Estonia braced for sharp jump in inflation

  • 2008-01-09
  • By TBT staff
TALLINN - Estonia's inflationary environment was set to worsen at the start of the new year after a series of higher excise taxes went into force beginning Jan. 1.
The taxes affect electricity, natural gas, fuel, alcohol and cigarettes and are part of Estonia's effort to gradually raise its excise taxes to the same level as those of EU average, which all new EU member states are obligated to do.

Last year the government of Prime Minister Andrus Ansip decided that it would be better to suffer the consequences of a sharp jump in excise taxes now 's "get it done and over with" 's rather than drag out the inevitable. This way, it is hoped, inflation over the long run will subside, and Estonia will be able to join the eurozone at the earliest possible date.
It was a risky move. November data put Estonia's annual inflation at 9.1 percent, and analysts agree that double-digit price growth is inevitable, if not in December then for sure in January. From February on, inflation will only increase, analysts agree.

Meanwhile, inflation forecasts in recent months have fallen short of the actual result due to higher than expected gains in food prices. Indeed, price gains have been sharp, growing from an annual rate of 5.7 percent in August, to 7.2 percent in September and 8.5 percent in October.
The Bank of Estonia has forecast that 2008 inflation would decline to 7.4 percent despite the excise tax hikes, though this would appear to be overly optimistic.
In order to adopt the euro, growth in the consumer price index will have to come down to 3 percent, which at this point seems a world away. Finance Minister Ivari Padar admitted in an interview that inflation would not fall to the requisite level until 2012.

"The euro adoption is very important, but, if we look at the situation objectively, it is hard to meet the Maastricht criteria concerning inflation. Of course, we are trying to reduce inflation, but it is unlikely to happen before 2012," Padar told Latvia's Dienas Bizness daily.
International ratings agency Fitch Ratings has said that, due to the growing inflation and macroeconomic unbalances, Latvia and Lithuania would be unable to adopt the European single currency earlier than 2013, while Estonia might be able to do so in 2012.
Starting Jan. 1, an excise duty of 0.059 kroon per kilowatt-hour is to be slapped on electricity, which will add 17 kroons (1.09 euro) to the monthly electricity bill of an average household, Eesti Energia (Estonian Energy) has said.

The price of a liter of gasoline will increase by 1.32 kroons and of diesel by 1.56 kroons, while the alcohol excise duty will jump 10 percent at the beginning of the year and then another 20 percent in June.
The tobacco duty will be raised to the EU's minimum level 's or close to 1,002 kroons per 1,000 cigarettes 's by July 2008.
Excise taxes will be increased again in June, which will put additional price pressure on goods and services in the second half of the year. Annual inflation in Latvia was 13.4 percent as of November, while Lithuania's reached 7.9 percent.

Latvian analysts have stated in recent days that inflation would peak in April or May and subside in the second half of the year. However, past forecasts have been notoriously erroneous, and often understandably so given the impact of global trends on Baltic prices, particularly as far as food and energy.
One analyst from SEB Latvijas Unibanka has forecast that average annual inflation would amount to 9 percent, while an expert from Hansabanka has predicted 10 - 11 percent.
In 2006 Latvia boasted the fastest growing economy in the European Union, and it is expected to repeat the accomplishment for 2007. Lithuania, in all likelihood, will have the second highest GDP growth.