The surplus on the current account of the balance of payments increased in the second quarter of this year to equal 6% of GDP. Corporate income tax was the cause of the large change, as it is calculated separately for large dividends. External sector statistics treat exceptionally large dividends as a reduction in a company’s equity, and so it is not the size of the dividend that affects the calculation of the current account, but rather the income tax applied to it. In technical terms this meant a reduction in the outflow of direct investment, and this in turn increased the current account surplus.
On top of corporate income tax receipts, the current account surplus increased due to a reduction in the outflow of investment income that stemmed from lower profitability for foreign owned companies and an increase in the surplus on the goods and services account. Unfortunately this increase came not from increased growth in the exporting sector, but from a reduction in imports of goods. This reflects the low level of investment activity and may prove an obstacle to GDP growth in the near term.
Given a current account surplus, it is to be expected that external assets grew faster than liabilities. This growth continued in the second quarter of this year, and by the end of June the Estonian net international investment position, which shows the gap between assets and liabilities, had dropped to -38% of GDP. Estonia’s external liabilities have not been so small in net terms in the past 15 years.
Source: Bank of Estonia
Author: Andres Saarniit, Economist at Eesti Pank
Filed under: Government |