SURVEY OF THE ESTONIAN ECONOMY
SECOND QUARTER OF 1996

CHRONICLE

19 April. Estonia and the Czech Republic signed a free trade agreement which does not cover agricultural products.

30 April. The Riigikogu (the Parliament) made amendments in the land reform legislation with the aim of speeding up and simplifying the land reform.

15 May. The Riigikogu passed the Law on Inheritance.

28 May. Estonia signed agreements with Latvia and Lithuania on social insurance.
The Riigikogu made amendments in the Business Code and related legislative acts.

5 June. The Riigikogu passed amendments to the Law on the Social Protection of the Unemployed and the Law on Commercial Pledge.

6 June. The Government approved a plan of action for Estonia's unification with the European Union (EU). The measures listed in the plan are meant to be applied in 1996-1997, negotiations on EU membership are expected to be started in 1998 and concluded by the year 2000.
The Riigikogu passed the Law on Non-Profit Organisations.

12 June. The Riigikogu made amendments in the Law on VAT, the Law on State Pensions and Social Benefits, the Law on Alcohol Excise Tax, the Law on State Reserves and related legislative acts, and the Law on the State Founding of and Participating in Institutions Under Private Law; amendments and additions were also made in the Law on the Agricultural Reform and related legislation.

13 June. The Riigikogu amended the Law on State Support for Entrepreneurship.

16 June. The prime ministers of the Baltic countries signed the free trade agreement on agricultural products between Estonia, Latvia and Lithuania. All export and import tariffs and quotas on mutual trade with agricultural products will be abolished after the agreement takes effect.

18 June. The Estonian Government, Eesti Pank and the International Monetary Fund (IMF) signed an economic policy memorandum which will be in force until 1 July 1997.

26 June. The Riigikogu passed the Law on Additional Budget and changed the distribution of funds between state-financed Government departments; amendments were also made in the Government of the Republic Act and related legislative acts.

27 June. The Riigikogu made amendments in the Law on VAT, authorizing the Government to introduce minimum prices for imported agricultural products and second-hand cars.

ECONOMIC GROWTH

Decline of the economic growth in the first quarter as compared to the end of last year and increase in the second quarter is seasonal by nature (see Table 1). According to the trend of the first six months the economic growth for 1996 could be 1.8-2%.

The change in the aggregate index of the market reasearch barometers of the Estonian Institute for Market Research was analogous to that in the economic growth index calculated by the Macroeconomic Research Department of Eesti Pank (EGI; see Figure 1).

Economic growth is to a great extent influenced by industrial production which, according to the State Statistical Office, measured at constant prices was 1.5% lower in the first six months of this year than it had been in the same period in 1995, whereas the decline in the processing industry was partly compensated by the increase in the production of the energy and mining industry (see Table 2). To some extent this can be attributed to the cold winter of 1996 that increased the consumption of energy but had a hindering impact on economic activity in several branches.

Restructuring is continuing in the processing industry and development is different in different branches. The development has been more rapid in timber processing; the production of paper has been relaunched and the textile industry has overcome the low ebb over the past year. The production of alcoholic beverages suffered mostly due to the high price increase caused by the rise in the excise taxes. The production of clothes declined, processing of hides and production of footwear are on the verge of perishing.

A considerable impact on the economic growth of the second against the first quarter had the enlivenment in freight transport and the beginning of tourist season.

INFLATION

The average monthly increase in consumer prices was exceptionally small in the second quarter - 1.0% (2.8% in the first quarter of this year and 2.0% in the second quarter of 1995). One of the reasons for this slow-down was the rapid seasonal drop in the increase in prices in the open sector - the monthly average price increase dropped from 2.7% in the first quarter to 0.7% in the second quarter (in the same period in 1995 the average prices in the open sector had decreased from 2.6% to 0.1%).

The actual reason for the low inflation was the remarkably big decline in the average monthly increase in prices in the sheltered sector - from 3% in the first quarter to 1.5% in the second quarter (in the second quarter of 1995 the average monthly increase in prices in the sheltered sector had been 4.7%).

In the second quarter the administratively regulated prices of the sheltered sector were increased less than originally intended (in case of electricity) or the price increase was postponed (in case of imposing VAT on the price of heating sold to the population). Apparently, the fact that no one wished to take responsibility for unpopular decisions before local elections also had a certain impact.

A seasonal decrease in the increase in consumer prices in the second quarter was also recorded in Latvia, Lithuania and Russia, where the average monthly consumer price index (CPI) in the first quarter was 1.023, 1.026 and 1.032 respectively, while the corresponding figures for the second quarter were 1.009, 1.007 and 1.017.

The increase in consumer prices slowed down also as compared to the second quarter of 1995, with the price increase slowing down in the sheltered sector and speeding up in the open sector. The latter was due to the new excise tax rates (on car fuel, alcohol and tobacco) that took effect at the turn of the year as well as the increase of prices of some goods on the world market (grain, fodder, car fuel). Without these factors the price increase in the open sector would have slowed down as well (see Figure 2).

As compared to the first half-year of 1995, the increase in the majority of inflation indicators slowed down (see Table 3). The increase in prices in the second quarter also slowed down as compared to the first quarter of 1996 (with the exception of producer prices in the energy and mining industry). At the same time export prices even decreased. As compared to the second quarter of 1995 the increase in consumer prices in the open sector as well as the producer prices of industrial production quickened in the second quarter of this year (see Table 4). There were several reasons for the acceleration in the price increase in the open sector. The relatively cold spring and the first half of the summer moved the seasonal cheapening of foodstuffs (dairy products, butter, meat and fish products) to a later period of time as compared to the previous year. In addition, the price reduction was smaller than in earlier years. Due to price increases on the world market, car fuel and bakery products became more expensive in May. The acceleration in the increase in producer prices in June can be attributed to the increase in the price of electricity and oil shale.

Consumer Price Indec (CPI)

The increase in consumer prices in the second quarter of 1996 was smaller than in any other period (see Table 4). The increase in the prices of the sheltered sector was the smallest in the entire post-monetary reform period (see Figure 3). Characteristic of the recent periods has been the slow-down in the increase in prices in the sheltered sector (mostly administratively regulated prices). However, in the second quarter of 1996, their increase was still higher than the increase in prices in the open sector. As to its impact, the share of the sheltered sector accounted for up to one third of the total consumer price increase (see Table 5).

Looking at different months we can see that the increase in consumer prices accelerated in April, slowed down in May, and remained practically unchanged in June (see Table 6).

In April, the prices in the open sector were mainly affected by the increase in the prices of fruit and vegetables, as well as clothing. The price increase in the sheltered sector mostly resulted from the increase in the price of telephone services and railway tickets.

In May, the prices in the open sector were greatly influenced by the increase in the prices of bakery products. The price increase in the sheltered sector was mostly due to the increase in the price of newspapers and fees for the technical inspection of motor vehicles.

In June, 64% of the consumer price increase was caused by the increase in the price of electricity. Its impact was somewhat diminished by the seasonal cheapening of foodstuffs which brought consumer prices down (see Table 7).

Producer Price Index of Industrial Production

The increase in the producer prices of industrial production slowed down in the second quarter, as compared to both the first quarter and the quarterly average of the previous four quarters (see Table 4 and Figure 4). The price of products of the processing industry increased by the same amount as they had in the second quarter of 1995 but less than in the first quarter of 1996. Due to the increase in the prices of electricity and oil shale, the producer prices in the energy and mining industry increased considerably more in the second quarter of 1996 than they had in the corresponding periods before that, and their impact on the overall increase of the producer price index was big (see Table 8).

The reduction in producer prices in April and May was mainly due to the seasonal cheapening of foodstuffs. The decline in the price of timber products that has lasted for some time was due to the situation on the world market.

The increase in producer prices in June can mostly be attributed to the 15% rise in the wholesale prices of oil shale and electricity. According to the Ministry of Economic Affairs, this was due to the prices of materials and spare parts going up. The Government decided to increase the price of electricity less than Eesti Energia (the Estonian Energy) had proposed, in order to force the company to reduce losses and look for ways of increasing electricity export.

Export and Construction Price Index

Compared to the first quarter, export prices decreased in the second quarter. This was the first long-term reduction - so far export prices had been dropping only in a few separate months (see Table 4 and Figure 5). Export prices decreased for the majority of merchandise (animal products, chemical and timber products). This put local producers in an unfavourable situation and resulted in the decrease of the export of animal products, timber and timber products in the first half of this year.

The increase in construction prices remained on the level of the first quarter, being all-time low (see Table 4 and Figure 5). The slow-down in the price increase as compared to the same period last year continued (see Figure 6).

Among the components of the construction price index the biggest increase in the second quarter occurred in the cost of using building machines. The cost of labour increased less than Estonia's average wage. However, 67.3% in the construction price increase was due to the increase in the price of building materials which account for approximately three fourths of the total costs of building projects (see Table 9).

Real Rate of the Kroon

The increase in the real rate of the kroon, based on changes in the consumer prices, slowed down in the second quarter (see Table 10 and Figure 7). The real rate of the kroon mostly increased due to prices increasing in Estonia more than they did for Estonia's major trade partners. The nominal rate of the kroon decreased against the level of the first quarter (see Table 11).

The increase of the kroon's real rate against the currencies of industrial countries was mostly caused by the price increase in Estonia the impact of which was reduced by the industrial countries' own inflation as well as by the fall in the nominal rate of the kroon against the currencies of Estonia's major trade partners.

The real rate of the kroon was down against the currencies of transition economies in the second quarter. This was mostly due to the kroon cheapening against the Latvian lats and the Lithuanian litas, but also because of the much higher price increases in Russia.

PUBLIC SECTOR

Revenue

Leaving aside the increase of revenue resulting from the redistribution of income from taxes, the nominal income of the state budget was up approximately 14% in the second quarter of this year as compared to the same period last year (see Figure 8). As compared to the first quarter of this year, 20% more revenue was collected but it was still less than the planned target. In the first half of 1996, 45% of the planned annual revenue was collected.

Thanks to the larger than expected profits, more corporate income tax was collected (67% of the annual target was collected by 1 July). However, the increase of revenue collection still mostly depends on VAT and personal income tax which make up a big share of the total revenue. The collection of VAT increased 27% in the second quarter as compared to the second quarter of 1995 but it was below the predicted annual growth (28%). Revenue from personal income tax increased 1.2 times over the same period, being close to the planned average growth rate (see Table 12 and Table 13).

Revenue from excise taxes was 40% bigger than it had been in the first quarter and 48% bigger than in the second quarter of 1995. However, the planned amount was 1.7 times more than last year. The unsatisfactory collection of indirect taxes in the first quarter of this year prompted the Government on 23 April to set up a commission for working out measures to stop VAT and excise tax fraud. Besides representatives of the Ministry of Finance the commission comprises representatives from the Central Criminal Police, the Border Guard, the Customs Department and the Security Police.

Revenue collection for the budgets of local governments and social and health insurance purposes can be estimated as satisfactory. The share of local taxes has still remained modest, due to the high cost of collecting them - in the second quarter local taxes amounted to 2.2% of total revenue for local governments, including allocations from the state budget. At that, 75% of the total revenue collected from local taxes was made up of the motor vehicle tax imposed in Tallinn. The sources of revenue differ widely across local governments and a number of local administrative units are too small to fulfil all the functions expected from them. On 29 May the Riigikogu amended the Law on Administrative Division of the Estonian Territory, making the merger and split-up of administrative units simpler. So far, however, only two parishes have taken advantage of the possibility to merge.

Over the second quarter the Government and the Riigikogu received several proposals that would have led to the reduction of state revenue (income tax reliefs, VAT reliefs). The Government rejected all those proposals. Although the draft 1997 state budget has been drawn up proceeding from the taxes that were in force in the first half of 1996, this does not exclude the possibility of indirect taxes being increased. The procedures for indirect tax increases are constantly being improved. In the second quarter, for example, the Riigikogu adopted amendments in the Law on VAT under which zero-VAT level applies only to exported merchandise and services; in 1997 the excise tax rates for imported and locally brewed beer will be equalized, etc. While adopting amendments in the Law on VAT the Riigikogu also gave the Government the right to establish minimum prices for agricultural products which is aimed at facilitating fight against tax fraud.

Expenditures

Expenditures of the state and local budgets have increased more rapidly than revenue (see Table 13). The breakdown of the expenditures according to the purpose of use has been relatively stable over the past few years (see Table 14).

While every summer expenditures made on economic development have increased due to construction and repairs then this year the increase was only noticeable in the expenditures of local governments. In the second quarter, local governments spent 283 million kroons on investments (117 million kroons in the first quarter); 148 million kroons of this sum was spent by the Tallinn city government. As compared to 1995, investments increased 2.7 times. Thanks to loans, investments by the public sector this year can turn out to be the biggest since the beginning of the transition period, reaching over 5% of the gross domestic product (GDP). The increase of other expenditures has been smaller - 47%. But expenditures on salaries by local governments have increased particularly rapidly - 50% (the increase has been smaller than average in Tallinn - 32%).

The deficit of the state budget and local budgets has been increasing every month (see Figure 9). In the coming months the deficit will further increase due to the Riigikogu's decision in June to increase the Government's reserve fund using the surplus of 1995, and this way increase the salaries of cultural and educational workers.

As pensions have been increased twice this year already and a decision was made to pay full pensions to working pensioners from the second quarter, expenditures on social insurance have still been bigger than revenue from the social tax.

The health insurance system was able to reduce expenditures on compensations for sick leaves since the number of sick leave days has decreased. At the same time, several hospitals began to complain about the lack of money starting from May. At the end of 1995, the Ministry of Social Affairs increased the prices of most medical services by an average of 30%. However, in the first months of this year it turned out that expenditures of health insurance institutions had been so high that some Health Insurance Funds were no longer able to afford new services. As the medical establishments' current costs are smaller in the summer months, the balance of revenue and expenditures of the health insurance system turned out to be positive in the second quarter, contrary to the balance in the first quarter. However, the surplus was too small to compensate for the deficits of the social insurance system and local governments. From next year, the Government intends to stop financing the communal and maintenance costs of state-run hospitals. State funding would only be provided for the emergency aid system and the Tartu University Clinic, as well as emergency aid for persons without health insurance (this year, approximately 64 million kroons are spent on that purpose).

Financing of the Deficit

The deficit of the entire public sector is unusually large as compared to previous years, although the first quarter overall deficit that amounted to 4.4% of the GDP has been reduced to 3% in the second quarter. According to preliminary estimates, the financial deficit decreased from the first quarter's 3% of the GDP to 1.7% of the GDP in the second quarter. This reflects the increase of revenue as compared to the first quarter, and the fact that the size of investments financed from foreign loans taken by the central government remained on the level of the first quarter, while local governments had too little time to carry out their loan-based investment plans.

In the second quarter financing of the deficit was different from that of the first months of this year. While in the first quarter 59% of the deficit was covered from the domestic financial sector and 41% from the foreign sector, then in the second quarter the deficit was entirely covered from the foreign sector (see Table 15).

Local governments have declared their intentions of borrowing a total of 670 million kroons this year. By the beginning of the second half-year local governments owed approximately 620 million kroons. Nearly 70% of the loans disbursed in the second quarter remained unused. This provides for the possibility of expenditures being higher than revenue also in the third quarter. In order to avoid an excessive loan burden the Government has began drafting legislation that would restrict pursuing the policy of a budget deficit.

Loan Burden and Disbursement of Foreign Loans

In the second quarter, a total of 122 million kroons worth of loans taken or guaranteed by the state were disbursed (see Table 16), that is, considerably less than in the first quarter. The public sector itself used approximately 60% of the loans taken by the state. Foreign loans were used to finance the reconstruction of district heating systems as well as the purchase and installation of the frontier observation systems. In addition to state loans, local governments received 462 million kroons worth of loans.

A loan taken from the US Department of Agriculture for purchasing cotton for Estonia's textile industry and guaranteed by the Estonian Government was fully paid back in the second quarter. The required parts of the loan taken from the Finnish Exportcredit Ltd were also paid back. The costs of servicing the loans accounted for 1.5% of the export of merchandise in the second quarter. The increase in the servicing costs as compared to the previous years is due to the increased amount of loans that have to be repaid.

Of new loans, the Riigikogu ratified a loan guarantee for 20 million German marks to the Eesti Veevärk (the Estonian Water System) from the European Bank for Reconstruction and Development. This project will finance the expansion and reconstruction of the municipal water supply systems in Tartu, Narva, Pärnu and other towns. The loan will be given to the Eesti Veevärk for 15 years, with a grace period of five years during which only interests have to be paid. The 480 million kroon bond issue of the Tallinn municipality was also added to the foreign liabilities of the public sector.

So far the Estonian state has followed a relatively conservative policy of borrowing. At the beginning of July 1996, the state had taken 20 foreign loans with the total worth of 3.6 billion kroons (USD 297 million). In addition, the Government has guaranteed some 1.6 billion kroons (USD 130 million) worth of loans (see Table 17).

Estonia's official foreign debt, that is, the disbursements of loans taken and guaranteed by the state minus repayments, was 3.3 billion kroons at the end of the second quarter (see Figure 10). If we add here the Tallinn municipal bonds, the foreign debt of the public sector will reach 3.8 billion kroons. Although the absolute size of the foreign debt has been constantly increasing, the ratio of the actual foreign debt to the GDP has remained relatively low (7,2% in 1995). This year, the (foreign) loan burden of the public sector will increase to 8% of the GDP, mostly due to foreign loans taken by local governments.

POPULATION

In the second quarter the decrease of the population continued due to emigration and a negative natural increase (see Table 18). Although the negative natural increase was reduced two times in the second quarter (the number of deaths was smaller and the number of births was slightly up), the population still decreased by nearly 3,000 people, due to more active emigration (1,200 people in the first quarter, 1,800 people in the second quarter). Overall, the number of permanent residents decreased by approximately 6,300 people in the first half of this year (the decrease was nearly 9,000 people in the first half of 1995).

UNEMPLOYMENT

The number of unemployed registered at the State Labour Market Board reached its peak by 1 May when a total of 19,800 people had been declared unemployed (18,300 of them received unemployment benefits). From January to May, some 39,000-40,000 non-working job-seekers turned to employment offices each month; in June their number dropped to 35,000.

In the first half of this year, the number of unemployed has constantly been nearly 1.2 times higher than the level of 1995 (see Figure 11). The reduction in the number of state-run companies has led to a large number of redundancies and people have been unable to find themselves new job in the new economic structures.

According to the studies by the EMOR, 70% of the working-age population had a job in the second quarter (76.8% in the first quarter). The share of unemployed was 9.1% of the working-age population in the first quarter and 8.8% in the second quarter, according to the EMOR. Data of the Labour Market Board give a much lower level of unemployment - 4-5% of non-working job-seekers and 2-2.3% of registered unemployed of the total number of working-age population (see Table 19).

According to the Labour Market Board, the share of women among the unemployed has been on the increase - on 1 July 1995, there were 64.3% of women among the officially registered unemployed; on 1 July this year the share of women was 67%. Among different age groups the share of women is the largest among Russian-speaking pre-retirement age group. Nearly one third of the officially registered unemployed have been housewives or stayed at home with small children for a longer period.

As compared to 1 July 1995, the share of unemployed with higher education has increased by two percentage points (being 7.6%). The majority of the unemployed (45.2%) had secondary education. The share of the unemployed with vocational secondary education (24.3%) and with basic education (up to nine years, 22.9%) was nearly equal. Considering their earlier jobs, a large share of the unemployed are non-skilled labour, skilled workers from the industrial sector, and workers from the services and trade sectors.

As of 1 July, the state employment system had a total of 1,099 vacant jobs to offer, of which 419 were for skilled workers or handicraftsmen, 255 were in services and trade, 103 were for operators of machinery or equipment, or drivers, and 89 for senior executives. With the beginning of the summer season the number of seasonal jobs on offer increased. As before, the chances of finding a job were the best in Tallinn and the Harju county, and the worst in southern and north-eastern Estonia (see Table 20).

Labour Market Policy

In every month of the first half-year an average of 39,100 non-working job-seekers turned for the employment offices; 4,900 of them were first timers (the respective figures for 1995 were 36,300 and 4,100). The increase can be attributed to the greater number of the unemployed as well as a change in the behaviour pattern of the population - the negative attitude towards the state employment system stemming from the early 1990s is gradually being replaced by a much more rational attitude.

In the first half of this year, a total of 35 million kroons (30 million kroons in the first half of 1995) was spent from the state budget on the social protection of the unemployed and for maintaining the state employment mediation system. Nearly half of this went on paying unemployment benefits - to a total of 30,000 people in the first half of 1996.

For retraining of the unemployed, 12.7 million kroons was spent in the first half-year, plus 2.6 million kroons was paid in scholarships to the unemployed during their retraining. The employment offices sent a total of 5,400 unemployed for retraining courses in the first half of 1996.

Providing starting capital for the unemployed for setting up their own business is another means of active regulation of the labour market. Such starting capital was paid to 250 unemployed in the first half of this year, with the total worth of 2 million kroons (in the first half of 1995, 230 unemployed were paid 1.75 million kroons in starting capital).

There are also subsidies paid to employers who offer jobs for less competitive job-seekers (mothers with small children, pre-retirement age workers, released prisoners or the disabled). Such subsidies (300,000 kroons in total) helped 160 people to find a job in the first half of this year, or twice as much as the year before.

WAGES AND SALARIES

After the payment of bonuses at the end of the year, the average wage usually decreases at the beginning of the year. The second quarter marks the beginning of a new increase which culminates in June when holiday payments are added to the usual wages (see Figure 12). Compared to previous years the growth of the average wage, according to expectations, displays a slight slowdown.

According to the State Statistical Office's data based on company reports, the average monthly wage was 2,649 kroons in the first quarter, which means a 1.8% seasonal decline against the fourth quarter of 1995. According to estimations of the Ministry of Social Affairs, the average monthly wage was over 3,000 kroons in the second quarter, mainly thanks to the 14.5% increase in June (see Table 21).

In the first half of 1996, real wage decreased in three months (22.4% in January, 0.9% in February and 0.4% in May) and increased in the remaining three months (4% in March, 1.5% in April, and 13.7% in June). Overall, the decline of the real wage was bigger in the first quarter of this year than it had been in the first quarter of last year (9.1% and 7.7%, respectively), but a growth similar to that of the previous year was achieved in the second quarter (8.3% and 8.1%, respectively). But despite this, the average real wage was below the level of respective months the year before throughout the first half-year.

In connection with holiday payments in June, the differentiation of wages increased seasonally in the second quarter (the Gini coefficient for the first quarter was 0.381 and for the second quarter, 0.410). According to the EMOR family studies, the share of workers whose monthly net wage was more than 2,000 kroons has increased considerably over the past year (see Figure 13).

According to the EMOR, in the second quarter the average monthly net wage was more than 3,000 kroons only in construction, the energy sector, gas and water supply and financial sector. The net wages were less than 2,000 kroons a month in agriculture, forestry and fishery, and various services.

In US dollars the average gross wage was USD 268 in June (USD 237 in June 1995). In Latvia the average wage in June 1996 was 113.1 lats or USD 204, and in Lithuania 656.7 litas, or USD 164.

FAMILY INCOME

According to the State Statistical Office's family study, the monetary income per family member was 1,698 kroons in June, or 5.8% up from the level of May (see Table 22). As income increased also in April and May (7.1% and 3.7%, respectively), the average rate of increase in income was 5.5% a month in the second quarter.

The increase of the real income was over 8% in the second quarter, similar to the increase of the real wage. However, just like in case of the real wage, the real income remained below the level of the respective period of 1995 (see Figure 14).

The size of income is mainly affected by the wage. While in the first quarter of this year the decline of the wages led to the decline in income, then in the second quarter the wage was the main contributor to the increase of income (see Table 23). In the second quarter the problems of wage increase were often discussed by the Riigikogu, the Government and the trade unions. According to an agreement reached between them, a more substantial increase in the salaries of civil servants and employees of the social sphere will take place in the second half of this year.

Pensions were increased from 1 January and 1 April. From 1 April, working pensioners, women over 60 and men over 65 years of age, began to receive full pensions, regardless of the size of their wage. In June, the Riigikogu decided that from 1 September this right would be guaranteed to all working pensioners.

Income from production activity and financial resources applied has so far been a relatively insignificant component of family income (see Table 24).

PRIVATE CONSUMPTION AND SAVING

Family spending on consumption increased 17.5% in the second quarter, thus making up for the 8.1% decline in the first quarter (see Table 25). In June, spending on consumption reached the level of December 1995.

In the second quarter, families spent 94% of their net income on consumption (91% in the first quarter), which indicates that savings amount to less than one tenth of income this year.

In terms of real consumption (in prices of 1993), the 12.9% increase of the second quarter was not sufficient to compensate for the 15.3% decline in the first quarter. Therefore, the real consumption of the first half of 1996 was smaller than it had been in the first half of 1995 (see Figure 15). According to the State Statistical Office's family study, spending on consumption was somewhat bigger than according to the study by the EMOR, but gives a smaller monetary income. Thus, the figure for savings is smaller according the State Statistical Office data, since it is a remainder indicator.

According to analyses, one of the most important factors affecting total consumption is spending on housing (see Table 26). The frequent increase of the prices of district heating and other communal services increased consumption costs also in the first half of this year. Only in June that heating costs decreased slightly, bringing down overall consumption costs. In the first quarter the share of housing-related costs was 25.2% in overall consumption and in the second quarter it was 22.6% (see Table 27). In the spring and summer season spending on transport and buying manufactured goods increased.

ECONOMIC INEQUALITY

The differentiation of the income of the population has varied considerably in different seasons over the past few years (see Figure 16). The differentiation is more marked in the second and third quarters when holiday payments are being paid, and less noticeable in the fourth and first quarters. Adjusting the values of the Gini coefficient with the sliding average of the 12 months we can notice the equalization of income rather than greater differentiation (see Figure 17).

In the first half of 1996 the slight decrease in the differentiation of income can be attributed to the rise in the minimum wage, as well as the equalizing effect of social insurance benefits on the population's income. In June, the Gini coefficient increased (see Table 28) but this is normal during the period of holiday payments.

The share of the income earned by the 40% poorer families is nearing 20% of the total, while 20% of richer families still receive nearly half of the total income. The net income of the 10% wealthiest families exceed the average net income by more than three times.

The cost of the minimum food basket was 437 kroons a month in the second quarter, according to the EMOR (390 kroons in the first quarter). As compared to the fourth quarter of 1995 (325 kroons) the cost of the minimum food basket has increased by a third.

Eesti Pank Macroeconomic Research Department