Annual Report 1994. Estonian Economy in 1994

GENERAL FEATURES

In the transition process of Estonian economy the beginning of the year 1993 marked the end of a period of decline; the second half of 1993 and the year 1994 mark the making for the path of growth. The stabilisation of economic environment and the growing openness have created the requisite conditions for growth. In 1994 the positive changes that had started in 1993 were taking root; as a result of tax reform, a tax level moderate for a transition economy was guaranteed. In the context of economic policies, the year 1994 was quite similar to the year 1993. The framework remained the same; that is, a monetary system operating on the basis of a currency board accompanied by a restrictive budget and income policy. A liberal approach excluding protectionism, aimed at promoting market regulation, was maintained. In these circumstances, market forces were the driving force behind the reorganisation of economy.

Economic environment and sources of economic growth

Considering the world economy in the broadest sense, including the signs of economic growth in Western Europe, the economic environment is favourable for a quick development of the Estonian economy. The favourable environment still allows for future developments in re-establishing normal foreign economic relations both in the West and East.

Among the sources of economic growth, mention should also be made of the impulse originating from the change of the economic system. It is expressed in the gradual formation of a normal economic environment and the attendant growth of entrepreneurial activities. It should be noted that the domestic financial sector (including insurance) is still in an embryonic stage and the capital market is only still arising. Institutional development in a broader sense, including progress in drafting legal acts, is an important prerequisite for speeding up economic growth and achieving a stable growth rate in a longer perspective.

The intensive capital inflow which started in 1993 and continued in 1994 creates conditions for a more effective distribution of resources, therefore making it possible to achieve rapid development via increase in productivity exceeding that of the developed countries. Capital inflow has taken place mainly in the form of direct investments, to a lesser extent through foreign loans taken by the government. It is probable that the present level of foreign investments will not be maintained for very long. At the present time the servicing costs of loans taken by the government are minimal. Starting from 1996 intensive repayment of loan interests and, from 1998, repayment of principals will begin. This will create an additional burden for the economy, but according to the present estimates, loan servicing will not be beyond the powers of the state. Considering the above said, the period from 1994 to 1995 will be a favourable period in the Estonian economy that should create conditions for a rapid growth.

Financing economic growth

The conditions prevailing in Estonia - an open economy and a small domestic market - leave exports to offer the impetus for economic growth. A growth of export and economy in general requires investments. Financing investments in a broader sense is connected with the growth of domestic savings and capital inflow (foreign savings).

There are not enough internal resources in Estonia for financing growth. Financing of economic development would involve significant domestic savings. As the savings of the population are small, one cannot count on a quick emergence of domestic long-term credit resources. Thus, financing economic growth solely on the basis of domestic resources is not realistic. In the course of the last two years there has been a considerable growth in foreign investments. Disbursements from the loans taken by the government and directed for investments have also increased. A significant increase in the disbursements was expected in 1994. In reality the disbursements remained smaller than expected. At the same time the level of direct investments surpassed the estimates made at the beginning of the year (the ratio of direct investments to the GDP was 9% in 1993 and 8% in 1994- a very high figure on the central European scale). Considering possible future loan commitments of the government and a presumably higher effectiveness of the private sector in investing resources, private investments have to be preferred to the government loans in the long perspective. To sum up, the financing of economic growth is external to a large extent at the present time; in the course of 1994 the capital inflow exceeded the capital outflow to a considerable extent. There was a parallel increase in the deficit of the current account.

At the present moment domestic financing of investments is feasible mainly at the expense of enterprises' own means, e.g., on the basis of the savings forming in the entrepreneurs' sector. Observing the changes in respect to domestic credit in 1994, it turns out that compared to 1993 the usage of the resources of the banking system has improved. Domestic loans grew approximately 30%, time and savings deposits approximately 35%, the total quasi-money approximately 70%. It should be mentioned that there has been an increase in the share of long-term loans in 1994. While the banking system was highly liquid in 1993, the liquidity norms were less "overfulfilled" in 1994. Due to this the share of loans in the consolidated balance sheet of banks increased to 44% (together with the claims to the central government up to 48%). In 1994 the credit resources were used near to maximum.

Economic development is accompanied by a growth of money demand. In a monetary system based on the principle of currency board, the money supply adjusts itself to the money demand. As a result of the increase in money demand the money supply has increased by almost 40% in 1994. That is a little below the growth of the nominal GDP. Looking at the years 1993 and 1994 by quarters (Figure 1) we can see that during of the whole 1993 the growth of the money demand and money supply exceeded the rate of economic growth. The year 1993 can be considered a period of preliminary stabilisation, when insurance against possible (financial) risks was taken both in the entrepreneurial and banking sector. Thus, the growth of the money demand temporarily surpassed the rate of economic growth.

Figure 1. GDP, money supply and cash in circulation (except commercial banks' vault cash) 1993-1994

The situation changed in the first quarter in 1994 when the growth rate surpassed the increase in the money demand and money supply. Readers should be reminded here that the first quarter of 1994 was a period of high inflation which bloated the gross domestic product in current prices. Since the second quarter of 1994 the growth of money demand and of money supply was nearly equal to the economic growth. The self-regulation inherent in the currency board environment has led to a significant decrease in the inflation rate from the second quarter of 1994.

Economic growth in 1994

The estimated real economic growth was 4.7% in 1994. Quarterly changes in economic growth for 1993 and 1994 are shown in Figure 2.

Figure 2. Seasonally adjusted quarterly growth index 1993-1994

Calculated by the consumption method, the economic growth has been brought about by the growth of investments and exports (and increased public consumption, to a lesser extent). There has been considerable growth in investments as well as export and import, including import of capital goods (approximately 20% of total import) during 1994. From 1993 the exports and imports grew, in current prices, by 59% and 82% respectively. No significant changes took place in private consumption for the second successive year; public consumption grew only slightly.

On the income side the economic growth is mainly caused by the increase of wages and salaries as well as tax revenues. There was an increase of approximately 5% in real wages in 1994, but there were no significant changes in the average consumption. For the first time since the monetary reform a slight increase in the savings was to be noticed. The increase in the tax revenues was mainly caused by the growth of foreign trade (the growth of indirect tax revenues in constant prices was almost 17% from 1993).

Structural changes in the economy and employment

The influence of market forces has contributed most to the structural changes that have taken place in the economy. Due to the significant share of foreign investments in the formation of real investments, there has been a decided shift towards an increase in the share of export-oriented industries and services. Comparing the first half of 1994 with the same period in 1993 it is evident that the share of wholesale and retail trade, energy, forestry, construction, hotels and restaurants, etc., in the gross domestic product has grown. The share of transport and warehousing, real estate, rental and business services, manufacturing industry and agriculture has decreased. In general, the structural changes coincide with the rates of growth in particular industries. Comparing the structural changes and the rates of growth with the changes in the structure of employment, only a weak correlation can be found (incompleteness of statistical data has to be considered here). During recent years, employment has decreased in the manufacturing industry, agriculture and fishery sectors. The number of employed has remained the same or even grown in the trade, finance, energy industry, gas supply industry and waterworks sectors.

Structural changes in the economy are either promoted or inhibited by the general level of infrastructure. The Public Investment Programme approved by the Riigikogu in 1994 is the first step in increasing investments in the public sector: the investments are targeted at sectors which, on the whole, are not subject to privatisation. Paying attention to the issues of infrastructure is important both in order to achieve a better-functioning labour market and to increase the capital absorption capacity of the Estonian economy. That would benefit the development of the Estonian economy as a whole and secure economic growth in a longer perspective.

Changes in employment and the official unemployment 1993/1994

At the beginning of 1994 Estonian population was 1506.9 thousand. The working age population amounted to 840.8 thousand, i.e., 55.8% of the total population. In the course of one year the total population fell to an estimated 1492 thousand (832 thousand of which work-age). Employment remained on the level of 72-73% of the work-age population. The decrease in the population by 15 thousand people was more or less equally due to emigration and negative natural increase.

Those who receive unemployment benefits are considered officially registered unemployed in Estonia. The official figures show that at the beginning of 1993 there were 14.9 thousand unemployed, at the beginning of 1994 - 16.2 thousand and at the end of 1994 - 12.7 thousand unemployed. The number of the unemployed was the biggest in the spring months of 1994 (it reached 19.5 thousand) and the lowest in the autumn (11 to 12 thousand). While the percentage of the unemployed of the work-age population fluctuated between 1.4 and 2.7 in 1993-1994, it did not exceed 2.3% in 1994.

During the transition to the market economy, the structural changes in Estonian economy and the development of a new enterprise sector have influenced the employment in several different directions. On the one hand there is the normal process of decrease of an earlier, artificially high employment. On the other hand, the accelerating economic growth has been accompanied by an increasing demand for new employees with rather high qualifications in knowledge and market experience. Since the background of the Estonian labour force does not meet the requirements of the employers, the issue here is mainly the structural unemployment. In order to solve that problem many enterprises have taken on their personnel training costs.

The labour market reacts slowly to the changes in the structure of economy. The relatively low mobility of the labour force and issues of retraining can be considered the main problems of the labour market.

INFLATION

Reasons for inflation in a transition economy

According to the principles of the monetary and exchange rate policy implemented in Estonia, inflation in Estonia is first of all influenced by the growth rate of international prices transmitted by the medium of the fixed exchange rate, and by the changes of the real exchange rate typical to rapidly developing transition economies. While the inflation input directly influences the prices of the exposed sector connected with international competition, the strengthening of the real exchange rate is reflected mainly in the processes occurring in the sheltered sector.

The Estonian kroon being pegged to the German mark, input inflation is modest by its nature. The Russian market forms a significant exception here. During the recent years, industries connected with the Russian market have repeatedly been influenced by the wide fluctuations of the real exchange rate of the Russian rouble and the instability of the market prices there. These fluctuations in their turn have created pressures to increase or decrease our price level.

The price stability imported via the exposed sector has, without doubt, stabilised the price level in Estonia as a whole, and with the present policy going on, this stabilising influence will continue. A somewhat higher rate of increase in the prices of the sheltered sector compared to the exposed sector may be a phenomenon to reckon with for some time to come. Some price distortions (i.e. inadequate price structure) originating from the planned economy still need to be eliminated in the sheltered sector. The wage increases accompanying the increased productivity of the exposed sector results in a growing demand for the products of the sheltered sector. This leads to pressure to rise the level of wages and salaries there. However, it should be noted that a wage increase need not necessarily bring along a sufficient rise in the productivity of the sheltered sector.

The growth of the real exchange rate originating from the sheltered sector, above all, is characteristic of all transition economies. To a certain extent, this phenomenon is quite a natural reflection of the economic development - in transition economies there are several factors making possible or generating developments like that. The relatively wide opportunities for a growth of primary productivity in the exposed sector, the exchange rates possibly underrated as compared to a long-term balanced exchange rate because of the underdevelopment of money markets, etc. should be mentioned in this context. The relatively high growth of domestic prices and the increase in the nominal exchange rate are inevitable characteristics of a transition economy .

On account of the above factors, the changes in the price level need not necessarily be a sign of diminishing competitiveness with trading partners. These processes may well be connected to the relatively rapid rise of effectiveness of a transition economy. The above phenomena may become a source of temporary problems, in case economic agents (including the state with its budget policy) reach wrong decisions in forecasting inflation processes due to the complexity of the problems. Limited two-way adaptability of prices as well as salaries and wages during a later period can aggravate the difficulties.

Inflation factors

Comparing the price changes in the open and sheltered sectors, it can be seen that in the course of 1994 the prices in the exposed sector rose 23.8% whereas there was an increase of 85.2% in the sheltered sector. In 1993 the rise in the consumer price index was caused by a 33% price rise in exposed sector and a 70% price rise in the sheltered sector. In 1994 the inflation in the exposed sector slowed down but the price rise in the sheltered sector accelerated. Therefore, the main component of the 1994 inflation was the price rise in the sheltered sector which was 4 times higher than that of the exposed sector. In this sense, the inflation in 1994 was "administrative". It means contributing factors like price liberalisation, i.e., changing price ceilings (for rents), decreasing state subsidies (to public transport), and price regulation (as to the prices of energy complex).

The average monthly price rise in the exposed sector was 1.8% in 1994. The price changes were considered to originate from the following factors:

• price rise in other countries expressed in kroons, reflecting rises in real prices caused by the internationalisation of price level. The prices of the exposed sector on the average rose 0.8 percentage points a month (1.2 percentage points in 1993) due to the changes in foreign prices. The lessening influence of foreign prices can be attributed to the decreasing of inflation rates in Russia and a certain strengthening of the German mark against other currencies.
• excess money supply. The monetary system chosen in Estonia means that money supply is determined by demand. Excess money supply is a variable which reflects the short-term imbalance of money supply. In 1994 the money demand somewhat exceeded the money supply mainly due to economic growth and overly high inflation expectations.
• the effective real exchange rate of the kroon,
• seasonal factor which considerably influences the inflation by the month.

In 1994 the prices in the sheltered sector increased by 5.3% a month on the average. Price changes in the sheltered sector could be considered to be dependent on the following factors:

• price rises in the exposed sector which bring along the price rises in the sheltered sector. Internationalisation of prices in the exposed sector is carried to the sheltered sector through the rise in wages and salaries as well as through prices of products which are production inputs for the sheltered sector. The decreasing rate of the price rises in the exposed sector has led to the diminishing of the effect of this factor on the prices of the sheltered sector.
• foreign prices the effect of which in the sheltered sector is bigger than in the exposed sector. In 1994 the change in foreign prices gave an average monthly price increase of 0.4 percentage points in the sheltered sector (in 1993 - 2.0 percentage points).
• administrative price rise which turned out to be the most powerful factor on the account of which the prices in the sheltered sector grew on average 2.9 percentage points a month.

The factors listed here conform to the supply-sided price formation in the sheltered sector.

All in all, it could be said that the rise in the consumer prices in 1994 has taken place mainly at the expense of the sheltered sector and is "administrative" in its nature. The price liberalisation going on in the sheltered sector at the present time is a long process, therefore prices in the sheltered sector can be expected to rise in the future as well.

Inflation components

In 1994 the price of services increased 78% and goods 23%.

Of the commodity aggregates included in the consumer price index (CPI), the prices of the following rose the most: housing (price rise 81.8%), transport and communication (50.9%), expenses related to leisure (49.4%). Compared to 1993, the prices of food, clothing and footwear, health care and miscellaneous goods and services have risen the least. The growth of the consumer price index was influenced, above all, by the increased housing expenses (39% of the growth of the CPI), food (22%), transport and communication (16%).

The rising housing costs could be attributed to the rise in the rent tariffs and public utilities (water and sewerage) costs. In 1994 the minimum rent tariffs were raised 3.3 times as the tax on land and the expenses related to repair works were added to the structure of the rent. In 1995 the insurance costs of the building will be added and in 1996 depreciation costs.

INCOME AND CONSUMPTION

Nominal and real income

The incomes of families increased by 48.1% in 1994 and amounted to 926 kroons per family member on the average. Nominal incomes were highly unstable (Figure 3) and their average growth was smaller than that of the CPI. The incomes having grown rapidly at the end of the year and the growth of CPI having slowed down, the annual real income increased by 0.4%.

Figure 3. Family income (kroons per family member)1993-1994

Wages and salaries by industries

Wages and salaries have increased rather rapidly during the recent years in Estonia (Table 1. Changes in the average wages during the post-monetary reform period). In 1992 the average wage was 549 kroons per month, it increased to 1066 kroons in 1993 (194% growth) and up to 1689 kroons in 1994 (158% growth).

There has been a relatively rapid increase in the wages and salaries in the finance, transport, energy industry, construction, real estate and business services sectors. The growth of salaries in sectors financed from the government budget like education, health care and welfare, government, national defence and social security has remained rather modest.

In 1994 the issues of wage policies were discussed rather often by the Government and the Riigikogu (Parliament). In June the Government and the representatives of employers and employees decided to adopt minimum hourly wages instead of the minimum monthly wages. The respective Government Decree (No 260) was adopted on 15 July and a new minimum pay by hour of 2.65 kroons became effective starting from 1 September. This way the calculatory monthly minimum salary for standard hours rose to 450 kroons (formerly 300 kroons).

Real wage and its changes

The comparison of the month-to-month growth of wages, salaries and the consumer prices shows that from December 1993 through 1994 the wages and salaries grew more rapidly than the consumer prices. Looking at the whole post-monetary reform period (June 1992=100), the real wage has overtopped the base level only in a few months (Figure 4). The average monthly growth of the real wage (as the average from the monthly real wage increases, compared to the same month of the year before) was 5% in 1994.

Figure 4. Wages and salaries in Estonia during post-monetary reform period (percentage change, July 1992=100)

Private consumption

Total consumption grew by 45.2% in 1994 and comprised 828 kroons a month per family member on the average. The changes in consumption (see Figure 5, page 18) follow quite closely the changes in earnings. In December the growth of consumption exceeded the increase in earnings and amounted to 1140 kroons per family member (compared to November the growth was 24%).

Still, in 1994 the average annual real consumption (in the 1992 June constant prices) was 1.7% lower than the year before. Due to the rapid growth of nominal consumption and the deceleration of the growth of the CPI, the level of real consumption in December was the highest since the monetary reform.

The following changes have taken place in the structure of consumption during 1994:

• the share of foodstuffs has decreased;
• the share of other goods and services has increased.

Figure 5. Changes in family consumption (kroons per family member)

GOVERNMENT SECTOR

Development of the fiscal system

The 1994 budget policy was discussed in a new legal framework. A number of new laws had been adopted in 1993: Law on Taxation, Law on State Budget, Income Tax Law, Law on Municipal and Town Budget, Law on Value Added Tax, Law on Correlation between Municipal and Town Budgets and the State Budget. Fiscal balance still remained the main characteristic feature of the budget policy, e.g., covering the recurrent expenses by current revenues.

As a result of the recent administrative reform, the Estonian budget system (central government budgets and local budgets together with welfare and health insurance) has become even more government-centered than before. The central government, taking over several financial obligations, made the expenditures of local administration on the average 10% smaller than in 1993. The local government revenue base was reduced as well. 48% of the personal income tax (which had formerly remained completely at the disposal of local administrations) was allocated to the state budget. Due to this the share of local budgets in the total revenue of the budget system diminished from 23.6% in 1993 to 11% in 1994 (Table 2. Distribution of current revenues in the fiscal system). The share of the transfers from the central government budget in the expenditures of local budgets increased from 27% in 1993 to 32% in 1994.

Revenues and expenditures of the fiscal system

The new Income Tax Law lowered the ceiling for the corporate and personal income tax, in both cases to 26%. Both are proportional. A certain fixed amount of personal income remained exempt from tax; the exact amount was left in the competence of the government. Investment incentives for legal entities were replaced by the so-called accelerated procedure of calculating depreciation. At the beginning of the year, additions were made to the list of goods and services subject to VAT and the time limit for the refunding of VAT on imported goods was changed. That led to considerable changes in the structure of revenue of the central government budget. The share of VAT increased from 25 to 29%.

Summing up, it could be said that compared to other transition economies, the tax burden in Estonia has remained moderate. Due to the liberal price policy and renouncement of subsidies it has been possible to keep the revenues and expenditures in the Estonian fiscal system within 35% of the GDP.

On the expenditures side, the traditional basic structure (social sphere, administration costs, law enforcement, financing of economy, etc.) has changed very little.

New tendencies in budget policy

The most important legislative changes in the sphere of fiscal policy were the decisions to establish state allowances for living expenses in direct correlation on the social security tax received, and the law on local taxes. The latter includes a list of taxes the local administrations are allowed to introduce. The central governement budget for 1995 prepared in 1994 may be considered the first budget based on the budget law adopted in 1993, and a longer than one year perspective was taken into consideration.

A programme of public investments for 1995 to 1997 was prepared to ensure an adequate level of investments for the development of infrastructure. Foreign loans together with spendings from the government budget are to ensure, in the coming years, public investments of at least 4 to 4.5% of the GDP. Foreign loans guaranteed by the government and further extended to the manufacturing sector make it possible for the government to direct economic policy beyond the framework of the budget system.

Foreign Loans

The first foreign loans taken in 1992 were used for vital imports (fuel, medical equipment, medicine, etc.). Now, the direction has changed and investment loans are predominant. The loans are used to modernise the heating industry, communications, airfields, etc.

In 1994 several new loans were taken:

• a loan granted by the World Bank for the reconstruction of the roads in Estonia in the amount of USD12 million;
• an energy loan for the reconstruction of heating systems in Tallinn, Tartu and Pärnu, financed by the World Bank, European Investment Bank and the Swedish Technical Assistance Fund for Investments (BITS);
• a loan granted by the European Bank for Reconstruction and Development (EBRD) for the reconstruction of the Tallinn Airport in the amount of USD14.2 million. In this case the Government is the guarantor.
• a 7 million ECU loan from the European Investment Bank (EIB) and the World Bank for the renovation of Tallinn and Pärnu heating systems and for the improvement of the quality of drinking water; a CAD 10 million loan from the EDC Canada for the energy industry and health care.

The total amount of loans increased by USD 94.5 million.

Table 3. Foreign loans taken or guaranteed by the Government of the Republic of Estonia as of 30 December 1994 (according to Ministry of Finance data)

* Loans denominated in various currencies are translated into EEK and USD, using the official exchange rates of Eesti Pank valid on 30 December 1994:

** Government acts only as guarantor

As of 30 December 1994 the Estonian Government had been granted foreign loans (both ratified and non-ratified for USD 337.506 million in all. Actual indebtedness (disbursements minus loan repayments) amounted to USD 174.951 million.

An estimated USD 39.77 million was disbursed in 1994. Although the disbursement of loans became more intensive in the fourth quarter, the total is considerably smaller than in 1993 when it was approximately USD 62 million. The disbursements were also smaller than planned because disbursements of several loans planned for 1994 were deferred.

Foreign loans are an important source for financing imports and investments. Investments and imports can also be financed from other sources, e.g. direct loans to enterprises, foreign direct investments, etc. A explanation for the relatively scanty disbursements in 1994 can be found in the following: firstly, in 1994 the programme for public investments was not yet completely ready; secondly, an intensive inflow of foreign direct investments decreased the need for foreign loans guaranteed by the government; thirdly, some of the loans taken earlier (e.g. a loan from the EBRD for the Estonian energy saving programme) are no longer necessary.

In 1994 the loan servicing costs were low (Table 4. Foreign loans of the Government in 1994). The loan servicing burden, which is expressed by the ratio of servicing costs to the export, was close to zero. In the future, the burden will increase to a considerable extent. Taking into account the foreign loans taken so far, the maximum servicing burden will come in the years 2000 and 2001.

Long term loans made up 93% of all the foreign loans. Examining the distribution of loans by creditors, one can see that the main creditors are international banks and institutions (The World Bank, EBRD, etc.). Only 14.5% of the total amount of loans goes to other creditors.

FOREIGN TRADE

Foreign trade turnover increased by 71%, exports by 59% and imports by 82% in 1994 (current prices here and elsewhere in this chapter). The monthly export-import balance has been negative since July 1993 (see Figure 6). The trade balance was negative by 4.6 billion kroons in 1994 (compared to the 1.2 billion kroon deficit in 1993). There were no significant changes in the structure of the trade partners in 1994.

Figure 6. Exports and imports 1993-1994 (million kroons)

Following the changes in Estonian foreign trade by commodity groups, some preliminary conclusions can be made about the structural changes in the Estonian economy in 1993-1994 (see Table 5. The percentage share of various commodity groups in Estonian exports). Opening the economic borders and abolishing the command economy provides an opportunity to rearrange economic resources (workforce, capital) in a more effective way. That, in turn, guarantees that the society will earn the highest possible (total) profits from the resources at its disposal. On the other hand, the Estonian market is so small that increasing export must be considered one of the key factors instrumental in expediting economic development. Only those industries that are able to win new markets outside Estonia would probably have sufficient potential for further development.

Because of the relative cheapness of Estonian labour compared to the developed countries, a tendency to import more and more goods (from Finland and Sweden, above of all) to be processed in Estonia has been prevalent lately. Textiles and textile products and machinery and equipment are the commodity groups most commonly involved. It is interesting to look at the structure of exports excluding the goods imported for reprocessing in Estonia. In this case, foodstuffs turn out to be the most leading export article (13.6% of total exports), with wood products (11.4%), mineral products and fuels (9.2%) and non-precious metals (8.9%) following. The share of textiles and textile products falls to only 8.9% in this case. In other words, goods reprocessed in Estonia amount to 47% of the textiles export. The share of these articles in total exports is 16.0%.

The structural changes in imports are on a somewhat smaller scale than the changes in exports (see Table 6. The percentage share of various commodity groups in Estonian imports). Machinery and equipment was again the leading commodity group in imports for 1994. The share of mineral products and fuels as well as textiles and foodstuffs remained high. Transport equipment lost most of its former share in imports during the year.

The predominance of machinery and equipment in imports allows us to presume that the growth in foreign investments and foreign loans taken is accompanied by modernisation of the technologies in various industries. That, in its turn, would create a basis for growth in exports in the near future.

The present deficit of the trade balance and its structure is typical to a developing country like Estonia where the existing capacities and technologies are insufficient for guaranteeing the relatively high rate of growth. A solution could be found, first, in modernising the technologies, possible only with the help of imports, and secondly, in gaining access to foreign investments and foreign loans, for domestic savings are not sufficient for financing imports.

OTHER CAPITAL FLOWS

In 1994 the total direct foreign investments in Estonia amounted to 2.8 billion-plus kroons. That is approximately as much as the foreign direct investments in 1992 and 1993 taken together.

Compared to 1993, capital flows in the form of portfolio investments have increased to a considerable extent. The claims connected to portfolio investment increased by more than 200 million kroon in 1994, the liabilities for approximately 100 million kroons.

The balance of other investments (various loans, deposits, leasing etc.) became negative in 1994. Commercial banks' cash and deposits being transferred to other countries to the amount of more than 1.2 billion kroons was the most important factor influencing this development. Another cause can be found in the constantly increasing volume of long-term rental of equipment, mainly ships and trucks from other countries. At the same time, there was an increase in payments for foreign loans taken by Estonian enterprises.