TALLINN - The Finance Ministry announced last week that Estonia's chances to introduce the euro have declined due to the worsening inflationary situation in the country. If in the spring the ministry predicted the annual rise in the consumer price index would be 3.7 percent, it now appears that prices will rise some 4.5 percent this year and 3.9 percent in 2007.
"The rate of inflation reflected in the economic growth forecast is a disappointment for everyone and is higher than earlier forecasts of the Finance Ministry, the Bank of Estonia and the European Commission. The likelihood of accession to the eurozone in 2008 has considerably declined in light of today's forecast, but it would be premature to bury the aim for good," Prime Minister Andrus Ansip was quoted as saying last week.
Analysts said that, as a result of the new scenario, it was likely that the government would increase the excise tax on alcohol, tobacco and fuel, which had earlier been postponed so as to not exacerbate inflation. Officials from the International Monetary Fund, who visited Tallinn last week, suggested the government boost the excise tax.
Although a rise in the tax would spark further inflation, Estonia would have a much easier time later on, the IMF representatives said.
At the same time, IMF experts told Estonian officials that the biggest dangers to competitiveness of the Estonian economy were over-borrowing of funds and the outflow of labor. The bank recommended decisive political action to reduce these risks, including budget cuts and more supervision over lending decisions.
To check budget expenses, the mission recommended considering the timing of new projects financed by the European Union in order to prevent excessively rapid growth of GDP. The mission also recommended consideration of postponing the 1 percentage point reduction in the personal income tax and scaling back tax concessions for residential investment.
Finance Minister Aivar Soerd said he didn't believe that raising excise should be done hurriedly. "We play through all models first, and as a matter of fact we've done it already," he was quoted as saying last week.
He said that given the twofold difference between the current tobacco excise duty in Estonia and the respective EU rate, bringing the duty to the EU level at once was not reasonable. When increasing excise rates, one has to take into consideration the legitimate expectation of taxpayers and the matter has to be discussed with opposition parties too, Soerd said. "It cannot be decided in an offhanded manner," said the minister.
On Aug. 28, Soerd said that while a sudden increase in the tobacco excise would have an adverse effect on the country's fiscal position, a hike in the outlook for the next six months could be realistic.
The minister maintained that it was impossible to raise the excise rate to the EU level at once.
"In a situation where the tobacco excise duty is higher in Estonia anyway than in neighboring countries Latvia and Russia, a faster-than-planned hike is questionable," the minister explained. "Under conditions of free movement of goods, consumers will prefer cheaper cigarettes coming from neighboring countries. In Latvia, for instance, cigarettes of the same brand are nearly half cheaper than in Estonia because of the difference in excise," he said.
