ESTONIAN COMMITMENT TO FREE TRADE WEAKENING?

On October 14 the Estonian parliament passed a law allowing for the introduction of import tariffs. This was mainly a result of long-standing pressure from Estonian farmers, unable to compete with the flood of subsidized food imports from the EU. It was also in part a response to the nation’s yawning current account deficit, which reached 4.3 billion kroons ($360 million, or 14 percent of GDP) in the first half of this year.

The government introduced the tariffs proposal in January, but has been struggling with opposition from pro-free trade parties. As a compromise, the new law allows the government to levy customs duties only for a six month period, after which they must seek parliamentary approval. Likely targets for import tariffs are pork from the EU and chickens from the U.S. Reform Party chairman Siim Kallas complained that "Estonia’s success used to rest on three pillars: a liberal economy, a firm kroon, and a balanced budget. The first of these is now crumbling." (BNS, October 14)

The current account deficit (which was already 10 percent of GDP in 1996), is in part a result of the overheating of the Estonian economy. In the first quarter of 1997 GDP grew at an annual rate of 10.8 percent and industrial output soared 17 percent in the second quarter. (Bank of Finland, Week in Review, October 17) In September talks with the IMF broke down over the IMF’s insistence that the government aim for a 2 percent surplus in the 1998 budget in order to slow down the economy. Estonia’s strict currency board system, which pegs the kroon at eight to the Deutsche mark and ties money supply to the inflow of foreign currency, restricts the government’s ability to manage the economy. In September inflation was running at an annual rate of 11.9 percent in Estonia (compared to 8.1 percent in Latvia and 8.7 percent in Lithuania). On October 22 the Estonian parliament will start discussing the government’s draft 1998 budget, which — contrary to the IMF’s wishes for a substantial surplus — it intends to be in balance. Revenue will rise 15 percent on the 1997 level, to reach 36 percent of GDP.

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