Extensive and consistent reforms which began with the monetary reform in 1992 have considerably changed the economic environment of Estonia in recent years. The liberalization of prices and foreign trade, increasing macroeconomic stability, the growing share of the private sector and strengthening of the market economy institutions have laid the foundations for the emergence of an effective economic system and created prerequisites for a long-term and stable economic growth. An important role in the development of the economic environment has been played by the monetary policy implemented in the framework of the currency board system, institutional reforms and open foreign trade. The measures aimed at the restructuring of the economy have turned Estonia into a market economy oriented country characterised by a stable and transparent economic and political framework, important role of foreign trade relations and declining state involvement in the economy.
The openness of foreign economic relations is manifested by the lack of any restriction on trade and the movement of capital. There are relatively few restrictions on wages, foreign trade and the formation of new enterprises, and the impact of these restrictions is insignificant. The prices of the majority of goods have also been set free. The government regulates and coordinates the prices of land, oil shale, electricity, growing forest, medicines, medical insurance services and some transport, communication and communal services.
The property reform has played an important role in shaping Estonia's economic environment. As a result, the bulk of economic activity is concentrated into the private sector which accounts for two thirds of the gross domestic product (GDP). In the biggest branch of the economy, i.e. industry, private sector accounted for over two thirds in the middle of 1996.
The aim of the current privatization programme has been the formation of a circle of owners with adequate resources for the reconstruction of companies and ability to guarantee the effective management of the privatized enterprises. The target of this privatisation concept is to strengthen market competition, enhancing efficiency of businesses’ economic activities and acceleration of the development of market economy institutions. Therefore, most of the companies have been sold to core investors. By today, the majority of state-owned companies have been privatized (see Table 5. Development of privatisation, between 1994 and 30 September 1996). In 1996 the final phase of the privatization programme was launched, involving the privatization of infrastructure companies. At the same time problems cropped up in some companies which had been sold to not so competent new owners.
Table 5. Development of privatisation, between 1994 and 30 September 1996
Type of property
Net turnover (%)
State and municipal property
Estonian private property
The number of bankruptcies was relatively small in 1996, but since some of them concerned the major employers of small villages, bankruptcies sometimes created strong social tensions that required government intervention.
The progress of the property reform has been hampered by the slowness of the land reform. This could lead to the decrease in foreign direct investments because potential foreign investors need free land to build new structures on. Since the transition of land ownership to producers will increase the creditworthiness of companies, delays in the land reform can lower the competitiveness of Estonian enterprises. The speed of the agricultural reform has also been inadequate.
In 1996 structural and institutional changes affecting the economic environment were smaller than in the previous years. This was mainly caused by objective reasons. As a result of the transition process, there has already emerged an economic structure in Estonia broadly corresponding to the conditions of the market economy and compatible with the international economic environment. Therefore, economic processes related to structural transformation had a smaller influence than in the previous years. However, harmonization of the Estonian legislation with the requirements of the European Union gained momentum.
The institutional reforms necessary for the sustained development of the economy - those concerning the legal and financial system and the government sector - have proved to be time-consuming, as could be expected. It took two to three years to bring the economy in line with the basic requirements of the market economy but five years after start the reform of the legal system and the government sector is still only half completed. There has been some progress in reforming the tax system - tax collection has become more efficient and a simple and proportional tax system has been created - but little has been achieved in improving the efficiency of the state bureaucracy, social insurance reforms and regulating the relations between the different levels of government. The reform of the financial sector has been somewhat quicker and as a result, viable banks have emerged and conditions have been created for the development of other financial intermediaries.
DEVELOPMENT OF THE REAL ECONOMY
In 1996 stabilization in the Estonian economy continued. One significant result of the stabilization was the decline in the inflation rate. The nominal interest rates of loans and deposits decreased as well. Unfortunately, the budget deficit of the general government increased, mainly due to the active borrowing by the local governments. Several Estonian enterprises set up daughter companies, subsidiaries and sales representations outside Estonia. After a relatively slow take-off in the early summer, the Tallinn Stock Exchange gained momentum by the end of the year, becoming the largest exchange in the Baltics in terms of turnover.
Demand for imports increased, backed by the intensive inflow of capital, leading to the increase in the deficit of foreign trade and the current account of the balance of payments. The deficit of the trade balance (27% of the GDP) was further increased by the change in the rules of customs warehousing in the fourth quarter of 1996 and the inclusion of earlier arrived goods into the records.
The increasing stability of prices and reliability of the Estonian economy have created an easier access to the international money and capital market for both the public sector and the banks. Favourable loans granted to general government and Estonian banks indicate that Estonia's risk level is considered relatively low.
The most important economic policy result is the continuing economic growth that was also maintained in 1996, although the beginning of the year was not particularly successful for the Estonian economy. According to the State Statistical Office, the GDP of the first quarter of 1996 was only 0.3% larger than in the respective quarter of 1995. In the following quarters the rate of economic growth increased. In the first three quarters the GDP growth in current prices was 3.1% as compared to the same period in 1995, and various indirect indicators show that the growth rate quickened also in the fourth quarter.
An important role in determining the increase in the gross domestic product and economic growth is played by the conditions related to total demand and supply. Thus, for example, it is important for Estonia as a country with an open economy that is, besides domestic demand, also sufficient external demand for local goods. Thus, general economic growth (including the GDP) reflects the processes that result from and are caused by the relations between demand and supply in the economy.
Domestic demand amounted to 60% of total demand in 1996 (59% in 1995).The end consumption of the public sector increased as did investments. The nominal increase in the total expenditures of the public sector was 29%, while investments increased by 33% (the nominal increase in the GDP was 23%). An important role in financing the increasing expenditures of the public sector belonged to bond issues organised by local governments and which were used to borrow money from both the local and foreign market.
Investments and particularly total capital expenditures into fixed assets increased rapidly. The Estonian economy is characterised by the big share of investments in the GDP (27.6% in the first half of 1996, while total capital expenditures into fixed assets stood at 24.6%).
Companies financed investments mainly from their own funds. Thus, for example, in the processing industry only 20% of investments were financed from bank loans in the first nine months of 1996. However, the share of bank loans in the corporate sector increased considerably in 1996, and these loans served to compensate for the decline in direct foreign investments.
21% of the total investments in 1996 were made into transport, communication and inventory management, 20% into processing industry, and 18% into state administration, defence and social insurance.
In 1996 33% of the investments into the fixed assets were spent on construction and buying buildings, 44% went on the purchase of machinery, equipment, inventory and transport vehicles, 22% was used for repairs and restoration. The share of equipment in total capital expenditures accounted for 53% in the processing industry, 58% in transport, communication and inventory management, and 87% in the mining industry.
The profitability of the corporate sector increased in 1996. The nine-month results indicate that profits of companies have increased due to cuts in expenditures and increased productivity. According to the financial indicators of enterprises published by the State Statistical Office, the profitability of production increased from 11.95 sents per one kroon of revenue in the first quarter to 12.8 sents in the second quarter and 12.98 sents in the third quarter.
In addition to the companies' own funds, financing also came from other sources, including the foreign sector. While in 1995 the share of the financial sector had been considerably smaller than the share of the foreign sector, in 1996 the situation was reversed. The decline in the foreign sector was caused by the decrease in direct foreign investments made into Estonia from 2,312.9 million kroons in 1995 to 1,665.7 million kroons in 1996. However, foreign portfolio investments increased - from 127.3 million kroons in 1995 to 2,430.3 million kroons in 1996. The enterprises' bank loans also increased considerably. This increase was, besides the increase in domestic resources, also caused by the foreign credit lines received by the Estonian banks. The banks channelled foreign credits first of all into export-oriented companies as well as small and medium-sized companies.
Foreign Demand: Exports
In 1996 exports in current prices increased by 16.9% as compared to 1995, amounting to 24.6 billion kroons. The nominal growth rate of export decreased - in 1995 exports had increased by 24.2%. One reason for this was the slow-down in the increase in export prices: in 1995 export prices had increased by 15.1% while in 1996 the increase was only 11.3%. The export prices of several commodities dropped.
In case of animal products and food industry products the decrease in Estonia's export prices followed the trend of declining food prices in the world market. The 3.9% decrease in the export price of timber and timber products in 1996 also coincided with the general trend of price changes in the world market. But we also have to take into consideration price changes in the countries Estonia did business with. A large part of Estonia's food exports goes to Russia and price changes there do not have to follow the change of prices in the world market. In case of timber and timber products, which are mainly exported to the Nordic countries, the connection with world market prices is more obvious.
The above price changes were the main reason why the export of animal products decreased by approximately 45 million kroons in 1996 (by nearly 3% of the 1995 nominal export of animal products). Although prices dropped in case of other food products too, the nominal volume of export even increased (over 470 million kroons, or 32%).
In timber processing, where two thirds of the production was exported, profitability was reduced by the decline in world market and export prices: total profitability of the third quarter turnover had been 11.5% in 1995 while in the third quarter of 1996 it was 8%. In the production of paper and paper products pre-tax losses increased in 1996.
The above examples, on the one hand, point to the difficulties companies faced while trying to maintain their export and sales volume in the conditions of falling prices. On the other hand, the increase in export and production volume in more complicated conditions proves that production has become more efficient.
The period of intense growth of both export and import of goods fell into the fourth quarter when export increased by 28% as compared to the previous quarter, import grew by 36% and foreign trade deficit was up by 50%. One reason for this can be seen in changes made in the customs regulations that took effect from 1 October 1996 . Until that date goods in transit could be kept in a public customs warehouse for up to one year (the so-called interrupted transit) without having to be recorded under the customs warehousing procedures. From 1 October, such goods have to be entered into the books in accordance with the respective customs procedure; the goods already in the warehouse had to be re-exported or re-recorded under the new rules before 1 January 1997. Thus, it was the transit recorded under the new regulations that considerably increased both exports and imports.
There were no big changes in the structure of Estonia's exports in 1996. The most important groups of exported merchandise were clothing, footwear and headgear, foodstuffs, machinery and equipment, timber, paper and products thereof (see Table 6. Estonia's exports by groups of merchandise, between 1994 and 1996).
Table 6. Estonia's exports by groups of merchandise, between 1994 and 1996
Exports (EEK mn)
Products of chemical industry
Clothing, footwear, headgear
Timber, paper and products thereof
Non-precious metals and metal products
Machinery and equipment
The share of the export of processed merchandise has been constantly increasing in total exports, amounting to 19.7% in 1996. Of the total export of machinery and equipment, processed merchandise accounted for 60%, in case of clothing, footwear and headgear the share was 42%. By the main customs procedures total exports can be divided as follows: 62.7% was the export of Estonian commodities, or the so-called pure export; 19.7% was the export of processed merchandise, and 14.3% came from customs warehouses. Data on Estonia's major export partners is given in Table 7 (Estonia's major export partners, between 1994 and 1996).
Table 7. Estonia's major export partners, between 1994 and 1996
Exports (EEK mn)
The export of Estonian services increased by 33% in 1996, amounting to approximately half of the volume of the commodities export. Like in 1995, the export of services mainly increased due to the rapid growth in the export of transport and travel services. Nearly half of the transport services export came from freight services. The export of this category of services reached the highest level of the last couple of years, increasing by 29% as compared to 1995. The bulk of the increase derived from sea and road transport.
The export of passenger services accounted for 18% of the total export of transport services. In 1996 there was a slight decline. Although the number of foreign tourists continued to increase in the summer months, the share of non-resident shipping companies in servicing them increased, as could be expected.
The export of other transport services (port, airport, navigation, stevedore, storage, bunkering, etc.) amounted to 34% of the total export of transport services.
The major export article of services was travel services which increased by 43% as compared to 1995 and amounted to 5.8 billion kroons. The export of services provided by travel agencies accounted for approximately 4% of the export of tourism services. The rest came from the spending made by tourists and one-day visitors in Estonia.
The export of other services increased by 32% in 1996.
The share of domestic supply in total supply fell in 1993 and 1994. The situation stabilized in 1995. In 1996 the share of domestic supply amounted to 53%, according to preliminary estimations.
The GDP increased rapidly in such sectors of the economy as real estate and renting services, construction, transport, wholesale and retail trade and finance in 1996. The increase was relatively high also in the mining industry and heat generation where demand was particularly boosted in the first half of the year by the cold winter. The above sectors are mainly oriented to meeting the demand of the domestic market.
The sales volume of the processing industry, as measured in constant prices, remained 0.4% below the 1995 level due to the slow-down in the real export (see Figure 1). The production of foodstuffs and beverages continued to decrease, and the output of clothing and machinery and equipment decreased in 1996 too. In the development of these branches a big role belongs to exports - in the first nine months of 1996 a third of the foodstuff and beverage production was exported, as well as two thirds of clothing and machinery and equipment. In the first three quarters of 1996 nearly 48% of the total production of the processing industry was exported (39% of total industrial production). The big share of exports in the sale of the production of several branches of the processing industry makes those branches dependent on external demand, a feature characteristic of a small open economy.
Figure 1. Sales volume of various industries, between 1994 and 1996 (EEK mn, in prices of 1995)
Source: monthly excerpt by the State Statistical Office
Of the subbranches of the processing industry the most successful were timber processing, the production of pulp and paper, as well as furniture manufacturing. But here, too, producers faced problems related to the low level of prices in the world market. In the sale of the timber and paper industry, too, export accounted for approximately two thirds.
Despite a slight decline in the sales of the processing industry products, industry as a whole displayed a 1.1% increase in the sales volume (in constant prices) due to the increase in the output of the mining industry and the energy sector. At the same time, the number of workers employed in industry decreased, leading to a considerable increase in productivity. In the third quarter of 1996, 13.8% more industrial production (in constant prices) was put out per one worker than in the third quarter of 1995. The profitability of the production activity increased to 16.7% in the second and third quarters of 1996 in the mining industry and the processing industry.
In 1996 the increase in the producer prices in industry slowed down: the change of the producer prices against the previous year was 14.9% in 1996 while it had been 25.6% in 1995. Since a relatively large part of Estonian industrial production is exported, changes in the producer prices are similar to those in the export prices. Thus, for example, both the export and producer prices dropped for dairy and timber products in 1996. This similarity can be put down to the large share of the exports: according to the nine-month data, exports made up 41.5% of the total sale of dairy products and 66.6% of the total sale of timber products.
In the energy sector and the mining industry producer prices increased by 14.2% in 1996.
Although the downward trend continued in agriculture, there were some signs that the decline was slowing down. Although the procurement of cattle, pigs and poultry as well as the number of livestock decreased, the purchases of milk went up by nearly 4%. The grain harvest too was nearly 20% bigger than it had been in 1995. The milk and grain production is stabilizing while the decline continues in the production of meat.
The year 1996 was successful in transport. Thus, the number of passengers through the Port of Tallinn increased by 10% and the volume of loading work increased by 7.5%. The number of air passengers and the volume of air freight, too, increased in 1996. Despite the overall increase in the construction volume, the number of housing units continued to fall.
Foreign Supply: Imports
The share of the import of goods and services in the total supply was 42% in 1993, and it increased to 47% in 1994. From 1995 the share of import began to drop. This tendency was halted by the extensive import of merchandise to customs warehouses in the fourth quarter of 1996.
In Estonia's foreign trade an important role belongs to the import of merchandise meant for re-export after processing in Estonia. In 1996 the import of merchandise for processing increased by 8% nominally while total import increased by 26%.
The value of merchandise imported for the needs of the Estonian domestic market in 1996 exceeded the respective figure of 1995 by 5.5 billion kroons (25.4%). Such a rate of increase was close to the nominal increase of the GDP.
The customs warehousing of imported merchandise more than doubled in 1996, indicating that the share of intermediation of transit freight is increasing in the Estonian economy. The share of merchandise imported to customs warehouses increased to 17% of total imports (10.5% in 1995). At the same time the re-export of merchandise imported to customs warehouses increased by 76% and amounted to 14.3% of Estonia's total export volume (9.5% in 1995). The new customs warehousing regulations that took effect from the fourth quarter of 1996 also played a certain role in the increase of the share of customs warehousing.
The changes in the real rate of the Estonian kroon against the currencies of developed industrial countries were not among the reasons for the rapid increase in imports. Due to the strengthening of the US dollar the base index of the real effective exchange rate of the Estonian kroon was even lower at the end of the year than it had been in the first quarter. The cheapening of the real rate should have actually curbed imports and favoured exports. In reality, the developments in imports and exports were just the opposite.
In 1996 the most important group of imported merchandise was machinery and equipment. An important place also belonged to foodstuffs, chemical products and clothing, footwear and headgear (see Table 8. Estonia's imports by groups of merchandise, between 1994 and 1996). The major structural changes concerned the increase in the share of foodstuffs, chemical products and metals and metal products. The share of the import of mineral products decreased from 11.5% in 1995 to 9.7% in 1996.
Table 8. Estonia's imports by groups of merchandise, between 1994 and 1996
Imports (EEK mn)
Products of chemical industry
Clothing, footwear, headgear
Timber, paper and products thereof
Non-precious metals and metal products
Machinery and equipment
The ranking of Estonia's four major import partners did not change in 1996 as compared to the two previous years (see Table 9. Estonia's major import partners, between 1994 and 1996). In terms of imports volume, the first place belonged to Finland, followed by Russia, Germany and Sweden. The share of Finland and Russia in the overall structure of imports decreased in 1996.
Table 9. Estonia's major import partners, between 1994 and 1996
Imports (EEK mn)
The import of services increased by 26% in 1996, amounting to 19% of the total value of imported merchandise. The bulk of imported services was made up of transport services which accounted for 45%. The volume of both freight and passenger transport services increased by nearly half.
The increase of Estonian residents' trips abroad continued in 1996 - the import of travel services exceeded 1.2 billion kroons and grew by 18% last year.
Main Peculiarities of Consumer Price Changes in 1996
In 1996 inflation followed the pattern predetermined by the price convergence process and the inflation rate continued to fall (see Table 10. Inflation against the previous year, between 1992 and 1996). On an average, consumer prices increased by 23.1% in 1996. Compared to 1995 (29%) the disinflation rate was 6 percentage points which corresponds to the long-term trend of the inflation rate decline.
Table 10. Inflation against the previous year, between 1992 and 1996 (%)
Increase in consumer prices
o/w in the open sector
o/w without tax rate changes and external factors
in the sheltered sector
o/w increase in regulated prices
increase in deregulated prices
Increase in net prices
Increase in producer prices
o/w processing industry
energy and mining industry
Increase in export prices
* no statistically comparable data
(1) evaluation of Eesti Pank
However, the way inflation rate changed during the year was remarkable. During 1996 consumer prices increased by 14.8% (as compared to December 1995). Three fourths of the price increase occurred in the first four months of the year. Over that period there was no disinflation - from January to April the annual inflation rate remained on the same level (28%) as in 1995. The decline in the annual rate was caused by the following months - from May to December consumer prices only increased by 3.9%, which corresponds to the 5.9% annual increase. Thus, inflation deviated from the long-term trend twice in 1996: at the beginning of the year actual inflation was higher than the trend and from May to December it remained considerably below the trend.
The halt in the decrease of the inflation rate in early 1996 was mainly caused by the rapid increase in the open sector prices that had began in the middle of 1995. Leaving seasonal deviations aside, something like this had earlier happened around the turn of the 1993 and 1994 years.
The acceleration of the inflation rate at the beginning of 1996 was first of all caused by the increase in excise taxes. At the end of 1995 excise tax on motor fuel and alcohol was increased by 200% and the impact was felt in early 1996. From January 1996 excise tax on locally-made tobacco products was also increased by 200%. If we eliminate the impact of the tax increase and change in direct subsidies from the consumer price index, the increase in the index would have slowed down instead of gaining momentum.
Yet, even more remarkable was the continuing decrease in the rate of inflation from spring until the end of the year (we are talking here of the inflation indicator cleared of all seasonal influences). The main reason for the slow-down of inflation in the second half of 1996 was the drastic lowering of the increase in regulated prices. In view of the near 100% increase in those prices in 1994 and the nearly 40% increase in 1995, the 17.4% increase of 1996 was indeed insignificant. With slight exaggeration one could say that regulated prices remained on the April level practically till the end of the year.
The atypically slow increase in the administratively regulated prices can be explained by political reasons and the current peculiarities of the price reform. One could speculate that big administrative price hikes were avoided for political reasons (elections to local governments). Thus, the imposition of VAT on the heating energy was put off until 1997 and the price of electricity was increased less than expected. The discussion on increasing the prices of drinking water and sewage services was postponed until February 1997 (the application for increasing the prices had been submitted in October 1996). The application for increasing the price of heating was also put aside although according to the original plan the old prices had to remain in force until 1 January 1997.
The increase in regulated prices was modest also because of the progress of the price reform. As a result of reforms in 1993-1995, various new items have been included into regulated prices and tariffs (land tax, repairs, depreciation, the cost of servicing loans). Although the reform of regulated prices is far from over, current tariffs and rates allowed the majority of the companies providing these services to avoid making losses. Apparently, earlier price rises had included a certain safety margin and lack of increase in the second half of 1996 had no significant negative impact on the financial results of the providers of services with regulated prices.
Another reason for the decline in inflation rate was the slow-down of the price increase in the open sector of the economy in the second half of the year. As we already mentioned, the slow-down in the rate of inflation due to the price convergence process was a logical course of development. However, in the second half of 1996 the rate of inflation in the open sector fell quicker than usual due to some favourable coincidences. The halt in the increase of regulated prices also played a certain role and prevented the price increase in production inputs originating from the sheltered sector. The disinflation in the open sector was also supported by lack of administrative action favouring the price increase (tax increase, customs tariffs, etc.).
On the other hand, a relatively new aspect could be detected in the open sector disinflation of 1996 - the impact of external factors and particularly the impact of developed industrial countries. The impact of transition economies (mainly the countries of the former Soviet Union) has been felt in Estonian inflation before and mainly due to the extent of the changes taking place there. Thus, for example, if prices increase by 200% in Russia, this certainly affects the Estonian market too. In 1996, however, it turned out that disinflation was caused by much smaller changes in international markets (the cheapening of the nominal rate of the German mark and fall in food prices). This was caused by the level of development of the price convergence.
The fall in the exchange rate of the kroon (see Table 11. Annual average change in the real effective exchange rate of the kroon, between 1994 and 1996) has a two-fold impact. If all other conditions are equal, the decline in the exchange rate boosts inflation because imports (expressed in terms of kroons) become more expensive. Unfortunately, Estonia does not calculate the import price index and therefore we cannot analyse this source of inflation.
Table 11. Annual average change in the real effective exchange rate of the kroon(1), between 1994 and 1996 (%)
a) against the currencies of developed industrial countries
b) against the currencies of transition economies
o/w against the Russian ruble
(1) based on quarterly changes against previous year
But changes in the export prices also play a part in reducing inflation. On the export market Estonia is apparently also nearing the price level determined by convergence and thus, the rate of price increase (expressed in foreign currency) is declining. The cheapening of the exchange rate of the kroon brought the export prices even lower. The export price determines prices in the domestic market through the demand for production inputs, price of labour, etc. From that aspect, the cheapening of the kroon helped to slow down the price increase in Estonia.
Disinflation in the open sector was caused by the fall of food prices in the world market. According to the International Monetary Fund (IMF), the price of food products (grain and cereals, vegetable oil and seeds, meat, sugar, bananas) dropped by 15% between May and September 1996. So extensive a decline was also reflected in the cheapening of food prices in Estonia or at least slowing down in the price increase. The drop of food prices in the world market in 1996 had a bigger impact on Estonian food prices than similar price decreases in previous years. By today, food prices in Estonia have reached the level comparable to that of the world market. This has made prices in the local market more flexible. In earlier years the majority of domestic prices reacted asymmetrically to various shocks (the reaction to a price fall was an increase, not a fall), while in 1996 prices were more flexible. In addition to food products, the price of petrol also followed the fluctuations in the world market.
The increase in prices in the open sector was also influenced by the slow-down of inflation of the Estonian trade partners, mainly Russia (here we have in mind the increase in consumer prices as expressed in Estonian kroons).
Russia is an important trade partner for Estonia and therefore inflation in Russia has a relatively strong impact on prices in Estonia. At the same time price changes in Russia also affect other former Soviet republics, whose total share in Estonia's foreign trade amounts to 22%, and thus price changes in Russia have an indirect impact on Estonia too. Thus, the impact of prices in Russia is stronger than could be expected judging by its share in Estonia's trade. The indirect impact of Russia can also be seen from the similarities of the inflation change patterns in the Baltic countries.
Prices in Russia affect the prices of both production inputs and end consumption in Estonia. Since the prices of the most important production inputs imported from Russia have not changed recently, this aspect of Russian impact was missing in the 1996 inflation in Estonia.
Role of Foreign Financing
In 1996 the bulk of investments was financed from the savings that had accumulated in the Estonian economy. According to the preliminary estimates, the share of such investments amounted to 70% of the total. However, the share of domestic savings as a source of investment has decreased: in 1994 it was 75% and in 1995, 81%. The cause of the decline can be found in the increasing inflow of capital and the diminishing of the savings of the public sector which in earlier years played an important role and which the increase of savings by enterprises and households has been unable to compensate for.
The share of foreign savings (that is the deficit of the current account) in the GDP was bigger in 1996 than it had been in earlier years, amounting to 10%, according to preliminary estimates. The increase in the current account deficit was first of all caused by the foreign trade. In 1994 the foreign trade deficit had been 11.9% of total turnover (imports in c.i.f. prices) and 16.4% in 1995 while in 1996 it was already 25.8%.
The increase in the foreign trade deficit resulted from the increase in imports, while the latter was caused by the intensification of the capital inflow. The capital inflow created more opportunities for financing import which, in its turn, led to the increasing of the current account deficit.
1996 was characterised by changes in the nature of capital flows. The record-high direct investments of the earlier years went down. The share of portfolio investments increased due to the launch of the stock exchange, issuing of new stocks and expansion of the securities market. Capital flow directly through banks gained more importance. On the one hand, this added to the importance of Estonian financial intermediators. On the other hand, the circle of foreign creditors changed as well - inter-government financial institutions are more and more replaced by the international capital market.
Capital flows into the Estonian banking sector are a source that allows to increase the volume of long-term credit and its positive influence. However, extensive foreign financing can lead to the decline in the efficiency of financial intermediation.
In 1996 there occurred a change in the structure of capital flows expressed first of all though the decline in the share of direct investments. In the conditions when the balance of direct investments decreased nearly two times, the surplus of the financial account was mainly based on the increase in the surplus of various other investments.
The inflow of foreign direct investment decreased by 28% as compared to 1995 (see Table 12. Structure of direct investments, between 1994 and 1996). This was mainly caused by the falling rate of the formation of new joint ventures. Like in 1995, the share of loans continued to increase in the direct investment capital. Investments into share or equity capital only amounted to 14% of total investments (50% in 1995).
Table 12. Structure of direct investments, between 1994 and 1996 (EEK mn)
Direct investments total
Investments from Estonia abroad
Investments into Estonia
o/w into capital stock
o/w claims on direct investors
liabilities to direct investors
Estonian investors developed an interest in making direct investments abroad. In previous years such investments had been very small while in 1996 direct investments into foreign countries amounted already to one third of direct investments into Estonia, which makes 481 million kroons.
Over one third of direct investment capital came from Finland (35%). Capital placements from the USA (28%), Denmark (10%) and Sweden (9%) were also important. One third of direct investments was meant for transport, inventory management and communication companies, one fourth went into the financial sector. 22% of direct investments went into the industrial sector (50% in 1995).
Estonian investors were mainly interested in Cyprus, Latvia and the Netherlands; as to the fields of activity investments were made into transport, inventory management and communication (53%), real estate, renting and business services (22%) and finance (14%).
In 1996 the turnover of portfolio investments increased rapidly, particularly as far as liabilities were concerned. In the middle of the year this could be put down to a couple of large bond transactions (in the second quarter the bond issue of the Tallinn municipality and in the third quarter the purchase of the government's Israeli arms deal bonds by Eesti Hoiupank) which do not reflect a long-term tendency. At the same time, however, liabilities in the form of securities have increased rapidly, both in case of banks and other sectors. Here an important role was played by the launch of the Tallinn Stock Exchange and the rapid increase in the price of stocks, particularly in the fourth quarter.
Just like in case of portfolio investments, the increase in other investments mainly concerned liabilities. This was first of all facilitated by the increase in the liabilities of other sectors to non-residents in the form of trade credit, as well as by the increase in commercial banks' external commitments (due to the lack of information the total sum of it has been entered under the item cash and deposits).
The increase in reserves was EEK 1,224.8 million in 1996 (EEK 1,200.4 million in 1995).
UNEMPLOYMENT, INCOME AND CONSUMPTION
The population of Estonia has decreased in recent years due to the negative birth rate and emigration. In 1996 the demographic situation improved, not so much through higher birth rate but rather the decline in the mortality rate: in 1996 approximately 13,000 children were born (13,500 in 1995) and some 19,000 people died (21,000 in 1995). The population was reduced through emigration by nearly the same amount as the negative birth rate. The balance of foreign migration remained relatively high. On the whole, the number of population in Estonia decreased by 12,200 people or 0.8%.
Although the continuing emigration has somewhat decreased the number of the working-age population, its impact on the supply of labour has been insignificant. At the same time, the number of the working-age population and the supply of labour has been increased by higher retirement age (will be increased by five years over the next ten years, of which two have already passed) and the large size of the age groups that reach working-age.
According to the Ministry of Social Affairs, the total number of gainfully employed in 1996 remained more or less on the same level as in 1995 (approximately 650,000 people) while the number of hired labour decreased on the account of the increasing number of private entrepreneurs. The number of workers continued to decline in industry and agriculture and increased in trade and services (see Table 13. Structure of employment, between 1992 and 1996). Major changes in employment took place in the years 1992-1994 and no big changes have been recorded over the last two years.
Table 13. Structure of employment, between 1992 and 1996 (as of end of year, %)(1)
Construction. transport. inventory management and communication
Wholesale and retail trade
Health care and social maintenance
Real estate, renting and business services, finance
Government, national defence and social insurance
Agriculture (excl. farms), fishery and forestry
Mining industry, energy, gas and water supply
Other spheres of activities
(1) according to the State Statistical Office
The share of the unemployed in the economically active population remained at around 5-6% in 1996, according to the officially registered job-seekers, but according to public poll results amounted to 10-11%. The Estonian level of unemployment is typical of a transition country.
In 1996 unemployment increased mainly in big cities (Tallinn, Pärnu) where there was practically no unemployment in earlier years. The jobless figure continued high in the Võru, Valga, Ida-Viru, Viljandi and Lääne counties.
According to the length of the job-seeking period, at the end of 1996, 54.9% of the job-seekers had been registered in employment offices for up to six months, 20.8% had been looking for a job for 6-12 months and 24.3% for over a year. As compared to 1995, the length of the job-seeking period did not change significantly.
The average nominal wage increased at a moderate rate in 1996 (see Figure 2). According to the preliminary data, the average monthly wage was 2,986 kroons in 1996, which is 25.7% higher than in 1995 (see Table 14. Average gross wage by spheres of activities, between 1994 and 1996).
Figure 2. The increase in nominal and real wages and consumer prices, between 1993 and 1996 (%, January 1993 = 1)
Table 14. Average gross wage by spheres of activities, between 1994 and 1996 (EEK a month per wage earner) (1)
Energy, gas and water supply
Transport, inventory management and communication
Government and national defence; social insurance
Health care and social maintenance
Agriculture (excl. farms)
(1) according to the State Statistical Office
(2) arithmetic means of four quarters
In the first and second quarter the real wage was below the respective periods of 1995 but the decline was compensated for by the increases in the second half of the year. As an annual average, the monthly real wage increased by nearly 2% (7% in 1995 and 8% in 1994).
Productivity increased more than real wages. Unfortunately, there is no reliable data to evaluate productivity throughout the national economy. However, this can be done using indirect data. Proceeding from the growth of the GDP and the unchanged level of employment, productivity increase can be estimated at 3% in 1996 as compared to 1995.
There are slightly more precise data for industry where the real increase in productivity outstripped the increase in the real wage. Against the same quarter of 1995, output in the processing industry in constant prices per one worker increased by 3.6% in the first quarter, 5.9% in the second quarter and 12.9% in the third quarter while the respective change in the real wage was -2.8%, -3.6% and +0.7%. In the conditions of the surplus of labour, companies can curb their expenditures on labour and avoid frequent wage increases .
Income, Consumption and Savings of the Population
A survey of the household income conducted by the State Statistical Office indicated that the nominal income of the population (calculated per one member of the family) increased by 19.8% in 1996 (31.2% in 1995). Since the increase in consumer prices (23.1%) was higher than the increase in income; real income was down by 0.2%.
As before, wages and income from production activity accounted for nearly 70% of the families' net income in 1996 (see Figure 3).
Figure 3. The structure of the family net income in 1995 and 1996 (%)
Over the year, the share of income from social insurance increased by 4 percentage points. Pensions increased by 40% in 1996, that is, more rapidly than wages. In the fourth quarter average pension was over 1,000 kroons a month. A total of 367 million kroons was paid last year for housing and subsistence benefits (278 million kroons for housing benefits and 89 million kroons for subsistence benefits). 13.7% of families needed housing benefits (16.4% in 1995) and 3.8% received subsistence benefits (3.6% in 1995).
The differentiation of the population's income, according to the 1996 survey of the household income, remained more or less on the level of 1995 (see Table 15. Economic inequality in the distribution of family income, between 1994 and 1996). Although the Gini coefficient and the ratio of the lowest and the highest income groups increased slightly, for data of a sample study this can be regarded as insignificant. At the same time we can conclude that as the share of income earned by the 40% of the low-income families did not change and the share of income earned by the 20% of the richer families increased, the share of income earned by the middle 40% of families had to decrease. Or in other words, the middle class became poorer as compared to the well-to-do families.
Table 15. Economic inequality in the distribution of family income, between 1994 and 1996
Ratio of income of the 10th and 1st decile
Share of income of the poorer 40% of families (%)
Share of income of the richer 20% of families (%)
In the structure of consumption, the biggest increase was recorded in spending on housing which was caused by the increase in the price of communal services and fuel. At the same time the share of spending on transport, durable goods and services decreased (see Table 16. Structure of consumption, between 1994 and 1996).
Table 16. Structure of consumption, between 1994 and 1996 (%)
Alcoholic beverages and tobacco
Clothing. footwear and headgear
Other goods and services
90% of the families' net income was spent on consumption and 10% was saved, which for savings was a high level. Leaving aside the increase in savings due to interest rates and loans, the increase in net savings amounted to 40-45%. The increase in household savings is a positive development in every aspect: both from the point of domestic financing of investments into the national economy and from the point of the well-being of the households themselves.
In the course of reforms, a relatively simple taxation system has been developed in Estonia, based on the principles of proportional and uniform tax rates. The proportional income tax equal for both the private individuals and corporations as well as lack of import taxes create a situation where market disturbances caused by taxes are minimized. The overall tax burden has been increasing with every year. This has been caused by the increase in indirect taxes as well as the increasing efficiency of the tax collection.
The regulation of the tax rates in 1996 meant both their increase and decrease. From the beginning of the year excise tax on alcohol and tobacco was increased. This led to the decline of revenue not just from the excise tax but also from VAT: in the first half of 1996 approximately 10% less revenue was collected from VAT than could have been expected. Thus, it is likely that the increase in the excise tax encouraged smuggling and tax fraud. As the share of VAT in budget revenue was 25%, it was not just income from indirect taxes that fell short of the target but also the entire budget revenue. Income from the excise taxes reached the level that corresponded to the tax base only in the second half of the year and their annual collection thus remained smaller than had been planned. In the second half of 1996 the collection of VAT improved and by the end of the year the annual target was met. As the size of revenue from VAT is considerably affected by the advance payments from imports at the border, the increase in the share of foreign trade turnover in the GDP (import increased to 70% of the GDP) also contributed to increasing the tax burden. In general, the share of VAT and excise taxes in the GDP increased from 13% in 1995 to 14% in 1996.
In addition to the rise in the excise taxes, the tax burden was also increased by the striving of local government to increase their revenue by imposing local taxes. The most widely used of them were the advertising tax and the motor vehicle tax. The latter yielded over 40% of the local government collected taxes in Tallinn. On the whole, local taxes have not become a significant source of income for local governments: in the 1996 fiscal year local taxes amounted to only 6% of the local budget revenues.
The increase in the general tax burden was slowed down by the decline in the actual rate of personal income tax. Besides VAT, personal income tax takes the second place as to its share of total revenue (22% of the income of the budget system). From the beginning of 1996, the tax-free minimum was increased from 300 kroons to 500 kroons a month and therefore income from personal income tax was practically the same against the GDP as in 1995. The tax burden was also lowered by the decline in the efficiency of collecting the social tax that is paid by employers from the wage fund. Despite the increasing share of the wage fund in the GDP and stable tax rates, the share of the social tax in the GDP did not change.
The combination of all the above factors led to the increase in the overall tax burden from 37% to 38% against the GDP in 1996. Other changes in the tax policy derived from the need to harmonize taxes with the requirements of the European Union. Thus, for example, excise taxes on local and imported tobacco products were made equal from 1 January 1996, while the equalization of the excise taxes on beer was postponed from 1 July until the beginning of 1997.
In the distribution of revenue the centralized build-up of the consolidated budget was maintained: approximately 63% of all revenue was channelled into the budget of the central government from where 32% was redistributed to local governments and social insurance. After redistribution the central government kept only 43% of the total revenue of the budget system (see Table 17. Revenue and expenditures of the Estonian public sector in 1996).
Table 17. Revenue and expenditures of the Estonian public sector in 1996 (EEK mn)
Non-budgetary funds, o/w
(%) of the current revenue
Corporate income tax
Personal income tax
Other taxes and income
Total current revenue
Distribution of revenue (%)
Income transfer to local budgets
o/w allocations from the income tax
Investments financed from foreign loans
made by the central government
Distribution of expenditures (%)
Bonds issued abroad
Bonds issued in Estonia
Change in deposits
(1) This column includes also data by Metsakapital (Forest Capital) and Keskkonnafond (Environment Fund)
The increase in income from taxes created prerequisites for increasing expenditures of the government sector. The share of the government sector expenditures increased from 40% of the GDP in 1995 to 42% in 1996. Both current expenditures (with the exception of subsidies) and investments increased (see Table 18. Structure of expenditures of state and local budgets by economic purposes, between 1994 and 1996). Characteristic of the last year was the rise of expenditures of the consumption type (salaries of the government sector employees and managing costs of institutions). The increase in the end consumption expenditures of the public sector has been characteristic of the entire post-independence period - from 20% of the GDP in 1992 their share increased to 25-26% of the GDP in 1996. The measures devised for curbing the consumption expenditures of the government have so far proven to be inefficient.
Table 18. Structure of expenditures of state and local budgets by economic purposes, between 1994 and 1996 (% of GDP)
(in percentage points)
The increase in the public sector investments turned out to be even higher than the increase in the consumption expenditures. A specific feature of 1996 was that nearly 45% of the government sector investments was made on the level of local governments. Since the bulk of economic activity is concentrated into Tallinn, the decisions taken there largely determined the size of investments made by local governments. In 1996, the municipality of Tallinn increased the total sum of investments to 500 million kroons, which is over three times more than in 1995. Nearly half of this sum was used for road maintenance, 16% in the communal construction and 13% for the renovation of schoolhouses. Such a sharp increase in investments into the social and technical infrastructure, however, jeopardizes the stability of the city's budget policy in the long run because it considerably exceeds the growth of income. Investments on the central government level, on the contrary, increased by nearly 15% less than was initially planned. However, on the whole, investments made by the government sector increased to 5% of the GDP in 1996. According to the comparative studies of different countries, this level of the public sector investments is considered adequate although there will always remain the question of the expediency of the structure of investments.
In addition to the end consumption expenditures and investments, the share of income transfers for households also increased considerably. In the Estonian system of social benefits changes in income transfers are greatly affected by pensions which account for 67% of all transfers. In 1996 1.4 times more money was spent on pensions than in 1995. This rapid growth was caused by the more frequent (three times instead of the traditional two times a year) and more substantial increase in pensions and the decision to start paying working pensioners full pensions. Since the pensions paid out exceeded the revenue from the social tax by 4-5%, such a rapid increase in pensions cannot be viewed as stable income policy.
The share of other income transfers decreased against the GDP. In case of social benefits, the policy of previous years continued, under which the system of benefits based on certain constant characteristics (age, working ability, number of children, etc.) was complemented by the subsistence and housing benefits that depend on the actual financial situation of the population. The employment policy also continued on the familiar path characterised by the unemployment benefits accounting for a small share (under 50% of the total expenditures meant for the regulation of the labour market) as compared to the funds meant for retraining programmes and promotion of entrepreneurship.
The relative size of subsidies and the loan servicing costs changed little in 1996 and had a smaller effect on the government sector expenditures than the above-mentioned expenses. The increase in the government sector expenditures exceeded not just the increase in tax revenue but also the increase in all government sector income.
In 1996 the government sector was characterised by the decrease in savings, that is, the difference between current income and expenditures, from the 1995 level of 4% of the GDP to 3%.
From early 1995 there began a decrease in the balance of the state budget and local budgets revenue and total expenditures. This process deepened in 1996, reaching a considerable deficit by the end of the first quarter (see Figure 4). After it was decided to start using not just current income but also the surplus of the previous year to increase pensions, the overall deficit of the consolidated balance was nearly two times bigger than it had been in 1995 (see Table 19. Budget deficit of the Estonian general government, between 1991 and 1996). The deficit reached its peak in the first quarter (approximately 4.2% of the GDP) which was followed by a relative decrease. In the third quarter there was already a surplus of the income (according to preliminary estimates it was 0.5% of the GDP). The overall budget deficit is estimated at 1.6% of the GDP.
Figure 4. Surplus of the state and local budgets revenue over expenditures in 1995 and 1996 (EEK mn)
Table 19. Budget deficit of the Estonian general government, between 1991 and 1996 (% of GDP)
The balance of the budget is not directly regulated in Estonia's budgetary policy and has depended on a number of relatively uncoordinated decisions passed on various levels of the government (the decisions of the central government to increase consumption expenditures on the account of the surpluses of the previous year, the investment and borrowing policies of local governments, the decision of Riigikogu (the Parliament) to increase pensions through the use of the previous year's surpluses, etc.). Therefore, the size of the deficit or surplus has varied greatly over the years. The size of the overall deficit has been affected the most by the decisions on the size of investments financed from foreign loans made by both the central government and the local governments (on the presumption that expenditures of a consumption type are more stable, that is, more difficult to regulate).
In the first years after the restoration of independence the central government often had to intermediate foreign loans to production enterprises because the latter were not regarded reliable enough. This need has been constantly decreasing. From the point of view of the fiscal system the change means that the indicators of the overall deficit and the financial deficit (which does not include loans given to the non-financial sector) have become closer to one another every year and in 1996 they differed only by 0.1% against the GDP (see Table 19).
As Estonia's loan burden is moderate, the loan servicing costs have not increased significantly and the primary deficit (that is, overall deficit minus interests) is not much different from the overall deficit.
Approximately half of the deficit of the consolidated budget came from the local budgets, with the rest divided more or less equally between the central government and the social insurance fund. Other off-budget funds ended the year with a surplus.
Budget Financing and the Loan Burden
Like in earlier years, the bulk of the deficit was covered from foreign financing. Foreign loans and bonds issued abroad covered approximately 80% of the overall budget deficit (see Table 17).
As the sum total of the central government's investments was smaller than originally planned for 1996, disbursements of loans meant for those investments decreased by nearly half as compared to 1995. Estonia's foreign debt, as measured in terms of official loans taken by the central government, remained on the level of 1995, accounting for 5% of the GDP (see Table 20. Movement of foreign loans taken by the central government, between 1994 and 1996). The loan burden was lowered by the repayment of the principals of the loans that exceeded 100 million kroons and the rapid increase in the nominal GDP that outstripped the increase in the loan flows.
Table 20. Movement of foreign loans taken by the central government, between 1994 and 1996 (EEK mn, exchange rate as of end of year)
Disbursements as of end of year
Disbursements in the current year
After the restoration of Estonia's independence the only reliable partner for creditors was the central government. In the following years local governments, too, have earned the trust of both local and foreign creditors. This enabled the municipality of Tallinn to carry out the programme of multiplying its investments. Due to the low level of domestic savings in the conditions of economic transition it is only natural that foreign financing is being used.
The domestic financing of the deficit was more or less equally divided between bank loans and bonds and the reduction of the 1995 surpluses. A new phenomenon in 1996 was the increase in the share of bonds in deficit financing - approximately half of the deficit was covered with bond issues. On the domestic market, local governments started to take long-term loans, with seven small towns and parishes issuing five-year and one village six-year bonds. In previous years, the usual term of redemption of the bonds was six months.
In order to avoid uncoordinated borrowing by local governments that could jeopardize the country's macroeconomic balance, the central government started to draft measures that would restrict borrowing. However, despite the increasing deficit the creation of a system that would legally regulate the balance of the budget was not finished in 1996, although respective draft laws were drawn up for both the local governments and the central government (for regulating the loan flows, linking their size and servicing costs with the current revenue).
The share of bank loans in the structure of financing the overall deficit was reduced to 8%. This was due to the two supplementary budgets passed by the central government that were financed not from extra revenue as had been the practice so far but from the surpluses of the previous period. A positive role in covering the deficit was certainly played by the State Treasury which was set up in the first quarter of 1996 and which for the time being only services the budget of the central government, securing quick turnover and more efficient control over the movement of the funds of the central government.
Of the approximately 7% loan burden of the general government against the GDP the foreign loans of the central government account for two thirds (see Table 21. Debt of the general government as of 31 December 1996). However, both the loan burden of the general government and the foreign loans of the central government increased at a lower rate than the GDP in 1996. Over half of the foreign financing was received directly from the international money market (the bond issue of the Tallinn municipality intermediated by the Nomura International PLC, for example, the loans of the central government from Banque Paribas and the Marubeni Corporation). So far, foreign loans had usually come from the World Bank, the European Bank for Reconstruction and Development (EBRD), the European Union, the Bank for International Settlements and other institutions, or the loans had been guaranteed by the Estonian government.
Table 21. Debt of the general government as of 31 December 1996(1)
Foreign debt of central government (disbursements minus repayments of loans)(2)
Claims of Estonian commercial banks
Claims of other creditors
Total debt of central government
Claims of Estonian commercial banks
Claims of foreign creditors
Total debt of local governments
Total debt of central and local governments(3)
(1) Includes also the IMF loans, i.e. this is the biggest indicator of debt burden by disbursed loans.
(2) Liabilities of the central government also include foreign loans on-lent to local governments.
(3) Excluding claims on the banking system decreasing the debt burden of the general government.
The servicing costs of the foreign loans taken by the central government amounted to 0.4% of the GDP in 1996. Under the terms of the loan agreements, the servicing costs will increase considerably at the turn of the century when they will amount to 1-1.5% of the GDP. The servicing costs of the loans taken by local governments also amounted to approximately 0.4% of the GDP and were mostly covered by new loans. The total sum of loans taken by local governments from the Estonian financial market in 1996 amounted to 270 million kroons, of which 206 million kroons was spent on servicing the previously taken loans. Presuming that the current rate of productivity increase continues until the turn of the century, the burden of servicing the loans will remain relatively insignificant.
INTERNATIONAL INVESTMENT POSITION
The international investment position (IIP) is a country’s consolidated balance sheet of external financial assets and external financial liabilities at a certain fixed date, and including all sectors of the economy (i.e. the central bank, the government sector, the financial sector and the rest of the private sector, including households). As inter- and intra-sector assets and liabilities are mutually reduced in the process of consolidation, the IIP only reflects external assets and liabilities of a country as a whole.
The investment position differs from a traditional balance sheet in that it does not reflect the real property and equity of residents located in Estonia. This is also the reason why the IIP is not balanced.
If external assets exceed external liabilities, the country’s net investment position is positive and it indicates that the rest of the world has net debt to that country. A negative net investment position points to the country’s net debt to other countries.
The structure of the IIP is similar to that of the financial and reserve accounts of the balance of payments, with the IIP reflecting the positions, while the balance of payments shows changes in those positions. Theoretically, the net investment position can also be seen as the sum of the balances of the current accounts of the previous balances of payments (excluding the capital account which has a very small turnover).
The net foreign debt is the difference between the external assets (debts by nature) on the country's all economic sectors and external liabilities. Investments that create a property right are not considered debts by nature (they are described under the equity capital of the investment object). These are direct and portfolio investments into the share capital and reinvested income (the undivided profit/loss of previous periods, reserves and capitalization issue). The foreign debt does not include the gold reserves of the central bank and participation in the International Monetary Fund (Special Drawing Rights).
The official state debt is a narrower term and reflects only the debt of the government sector.
International Investment Position as of 31 December 1996
By the end of 1996, the claims of Estonian economic sectors on non-residents amounted to 17.6 billion kroons. The sum total of the liabilities of the Estonian economic sectors to non-residents exceeded the assets by more than a third, amounting to 24.4 billion kroons. Thus, Estonia's international net investment position was in deficit with 6.9 billion kroons (see Table 22. Estonia's international investment position as of 31 December 1996).
Table 22. Estonia's international investment position as of 31 December 1996 (EEK mn)
Direct investments abroad
Direct investments into Estonia
Equity capital and reinvested income
Equity capital and reinvested income
Portfolio investments abroad
Portfolio investments into Estonia
Cash and deposits
Cash and deposits
External assets total
External liabilities total
International net investment position
Net foreign debt of Estonian residents
o/w government sector
Among external assets, the bulk was made up of the gold and foreign currency reserves of the central bank (50%) and loans, deposits and other assets placed abroad (34%). The bulk of the external liabilities were direct investments (42%) and other investments (52%).
Dividing external assets and external liabilities in terms of time, we can see that the Estonia’s short-term international investment position was positive by 6.5 billion kroons. The balance of long-term (over one year) external assets and external liabilities, however, was negative with 13.4 billion kroons. 90% of investments abroad were short-term while foreign investments into Estonia were dominated by long-term capital (60%). Short-term assets exceeded short-term liabilities by nearly two times.
By 31 December 1996, Estonian direct investments made into foreign countries amounted to 1.3 billion kroons, being nearly eight times smaller than direct investments made into Estonia from abroad. 75% of the direct investments abroad were trade credit to subsidiaries and long-term loans. The share of own funds formed 25% of the total investments into foreign countries.
By the end of 1996, 1.5 billion kroons worth of various portfolio investments had been made abroad. Nearly three fourths of those were made by banks. 80% of the securities bought abroad were bonds and other financial instruments.
Nearly 6 billion kroons was placed abroad in the form of other investments, half of it demand and time deposits. Two thirds of foreign deposits belonged to banks. Over 2 billion kroons were invested abroad in the form of various loans, the bulk of it being trade credit.
The gold and foreign currency reserves of Eesti Pank amounted to 8.8 billion kroons at the end of 1996.
By 31 December 1996, a total of 10.3 billion kroons worth of direct foreign investments had been made into Estonia. Half of it was own funds and the other half was the loans received from direct investors. In terms of the total size of direct investments per capita Estonia was among the top three Central and Eastern European countries besides Hungary and the Czech Republic.
Portfolio investments made into Estonia amounted to 1.5 billion kroons at the end of 1996 (in nominal prices). Two thirds of it was securities issued in Estonia and bought by non-residents.
Other investments brought 12.7 billion kroons into the Estonian economy by the end of 1996. Most of it was loan capital of various kind: trade credit (20%), government sector loans (20%), loans of other sectors (22%). A third of other investments made into Estonia was demand and other categories of deposits, mainly related to the banking sector liabilities to credit institutions of other countries.
Net Foreign Debt of Estonian Residents
If we include only entries of the debt character (sums that have to be repaid) into the external assets and external liabilities then the net foreign debt of Estonian residents amounted to nearly 2 billion kroons at the end of 1996. The net foreign debt of the government sector was 2.5 billion kroons at the end of 1996 (in addition to official foreign debt, bond issues have also been included).
 In connection with evaluating economic growth the problems of the reliability of initial data have to be underlined. The official data tends to underestimate the role of the informal sector in the generation of added value. The underestimation mainly results from tax evasion. According to the International Monetary Fund the problems of the official statistics also include the inadequate reflection of the constantly increasing private sector and insufficient consideration given to the improvement of quality. The increase in quality is expressed through higher prices rather in the added value.
 The difference between net turnover and production costs of the sold production divided by net turnover.
 See the Decree of the Minister of Finance No. 64 from 22 July 1996 and decrees of the National Customs Board No. 274 from 23 August 1996 and No. 313 from 27 September 1996.
 See the International Monetary Fund's publication "International Fiancial Statistics".
 The situation is different in case of executives and highly-skilled experts who form a separate segment in the labour market. In those categories the demand obviously exeeds supply.
 According to the estimate of the Ministry of Finance, below 6%, with no difference in the estimation of the absolute size of loans.