BALANCE OF PAYMENTS OF ESTONIA FOR 1993

The balance of payments of Estonia for 1993 gives evidence of a favourable foreign economic position for Estonia: the current and capital accounts had surpluses, the reserves increased. During the post-monetary-reform period the Estonian economy has stabilised. Also, information used for compiling balance of payments is much more trustworthy. An aggregated variant of the balance of payments is given in Table 8, a more detailed variant at the end of the present section.

* according to additional information, the previous periods have been adjusted

CURRENT ACCOUNT

The surplus of the current account amounted to 0.5 thousand million kroons. While the current account of the first three quarters of 1993 had a surplus, the fourth quarter showed a negative balance of 518.5 million kroons. This was the first time in 1992-93 (i.e., during the time balance of payments has been complied in Estonia) when the current account had a deficit. The main reason for the deficit was the abrupt increase of imports.

Estonian foreign trade in 1993 was characterised not so much by great structural changes in trading partners and groupings of goods (as it was in 1992), but by an impetuous increase in turnover. The foreign trade balance was in deficit for all of 1993, being especially large in the last quarter. The annual foreign trade deficit was 1.7 thousand million kroons. Goods received as foreign aid, amounting to 376.2 million kroons, are included here as well. Excluding these goods, the deficit for 1993 would be approximately 1.4 thousand million kroons. An adjustment has been made to this and to previous balances of payments concerning imports. As assessed by specialists from the Statistics and Customs Offices the undeclared import can amount to approximately 10% of the declared import volume. We have increased total imports in all four quarters by the respective percentage.

Compared to 1992 the export of goods (in f.o.b. prices) increased 1.9 times in 1993 and import (f.o.b. prices) increased 2.3 times. The more rapid increase of imports is natural, for in 1993 Estonia received a remarkable amount of foreign loans, enabling imports to be increased. The increase occurred mainly in two large groups of merchandise - machinery and equipment and transport equipment (Table 9).

*data from State Statistics Office, export in f.o.b. prices, import in c.i.f. prices

The two above mentioned groups of merchandise together with mineral products (mostly fuels) were the main reasons for the negative balance. As the import of machinery and equipment, transport equipment and fuels (preparations for winter) rapidly increased, especially during the last quarter, they played an important part in the whole current account of the period.

According to the State Statistics Office 42.6% of total exports in 1993 went to the former Soviet Union, including Latvia and Lithuania (47% in 1992). As for imports, 28.1% came from the former Soviet Union (45% in 1992). A clear tendency of increasing exports to the above region could be observed in each quarter (already 50.5% in the fourth quarter) and a decrease of imports from that area (22.6% in the last quarter). The most important trading partner of Estonia in 1993 was Finland (24.5% from the foreign trade turnover) (Table 10).

*data from State Statistics Office, export in f.o.b. prices, import in c.i.f. prices

As Finland was also the main source of imports for Estonia, the trade balance with Finland was deeply in deficit (1.1 thousand million kroons). Russia had second place among the trade partners (one fifth of the total foreign trade turnover). The balance with Russia was in surplus, mainly due to the export of food products. The above two countries were followed by Germany and Sweden with a more or less equal turnover. The balance with these countries was in deficit. Mention should be made of Latvia, the fifth foreign trade partner, with whom Estonia had a strong surplus foreign trade balance (646.6 million kroons). This was due mainly to the export of electricity, which formed one fourth of the total turnover between these countries. In general, the foreign trade balance of Estonia was in surplus with the so called East region countries and in deficit with western countries (with certain exceptions).

The balance of services is the second largest (following the foreign trade balance) in the Estonian balance of payments. This subdivision of the balance is of special importance as the deficit of both the foreign trade balance and that of the income balance is covered from its surplus. Services rendered to non-residents amounted to 4.4 thousand million kroons in 1993. Services were purchased from non-residents in the amount of 3.4 thousand million kroons. Thus, the services balance had a surplus of 1 thousand million kroons.

The most profitable for Estonia were transport services - the balance of these services had a surplus of 1.3 thousand million kroons in 1993 (Table 11). The majority of income was received from freight services, mainly those by sea. Due to the increase of imports in the last quarter, the purchase of transportation services increased to a remarkable extent as well. The income from passenger services increased from quarter to quarter. As in the case of freight services, sea transport formed the majority of passenger services as well. The share of income from passanger services by air grew constantly.

The balance of other transportation services (mainly sea and airport services) was in deficit, for the prices of respective services are still lower in Estonia than abroad. As the gap between domestic and foreign prices is constantly narrowing, one can predict a decrease of the deficit in other transportation services and even a surplus.

Besides transport services, travel also played an important role in the Estonian balance of payments. The income received from these services amounted to 323.2 million kroons in 1993. Because of the seasonal nature of travel, the income from this area in the second and third quarter twice exceeded that of the first and fourth quarter. Foreign travellers visited Estonia mainly via tourist agencies (70% of purchased services), Estonian tourists visited foreign countries mainly on their own.

Foreign trade in all other services amounted to a deficit (610.8 million kroons). The main reason for this is that according to the methodology used, the balance of services includes services received as foreign aid with a minus-sign. The total amount of foreign assistance is included in the transfer balance with a plus-sign. Foreign aid was received in the form of services for the amount of 890 million kroons in 1993. As for other services, construction, communications, insurance and processing goods were important for Estonia. The export and import of communication services was more or less balanced in 1993. The sale of construction services to foreign countries exceeded the purchase of these services from abroad many times: 236.5 and 80.6 million kroons, respectively. The balance for insurance services was totally unilateral - Estonia was able to sell these services to non-residents for only 3.5 million kroons, but purchased the same services from abroad for 62.1. million kroons.

As labour costs are rather low in Estonia compared to western countries, it is profitable to process goods here (such services rendered 123.8 million kroons). Estonia spent 94.3 million kroons for leasing equipment from abroad.

Compared to 1992, the turnover of the income balance has notably grown in 1993. First of all, this can be explained by improvements in the information basis for compiling the balance of payments. Secondly, it reflects the increase of foreign investment volume and profitability. The debit side of this balance consists mainly of income from direct investments received by foreign investors from capital invested in Estonia. The income balance was in deficit for all of 1993, with the deficit increasing constantly.

The income balance has two large subdivisions: income from direct investments and income from other investments (securities, loans, deposits, etc.). As direct investments have so far been one-sided - from other countries to Estonia - income received in Estonia has moved in one direction - from Estonia to other countries. This explains income balance figures. Income from direct foreign investments in the amount of 400 million kroons moved from Estonia to other countries in 1993. The increase of these figures gives evidence of the fact that joint ventures are becoming more and more successful. Another reason for the income balance deficit was the fact that the amount of interest paid on foreign loans has increased with the increase in foreign loans taken.

This section of the balance of payments reflects foreign aid received, various money transfers, membership fees paid to international organisations, etc. The transfer balance had a huge surplus in 1993 - nearly 1.4 thousand million kroons. Of this amount approximately 1.3 thousand million kroons can be accounted for as foreign aid: Estonia received goods for 376.2 million kroons and services for 890 million kroons.

CAPITAL ACCOUNT

The balance of the capital account (excl. reserves) was in surplus for all quarters of 1993. It amounted to 2.5 thousand million kroons for the whole year of which 2.1. thousand million was the balance of direct investments and 0.4 thousand million the balance of other capital. The balance of portfolio investments was negative, but for 3 million kroons only.

Foreign direct investments for 2.2 thousand million kroons were made into Estonia in 1993 and Estonia invested 103.6 million kroons in the same way abroad. 55% of the direct foreign investments were made in the form of equity capital, 29% as loan capital and 16% as reinvested income. In the total amount of direct investments Finland had the leading position (32.3%), followed by Sweden (29%). The share of other countries was much less, e.g., the Netherlands 5.9%, Switzerland 4.4%, Italy 3%, Russia 2.6%, Germany 2.4%, etc. Foreign investors preferred industry (45% of direct investments). Industry was followed by wholesale and retail trade (26%), banking (8%), real estate, rental and business services (7%).

Last year the inflow of foreign capital in the form of equity capital increased constantly, amounting to 1.2 thousand million kroons for the whole year. This figure includes 764 million kroons foreign investors invested in new entities founded in 1993 and 388.6 million kroons invested in the equity capital of already existing entities. 80.4 million kroons were received from the privatisation of state-owned enterprises, 80% of this in the last quarter of 1993.

Concerning joint ventures founded in 1993, the leading position was held by Finland (1551 ventures), followed by Sweden (301), Russia (253), Germany and the USA (126 both). The leading investor into one newly founded joint venture was Hungary (4.7 million kroons), followed by Italy (4), the USA (1.5), Bahamas (1.2), Turkey (1.1) and Sweden (0.9). Finland (first as concerns total amount of investments made) was in 34th place, Russia in 30th and Germany 24th. With regards to increasing equity capital of already existing joint ventures, the leading role was played by Sweden (49% of the respective figure), followed by Finland (28%) and Switzerland (9%).

Long-term loans from foreign investments and their repayment amounted to 169.3 million kroons. The majority of long-term loans were obtained during the second and fourth quarter, and the bigger creditors were from Finland and Austria.

The net volume of reinvested income and short-term loan capital increased constantly, which gives evidence for productivity of joint venture activities.

This item reflects all foreign investments making up less than 10% participation in enterprises and various investments in the form of securities. This kind of capital movement is not of importance in Estonia at the present moment, the respective turnover not noteworthy.

The balance of the export-import of other capital in 1993 was +0.42 thousand million kroons. The movement of the other capital is given in Table 12 below, broken down by economic sectors and maturity dates.

As can be seen from the above data, an important role in the surplus of the other capital balance was played by the government sector, especially its long-term capital. The latter reflects mainly foreign loans taken on the level of government (not just signed loan agreements, but actually used loans), as well as the repayments of such loans. In 1993 on the government level loans were used for the amount of 0.9 thousand million kroons and repayments were made for the amount of 19.5 million kroons. The deficit of the short-term capital balance in the government sector amounted to 188.9 million kroons at the end of the year and was to a large extent caused by the repayment of the "Neste" loan in the first half of the year.

For commercial banks long- and short-term capital has been shown together. The movement of other capital in this sector was negative by 495 million kroons. The balance was in surplus in the first quarter but in deficit during the remaining part of the year, the deficit increasing from quarter to quarter. The underlying reason was that commercial banks preferred to deposit money abroad rather than credit Estonian enterprises. In 1993 foreign economic relations in other sectors livened up (i.e., entities which are not government institutions, not commercial banks, entities having no direct investment relationships).

In other sectors the surplus of the balance can be attributed mainly to long-term loans. During 1993 Estonian enterprises (excluding entities with direct investment relationships) obtained 347.3 million kroons of long-term loans. The process was especially active in the first and last quarter. The repayment of long-term loans amounted to 93.2 million kroons.

The short-term capital balance in other sectors resulted in a deficit of 31.3 million kroons in 1993. As the turnover of short-term capital was rather significant in other sectors - short-term loans and trade credits were granted for the amount of 651.2 and were received for the amount of 596.1 million kroons (net) - the deficit is not too large.

RESERVES

The reserves of the balance of payments grew by each quarter of 1993 - the total annual increase was nearly 2.2 thousand million kroons. The increase was mainly caused by increased foreign exchange reserves. Gold reserves decreased.

In conclusion, one might say that the Estonian balance of payments for 1993 was rather good - the current account had a surplus, Estonia obtained foreign investments in a considerable amount, several foreign loans for developing economy were obtained, the reserves increased. However, the deficit of the current account occurring in the fourth quarter is a warning signal. There is reason to believe that the increase of imports resulting from the growth of foreign loans makes the current account negative this year also. Nevertheless, at the present stage there is no reason to worry, for the deficit can be covered from the reserves. But attracting foreign investments and increasing export potential should be seriously considered.

Table 13
Balance of payments of Estonia for 1993: transactions during period (million kroons*)

Claims (increase -, decrease +)
Liabilities (increase +, decrease -)