ESTONIAN ECONOMY IN 1993

In 1993 favourable changes took place in economic development. Tendencies of decline prevailing up to the end of 1992 were replaced by growth of the gross domestic product. According to the preliminary estimations of the State Statistics Board, the gross domestic product of Estonia in current prices should be approximately 21 billion kroons (i.e. 2.63 billion German marks) in 1993 against the 14.255 billion kroons (i.e. 1.7 billion German marks) in 1992. According to the Department of Macroeconomics of Eesti Pank, the real GDP growth (in annualized constant prices) is 3% (in 1992 the GDP decreased approximately 15%).

Economic growth has been achieved mainly on account of more lively international relations and a considerable growth of export. The opening of the economy should help to keep Estonia on an outward oriented path. If the economy and the market are as narrow as they are in Estonia at the present moment, production that is solely oriented to the domestic market is not effective, as a rule: participation in the foreign markets can also be considered a matter of economic effectiveness. In addition, openness of economy is important due to the competition resulting from import and favouring the restriction of monopoly.

The economic policy of 1993 as a whole was characterized by liberalism and minimal interference by the state. Economic policy management (by different institutions) proceeded first of all from the need to carry out reform leading to a market economy and to pursue an antiprotectionist and competition strengthening economic policy that would promote market regulation.

In 1993 a notable step was taken as to the development of the money market and banking sector. After the 1992 crisis the qualitative development of the Estonian banking sector has been especially dynamic in 1993. The development of a money market where Eesti Pank had a momentous part to play is also worth mentioning. Eesti Pank commenced with the emission of short term certificates of deposit and that, in its turn, contributed to initiating an interbank (overnight) market.

In 1993 stabilisation deepened in the economy. Despite its rise in the autumn and winter, the inflation rate remained lower than expected (35.6% in the course of the whole 1993 as against 1053% in 1992). Monthly inflation was at its lowest in August, i.e. 0.7%.

The largest price increases in 1993 were for medical care (115.1%), housing(83.3%), personal consumption (51.3%) as well as clothes and footware (42.8). The price of food, which contributes 43.5% to the consumer basket rose by 27.1%. The scope of influence for commodity aggregates on the consumer price index, considering their contribution, was the following: food caused the consumer price index to increase 32% (of which meat and meat products constituted 22%), housing 26%, clothes and footware 14%, transport and communication 7%. The scope of influence for other inflation components remained between 2 to 7 per cent.

The biggest contributor to the change in the consumer price index is the price increase for local products and services. This reflects the narrowing margin between the domestic and foreign value of the kroon, which accompanied the opening of the economy.

As for budget policy, 1993 started with lowering the ceiling for individual income tax, established after monetary reform, from 50 to 33 per cent. Establishing higher tax rates for the utilisation of natural resources starting from 1 January, and establishing a land tax and excise tax from the second half of the year, were steps that increased the tax burden.The revenues from these taxes remained lower than expected. Tax liabilities of legal entities to the state budget did decrease but their deficiency is still large: debts comprise approximately 10% of the annual state budget receipts.

Although Government receipts were 2.8% smaller than expected, sums received in the budget system (state and local budgets together with medical treatment and social security budgets), according to the preliminary assessments of the Department of Macroeconomics of Eesti Pank, exceeded forecasts made at the beginning of year by 15%. This made it possible to adapt two extra budgets (to cover the expenses of the first supplementary budget a foreign loan of 40 million kroons was also used).

In the course of the last year new tax bills (state budget law, law on value added tax, income tax law, law on regulation of taxes, law on the budgets of counties and towns, law on the relation between the budgets of counties and towns and the state budget) for 1994 were prepared, which stipulate a lower general tax burden compared with the developed European countries and neutrality of the regulation of taxes against market forces. According to preliminary estimates the general tax burden did not exceed 34% of the gross domestic product in 1993. The level will probably be the same in 1994.

Tendencies which began in earlier years, resulting from the transition to free price formation with little interference by the state, strengthened on the expenses side, i.e. the relative decrease of subsidies and investments.

Due to stabilisation, the volume of foreign investments has grown and interest rates in the Estonian money market have decreased. For the growth of economic potential both tendencies are extremely favourable.

The volume of real investment has grown in 1993 ( as compared to 1992). Discounting the impact of changing prices the growth, as compared to 1992, has been more than double. The main sources of investment were company resources followed by state and local budget resources as well as bank loans. As to the sources of real investments, according to data from the State Statistics Board, there were no essential changes in 1993 as compared to 1992, despite the decrease in interest rates for loans. Weighted annual interest rate for loans was 33.8 and 25.4 in January and December respectively. A positive fact was the more than double growth of foreign investments as compared to 1992.

The contribution of foreign loans to the financing of the Estonian economy grew considerably as compared to 1992. The majority of loans taken so far were arranged in 1993. Until now the creditors have been mostly international organisations (The World Bank, International Monetary Fund, European Union etc.). (See Table 1, p. 12).

*     non-ratified loans
**  STF = Systemic Transformation Facility
***SBA = Stand-by Agreement

The present volume of foreign loans does not present a critical administrative problem for the Estonian economy.

The principles of social policy did not change to any considerable extent in 1993. Concerning important legislation one could mention the law on state allowances for living expenses adopted in March, which adopted length of service as the basis for calculating pensions, in addition to minimal wages. The average old age pension rose to 358 kroons. The system of tuition loans for students and post-graduates was introduced 1 February 1993. In September the Government began calculating the poverty line, but found no financial cover for granting social aid to poor families living below the poverty line (except for the unemployed with underage children).

According to preliminary estimates, the population decreased during the course of the year by approximately twenty thousand people (from 1,526,000 to 1,506,000). Six thousand of this was due to the difference between birth and mortality rates and fourteen thousand to emigration. Contrary to all forecasts the number of registered unemployed receiving benefits unexpectedly started to decrease. During the last months of 1993 they numbered 14 to 15 thousand (2.2% of the economically active part of the population). Taking into consideration the present accuracy of official employment statistics, it is quite likely that in reality, both figures were somewhat larger.

The level of salaries and wages fluctuated greatly during the year. Nominal wages and salaries grew more quickly than the consumer price index. The calculated average monthly salary was 1210 kroons in November (DEM 151) and almost 1306 kroons in December (DEM 163).

According to family research data from Estonian Media Opinion Research (EMOR) the total consumption of families in current prices, as compared to 1992, has increased by 77%, constituting an average of 566 kroons per month per family member. Total consumption in constant prices decreased 10%. The rate of consumption increase can be seen as a favourable tendency. Since August 1993 consumption (in constant prices) has exceeded the level of 1992 (except for October).

Comparing the structure of total consumption in 1993 to the consumption structure of the second half of 1992 (after the introduction of the kroon) as broken down by main subdivisions, we can see that the share of both food (now comprising 41% of total consumption) and other goods and services (21% of total consumption) has increased by one percentage point. The costs for housing (16% of total consumption) have increased by two percentage points. The contribution of clothes and footware as well as spirits and tobacco has decreased.

Compared to the second half of 1992, the contribution of salaries and wages to family income has increased by 1 percentage point and accounts for 50% of gross income, taxes have increased by 2.2 percentage points (comprising 14.9% of gross income) and social security by 1.4 percentage points, 8.8% of gross income. Incomes in foreign currency (3.2 percentage points, 1.8% of gross income) and scholarships (0.3 percentage points, 0.2% of gross income) have decreased.

In 1993 the abrupt widening of the income difference stopped. Income distribution indices for the end of the year resemble those for the beginning of the year. Only in the 2nd and 3rd quarters was the income difference relatively larger. On the average 40% of poorer families receive 18% of total income and 20% of richer families receive 45.7%.

Expenditures for goods and services per family member (according to the actual consumer basket), as broken down by the EMOR prosperity groups, grew by 40% in 1993 in the poorest families. The consumer basket of the rich rose 42.1%.