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Estonia: Budget Crisis Mars Economic Performance

By Michael Wyzan

Prague, 18 May 1999 (RFE/RL) -- Estonia, which has long had one of the best performing transition economies, has made news recently because of a budget crisis.

Early this month (May 4) the Estonian government approved a so-called "negative supplementary budget" under which expenditures this year would be cut by some $71 million (about one thousand million kroons). The document foresaw reductions in government investment and subsidies to the private sector. The International Monetary Fund (IMF) promptly warned that cuts of at least twice those estimated by the government are required.

The emergence of these fiscal problems contrasts with the good news about economic policy and performance that usually comes from Tallinn. Estonia has weathered the Russian financial crisis far better than the other two Baltic states. It has also succeeded in cooling off its economy, which overheated in 1997, and reorienting more of its exports to European Union markets.

To some extent, Estonia's budget problems are the result of a slowdown in economic growth, with value-added and excise-tax receipts declining accordingly. Gross Domestic Product (GDP) growth slowed from more than 11 percent in 1997 to about four percent last year. Although the 1999 budget was based on a growth forecast of 5.5 percent, the IMF now predicts that the economy will grow only by 2.5 percent this year.

But the most obvious Estonian fiscal problems are occurring on the expenditure side. While total consolidated budget revenues at the end of February were more than 3 billion kroons, up by more than a quarter over the same period in 1997, expenditures were more than 4 billion kroons, an increase of 58.2 percent. Indeed, even after the budget cuts, the share of government expenditures in GDP is projected to rise.

The increased spending is related to promises made in 1998 by a centrist coalition government -- which was replaced by a right-wing coalition after the elections of March 1999 -- that included a party representing rural interests. In the wake both of last year's Russian economic crisis -- which hit Estonia's agricultural and food sectors hard -- and of weather-related poor harvests, promises were made to increase farm subsidies and raise agricultural procurement prices. In the end, farmers received 227 million kroons in subsidies. There have also been problems with controlling extra-budgetary spending in such areas as pensions.

Nonetheless, the situation is not as alarming as it might appear. The sale of stakes in Eesti Telekom to Telia of Sweden and Sonora of Finland will bring more than $300 million to the budget this year.

More broadly, many economic indicators show that the Estonian economy continues to perform well, if somewhat worse than before the outbreak of the Russian crisis. The slowing of economic growth last year was helpful in reducing the current account deficit from a high 12 percent of GDP in 1997. The deficit was down to a less worrying 8.6 percent last year.

Especially encouraging is the fact that exports grew by a third (from $2.2 billion to $3.2 billion) from 1997 to 1998, a period when both Latvian and Lithuanian exports fell. Estonia has also been quite successful in increasing its exports to the EU. In 1998, EU members bought 55 percent of Estonian exports, compared with 48 percent in 1993. Finland and Sweden together took 36 percent of Estonia's exports last year.

The importance of Russia as a trading partner has declined, with exports and imports falling from 23 percent and 17 percent of the respective totals in 1993 to 13 percent and 11 percent in 1998. By January of this year, Russia accounted for less than nine percent of Estonian exports.

Estonia's strong export performance is especially impressive in the light of the rapid growth of wages, as expressed in dollars or constant kroons. The gross monthly wage reached $363 last December (compared with $321 a year earlier), higher than in all other transition countries except Croatia, the Czech Republic, Hungary, Poland, and Slovenia.

Real wages in kroons grew by about four percent last year, an increase that was approximately matched by labor productivity. This again contrasts with Latvia and Lithuania, where real wage growth far outstripped productivity in 1998. The coexistence of healthy export growth and rising real wages in Estonia reflects significant restructuring at the enterprise level.

Estonia's budget problems do not suggest that the country has ceased to be a strong economic performer. They do imply, however, that the era of exemplary policy-making, as reflected in balanced budgets, has been replaced by a political process more similar to those of other transition countries. Reports last week that the government is working on a bill that would, for the first time since independence was regained, impose import tariffs is another indicator of this trend.

(The writer, a research scholar at the International Institute for Applied Systems Analysis in Laxenburg, Austria, contributes occasionally to RFE/RL.)