SURGING EXPORTS AND TRANSPORT SERVICES IN ESTONIA…

Estonia, Latvia and Lithuania ran large current account deficits during 1997-1998, which heightened their vulnerability to the trade shock produced by Russia’s August 1998 financial collapse. All three economies went into recession in 1999, as domestic spending and imports fell in order to restore external balance. This year, growth in some key export markets (especially Russia and the EU) have allowed domestic spending to recover. But so far only Estonia has been able to combine accelerating GDP growth with significant reductions in the current account deficit.

Estonia’s current account deficit, which had been at 12 percent of GDP in the fourth quarter of 1999, dropped to 6.5 percent of GDP in the first quarter of 2000 and only 4.5 percent in the second quarter (www.ee.epbe, “Statistical Indicators,” “Balance of Payments”). While the merchandise trade deficit remained largely unchanged at US$380 million in mid-year, a growing surplus in services (which grew to US$275 million at mid-year–a 17 percent increase over mid-1999) helped reduce the current account deficit. Transport (chiefly the transshipment of Russian goods) accounted for US$172 million of the total surplus on services, while tourism added another US$136 million. Estonia’s current account deficit in the first half was fully financed by 2,336 million kroons received in foreign direct investment. The central bank believes the current account deficit may rise modestly this year due to the quickening pace of recovery in domestic demand. However, Estonia constitutional commitment to a balanced budget and relatively large pool of private savings should help maintain external balance over the medium term.

…WHILE LATVIA AND LITHUANIA MAY NEED TIGHTER FISCAL POLICIES.