This 1999 Article IV Consultation highlights that real GDP growth of Estonia slowed to 4 percent in 1998. Tighter macroeconomic policies, the decline in the stock market, and banking difficulties in the wake of the Russian crisis in August 1998 dampened domestic consumption and investment. Output growth in early 1999 has remained weak. Overall, the direct impact of the Russian crisis on growth was relatively modest, mainly because Estonia had reoriented most of its trade to the West and the exposure of Estonian banks to Russian financial markets was limited.
Since issuance of SM/99/130 (6/7/99), the following information became available.
1. The authorities revised their estimate for GDP growth in the last quarter of 1998 from 0.2 percent to minus 0,7 percent.1 Preliminary official estimates suggest a decline of GDP by 5.8 percent in the first quarter of 1999, as domestic and foreign demand weakened. Twelve-month inflation at end-May was, at about 3½ percent, in line with earlier staff projections.
2. Reflecting the larger than expected decline in the economy, budget revenues in April and May of 1999 increased somewhat less than expected. However, this was offset by expenditure restraint and the staff maintains its budget deficit projections.
3. Parliament completed on June 21 the second reading of the supplementary budget, which, as indicated in the staff report, entails expenditure cuts of over EEK 1 billion. The authorities expect the supplementary budget to be passed by the end of this month.
4. Recently released official data confirm the staff’s balance of payments estimates. Because of the pronounced weakening of import demand, the current account deficit narrowed in the first quarter of 1999 to about 7 percent of GDP, even though exports declined by 10 percent. Exports to Russia fell by around 50 percent, which was about in line with the overall shrinking of Russian imports. Exports to neighboring Baltic states also declined sharply as their economies slowed. By contrast, exports to EU markets rose by a brisk 10 percent.
All comparisons in this statement are with the same period one-year earlier.