Survey of the estonian economy. August 1995

Contents


Chronicle

August 1. Riigikogu (the Parliament) approved Estonia's Association Agreement with the European Union.

The Government approved instructions on the students' state loan scheme.

August 2. Riigikogu changed the Law on Pensions. As of September, pension-age teachers who continue to work as teachers will be paid a full pension, regardless of the size of their salary.

Riigikogu adopted a 65-million-kroon additional budget for 1995. The revenue for it is expected to be collected from the increased excise tax on alcohol. The additional budget will be used for financing investments by local governments.

Riigikogu reduced the term of office of the board of the Compensation Fund from three to two years. Consequently, the term of the current board will end in September.

August 15. The Government approved regulations for dealings with securities.

August 16. An agreement regulating road haulage was signed between Estonia and the United Kingdom of Great Britain and Northern Ireland.

August 23-25. A seminar on establishing a State Treasury in Estonia was held in Pärnu. The treasury is scheduled to be partially launched in 1996.

August 29. The Government passed a decree proceeding from the Anti-Corruption Law which specifies that officials are not allowed to accept personal gifts.

August 30. Twenty employers' unions founded the Association of the Estonian Employers' Unions, an alternative to the Association of Estonian Industries and Employers.

Economic Policy

The text of the memorandum of economic policy, signed in December 1994 by the Estonian Government, Eesti Pank and the International Monetary Fund (IMF) was published in the newspapers in August. Comparing this to the principles of the new Government that took office in March, it is obvious that the same economic policy will be pursued.

Proceeding from the ideology of an open economy, the Government has named supporting export as one of the cornerstones of its economic policy. In order to implement this policy, the Government intends to create a state-owned limited liability company, the Centre for Crediting and Guaranteeing Export, with a share capital of 60 million kroons. The loans provided by the centre are meant to be 5-6 times bigger than the ones provided by the current Export Crediting Fund. The Government also decided to create a commission to deal with transit trade.

One of the basic documents of the 1996 state budget was completed in August - the Programme of State Investments for the period 1996-1998. Compared to this year, investments are to be increased by 15%. In terms of economic policy the programme is neutral since most of the investments are meant for repairs and completion of half-finished buildings.

In view of the next fiscal year and proceeding from the desire to limit expenditures the Government began discussing cuts in the number of government institutions. Currently there are 11 ministries and 37 departments in Estonia. The reduction of their number is linked to the increase in the number of organisations dealing with income policy.

A new representative body of the employers was set up, the Association of the Estonian Employers' Unions. If the majority of private unions join the association, it will have the authority to talk to the Government on behalf of Estonian employers and negotiate with trade unions. The association is an alternative to the older Association of Estonian Industries and Employers. The latter organisation's council of employers has proposed beginning of negotiations in September with the Association of Trade Unions on concluding an agreement of co-operation on labour and social issues.

In the business world, the central problem in August was finding additional capital. The impetus for this came from the law drafted by the Ministry of Finance under which insurance companies dealing with compulsory pension or life insurance would have to rise their share capital to 20 million kroons by July 1, 1996, and insurance companies dealing with voluntary insurance, to 200 million kroons by January 1, 1997.

In August the sphere of foreign investments was dominated by technical assistance programmes and credit lines to commercial banks. Thus, Estonia will get USD 200,000 assistance from the International Bank for Reconstruction and Development (IBRD) for setting up a Legal Centre. The EU intends to set up a local financing centre of the PHARE programme in order to bring management closer to the implementation of the programme.

Estonian commercial banks are increasingly more trying to involve foreign capital independently. Thus, for example, Eesti Ühispank (Estonian Union Bank) received a 136-million-kroon loan from the European Bank for Reconstruction and Development (EBRD), for six years.

On August 18, the meeting of shareholders of Eesti Hoiupank (Estonian Savings Bank) decided to increase the share capital by a new share issue. The 40-million-kroon share issue will partly be sold abroad. Currently, EBRD has a 30.1% stake in Eesti Hoiupank.

In banking circles, the liquidity crisis that hit Russian financial markets at the end of August caused much concern. Estonian commercial banks which deal with Russia assured that thanks do a good choice of partners this has no ill effect on them.

The problem of insuring deposits attracted wide attention. By August, two insurance schemes had been worked out: the Eesti Pank plan for compulsory insurance of deposits, and the initiative of six commercial banks to set up a voluntary fund for insuring deposits. After negotiations, the first option was favoured.

Since the increase of the consumer price index (CPI) was rather modest in August (0.6%) the public was concerned about the big number of requests for increasing administratively controlled prices. Thus, for example, Tallinna Soojusvõrk (Tallinn Heating Network) wanted to increase the price of heating sold to the population by 37%. Although a lesser, 25% increase was granted, it will still cause the CPI to increase 1.4%. The state-owned Eesti Raudtee (Estonian Railway) announced its intent to increase travel fares in order to reduce losses passenger transport was causing to the company. These have made it difficult for Eesti Raudtee to pay back the USD 7.5 million loan it took from the World Bank (WB) for repairing engines of passenger trains. The Ministry of Economic Affairs agreed on August 16 to the 11% increase in the electricity prices for households. The price increase is a result of the decision to increase the price of oil-shale by 10%. The Ministry of Economic Affairs suggested that the price of oil-shale be linked to the CPI.

Economic Growth

The economic growth index against the previous month was 4% in August. The index of income changed little, just like in July, and the growth was mainly due to the increased consumption index. The chain index of economic growth is given in Table 1and Figure 1. The values of the index are based on the time series adjusted by the three-month sliding average, because in view of the shortness of statistical time series it is very difficult to eliminate seasonal influences from the growth index. The certain instability of the monthly growth index has partially been caused by seasonal fluctuations that have not been eliminated.

This year, the economic development expressed through the growth index has been different from that of 1994: in the first quarter the development was quicker than in the first quarter of 1994; the second quarter was not up to the second quarter of 1994; no big changes in the development rate could be noticed in the first two months of the third quarter as compared to the similar period of the previous year. The economic growth for the first half-year and for the eight-month period was practically on the same level as in the respective periods of last year.

The income-based growth index increased in August due to the collected taxes and gross operational surplus(*) (see Table 2). The positive impact of revenue from indirect taxes can be explained by the increased alcohol excise tax. The fall in the income of the population after the peak of June and July was seasonal in character.

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

The growth of the consumption-based index resulted from a positive shift in the foreign sector, expressed through a considerable increase in the volume of export against the decrease in July. In essence, the old situation was restored: the value of exports in August surpassed the July level by 46% and the level of June by 3% (the prices of exports decreased 1.8% in July and increased 1.1% in August). The cost of imports remained practically the same as in July. Other components of the consumption-based growth index had less marked impact on its increase (see Table 2).

Inflation

During the post-monetary reform period most of the inflation indicators have gone down every year (see Table 3).

Consumer Price Index

Consumer prices increased 0.6% in August against July (see Table 4and Figure 2). The slow-down corresponded to seasonal peculiarities.

Over the past year (from September 1994 to August 1995) the CPI increase in Estonia has been smaller than the respective index in Russia and Lithuania, but bigger than the CPI increase in Latvia (see Figure 3). Consumer prices increased 22.7% in Latvia, 36.2% in Lithuania and 223.5% in Russia over this period.

Analyzing the price indices of the open and sheltered sectors we can see that while in the previous three months most of the price increase derived from price increases in the sheltered sector then in August four-fifths of the CPI increase was due to price increases in the open sector (see Table 5). There was no change in administratively regulated prices in August and other prices in the sheltered sector (communal services, etc.) increased only slightly. The cause for the fact that open sector prices in August had the strongest effect on the CPI increase over the past 20 months was not that prices in the open sector increased more rapidly but rather that the price increase in the sheltered sector slowed down.

Against August 1994, consumer prices in August this year pointed to a continuing downward slope (see Figure 4).

Factor Analysis of the Price Increase

Over the past four months the nominal rate of the Russian ruble has been rising but the increase of consumer prices has remained relatively rapid. Therefore the inflational pressure from Russia on Estonian prices has increased (see Table 6). Another boost to the increase of open sector prices in August came from the earlier weakening of the German mark which also contributed to the increased inflational pressure from foreign (Western) prices. Thus, external factors influenced the open-sector prices in August towards the increase while at the same time unidentified factors (seasonal influences) and deviational money supply slowed down the increase.

In August, the impact of foreign prices on the increase of prices in the sheltered sector grew too. There were no changes in administratively regulated prices.

Component Analysis of the Price Increase

Among goods and services, the price increase was the sharpest for such categories as leisure, health care and clothes, footwear and headgear. Alcoholic beverages and tobacco became a bit less expensive (see Table 7).

Price increase in such categories as leisure, food, clothes and footwear as well as housing accounted for a total of 80% in the growth of CPI (see Table 8).

Among groups of goods, fats accounted for one-fourth of the CPI increase (see Table 9). This was due to the rise in the price of butter. While in 1993 and 1994 the seasonal increase in the price of butter began in November-December then this year the price increased 15.6% already in August. This was probably due to a price increase (expressed in Estonian kroons) in Russia.

Increase in the price of other food products also had a relatively big impact, most importantly the 4.5% increase in the price of sugar.

The increased prices of electricity, heating and fuels accounted for 16% of the CPI increase. Of this, 39% derived from the increase in the price of heating, 32% from gas and 29% from the price increase of other fuels.

Fruit and vegetables played the most important role in reducing the CPI increase in August, mostly due to the fall in the prices of fresh vegetables and apples (20.8% and 14.1% respectively). The price of potatoes too went down seasonally, although a bit less than in earlier years.

On the whole, the increase of consumer prices was relatively low in August, just as could be expected. The increase was mostly due to the rise of prices in the open sector (butter, newspapers, sugar). Administratively regulated prices of the sheltered sector did not change in August.

Producer Price Index

The producer price index characterises changes in the products manufactured in Estonia. In August, producer prices were up by 1.2% against July (see Table 10).

Against August 1994, the increase of producer prices in the energy and mining sector outstripped that of the processing industry by nearly four times. However, there was no administrative price increase in the energy and mining sector in August (see Figure 5).

Export Price Index

The export price index is calculated using the customs statistics. Export prices increased in August 1.1% against July (see Table 11). Since the beginning of the year export prices have increased 6.9%, and over the past 12 months (compared to August 1994) the increase has been 13.3%. The growth of the export price against the corresponding month of the previous year in general tends to fall although the August figure increased somewhat against the corresponding figure of July.

Index of the Real Effective Exchange Rate of the Kroon

In order to evaluate changes in the real rate of the kroon we use the index of the real effective exchange rate (real rate index). This index characterises changes in the exchange rate of the kroon against the currencies of Estonia's eight major trade partners and changes in Estonian consumer prices against the consumer price indices of those countries. The analysis is based on the breakdown of Estonia's foreign trade turnover. Since we will be using a standard breakdown in this article and in future instead of the earlier non-standard breakdown, data of the earlier periods have been adjusted accordingly.

In August the real rate of the kroon decreased (see Table 12and Figure 6). The fall against the currencies of developed industrial countries was caused by the cheapening of the German mark. The kroon's real rate fell against the currencies of transition economies mostly due to the influence of Russia.

Table 13characterises the importance of different components in the changes of the kroon's real rate. In August, the fall of the real rate of the kroon was caused by the 4.4% rise in foreign prices (expressed in Estonian kroons) that was higher than the Estonian CPI increase (0.6%). The major factor here was the 5.8% decline of the kroon's nominal rate against the Russian ruble, amplified by the 4.6% increase of the Russian CPI.

Another internationally acknowledged indicator of changes in the real rate is the domestic real rate index which is expressed as a ratio of price indices of the sheltered and open sectors. In case of longer time series, changes in this ratio are similar to changes in the real effective exchange rate of the kroon (see Figure 7).

Fiscal System

In the first eight months of this year the inflow of state revenue was close to the planned target - 64.5% of the annual target. The biggest difference this year compared to 1994 is the need to pay constant attention to balancing revenue and expenditures. While in the first half of 1994 more revenue was collected than initially planned then this year current revenue has been only slightly bigger than expenditures (see Figure 8).

In case of state revenue (see Figure 9) we can notice that in April increase in revenue was smaller than a year before, and that in May revenue declined as compared to April. This was due to VAT. In the first four months of 1994, 1.2 times more VAT was collected than in the period from May to August, but this year 6% less VAT was collected (see Figure 10).

Revenue from personal and corporate income tax has been flowing in according to the same patterns as the year before and is up to the mark. The slight reduction in August was caused by the cyclic nature of tax collection. Increase of the average wage has guaranteed a smooth increase in the revenue of local governments (see Figure 11).

The collection of excise taxes has been the most successful: 78% of the planned target in eight months. This is the result of tax increases and introduction of new taxes (excise on motor vehicles). Additional income earned form excise taxes is meant to compensate the shortfall of other taxes. The situation is similar to earlier years.

In the autumn months revenue is expected to increase more against the respective figures of 1994 than in the first half of the year. As in the first half-year of 1994 expenditures increased slower than in the second half-year, it seems that this year expenditures have increased more than revenue. However, for the entire year the increase rates should become even.

In general, state budget is more strained than the budgets of local governments. This is because of a higher than predicted revenue from VAT and lower than predicted revenue from personal income tax. Higher than predicted revenue has allowed more varied expenditures from local budgets. Taking both budgets together, the monthly changes in expenditures are not much different from those of the previous year (see Figure 12and Figure 13).

The reference to the more strained nature of the state budget is based on the fact that 17% of state revenue has to go to support local governments and social insurance funds. Disregarding this fact one could get a misleading contrary impression when comparing the money flows (see Table 14). Considering the "donor" role of the state budget, the average eight-month surplus of revenue compared to expenditures made directly from the state budget is less than required. One of the reasons is also the need to allocate funds to local governments for repairing schoolhouses as provided by the additional budget passed in the summer.

The structure of expenditures has been stable over recent years if only for the limited nature of revenue. As it is often with small countries, expenditures on the social sphere have taken priority. The share of such expenditures in local budgets amounted to 65% over the past eight months. The respective figure for the eight months of last year was 60%.

Population

According to the State Statistical Office, decrease of the Estonian population has continued this year due to emigration and negative natural increase. In the first six months of this year, a total of 5,395 people left Estonia and 679 arrived. The number of emigrants was the highest in the Harju and Ida-Viru counties (accounting for nearly 70% of the total number). These two counties also had the biggest number of new settlers.

Emigration from all three Baltic States was most active in 1992 when the population there decreased by a total of 103,000 people (see Figure 14). With every next year emigration has dropped nearly two times: in 1993 the balance was 54,800 and in 1994 29,100. Emigration has been the smallest from Lithuania which has the biggest population of the Baltics and the smallest share of non-indigenous potential emigrants. In 1994, for example, Lithuania's migration balance was only 2,600 people.

In the first half of this year nearly 7,000 babies were born in Estonia (an average of 1,160 live births per month). In the first six months, a total of 11,200 deaths was recorded (1,868 per month). Since the birth rate in July and August was a bit higher than the average and there was fewer deaths, the natural increment reached its 1995 peak in August - minus 358 people (see Table 15).

Estonia has had a negative population natural increment since 1991. Natural increment has been falling in all Baltic States with every year. In Lithuania the balance became negative only in 1994 (see Figure 15). Thanks to higher birth rate (in Estonia and Latvia there was 14.2 births per 1,000, in Lithuania, 15.3) Lithuania has the highest share of the young in the population and the lowest death rate per 1,000 people (16.3 in Latvia last year, 14.8 in Estonia and 12.5 in Lithuania).

The number of marriages was higher in Estonia in the summer months than it had been in the first half of the year, and the number of divorces dropped due to the summer recess of courts.

Unemployment

According to the National Labour Market Board, the decrease in the number of unemployed characteristic of summer months continued in August - compared to July, 6.7% less people were registered as unemployed in August (taking into account the seasonal factor, even 16.8% less) (see Table 16). The number of people receiving unemployment benefits was 12,821 in August (14,204 in July).

There was approximately 33,000 job-seekers who did not work in August. This figure includes, besides those registered as the unemployed, also persons without a job who turned to employment offices in August to find work or use some other labour-related service.

The unemployment rate (ratio of the number of job-seekers to the total number of gainfully employed and job-seekers) was smaller in August than it had been in July and was also below the level of August 1994.

Since the unemployment benefit is relatively small (180 kroons a month) and the requirements for registering a person as unemployed are fairly tough, part of the unemployed obviously do not bother to register at the employment offices. Therefore, the jobless figures of EMOR are somewhat higher than the official statistics. Thus, for example, in the first quarter of 1995 unemployed job-seekers amounted to 6.2% of the working-age population and 6.3% in the second quarter (the respective figures from 1994 were 7.5% and 6.3%). The share of job-seekers in the total number of gainfully employed and job-seekers was 7.9% in the first quarter of this year, according to EMOR, and 8% in the second quarter (the respective figures for last year were 9.5%

and 7.9%).

The number of available jobs was smaller in August than the three-month average. Approximately 60% of the jobs offered requires special skills and training, something job-seekers seldom have. Training courses organised by employment offices were attended by 2.7 times less people this August than a year ago. There are two reasons for this: first, the Law on the Social Security of the Unemployed that took effect at the beginning of the year, allows only unemployed to be sent to training courses. Second, no Estonian language courses are arranged for the unemployed any more which were well attended in northeastern Estonia and Tallinn last year.

Experience of arranging retraining and in-service courses has shown that it is practicable to send the unemployed to in-service and retraining courses first and foremost, since a good share of those who finish these courses are able to find jobs. In general, only one-third of the unemployed, mostly young people eager to learn are interested in training provided by the employment offices. In addition to special training the employment offices also provide general training to introduce the services of the labour market and advise on how to be more competitive and cope with life.

Regionally, the highest number of non-working job-seekers in August was recorded in Ida-Viru county - 8,878 people. The share of non-working job-seekers among the working-age population was the highest in the Võru county (see Table 17). The biggest number of available jobs was recorded in the Pärnu, Harju and Tartu counties. In regions with high unemployment only 2-3% of job-seekers found job through the employment offices in August.

Figure 16depicts changes in the number of registered unemployed in the Baltic States. However, it should be kept in mind that legislation regulating labour relations, the status of the unemployed and access to benefits differs greatly in the three countries. In Latvia, a person who leaves a job of his own will or who has violated the labour contract will be registered as unemployed but he is not entitled to benefit. In Estonia, a 60- day waiting period is applied to such persons. In Lithuania, the compensations paid to employees whose jobs are cut may range from six to 36 monthly wages and companies therefore try not to fire their workers. For that reason, Lithuania has much hidden unemployment, that is, people work part-time or are sent on forced leave. In Estonia, the employee whose job has been cut gets a compensation ranging from four to eight months' salary, and in Latvia, from three to six months' salary.

The ratio of officially registered unemployed to the economically active population is the highest in Latvia, where it remained around 6% in the summer months. In Lithuania and Estonia the figure was between 2% and 3%. Compared to East European countries the unemployment rate in the Baltics is low rather than high. Unemployment is in the same category with Estonia and Lithuania also in the Czech Republic (2.8% in June), while in Hungary, Romania and Bulgaria it was between 10% and 11%, over 13% in Slovakia and Slovenia, and 15% in Poland.

Wages and Salaries

According to the Ministry of Social Affairs, the average gross wage was 2,207 kroons in August. Thus, the nominal wage decreased 10.6%, reaching the level of March, although it had been considerably higher in the summer months due to holiday payments (see Table 18). The average real wage diminished even more compared to July, that is 11,2%. The changes in the real wage this year have been much like the fluctuations in the respective months last year (see Figure 17).

According to the EMOR family studies, the average wage in August was 2,260 kroons per earner (see Figure 18). Of this, approximately 100 kroons was payment received from services rendered to private individuals that is not reflected in data of the Ministry of Social Affairs. Holiday payments affected wages and salaries also in August, but to a lesser extent than in June and July.

Including August, the increase of the average real wage over the last 12 months (taken as an average of the monthly increase of the real wage against the respective month last year) amounted to 10%.

According to the State Statistical Office, the average gross wage was 2,395 kroons per month in the second quarter, which was 14.3% higher than the average wage in the first quarter (2,086 kroons). Usually the average wage remains more or less on the level of the second quarter in the summer months, and therefore this year's average wage first and foremost depends on the wage increases in the final months of the year.

Among the Baltics, Estonia has been ahead of Latvia and Lithuania this year as to the size of the average gross wage. Due to the fall in August, the gap between the wage levels of Estonia and Latvia narrowed. Calculated in dollars, the average gross wage was USD 191 in Estonia, USD 188 in Latvia and USD 134 in Lithuania in August. Compared to other countries in transition, it is higher than what is paid in Bulgaria and Romania where the average wage this spring was between USD 105 and USD 106. In other East European countries the wage level is higher - USD 603 in Slovenia; USD 357 in Croatia; USD 317 in Poland; USD 315 in Hungary; USD 293 in the Czech Republic; USD 244 in Slovakia.(**)

(**)According to the September 1995 issue of the journal Business Central Europe

Family Income

Since July there are two studies on income and consumption available: one based on the questionnaires of EMOR and the other conducted by the State Statistical Office (SSO). While in July the difference between incomes in the two studies was relatively big then in August the results are fairly similar (see Table 19). Conclusions about changes in family income can so far be made on the basis of the EMOR data because the model used by SSO for calculating the average income is not final yet.

According to EMOR, the decline of income stopped in August: although the gross income was smaller than in July the net income was bigger. This can occur in the month after a holiday, when income tax from the holiday payment has already been deducted from the total wage and thus the net income is relatively large. In 1994 the income of families declined in both July and August.

As the seasonally adjusted net income in August was considerably larger than the actual net income, the relative share of seasonal factors in the increase of income in August was -910%. This indicates that the increase in net income was not seasonal in August. This year we can notice a seasonal decline of income in January and February and a seasonal increase in June (see Figure 19).

Since the CPI increase in August was relatively small, the real income remained on the same level as in July. In the first eight months of this year the average real income was 7.5% higher than in the same period last year.

The real income of Estonian families from work-related earnings this August was 4.6% higher than in August 1994. Compared to other former socialist countries, Estonia was quite successful as far as the annual growth of real income is concerned (see Table 20).

In the breakdown of income, the small share of net wage as well as the small share of taxes was characteristic of August (see Table 21). Compared to August 1994, income from production activity has decreased considerably. Social benefits in August included the school-starting benefit besides the regular child benefits, which increased the overall child benefit by 49%.

Private Consumption and Saving

Being a post-holiday month, the level of consumption by families was relatively low in August. According to the EMOR study, a slight increase compared to July consumption was recorded, while the SSO study points to a slight decline (see Table 22). As EMOR has conducted its studies over a longer period, the following analysis is mostly based on their findings.

Like in case of income, the increased consumption in August was not caused by seasonal factors (their relative share in consumption increase was -290%). Seasonal increase could be noticed in consumption in May and June and a seasonal decline occurred in January and February (see Figure 20).

Real consumption (in prices of January 1993) changed little in August and its level was 3.2% higher than the respective figure for the last year. In the first eight months of this year, real consumption is up by 2.9% against the same period last year.

Since family income and consumption changed little in August, the share of savings also changed little. Savings in cash as well as investments were slightly reduced.

Seasonal influences could be noticed in the breakdown of consumption: the share of food and housing costs was smaller than the long-time average (see Table 23). In case of food this can be attributed to the bigger share of garden produce grown by the population itself (less was spent on buying fruit and vegetables). The smaller than average share of housing costs was due to smaller heating costs. August was characterised by preparations for the beginning of the school year: more clothes and stationery was bought. The increased share of transportation costs compared to July has been caused by the fact some families in the EMOR study bought a car.

Economic Inequality and Living Standard

The distribution of income in August, according to an index smoothed by the sliding three-month average Gini coefficient, was the most uneven this year, just like it had been last year (see Figure 21and Table 24). However, in the first eight months of this year the Gini coefficient has been considerably smaller than in the respective months of last year. A distinctive feature in August was the increase in the income of both the wealthiest 10% of families and the poorest 10% of families.

The average net income expressed in US dollars decreased in August due to the strengthening of the dollar against the kroon.

The spending on vital necessities decreased to 355 kroons per family member in August. This was caused by the fall in the price of products included in the physiological food basket, and smaller heating costs. Seventy-five per cent of families spent more on food than the cost of a minimum food basket (300 kroons per person in August). The share of such families increased 5% in August compared to July.

In August, price increase had a slightly bigger influence on wealthier families than on low-income families who spend more on food (see Table 25). From the same table we can see that the CPI based on the actual average consumer basket was smaller than the CPI based on the fixed consumer basket of the State Statistical Office, and this concerns both August and the long-term average.

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