January 2. AS Eesti Tubakas (Joint-Stock Company Estonian Tobacco) began to use tax labels on its cigarettes.
January 3. The President of the Republic of Estonia proclaimed the Law on Credit Institutions.
January 9. The Riigikogu (Parliament) adopted amendments and additions to the Criminal and the Administrative Codes which specify punishments for the violation of copyright-related laws.
The first auction of goods confiscated by the Customs was held.
January 10. The Riigikogu adopted the Law on the State Audit Office. Under the law, the State Audit Office is an independent state institution with the responsibility of auditing the economic activities of state institutions and other state organisations.
The Government approved amendments to the Customs Regulations for single individuals in regard to alcoholic beverages and tobacco products. The amendments proceed from the introduction of tax labels in Estonia.
January 12. The Riigikogu passed the Law on Universities which outlines the procedures for the establishment, operations, merger and liquidation of universities. The majority of members of the Riigikogu was against the introduction of tuition fees in universities.
January 16. The Riigikogu made amendments to the Law on Labour and Holidays, and to the Wage Law.
January 17. The Riigikogu made amendments to the Law on Pre-school Children's Establishments, giving local governments the right to regulate the rules on ownership, use and disposal of the property of children's establishments.
The Government introduced new regulations for granting and paying child benefits.
January 18. The Government changed the procedures of paying housing subsidies.
January 19. The Riigikogu passed a new Citizenship Law which extends the residence requirement from three to six years.
The Riigikogu also passed the Anti-Corruption Law.
The Government decided to put RAS (State Joint-Stock Company) Estonian Air on privatisation list, increase its share capital by 20 million kroons and lend the company 10 million kroons.
January 20. The Government confirmed the regulations on organising and participating in exhibitions abroad.
January 23. The Government confirmed the regulations on investing state property in the start-up capital of jointly-owned companies, aimed at facilitating privatisation.
January 24. The Riigikogu made amendments and addenda to the Pension Law.
The Government confirmed the regulations on keeping the State Cadastral Register.
January 25. The Riigikogu passed laws on Land Administration, Public Service and Foreign Service.
January 26. Estonia signed an agreement with the World Bank (WB) for a USD 18 million loan for the modernisation of the health care system.
January 27. The Government made amendments in the regulations on the import, export, production and sale of alcohol and tobacco. The rules on the sale and storage of these goods were made more stringent. The number of Customs checkpoints allowing the import or export of these goods were restricted as well.
In view of economic policy, January was a relatively quiet month. In the legislative sphere, attention focused on regulating the public sector. Besides other legislation, the Riigikogu also passed Laws on Universities, the State Audit Office, Anti-Corruption, and Public and Foreign Service. The size of the salaries of the members of the Government and the Riigikogu was also discussed, as well as matters of social welfare, but no decisions were made.
Since there is no automatic indexation mechanism in the system of social benefits in Estonia, both the legislative and executive powers traditionally have to deal with social benefits at the beginning of the year.
The Riigikogu made changes in the Pension Law, according to which the size of the retirement pension will in the future be equal to the old-age pension (360 kroons a month), instead of the earlier 225 kroons. The procedures on paying pensions to people under compulsory medical care were also specified.
In order to avoid contradictions with the general part of the Civil Code, the Riigikogu made amendments in the Law on Labour and Holidays and in the Wage Law, as well as to the Law on Pre-school Children's Establishments.
The Government amended the regulations on paying child and housing benefits. In the future, housing benefits will only be paid to those tenants, owners or members of the housing societies who have a domicile registration for a particular place of residence. The benefit is paid to families whose standard housing costs exceed 30% of the family's gross income.
In fiscal policy, a number of changes were made in legislation concerning local budgets. The Government confirmed the regulations on the utilisation of the funds allocated to local governments from the state budget for investments. These funds can be used for projects requiring 100,000 kroons or more on the condition that local government finance at least 10% of the total cost (this restriction is not applied for local governments in regions with small population). The allocated sum amounts to approximately two-thirds of all investments made by local governments in 1994. A lack of funds has forced bigger cities to look actively for credits abroad. In addition, Tallinn City Council has decided to introduce three local taxes as of April 1 (for local governments the fiscal year 1994/95 ends on March 31).
In foreign relations, Estonia continued publicity efforts, to conclude economic treaties and seek foreign investors. On January 26, the Minister of Finance and Minister of Social Affairs signed an agreement in Washington with the World Bank on a USD 18 million loan for modernising the Estonian health care system. The money will be used for building a uniform data analysis and information system, for training and development of a health protection system. The International Monetary Fund (IMF) approved a 16.9 million kroon Stand-by Agreement II to Estonia to be paid through commercial banks.
France decided to give Estonia FRF 3.85 million worth of irredeemable financial aid to renovate Tallinn Airport.
The Estonian-Dutch Trade Council was launched in January. It was founded by the Estonian Chamber of Commerce and Industry, the Dutch Central Chamber of Commerce, the Rotterdam Chamber of Commerce and a number of Dutch businesses.
In order to get an indirect evaluation of the dynamics of economic growth, the changes in the components of the gross domestic product (GDP) are modelled through analogue indicators. Under the income method, the GDP components are profits, wages, indirect taxes, depreciation and subsidies. Under the consumption method, the GDP components are private consumption, public consumption, investments, trade balance and the change in reserves (which is constant and equals to 1). The summary index of economic growth is derived as a geometric average of the income and consumption indices.
The economic growth index against the previous month was +2.6% in December and -2.4% in January. The quarterly index is given in Figure 1. Compared to the end of 1993, both the growth in December 1994 and the decline in January 1995 were smaller. In December both the income and consumption indices increased. In January there was a sharp decline in incomes, a typical sequel to the year-end seasonal increase. Unlike in 1993/94, the consumption index increased in January. The somewhat atypical increase of the consumption index for the beginning of the year can be attributed to the decrease in the trade deficit in January as compared to December.
The comparison of the economic growth base index against the indices of the previous periods is given in Table 1.
The quarterly comparison of the seasonally-adjusted base index of economic growth to the aggregate index of market barometers of the Estonian Institute for Market Research is given in Figure 2.
In December, the income side growth index increased on account of wages and taxes and decreased on account of profits and depreciation, just like in November (see Table 2). One of the reasons for the growth in real income in November-December was the slow-down of the increase in consumer prices at the end of 1994 (the consumer price index (CPI) was 1.6% in November and 1.4% in December). In December, a seasonal component in the form of Christmas bonuses was added to income. The decrease in income in January was also due to seasonal changes. The profits and taxes were also influenced by the 8.3% increase in the producer price index, which was mostly due to increases in the price of electricity and heating.
The consumption-based growth index increased in December due to private and public consumption and investments, and decreased due to the foreign sector (trade balance; see Table 2). In January, private and public consumption decreased but the consumption index increased on account of the foreign sector. This was caused by the decrease in trade deficit as compared to December (the positive impact of the balance of services was 0.3 percentage points).
The smaller increase of the economic growth index in December 1994 and the subsequent smaller decline in January compared to the turn of 1993/94 testifies to the more stable situation in the economy than a year before the continuation of the tendencies that developed in 1994.
In January, the CPI increased 3.5% against the level of the previous month, which was higher than the 1994 average (2.9% a month) and the average of the last three months (1.4% a month). In January 1994, the CPI increase was 5.5% (see Figure 3).
The CPI increase was within the presumed limits - forecasts predicted the CPI increase in January between 3.3% and 3.6%. The acceleration of the CPI increase resulted from increases in the price of electricity and the seasonal increase in the price of foodstuffs.
The comparison with the neighbouring states (see Figure 4) shows that in the last three months of 1994, the CPI increase was slower in Estonia than in Russia, Latvia or Lithuania. A rapid price increase in Russia pushes prices up in Estonia while the fall of the nominal rouble-kroon exchange rate diminishes the influence of Russian price increases on Estonia.
For a better analysis of the increase of consumer prices, the economy is divided into sectors according to the principles of price formation. Distinction is made between the open and the sheltered sectors, since the price mechanisms are different there and consequently the forms of inflation.
The open sector includes goods and services the prices of which are contingent to international competition. The open sector either produces for export, thus competing on foreign markets, or for the domestic market, where it has to compete with imports. Producers of the open sector are influenced by international price constraints.
The output of the sheltered sector (communal services, for example) is not directly influenced by international competition and therefore has no price constraints and the producers are free to determine the prices.
The domestic price increase, expressed through the increase of the consumer price index, is derived by combining price changes in the open and the sheltered sectors. In the State Statistical Office consumer basket the share of the open sector is 71.4% and the share of the sheltered sector, 28.6%.
The model our analysis is based on reflects the dependence of the price changes in the open sector on the following factors:
According to our model, changes in prices of the sheltered
sector depend on the following factors:
In 1994, prices in the open sector increased 23.8% while prices in the sheltered sector increased 85.2% (see Figure 5). The price increase in the sheltered sector will remain the main cause of domestic price increase also in the future.
Prices in the open sector increased 2.9% in January. Of this, 1.6% came from the changes in the prices abroad. The main reason was the rapid increase of prices in Russia (16.4%), which outstripped the fall in the value of the rouble against the kroon.
Prices in the sheltered sector increased 4.5% in January. The main factor here was the administrative price increase (electricity became 21% more expensive) which contributed to the 2.1 percentage points rise in the prices of the sheltered sector.
The absolute range of impact of different price increase factors is given in Table 3.
In January, prices increased the most in the following groups of goods and services: housing costs (4.5%), foodstuffs (excluding alcohol, 4%), and transport and communications (3.3%). Considering the share of these groups in the overall CPI increase, the bulk of it came from the increase in the price of foodstuffs (45% of total CPI increase), housing costs, and transport and communications (see Figure 6).
Among the sub-groups of goods and services, the largest role in the CPI increase belonged to electricity, heating and fuels, increase in the prices of which was responsible for 20.3% of the overall CPI increase, or 0.7 percentage points. The main reason was the fact that the prices of electricity increased 21% as of January 1 (the price of oil shale increased 14%). Problems with black oil import from Russia made a number of heating companies raise their prices. In January, heating became 5.9% more expensive. It is possible that for the private consumer, part of the increase in heating will be included in the February expenses.
Price increases in transport and communications accounted for 12.6% of the overall CPI increase. Major price increases consisted of the 100% increase in the public transport fares in Tartu, and the increase in the monthly telephone fee (25% for private subscribers).
The increase in the price of fats gave 11.4% of the overall CPI increase. The price increase which has been continuing for the second month running (22% in December, 27% in January) is caused by growing demand and rapid price increase in Russia, resulting in an increase of butter export to Russia and a decrease in the supply on the domestic market.
The average of 6.3% increase in the prices of dairy products and eggs (10.3% of the overall CPI increase) was obviously seasonal. The impact of inflation in Russia on prices of goods of this group can also be felt but it will not be long-term.
Increase in the prices of other food products (responsible for 7.4% of the overall CPI increase) followed price increases for sugar and coffee on the world market. These had a delayed effect on prices in Estonia.
Increase in rent, in the price of water and sewerage by 2.6% contributed a 6.4% increase in the overall CPI. Despite the fact that rent tariffs were increased in January due to the addition of insurance costs, rents actually increased only 1.6%. The cost of running water increased 8.7% and the sewerage, 7.4%.
In general, much of the CPI increase in January was the result of price increases in the sheltered sector (electricity, heating, communal services, transport and communications). The price increase in the open sector was mostly seasonal. Price increase abroad (mostly in Russia) also contributed to the increase of consumer prices in Estonia.
The index of the effective real exchange rate of the kroon is based on the changes of nominal exchange rates of currencies and price levels of Estonia's main trade partners in comparison with the price increase in Estonia. The price changes in these countries are based on their CPIs. The data of the following eight countries have been included: Finland, Russia, Sweden, Germany, Latvia, Lithuania, Denmark and the Netherlands. These countries account for 77% of the turnover of Estonia's foreign trade; the rest of the other countries are taken together. In calculating the effective real exchange rate of the kroon we proceed from the structure of the foreign trade turnover (export + import).
Since July 1992, the real exchange rate of the Estonian kroon has increased 3.9 times against the currencies of Estonia's Western trade partners because the increase of Estonia's CPI was 3.6 times greater than that of its Western partners.
Against the Russian rouble the kroon's real exchange rate has increased 1.1 times since 1992: the 30.4 times increase in the nominal exchange rate of the kroon and the rouble was higher than the ratio (27.3) of the Russian and the Estonian CPI. The real exchange rate of the kroon has decreased against the currencies of Latvia and Lithuania. The real exchange rate of the kroon became 2.1% cheaper against trade partners in the CIS countries.
In conclusion we can say that the effective real exchange rate of the Estonian kroon has increased 2.6 times since the monetary reform (see Figure 7). The strengthening of the kroon does not cause the general decrease in Estonia's competitiveness, however. The strengthening of the effective real exchange rate is characteristic of all transition economies, and it occurs parallel with restructuring of the economy and increase in productivity.
During the initial stage of internationalisation of the price level, the real rate of the currency is growing fast due to the general rapid increase in prices. In the later stages the real exchange rate increases mainly due to price increases in the sheltered sector. The ratio of price indices of the sheltered and the open sector will in future gradually approach the change in the effective real exchange of the currency. This process in Estonia is depicted in Figure 8.
The flow of revenue in January can be considered normal. In the first month of 1995, the state budget received approximately 587 million kroons which is 7% of the planned annual target.
The growth rate of the flow of revenue is slowing down although the January revenue was approximately 6% larger than the average for the second half of 1994 (see Figure 9). This slow-down can be attributed to turnover tax, the collection of which in January only outstripped the level of four months in 1994 (January, June, July, August; see Figure 10). As the total revenue from turnover tax was smaller than normally, the share of personal income tax increased in the overall revenue: in 1994 it accounted for an average of 18% in the total revenue but in January 1995 its share was 25% (see Figure 11).
The main source of revenue for local budgets is personal income tax. Its flow in January can be considered good. Due to the fact that income tax deducted from the 1994 December wages and bonuses was only partially transferred to local budgets, the January revenue turned out to be the largest for the past 12 months and outstripped the December 1994 level by 18% (see Figure 12).
As local governments end their fiscal year 1994/95 on March 31, unlike the rest of the government system, the Tallinn City Council decided to pass a 30-million-kroon additional budget in January 1995. The money for this came from the surplus personal income tax revenue. Tallinn receives approximately 40% of the personal income tax channelled to local governments in Estonia. Its additional budget is close in its size to two-thirds of the monthly average income tax revenue of the fourth quarter of the last year in the capital.
The revenue from the personal income tax indicates that the social and health insurance tax revenues should be collected according to the planned rate.
At the beginning of 1995, the population of Estonia was 1,492,000 according to preliminary data of the State Statistical Office. Over the past year, the population decreased by 15,335 people, which is 1%. This was in more or less equal degree caused by the negative population increase (minus 7,727) and emigration outstripping immigration (by 7,608).
The natural increment of population was negative throughout 1994 and amounted to minus 641 people a month (see Table 4). In January 1995 the negative increase was record high - minus 890 people. The increase in the death rate in winter months is seasonal in character: the number of deaths reached nearly 2,000 also in the first months of 1994, but decreased in summer and amounted to an average of 1,799 people a month.
In 1994 an average of 1,158 babies were born a month, but in January 1995 only 1,107. The decline in the birth rate that began in 1991 has constantly deepened in subsequent years. In 1994, the birth rate was only 9.4 babies per 1,000 people (10.0 in 1993, 14.2 in 1990). At the same time death rate has increased to 14.5 per 1,000 inhabitants (14.0 in 1993, 12.4 in 1990).
January was characterised by the traditional in the winter months increase in the number of the jobless, according to the National Labour Market Board. By February 1, 15,108 people had been registered as unemployed, which makes 2,438 people (19.2%) more than on January 1, and 1,768 (11.7%) people less than on February 1, 1994 (see Figure 13and Table 5).
Comparing the average monthly number of the unemployed for 1994 with the respective figure for 1993 (18,200), we can see that the general unemployment rate was 14.2% lower in 1994. This was the result of people adapting to the situation of the labour market (advantage was taken of the retraining opportunities, jobs were sought in regions far from the current place of residence, etc.), and the small size of the unemployment benefit (it is hard to manage on 180 kroons a month and therefore people's interest in registering themselves as unemployed has dwindled).
The number of people who registered themselves in employment offices as job-seekers was 36,319 in January, which is 1,335 (3.8%) more than the month before. Thus, in January the number of registered unemployed increased more rapidly than the number of job-seekers.
The unemployment rate (percentage of receivers of the unemployment benefit from working-age population) was 1.8% on February 1. If we include job-seekers under the unemployed, the unemployment rate was 4.3% of the working-age population. The unemployment rate taken as the ratio of all job-seekers and the total number of the gainfully engaged and the job-seekers, as recommended by the International Labour Organisation, was 5.3%. This coincided with the unemployment rate of the same period of last year.
According to the EMOR labour studies, the share of job-seekers in the total number of the employed and the job-seekers amounted to 7% in the fourth quarter of 1994. (According to the National Labour Market Board statistics, it was 5.1%.) Thus, the number of people looking for a job is higher than the number of those who have contacted the employment offices.
The Võru, Ida-Virumaa and Läänemaa counties are rural regions where job-seekers actively use the help of employment offices (see Figure 14). In those counties 9-10% of the working-age population contacted the employment offices in search for a job in January. As of February 1, the number of people receiving unemployment benefits was the highest in Ida-Virumaa - 4,912; this includes 1,932 people in Narva and 1,221 people in Kohtla-Järve. Thus, one in every three people receiving an unemployment benefit lived in Ida-Virumaa.
The number of jobs on offer was the highest in the Harju county (504 jobs, of which 380 in Tallinn). The number of available jobs was also relatively high in Ida-Viru county (279) but only 20% of them were in towns.
The quarterly studies of the unemployed indicate that at the end of 1994, those receiving unemployment benefits included 18% of people aged between 16 and 24; 16% of people near the retirement age (up to five years until retirement); and 66% of people in the prime of their working years. Comparing the age structure of the unemployed with that at the beginning of 1993 (22%, 13% and 65%, respectively), we can notice a shift towards the diminishing share of the young and an increase in the share of the pre-pension-age group (see Figure 15).
An even bigger change has occurred over the past year in the division of the unemployed by gender (see Figure 16). At the beginning of 1993 the share of men and women among the unemployed was practically equal, but by the end of 1994 the share of women had increased to 62%.
The majority of the unemployed have secondary education. Approximately half of the unemployed have been unskilled or skilled workers in industry or agriculture.
The ratio of unemployed Estonians and non-Estonians was 53:47 at the end of 1994; their ratio in the total population was 63:37. Thus, the number of unemployed non-Estonians exceeded by 10 percentage points their share in the total population.
According to the Ministry of Social Affairs, the average gross wage in January was 1,814 kroons. Like in earlier years, the January wage was lower than that of December, which was exceptionally high due to various bonuses (see Table 6). The January average gross wage was also below the November 1994 level (1,870 kroons; see Figure 17).
The 1994 average monthly wage was 1,725 kroons and the average monthly increase on nominal wages was 6%. Wages increased relatively quickly in the financial sector, transport, energetics, real estate and business services, remaining low in agriculture, education and health care.
Changes in wages and consumer prices indicate that against January 1993, the average wage had increased 2.4 times by January 1995, and consumer prices had gone up 1.9 times (see Table 7). Thus, wages have been increasing more rapidly than consumer prices.
Since EMOR increased the number of families to 1,000 in its analysis in January and changed its questionnaire, comparisons with earlier periods are conditional.
Income traditionally decreases after the turn of the year. Compared to December 1994, the nominal income dropped 19.5% in January (16.8% in January 1994 as compared to January 1993). Net income per family member was 1,049 kroons in January. The January nominal income was 7% lower than the average of the fourth quarter of 1994 (see Figure 18).
As consumer prices increased less in January 1995 than in January 1994, the January real income was 6% higher this year but 4% smaller than the 1994 monthly average.
Since EMOR included child benefits under social benefits in its January study (earlier these were listed under compensations), the share of social security and compensations has changed considerably. Therefore, changes in the structure of income can be compared to January 1994 only when grouping social security and compensations together.
Another peculiarity of this year's January is the increase in investments, which results from one family taking loan to buy house.
Compared to January 1994, the share of income earned from investments increased 4.1 percentage points. On the whole, we can notice a stabilisation of the structure of income (see Figure 19).
The above mentioned loan had an even greater impact on the index denoting differentiation of income - the income of the richest 10% of families increased considerably. If we leave out this particular loan, the differentiation of income in January was close to the 1994 fourth quarter average (see Table 8).
One indicator of differentiation of income is the Gini coefficient. In order to have a more objective picture of the changes occurred, it is better to take this coefficient as an average of a certain period. Figure 20 depicts the short-term and the long-term Gini coefficient based on the month-by-month data (as the sliding average of the last 3 and last 12 months respectively). Changes in the annual average Gini coefficient are small (0.378 in January 1995, and 0.374 the year before), but in the shorter run differentiation of income is bigger in the summer months (from June to September).
The net income of families in US dollars increased 67% over the year, amounting to USD 82.50 per family member in January.
The share of families with incomes lower than the minimum wage (450 kroons) was 16.5% in January. A year ago, the share of such families was 14.3% (the minimum wage was 300 kroons then).
Compared to December, nominal consumption decreased 22.3% in January, amounting to 885 kroons per family member. This was 8% lower than the last three-month average (see Figure 21). Real consumption (in prices of June 1992) decreased 24.9% in January against December. This corresponded to the level of August and October 1994 (see Figure 22) but was 4% higher than in January 1994.
The share of savings in the family budget decreased to 5.7% of the net income in January. In 1994, there was a similar low level of savings in one single month only. Various ways of investing money were only used to the extent of 30 kroons per family member. The level of investments did not fall that low in any period of 1994. At the same time, one family in the sample bought a house which increased the average investment level to 104 kroons per family member.
In general, the share of family savings and investments was 15.6% and the share of private consumption, 84.4%. Savings held in cash were equal in size to those deposited with banks.
The structure of consumption is given in Table 9.
Although the share of foodstuffs decreased the most over the past year, it was still higher in January than the 1994 average. The reason for this was the seasonal increase in foodstuffs prices (particularly prices of butter and other dairy products). The share of clothes, footwear and headgear increased considerably over the year, although it was lower than the 1994 average. Consequently, the renewal of clothes has become more evenly distributed throughout the year - the characteristic post-Christmas decrease was smaller this January. The housing costs do not reflect housing benefits, which were absent a year ago. Taking into account housing benefits paid through bank transfers, the share of housing costs amounted to 17.9% in total consumption.
The increase in the standard of living of the families is shown by the fact that in January 65% of families spent more on food than the standard minimum (307 kroons). In January 1994 the share of such families was 50%. The constant component of consumption (a sum of the constant share of the components of total consumption), or essential commodities, increased in January to 354 kroons, which was 40% of the actual average spending. The major constant components were spending on foodstuffs and housing, 255 and 72 kroons per family member respectively.
The price increase had a somewhat different impact on families from different wealth groups since increase concerned mostly such categories of goods and services which play a more significant role for low-income families (foodstuffs, housing costs, transport and communications). The consumer basket of low-income families (below one minimum wage per family member) became 3.9% more expensive in January, while the consumer basket of high-income families (earning more than three minimum wages per family member) 3.4%.Ilmar Lepik Andres Kerge Tiiu Luks Sünne Püss Andres Saarniit Natalja Viilmann