for economic analysis at the Finance Ministry. Growth in that field is likely to slow this year. Meanwhile, economic growth is speeding up in the EU, including Germany, which has been posting weak growth rates recently. GDP growth in the EU is estimated to come to 2.1 percent in 2006 and to 2.4 percent next year.
