Estonia rocked by corruption scandal

The Internal Security Service KAPO on Sept.22, 2015 detained Tallinn Mayor Edgar Savisaar as a suspect for repeatedly accepting bribes.

The Center Party chairman is suspected of repeatedly accepting bribes in 2014 and 2015 in assets and favors for himself as well as for a third party with a total value of several hundred thousand euros.

Read more from BBN

The increase in the current account surplus- reasons

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

Estonia’s highest ever surplus – 5.9% of GDP

The current account of the Estonian balance of payment recorded its highest ever surplus in the second quarter of 2015 at 308 million euros, or 5.9% of GDP, which is more than two and a half times larger than in the same quarter of last year. The main contribution to the growth in the surplus came from the primary income account, which shows labour and investment income, and from the trade account. Having been in deficit to a large degree for years, the primary income account showed a small surplus in the second quarter, while the deficit on the goods account decreased1. Exports and imports of goods and services had a positive balance of 295 million euros on the current account, with exports 3% below their level of the same quarter in the previous year, and imports 4% below theirs.

The deficit in the export and import of goods fell by around one fifth over the year to 196 million euros as imports declined faster than exports did. Imports of goods crossing the Estonian border were 242 million euros larger than exports going the other way. The turnover of goods under merchanting, which are those bought abroad by Estonian merchants for sale in a third country, made up 14% of the turnover of exports and imports of goods, and sales of goods under merchanting exceeded purchases of such goods by 46 million euros.

Exports and imports of services were down by 1% and the surplus from exports and imports of services was the same size as in the second quarter of last year at 491 million euros. There was a decline in the surplus of travel services and transport services, two important services sectors, while the positive balance of other business services increased its share slightly. The surplus in construction services increased almost fourfold at the same time.

The investment and other income account recorded a net inflow in the second quarter2 as a sharp fall in the outflow of direct investment income meant that the inflow of income exceeded the outflow by 13 million euros. The outflow of direct investment more than halved as income tax on superdividends3 was paid to the Estonian state.

The net inflow of labour income and subsidies for production from European Union funds increased somewhat, but remained at about the same level as last year.

The surplus on the capital account increased in the second quarter mainly because of the 69 million euros received in investment support from the European Union Structural Funds.

The net total of the current and capital accounts, or net lending (+) or borrowing (-), saw a surplus of 376 million euros in the second quarter, meaning that the Estonian economy was a net lender to other countries. This was reflected as a net outflow of capital on the financial account of the balance of payments as foreign direct investors reduced the equity of their direct investment companies in Estonia. Credit institutions brought capital in from their external accounts, which was reflected on the cash and deposits account under other investments, with the result that the external assets of the central bank, reflecting the deposits of the banks at the central bank, increased.

Eesti Pank will release the statistics for the balance of payments and the external debt for the third quarter together with a comment on 9 December.

1 All comparisons have been drawn on an annual basis, if not indicated otherwise.

2 Net flow = inflow minus outflow. If the inflow exceeds the outflow, there is a net inflow, if the outflow exceeds the inflow there is a net outflow.

3 Superdividends are on-off dividend payments that are treated as a reduction in equity and shown in the financial account.

The structure of the current account

Net lending (+) and net borrowing (-) and the total current and capital account


Source: Bank of Estonia

The current account at 25 Meur in surplus in July

The flash estimate1 put the Estonian current account at 25 million euros in surplus in July 2015. Activity in the Estonian external economy has declined in recent months and the volumes of credit and debit on the current account have been smaller than a year earlier for four months. Exports of goods, services and investment income were all down in July and imports of goods, services and income were all less in July than they were a year previously.

Capital income was boosted by active use of grants from the European Union Structural Funds, and the surplus on the current and capital account stood at 56 million euros in July. The Estonian economy has been a net lender to the rest of the world throughout 2015, so the country as a whole invested more resources abroad than it received from there.


1 The quarterly balance of payments is compiled from a combined system of representative primary data sources, including surveys of companies, while the monthly balance of payments draws from a considerably smaller database. Although the monthly report uses as much data available for the month reported as possible, including administrative data sources and reports on international payments, it is subjective to a certain degree, which is why it is called an estimate. Once the quarterly balance of payments is released, the monthly balances of payments are adjusted accordingly.

Source: Bank of Estonia (see graph here)

Estonia with lowest public debt level

public debt

General government balance back in surplus

According to the preliminary data of Statistics Estonia, in 2014, the Estonian general government surplus was 0.6% and the gross debt level was 10.6% of the gross domestic product.

At the end of 2014, the total revenues of the general government exceeded the expenditures by 112.7 million euros*, accounted as the Maastricht deficit criteria. Both the balance of the central government and those of local governments improved. By the end of 2014, the surplus of revenues of the central government sub-sector was 55 million euros*. The deficit of the local government sector decreased over the year, amounting to a deficit of only 4.5 million euros at the end of 2014. The budget surplus of social security funds was 62.2 million euros, remaining on the same level as in 2013.

The consolidated debt of the general government (Maastricht debt) amounted to 2.1 billion euros by the end of 2014, having risen 10% compared to 2013. The local governments as well as the central government contributed to the growth of the debt level. The loan liabilities of the central government rose by 11%, while the volume of long-term securities issued by the public-legal institutions and foundations belonging to the central government decreased by 28%. The share of foreign debt in the central government’s loan liabilities was nearly 84%.

The Estonian involvement in the European temporary rescue mechanism, EFSF (European Financial Stability Facility) increased by 26.4 million euros in 2014. At the end of 2014, the liabilities towards the EFSF totalled 485 million euros, 81% of which went for the participation in the rescue package for Greece, 12% for Portugal and 8% for Ireland.

The overall debt level of the local governments grew by 12% compared to 2013 and nearly a quarter of the loans were financed by foreign capital. While the volume of long-term loans increased 13% over the year, the volume of short-term loans decreased nearly three times. The volume of the securities other than shares increased 8%. As at the end of 2014, social security funds did not contribute to the debt of the general government sector.Diagram: Surplus/deficit and debt level of the general government in Estonia

* Unlike earlier years, the results of the economic activities of central stockholding agencies and deposit guarantee funds are now added as estimations to the central government balance according to Eurostat’s decisions on accounting harmonisation. The corresponding recalculations will be published in the Statistical Database of Statistics Estonia together with the results of regular revisions in September 2015.

In Estonia the general government sector comprises three sub-sectors: 1) central government (state budget units and extra-budgetary funds, foundations, legal persons in public law); 2) local governments (city and rural municipality governments with their subsidiary units, foundations); 3) social security funds (Estonian Health Insurance Fund, Estonian Unemployment Insurance Fund).

Source: Statistics Estonia

The current account was in surplus in January

The flash estimate put the Estonian current account at 55 million euros in surplus in January 2015. Exports of both goods and services were up on a year earlier, but import volumes were smaller than in January 2014. The smallest deficit on the goods account in recent years and an increased surplus in services turned the current account balance to surplus.

The total balance of the current and capital accounts was also positive. This means that the Estonian economy was a net lender to the rest of the world at the start of this year, so  all the economic sectors of the economy taken together invested more resources abroad than they received from there.

See more on the Bank of Estonia website


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