SURVEY OF THE ESTONIAN ECONOMY. JUNE-JULY 1995

Chronicle

June 1. The Riigikogu (Parliament) approved amendments to the Law on Land Tax under which revenue from the land tax will be channelled to the budgets of local governments. Local governments will have the right to fix the annual tax level at the beginning of a fiscal year between 0.8% and 1.2% of the land's taxation value. The tax on farming land will be between 0.3% and 0.7% until the end of 1997. No tax is set on land in public use.

June 4. A delegation of the Kuwait Fund for Economic Development arrived in Estonia to study the development opportunities of the Port of Tallinn.

June 5. An agreement on economic co-operation was signed between the Estonian-Russian Chamber of Entrepreneurs and the St. Petersburg Chamber of Entrepreneurs.

June 12. The prime ministers of Estonia, Latvia and Lithuania signed Association Agreements with the European Union in Luxembourg. Unlike Latvia and Lithuania, the agreement allows Estonia to become an associate member of the EU without a transition period. The Europe Agreement opens up new possibilities for Estonia to develop economic co-operation with EU member countries and associate members of the EU. The agreement will take full effect after ratification by parliaments of Estonia and the EU member countries.

June 13. The Government decided to approve the ECU 20 million loan (300 million kroon) from the European Investment Bank. The loan is meant for building a flight control system in Estonia meeting EU standards.

June 14. The Riigikogu adopted amendments to the Law on Child Benefits, under which the size of the benefit was increased from 105 to 115 kroons a month. All other related benefits were increased correspondingly.

The Riigikogu passed the Law on Forest Assets under which 18% of income earned from state-owned forests will go to the state budget and 82% to this non-budget fund for forest maintenance costs.

June 27. The Riigikogu ratified the USD 10 million World Bank loan to the Estonian Government. The ten-year loan is meant for re-lending through commercial banks.

The Riigikogu made amendments in the Law on Aliens so that non-citizens would be able to apply for residence and work permits after the original deadline (July 12, 1995). Procedures for accepting and registering the applications are to be drawn up by the Government within four months of the date (by November 12 the latest).

July 4. The energy prices commission decided to apply to the Government for an increase in the price of electricity and oil shale. The price increase was demanded by state-owned companies Eesti Energia (Estonian Energy) and Eesti Põlevkivi (Estonian Oil Shale), which stress the need for large investments in the industry. The new prices will be determined after the proposed increases have been reviewed (the price of oil shale will be determined by the Government; the price of electricity by the Minister of Economics).

July 11. The Government decided to abandon a 100-million-kroon part of an energy loan from the European Bank for Reconstruction and Development (the total credit was 588 million kroons) because of a lack of projects meeting the qualifying criteria set by the EBRD.

July 20. Minister of Economics Liina Tõnisson signed the Estonian-Moldovan Agreement on Trade and Economic Relations which provides for the most favoured nation trade regime between the two countries.

July 21. The Ministers of Environment of Baltic States signed an Agreement on Co-operation between the three Baltic States, aimed at co- ordinating environment protection and quick exchange of information in case of environmental disorders. The agreement covers conservation of natural resources, introduction of environment-friendly technologies and treatment of hazardous waste materials. The agreement provides for joint action in decreasing environmental pollution across state borders, protection of the Baltic Sea and handling of matters of radiation and nuclear safety.

July 25. The Government decided to send the Estonian-Russian treaties signed by presidents Lennart Meri and Boris Yeltsin in Moscow on July 26, 1994, to the Riigikogu for ratification. The treaties include an Agreement on the Withdrawal of Russian Troops from Estonia and an Agreement on Social Guarantees for Russian Retired Army Personnel. There are still a considerable number of former Russian army officers in Estonia who retired after the July agreements were signed and who were to leave the country under the agreements. Numerous environmental problems are also still unsettled at the former Russian army sites.

The Government decided to submit to the Riigikogu a draft Law on the Supplementary Budget. The additional money is meant for financing educational and social projects through local governments. The money for the supplementary budget will come from the excise tax on alcohol which was increased on July 1.

Economic Policy

June 1995 will go down in Estonian history as the month in which the Association Agreement with the European Union was signed. One part of it is the Free Trade Agreement with the EU that came into force at the beginning of the year. The implementation of the Europe Agreement will be coordinated in Estonia by the bureau of Minister for European Affairs (Eurominister) Endel Lippmaa.

It is expected that the agreement would provide new possibilities for Estonia to improve the market economy and attract foreign investments. At the same time, it also requires bringing Estonian legislation into line with the regulations and traditions of the EU. Thus, for instance, the existence of monopolies and restrictions on competition are against the principles of the agreement.

In order to improve access to European markets, Estonia has announced its intention to conclude, in addition to the existing bilateral agreements, a multilateral free trade agreement with the member countries of the European Free Trade Association (EFTA). In June, an Estonian delegation took part in the meeting of the ministers of the EFTA countries in Norway, where the three Baltic States began free trade agreement negotiations with EFTA.

The meetings between Estonian and Russian politicians in July over the ratification of the Estonian-Russian free trade agreement by Russia were less successful.

In domestic policy, attention was focused on drafting the 1996 state budget. Since next year's budget will be as tight as this year's one, the Government intends to increase the excise tax on alcohol and motor fuel. The expected revenue should at least cover the loss of revenue resulting from the planned increase of the tax-free minimum for individuals. The Government also intends to allocate a larger share of revenue from personal income tax to local governments. Income tax amounted to 82% of the total revenue of local governments in 1994. The increase of revenue will also entail passing on several of the functions currently carried by the Central Government to local governments: mostly payment of social benefits (child, subsistence and housing benefits).

On the expenditure side, the Government declared its priorities to be supporting farming exports and increasing the salaries of policemen, border guards, customs and revenue service officials and teachers.

The congress of Estonian rural people on July 26 discussed problems of land reform. According to Prime Minister Tiit Vähi, there are two ways of speeding up land reform: allocating more money on it from the next year's state budget, or, simplifying the reform. The Government has already sent several draft laws on land reform to the Riigikogu.

The Government has also asked the Riigikogu to write off the debts of several state-owned utility companies (such as Eesti Energia (Estonian Energy) and Eesti Põlevkivi (Estonian Oil Shale)). The Government also proposes to wipe off tax fines of the legal successors of collective and state farms accumulated since 1992.

In the social sphere, child benefits and pensions were regulated. Child benefits were increased by ten kroons from July 1, which means a rise of all related benefits as well. The basic old age pension remained the same but the proportion of size of pension to length of the working career will increase from September 1.

Economic Growth

June and July

Economic growth in respect to the previous month was +3.2% in June and -5.2% in July (see Table 1 ).

All components of the income-based growth index were positive in these months (see Table 2). The increase was caused mostly by the wage fund and social tax variables, and can be attributed to seasonal payments in the holiday period. The impact of the gross operational surplus(*) and indirect taxes on the income-based growth index was moderate.

(*) The gross operational surplus includes profit, mixed income and depreciation.

In July, the growth index decreased due to a fall in the consumption-based index. This was caused by a drop in the export since domestic demand was practically the same as in June.

In the development of the foreign sector the most important role was played by the trade deficit, which exceeded the one-billion-kroon in July. This was due to the fall in export: the total worth in goods exported in July was 29% less than that in June. At the same time, the export price index also dropped 1.8%, causing the volume of export to drop slightly over 30% in July against June. The drop mostly concerned the export of textiles and food products. A similar albeit smaller drop in export occurred in July 1994.

Second Quarter

Compared to the first quarter, the economic growth index of the second quarter was 1.8%, and, to the second quarter of 1994 it was -2.4%(**) (see Figure 1). Against the first half of the previous year, the economic growth index of the first half of 1995 was 0.3%. Thus, the first quarter of 1995 was economically more successful than the first quarter of the last year, while the situation was reversed in the case of the second quarter. In 1994, the second quarter was the most successful, followed by a drop in the third and a slight increase in the fourth quarters.

(**) According to adjusted data, the economic growth index in the first quarter of 1995 was 2.7% against the first quarter of the previous year. Compared to other former Eastern-bloc countries, the growth was a bit slower in Estonia than in the Czech Republic (3.9%), Slovakia (5.8%) and Slovenia (4.3%). The Macroeconomic Research Department of Eesti Pank has no data on other former socialist countries and the second quarter of 1995.

The aggregate index of the market barometers of the Estonian Institute for Market Research (EIMR) reflects changes analogous to the base index of economic growth (see Figure 2).

According to EIMR, there were no major changes in the basic economic indicators in the second quarter, regardless of seasonal deviations. There was no significant increase in demand and, according to questionnaires filled in by companies, there were excessive surpluses of finished products in all branches of the industry, indicating stiffening competition. Export demand decreased in the second quarter in several industries (particularly foods and textiles). The barometer of the companies' financial situation was negative, as it was in the first quarter. This was, among other factors, caused by the slow-down of the producer and export prices (producer prices dropped 0.6% in the second quarter).

The fall in the inflation rate due to the slow-down in the increase of producer, export and open sector prices and tightening competition point to a changed economic environment this year.

In the income index, we can notice a different impact of the gross operational surplus variable on the increment of the index, depending on what we compare it to. Compared to the first quarter of 1995, the impact is positive; compared to the second quarter of 1994 it is clearly negative (see Figure 3 and Figure 4). In comparison with the first quarter of 1995, the boosting impact of the gross operational surplus on the growth index suggests an increase of turnover in the second quarter. Comparison with the second quarter of 1994 suggests a fall in profits due to tighter competition and decreasing rate of inflation.

The impact of the variables of the wage fund and social taxes and indirect taxes was comparatively small on the income index.

The consumption index is dominated by the deepening negative impact of the foreign sector (trade deficit): approximately -2 percentage points against the first quarter of 1995 and approximately -15 percentage points against the second quarter of 1994 (see Figure 5 and Figure 6 ).

Inflation

Almost every economic indicator characterising inflation has been on the wane in Estonia since monetary reform in 1992 (see Table 3).

Recently, changes in producer prices of the manufacturing industry, consumer prices in the open sector and export prices have come closer to one another. Since these economic sectors are open to foreign competition, it is probable that with prices nearing the international level the rate of increase will slow down further.

Consumer Price Index

Against the previous month, consumer prices increased 2.3% in June and 1.7% in July (see Table 4 and Figure 7). The increase in consumer prices was mostly caused by increasing housing and public transport costs. The seasonally adjusted consumer price index (CPI) was higher than the actual CPI in both June and July (see Figure 8 ).

In the second quarter consumer prices increased 6.2% against the first quarter. The increase was smaller than both against the previous quarter and the corresponding quarter of the previous year (see Figure 9).

If we analyze the price indices of the open and sheltered sectors of the economy, we can see that analogously with all previous months the main cause of the price increase in June and July was the price increase in the sheltered sector, particularly in case of administratively-regulated prices (housing and public transport; see Table 4 and Figure 10).

Over the first seven months of 1995, prices in the sheltered sector increased 3.7 times more than prices in the open sector. In the same period in 1994, the price rises in the sheltered sector outstripped those in the open sector 3.9 times, with price increases in both sectors 1.9-2.0 times higher than this year.

With respect to the same months the year before, consumer prices increased more in June and July than they did in the previous three months. This was due to price increases in the sheltered sector (see Figure 11). The open sector price increases have slowed down during the last 17 months, as compared to the corresponding month of the previous year.

Considering the share of goods and services of the open and the sheltered sectors in the consumer basket of single individuals, we can calculate the impact of these price changes on the increase of the CPI (see Table 5).

Factor Analysis of Domestic Price Increase

Open Sector

Price increase in Estonia and the change in the real exchange rate of the kroon are under the influence of two very different economic environments: our trade partners in the West with their low inflation and comparatively stable exchange rate of their currencies, and our trade partners in the East (particularly Russia) with their fluctuating exchange rates and rampant inflation.

So far, incoming inflation has been dominated by the combined influence of the fall of the Russian rouble and Russian inflation. While in 1994 the fall of the rouble and inflation in Russia were in the same order of magnitude, later prices would increase more quickly than the rouble lost value; hence, the inflational pressure exerted by Russia on prices in Estonia has increased. Over the past three months the nominal exchange rate

of the rouble has been increasing and inflation in Russia has remained comparatively high.

In June, the change of the real exchange rate of the kroon with respect to the currencies of the Eastern trade partners somewhat slowed down the price increase in the open sector of the Estonian economy, and accelerated it in July (see Table 6).

The slight fall of the German mark led to a slight increase of inflational pressure from Western prices.

Due to the deviational money supply, which reflects short-term imbalance, Estonian prices in June and July were apt to fall.

According to the model, the seasonal factor was not included on the list of factors. The great impact of unidentified factors in June and July can thus be attributed to seasonal influences.

In summary, external influences tended to increase the prices of the open sector in June and July while the seasonal factor and deviational money supply slowed the price increase down. This resulted in practically nonexistent rise (in June) or comparatively small rise (in July) in the consumer prices.

Sheltered Sector

Prices in the sheltered sector are mostly influenced by administrative price increases. In June, the impact was direct as it had been decided in May and June to increase rent and the price of tickets of city buses; in July the impact was indirect since the impact of rent tariff increases that began in May and June continued in July, reflected by unidentified factors in Table 6.

Since the price increase of the open sector in June and July was below the three-month and the 12-month average, the impact of the open sector price increase on the sheltered sector was also correspondingly smaller.

In June, the impact of foreign prices (expressed mostly through the prices of production inputs) on the price increase of the sheltered sector diminished, while in July these had an inflational impact.

As said, the increase of prices in the sheltered sector is mainly caused by the rise of administratively regulated prices. In June this was to a certain extent also linked with the increase of prices in the open sector in earlier periods, in July with the rise of prices abroad.

Component Analysis of Domestic Price Increase

In June and July, the highest increases were those related to housing and transport costs (see Table 7), which also contributed the most to the CPI increase (see Table 8). At the same time the plummeting prices of food, alcoholic beverages and tobacco products slowed down the price increase.

June

Among various subgroups of goods and services, public transport was the weightiest contributor to the CPI increase. The price increase in this category was mostly caused by the increase in the price of bus tickets. From April 1, tickets became 2.5 times more expensive in Tallinn. Although public transport continued to be subsidised, the price increase was meant to spur competition between different bus companies. On May 18, the Town Council adopted a decree under which the single-ride tickets in the public transport became 50% more expensive from June 1, and the price of a 30-day farecard increased 37.5%. In June, bus ticket prices were increased in other towns as well, in commuter buses and long-distance buses.

The increase in the subgroup of rent, water and sewage was caused by the increase of rent tariffs in the course of a continuing reform. From June, rent tariffs were increased in two residential areas of Tallinn and in centres outside the capital.

The fall in food prices was mostly caused by the seasonal fall in these prices. The major components were the drop in the price of fats/oils shortening due to the cheapening of butter, as well as the drop in the price of dairy products, caused 30% by the fall in the price of milk, 18% by the fall in the price of cheese and 52% by the fall in the price of other dairy products.

July

The weightiest subgroup in leading to the CPI increase in July was rent, water and sewage, which accounted for 46.9% of the CPI increase in July. The price of these services was mostly caused by the increase in rent tariffs. In July, the last residential area in Tallinn to increase tariffs was Haabersti, and tariffs went up also outside the capital. The increase of the cost of communal services accounted for 21% of the total increase in this subgroup.

The price increase in the subgroup of electricity and heating was responsible for 36% increase in the CPI. This was 81% caused by the 24.1% increase in the consumer price of gas. In July, Eesti Gaas (Estonian Gas) increased the price of natural gas sold to private consumers. The reason given was increased distribution cost and the need for investments. The price of gas bought from Russia did not increase.

The most significant price decreases concerned subgroups such as fruit and vegetables (fresh vegetables became cheaper); milk and dairy products, and fats/oils (the cheapening of milk, cheese, butter and other dairy products).

Producer Price Index

The producer price index of industrial production describes changes in the price of products manufactured in Estonia. In June the producer price index decreased against the previous month, and remained practically unchanged in July (see Table 9).

Comparing the increase of producer prices year-on-year we can see that in June and July the consumer price increase in energy production and mining outstripped the increase in the manufacturing industry nearly five times (see Figure 12). As we already mentioned, changes in the producer prices of the manufacturing industry are closing up on changes in the economy's open sector consumer prices (see Figure 13).

Export Price Index

The export price index is based on the customs statistics. Export prices increased rapidly in June and decreased in July (see Table 10 and Figure 14). Since the beginning of 1995 export prices have gone up 5.7%, and compared to July 1994, 11.4%.

The year-on-year change in export prices points to a tendency of lowering (see Figure 15 ; no data is available for earlier periods). The great fluctuations (from +3.4% in June to -1.8% in July) are mostly caused by changes in the price of timber and timber products. To a certain extent fluctuations are coincidental, since in different months different companies may be involved and the quality of exports may also differ.

Real Effective Exchange Rate Index of the Kroon

In order to evaluate changes in the real exchange rate of the kroon we use the real effective exchange rate index (REER; real rate). The index characterises changes in the exchange rate of the kroon against the currencies of Estonia's eight major trade partners, as well as changes in Estonian consumer prices compared to changes in the CPIs of those countries. The comparison is based on the breakdown of Estonia's foreign trade turnover.

In June, the kroon's real rate fell but went up in July (see Table 11 and Figure 16). The real rate of the kroon has increased against the Western partners mostly due to inflation in Estonia. The kroon's real rate has dropped against trade partners in the East (Russia, Latvia, Lithuania).

The share of the components of REER in the change of the index has been given in Table 12 .

In June, the fall in REER was caused by the 3.1% increase in prices abroad as expressed in kroons, which was higher than the increase of Estonian consumer prices (2.3%). The main factor was the 8.9% fall of the kroon's nominal rate against the Russian rouble, amplified by the 6.7% increase of consumer prices in Russia.

In July, the increase of prices abroad (1.6%) was lower than the increase of Estonian consumer prices (1.7%) which resulted in a slight increase in the real rate of the kroon. Like in June, the kroon's nominal rate fell against the Russian rouble (2.1%) while consumer prices increased 5.6% in Russia.

The analysis of changes in the real rate of the kroon can be widened by calculating the ratio of the price indices of the economy's sheltered and open sectors, or the second internationally recognised economic indicator - the internal real exchange rate. This rate has recently been changing analogously with changes in the real effective exchange rate (see Figure 17).

Fiscal System

At the end of the first six months of the year the revenue and expenditure of the entire fiscal system (the state budget, local budgets and social and health insurance funds) were approximately up to the planned target (see Table13)

Judging by the results of the second quarter, the situation was the tightest with the state budget, which this year has to collect 54.3% of revenue of the entire fiscal system and from which 20.7% will be redistributed to other subunits of the system. In the second quarter, only 50% of revenue was collected and 14% of this was redistributed between local governments and the social insurance fund (the respective figures for 1994 were 60.9% and 17.5%).

The share of state revenue in the fiscal system diminished, because, compared to the previous year, the collection of the major contributor to revenue - the VAT - increased more slowly than the collection of personal income and social taxes. This year, revenue from VAT amounted to 21.7% in the second quarter while last year it was approximately 31.3% (see Table 14). At the end of the second quarter 7-8% less VAT had been collected than planned because internal consumption has not increased as rapidly as expected at the time that the 1995 state budget was drafted. The quicker-than-predicted increase of foreign trade has not been enough to compensate for the shortfall.

With respect to the second quarter of 1994, the revenue of the state budget was 1.18 times and the income of the entire fiscal system was 1.44 times larger this year. Expenditures increased 1.51 times and 1.38 times respectively (see Table 15). The more rapid increase of expenditures compared to revenue results from certain idiosyncrasies inherent in the comparison. Namely, expenditures in the first and second quarters of 1994 were considerably smaller than in the second half-year.

At the end of the second quarter of 1994 the income of the state budget amounted to 59% of the annual planned target. This made it possible to draw up two supplementary state budgets. By the end of the second quarter this year, 47% of the planned annual revenue had been collected and this did not allow to spend more than only 42% of the planned annual total. Less corporate income tax, personal income tax and VAT revenue was collected than planned for the first half-year. Revenue from personal income tax was expected to amount to 50% of the annual target, but tax from the large salaries of June is delayed.

More than half (53%) of the planned annual target for excise tax was collected. This was due to the revision of the tariffs and more efficient control over tax collection (tax labels were introduced for tobacco products), as well as the introduction of new taxes (excise tax on motor vehicles), revenue from which was not included when the state budget was drawn up.

The comparison of spending indicates that the nearly 1.4-fold increase against the same period last year is not a result of a changed budget policy but rather a different distribution of expenditures by month. Last year, the budget surplus amounted to nearly 20% in the first quarter. By the end of the first half-year there was still a surplus of 12%. In the fourth quarter the surplus was used up and as far as current revenue and spending was concerned the last quarter ended with a 13% deficit recorded. In 1995, the surplus at the end of the first and second quarters was very small, 4% and 5% respectively. Although in the second quarter the current income of the entire fiscal system outstripped spending by 6.2%, the surplus for the entire half-year amounted to 3.4% at the end of June (in 1994 the respective figure was 8.1%; see Figure 18).

Collection of the most important taxes this year has been very similar to that of 1994 (see Figure 19 , Figure 20 and Figure 21). Due to the cyclical nature of the tax collection system, the income tax of July increased state revenue. However, the decline of economic activity during the peak of the holiday season meant a decline in taxes paid from turnover. On the whole, it is usual that tax revenue in July does not differ much from that in June (see Figure 22 and Figure 23).

State expedintures had increased evenly this year, in correspondence with the increase of revenue. There was a slight increase in July as well (see Figure 24). In 1994, the revenue surplus allowed more spending, and adoption of a supplementary budget in June resulted in a sharp increase of spending in June. Changes in the expenditures of local budgets over the seven months of this year were every month similar to respective changes in the previous year (see Figure 25).

Foreign Loans

The total sum of foreign loans taken by the Republic of Estonia increased by USD 83.3 million in the second quarter, or by 27.4%. Four new loans were added as a result of ratification of loan agreements by the Riigikogu: the USD 18 million loan for the health care system and the USD 10 million loan for the development of entrepreneurship (both from the World Bank); the ECU 20 million loan for the renovation of the flight control system from the European Investment Bank; and the state-guaranteed USD 28.7 million loan from the EBRD for the Tallinn water supply and environmental projects.

All new loans have a long term of repayment: the repayment of the EBRD loan begins in 1998, for other loans repayment begins in the year 2000 and ends late in the first decade of the next century. The interest rate of these loans is between 7% and 8%.

On July 11 the Government decided to withdraw from the 100-million-kroon part of the EBRD energy loan (a total of 73.5 million German marks). The loan agreement was signed in 1992 to carry out Estonia's energy-saving programme mostly in view of the needs of Eesti Energia (Estonian Energy) and Eesti Gaas (Estonian Gas) companies. Compared to that time, the situation in Estonia's energy industry has greatly changed and many of the problems of that time have been solved.

According to the Ministry of Finance, the total sum of foreign loans ratified by the state was USD 355.4 million (according to the July 3 exchange rates quoted by Eesti Pank); in addition, the state has guaranteed USD 120.7 million worth of loans, which brings the total of loans as of July 1, 1995 to USD 476.1 million.

Twenty-eight per cent of the total loan sum is being used for the development of the energy sector and modernising heating systems, 17% for the reconstruction of roads and development of transport and communications, and 13% for vital imports. Thus priority has been given to loans aimed at economising resources and developing infrastructure.

Actually, USD 246.9 million in foreign loans was disbursed by July 1; in the second quarter of this year, USD 18 million was disbursed (see Table 16). Substantial disbursements were made from the EBRD energy loan (USD 4 million), and the import loan of the Japanese Export and Import Bank (JEXIM; USD 4.6 million).

The disbursement of foreign loans has significantly intensified this year: the total amount disbursed in the first half-year was five times larger than the amount disbursed over the same period last year. This increase was due to the disbursement of the IMF loan (USD 37.2 million), as well as an increase in the disbursement from loans meant for a longer period (EBRD, JEXIM).

In the second quarter, Estonia paid back a total of USD 2.42 million, to the US Ministry of Agriculture and the Finnish Export Credit Agency; also USD 2.7 million worth of interests was paid (see Table 17).

Compared to the second quarter of 1994, the total amount of loans has increased 51%. The increase will continue because the investment needs of the public sector will, first and foremost, be covered by foreign loans. The ratio of the cost of servicing the loans to export is still near zero, since at the moment most of the cost consists of interest payments.

Due to new loans, the ratio of the total value of foreign loans and export increased in the second quarter, but the share of disbursements according to agreements fell to 38% (without the IMF). One one hand, this was caused by the fact that no new loans were actually disbursed in the second quarter; on the other hand, the disbursement of several other loans has been delayed. Thus, for instance, the EBRD energy loan has lost its original purpose, as well as the second part of the EU's ECU 40 million loan.

The main lenders have been international banks (the World Bank, EBRD, JEXIM). Compared to the second quarter of 1994, the share of international banks involved in crediting long-term projects has increased from 26.8% to 35.1%. The current relatively low debt burden can be put down to the fact that no foreign loans were taken before 1992. The current loans have been amassed over the past three years and their repayment mostly starts in 1998.

The debt burden is also low in other Baltic States. In 1994 the foreign debt of Estonia, Latvia and Lithuania (loans minus repayments) amounted to 7.0%, 9.6% and 8.7% respectively of the GDP of the corresponding country. Among countries of the former Eastern bloc that have been able to borrow money over a longer period, Poland's foreign debt in 1993 amounted to 48% of the GDP; the figure for Bulgaria was 99% and for the Czech Republic, 17%.

Unemployment

According to the National Labour Market Board, the number of the unemployed in June and July continued its seasonal fall (see Table 18 and Figure 26). The absolute number of the registered unemployed has been slightly smaller in every month of this year compared with the months last year, and the seasonal fall has also been more modest (see Figure 27).

Against the same period last year, the total sum of money paid out as unemployment benefits decreased in the first half-year of 1995 while the sum spent on retraining increased as well as the funds allocated as starting money for unemployed residents who decide to launch their own business.

An average of 14,830 people a month received unemployment benefits in the first six months of 1995 (14,617 people in the first quarter, and 15,042 people in the second quarter), which is an average of nearly 2,500 people less than the monthly average of 1994. In the first half of this year, 14.5 million kroons (7 million in the first quarter) was spent on benefits, which is nearly 4 million kroons less than in the respective period a year ago.

A total of 17.2 million kroons has been allocated from the state budget on the retraining and in-service training of the unemployed this year. Of this, 10.1 million kroons was spent in the first six months (including 5.5 million in the first quarter), and 5,742 unemployed were sent to retraining courses (3,613 people in the first quarter). A total of 3.1 million kroons of retraining scholarships was paid in the first half-year (of which 1.4 million in the first quarter), and an average of 2,300 kroons was spent per one trainee (the respective sum in the first half of 1994 was 750 kroons). The most popular were the unemployed survival courses together with language classes, as well as courses for accountants, computer skills, entrepreneurial and business courses.

In the first half-year, 226 unemployed received entrepreneurial subsidies (80 in the first quarter). The size of the subsidy granted to an unemployed for starting his or her own business is up to 8,000 kroons. In the first half of 1995, the total sum of such subsidies amounted to 1.75 million kroons (0.6 million kroons in the first quarter), which is 4.3 times more than over the respective period last year.

It is also possible to subsidise the employer for hiring an unemployed person, paying him an equivalent of the monthly minimum wage over a period of six months. Such labour market subsidies paid to employers amounted to 185,000 kroons in the first half of 1995 (86,400 kroons in the first quarter), which is nearly half more than in the same period last year. Over the first six months of 1995, a total of 78 people found jobs thanks to this subsidy (60 people in the first quarter).

The share of long-term unemployed has increased among the total number of the unemployed. According to the National Labour Market Board, 61% of the job-seekers at the end of the first quarter had spent less than six months for looking for job, 22% had spent six to 12 months, and 17% over 12 months. At the end of the second quarter the respective figures were 46%, 32% and 22%. According to EMOR data, the long-term unemployment rate was even higher: in the first quarter of 1995 the number of job-seekers who had not been able to find employment during one year, was 35% and in the second quarter, 31%.

The number of jobless job-seekers turning to employment offices was considerably lower in the first half of this year than in the first half of last year. While in the first six months of 1994 an average of 40,200 job-seekers was registered per month then this year the average monthly figure was 36,400 (37,100 in the first quarter and 35,700 in the second quarter). According to the employment research of EMOR, one out of every two job-seekers has used the services of the employment offices this year.

In the first half-year the share of jobless job-seekers turning to employment offices among the working-age population was the highest in March - 4.6%. In July it fell to 3.9% (see Figure 28). The number of people officially registered as unemployed among the working-age population dropped to 1.7% in July.

According to EMOR, the share of the job-seekers among the working-age population amounted to 6.3% in the second quarter (6.1% in towns and 6.8% in the countryside), and the share of the job-seekers among the total number of employed plus job-seekers was 8% (7.8% in towns and 8.5% in the countryside).

As to regional differences, the unemployment went slightly down in the Põlva county but increased in the Lääne county. No decrease was recorded even in the summer months in the Võru and Ida-Viru counties which traditionally have a high unemployment rate (see Table 19). The regional evening up of the unemployment is prevented by the low mobility of the job-seekers.

The number of jobs on offer in July was relatively big in Harju and Pärnu counties. An analysis carried out in south-eastern Estonia indicated that only about one-third of vacancies were available through employment offices. The demand is the highest for highly-skilled workers and handicraftsmen, as well as for employees in the trade and services sectors. The highest number of job-seekers who succeeded in finding employment was recorded in July in the Pärnu county.

The share of women has increased among the officially registered unemployed - 62.7% in the first quarter and 64.3% in the second quarter. In summer, the number of young and middle-aged unemployed decreased while the number of unemployed aged over 50 increased by 521 people in the second quarter. The share of Estonians among the unemployed has remained around 54%.

Wages and Salaries

According to the Ministry of Social Affairs, the average gross wage in June was 2,636 kroons and in July, 2,470 kroons. The average wage of June was 16% higher against May, thanks to holiday payments (particularly due to the prepayment to teachers for their three-month summer holiday). Seasonal factors affected the size of the average wage in June 8.5% and in July 6.5%. The real wage increased 13.5% in June against May while in July a 7.9% decrease against June was recorded. Analogous changes were also recorded last year (see Table 20 and Figure 29).

According to the EMOR study of family budgets, the wage per earner was in June and July 3-4% higher on the average than according to the data of the Ministry of Social Affairs (see Figure 30 ). This difference can be attributed to the fact that the EMOR study included under wage such kind of income that is usually not reflected in accountants' reports. On the other hand, the Ministry of Social Affairs data on the average monthly wage can be regarded as preliminary until the results of the quarterly reports submitted to the State Statistical Office are released.

As to different professions, wages have rapidly increased in such areas as real estate, renting and business services and other service areas (see Table 21).

Compared to the other Baltic States, the average wage was much higher in Estonia in June than in Latvia and Lithuania, but in July the gap narrowed (see Figure 31).

Family Income

The EMOR survey recorded seasonal fluctuations in family income: in June the income increased rapidly due to holiday payments and bonuses, just to drop approximately to the level of April in July (see Table 22 and Figure 32). The time series of seasonally adjusted net income (see Figure 33) indicates that the increase of income that began in October 1994 stopped in April this year.

The State Statistical Office began to study family budgets from July. According to their data, the average pre-tax income per family member was 1,462 kroons in July and net income amounted to 1,306 kroons.

Against May real income increased 14% in June and dropped 19% from this level in July. Since the CPI increased relatively quickly in June and July (2.3% and 1.7% respectively), the July real income roughly corresponded to the level of the beginning of the year and was smaller that the average of previous periods.

By quarters, the family income in the second quarter of this year was larger than income in the second quarter of last year and the first quarter of this year (see Table 23). However, income increased slower than last year. The 1995 seven-month average real income was 7.2% higher than the respective indicator for last year.

Compared to the other Baltic countries, income of Estonian families was also higher than income of Latvian families - the average wage in the state sector in Latvia was smaller than in Estonia (2,238 and 2,636 kroons, respectively). Compared to Lithuania, the income of Estonian families have been larger for a longer period already (in the second quarter of 1995 monthly income per family member was 1,266 kroons in Estonia and 672 kroons in Lithuania).

There was no major change in the breakdown of income in June and July (see Table 24). The high share of hard currency income in June seems to be an accidental deviation. Compared to earlier periods, the share of wages increased slightly in the overall income. Since the nominal income from social insurance was relatively stable, its share in total income was smaller than the average in June, and equalled the average in July. The share of income from business and other income was smaller in June and July.

The breakdown of income varies also little in different quarters (see Table 25). In the second quarter of this year the share of wages was slightly bigger, for seasonal reasons. This year, the share of investing has somewhat increased. The increase of income from pensions and other social insurance benefits has lagged behind the increase in other kinds of income throughout the year. Since income from business activity mainly reflects the income earned by farmers, the decreasing share of this income points to a relative decline in agricultural income.

If we compare the breakdown of family income in the second quarter in Estonia with the respective figures for Lithuania, we can see that in Lithuania the net wage and the share of income from social security are bigger than in Estonia (in Lithuania, 72% and 14.9% respectively, and in Estonia 69% and 14.5%).

The difference in the distribution of income was smaller in the second quarter of 1995 than last year (see Table 26 and Figure 34). In June and July the difference increased slightly due to people receiving their holiday payments at different times. Because of holidays a great number of families received very little money in July, indicated by the fact that the number of families where monthly income per family member was below the minimum wage was nearly double that of June.

In Lithuania, the distribution of income in the second quarter was somewhat more even than that of Estonia (the Gini coefficient was 0.344; the less wealthy 40% of families received 18.7% of total income, while the wealthy 20% received 42.2%).

Comparing the share of different income components in differentiating net income in the second quarters of 1994 and 1995 (see Table 27), we can see that this year the share of net wage increased considerably, while income from investments decreased, and particularly income from other sources. The equalising effect of income from social security increased slightly.

Private Consumption and Saving

According to EMOR, consumption by families in June and July changed similarly to changes in income (see Table 28), only more slowly. Like in 1994, consumption increased in June and fell in July. Nominal consumption decreased more this July than a year ago but in real consumption the fall was smaller. Excluding seasonal influences from consumption (see Figure 35) we can see that nominal consumption, too, has stabilised.

According to official statistics, total consumption per family was 1,243 kroons per family member in July. Real consumption was in the second quarter an average of 1.7% up from the level of the second quarter last year (see Table 29).

With the increase of income, the share of savings has also increased. The decline of the index of placement of money against the respective figure for the second quarter of 1994 was due to EMOR changing its questionnaire.

The breakdown of consumption in July (see Table 30) corresponded to a breakdown of consumption in a month of low income when the share of food is comparatively high. Spending were higher than the average also on transport, alcohol and tobacco; for seasonal reasons the share of housing spending was small. Comparing the average breakdown of consumption by quarters we can see that the share of housing costs has increased, while the share of food and transport has decreased.

In Lithuania, the average consumption per family member was an equivalent of 503 kroons per family member in the second quarter. The breakdown of consumption was as follows: 58.9% was spent on food; 14.2% on housing; 5.9% on transport; 10.4% on clothing. Thus spending on food was comparatively high in Lithuania, and the cost of transport and housing relatively low (highly subsidised).

The calculation of vitally essential spending proceeds from actual spending on basic categories of goods and services and its change in correlation to the change in the prices of the respective good or service. Since food became cheaper in July and the increased housing tariffs were in reality followed by a drop in spending (the change in debts is not taken into account), the vitally essential spending decreased in July against the two previous months, and amounted to 360 kroons per family member. Only essential spending on clothes increased.

Seventy per cent of families spent more on food than the cost of the physiological food basket (311 kroons per person in July), which is 20% more families than in May and 18% more than in June.

Estonia's social welfare system is relatively inefficient.(***)

(***) Pensions and child benefits come under the social insurance system.

Families who have temporarily been left without income or are on low income are entitled to subsistence and housing benefits and to unemployment benefits. The share of these benefits amounts to only 7.2% of the income of families even in the lowest income bracket (the bottom 10% of families ranked by size of income). The share of social welfare was 4.7% in the income of families belonging to the second income decile. The share of benefits was relatively small in the third decile (2%), which is even smaller than in case of families of the fourth and fifth decile. Since in the third decile the majority of families consist of pensioners, the system of applying for benefits is evidently too complicated for them.

Although eligibility to housing subsidies is dependent on the size of the family income, even families belonging to the richest, 10th decile receive it - the share of housing benefit is 0.1% in their total family income.

The price increases affected the actual consumer basket of the poorest 20% of families less in June and July than the richest 20% of families (see Table 31). This was the result of the fall in the price of food in the summer months - food plays more important role in the consumer basket of poorer families than of the wealthy families.

Urmas Sepp
Andres Kerge
Ilmar Lepik
Tiiu Luks
Andres Saarniit
Natalja Viilmann