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Macroeconomic News


Estonia central bank says more budget cuts needed

Wed, 29th Jul 2009 12:58


TALLINN, July 29 (Reuters) - The Estonian central bank said on Wednesday t
he government will need to trim its 2009 budget deficit further to meet the criteria for joining the euro zone.

The Estonian government has made January 1, 2011 its target date for joining the euro zone and has already cut its 2009 budget by 16 billion kroons ($1.45 bln) to keep its deficit under control as the economy contracts sharply during a deep recession.

'Based on the bank of Estonia's spring economic forecast and measures taken by the end of July, the 2009 budget deficit will be close to 4 pct of GDP,' the Estonian central bank said in its annual report on the country's euro adoption preparations.

'Based on this the Bank of Estonia considers that further steps are needed to lower the budget deficit,' the bank added.

After parliament passed the last round of cuts to the budget in June, the central bank said the government would need to trim a further 1.5 billion kroons. The deficit ceiling for euro zone membership is 3 pct of GDP.

The bank said the country will meet the inflation criteria in autumn this year and the key question is whether the government can manage the state finances. Estonia signed an agreement to join the euro zone as soon as possible as part of its agreement to join the European Union in 2004.

It had initially hoped to join the euro zone in 2007, but an economic boom and high energy prices kept the Baltic country's inflation higher than permitted under Maastricht rules.

Estonia operates a currency board with the kroon pegged to the euro. Its exit strategy from the arrangement is by membership of the euro zone.

(Reporting by David Mardiste; Editing by Victoria Main) ($1= 10.9 Estonian kroons)

(Tallinn Newsroom, +372 5290992, david.mardiste@thomsonreuters.com, Reuters Messaging: david.mardiste.reuters.com@reuters.net)

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