Current account deficit may erode Estonian economy

  • 1998-10-01
  • Urmas Maranik
TALLINN - Estonia's current account deficit has been worrying the economic analysts since 1994, when the foreign trade balance become more unfavorable than ever before. Today, many economists say the 13.5 percent account deficit has reached a dangerous level.

Things could get even tougher because the Estonian government will begin repaying large loans from the European Bank of Reconstruction and Development (EBRD) and the International Monetary Fund (IMF). Optimists say that for a country that has only recently oriented itself to a free market economy, such a deficit is normal.

"Considering the system we came from, our needs to invest are obviously bigger than in other developed countries," said Aare Jarvan, economic advisor to the prime minister.

According to Jarvan, the best way to display the actual account deficit is through the following example: Estonian investments account for about 30 percent of the GDP, domestic savings are equal to only 18 percent of the GDP and this difference is the current account deficit.

The deficit can be defined in another way too. It is the difference between the value of imported goods and exported goods displayed by the foreign trade balance, which is negative for Estonia, meaning that imports exceed exports.

The pessimists have their own vision of the current account deficit. In their opinion, the fact that the balance is negative could become consequential to the Estonian economy. Estonia imports more than it exports, we consume more than we can produce, and for that we have borrowed money from abroad, which has to be repaid in the future.

There are also precautions that can be taken to reduce the current account deficit. The Estonian government could establish even more favorable conditions for the branches of industry, which are oriented to exports. The government could also allocate money to directly subsidize producers, who export most of their production. And protective duties could be imposed on imported goods.

Janno Reiljan, a professor at the University of Tartu and economic analyst, said the deficit is natural only until the economy collapses.

"It was natural in the Asian economy as well, until the financial crisis hit," Reiljan told Aripaev. The current account deficit could be considered as a normal phenomenon only if the country can repay its debts properly and in time, he said.

Reiljan said there is a problem with getting new loans to repay the old debts.

"But the loan conditions in Estonian commercial banks have become more strict and the banks as well as entrepreneurs have to pay back more money than we initially got," Reiljan told Aripaev.