TALLINN - Estonia's economy is to drop a worse than expected 14.5 percent this year and further budget cuts will be needed to keep if 2011 euro adoption hopes are to be met, the Finance Ministry said on Thursday.
Like Baltic neighbours Lithuania and Latvia, Estonia's economy has gone into a steep decline after several years of credit-fuelled boom. Though Estonia built up a reserve of funds during the good years, it is still having to hack back the budget to keep a cap on the fiscal deficit.
'Compared with spring, despite the economic contraction, you can see signs of stabilisation,' said Finance Minister Jurgen Ligi.
'However, this means additional decisions are needed to continue to join the euro, if the country can afford the cost of course,' he added in a statement.
The ministry forecast a gross domestic product drop this year of 14.5 percent, worse than the 8.5 percent previously expected. Under a positive scenario, the GDP drop would be 13.6 percent, it said.
'The government sector deficit will on the border of the Maastricht criterion. In addition to the already made decisions for 2009, improvements to the budget of 2.5 billion kroons will need to be found,' the ministry said in a statement.
The ministry saw the 2009 deficit at either 3.2 or 4.2 percent of GDP, above the 3 percent level allowed for countries wanting to adopt the euro. For 2010, it saw a deficit of either 2.1 percent or 2.9 percent, depending on the economic outturn.
Analysts said the government could meet its target.
'It is still possible. The positive scenario sees about 3 billion to cut and the negative scenario is a little more. It is possible,' said SEB analyst Ruta Arumae.
Handelsbanken analyst Gunnar Tersman said that reaching a deficit of 3, 4 or 5 percent of GDP would be an achievement and showed Estonia was making efforts to restrain its deficit.
'It is not that they have to meet the criteria this year, but it shows that they are very serious about fiscal policy and are one of the better states in the EU,' he said.
'I would not be surprised if they did not meet the exact three percent. They are still performing very well.'
Latvia's budget deficit this year is expected to be about 10 percent of GDP and Lithuania's about 8 percent.
For 2010, the ministry saw GDP dropping 2 percent, slightly better than the 2.5 percent decline expected before and saw growth resuming at 1.5 percent in 2011.
It forecast consumer prices would fall 0.1 percent this year, versus the previous forecast of consumer price inflation of 0.4 percent.
Prime Minister Andrus Ansip was determined to keep to the euro goal.
'I will confirm again: we will hold to the euro course, we have a plan and based on today's situation, I indeed believe that we will join the euro on Jan 1, 2011,' he told reporters after a government meeting.
Reporting by David Mardiste, editing by Mike Peacock/Toby Chopra
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