© 2002 International Monetary Fund

Production: IMF Graphics Section

Figures: Sanaa Elaroussi

Typesetting: Alicia Etchebarne-Bourdin

Cataloging-in-Publication Data

The Baltic countries: medium-term fiscal issues related to EU and NATO accession / Johannes Mueller … [et al.]—Washington, D.C.: International Monetary Fund, 2002.

• p. cm.—(Occasional paper. ISSN 0251-6365); 213
• Includes bibliographical references.
• ISBN 9781589061040

1. Fiscal policy—Baltic States. 2. European Union—Membership—Baltic States. 3. North Atlantic Treaty Organization—Membership—Baltic States. I. Mueller, Johannes, II. International Monetary Fund. III. Occasional paper (International Monetary Fund); no. 213.

HJ1214.B35 2002

Price: US$20.00

(US$ 17.50 to full-time faculty members and students at universities and colleges

Please send orders to:

International Monetary Fund, Publication Services

700 19th Street, N.W., Washington, D.C. 20431, U.S.A.

Tel.: (202) 623-7430 Telefax: (202) 623-7201

E-mail: publications@imf.org

Internet: http://www.imf.org

Contents

• Preface
• List of Abbreviations
• I Overview
  • Background
  • Run-Up to EU and NATO Accession
  • Medium-Term Fiscal Strategy
• II The Current Fiscal Position
  • Structure of Expenditure
  • Structure of Taxation
• III Medium-Term Fiscal Policy: Theory and Evidence
  • Growth
  • Fiscal Sustainability
  • Fiscal Policy Rules
  • Appendix: Determining the Medium-Term Fiscal Position—The Role of Public and External Debt Sustainability
• IV The Experience of Earlier Accession Countries
  • Similarities and Differences Between the Baltics and the EACs at the Point of Accession
  • Fiscal Challenges of EU Integration
  • Real Convergence
• V Medium-Term Fiscal Frameworks
  • General Principles and Objectives
  • Scenario I: EU Accession in 2004
  • Scenario II: EU Accession in 2004 in a Low-Growth Environment
  • Scenario III: EU Accession in the More Distant Future
• References
• Boxes
• II 1. EU Accession Requirements on Taxation
• III 2. Fiscal Policy and Economic Growth
  • 3. Private Saving and Investment
  • 4. Institutional Fiscal Reforms: Rules and Transparency
• IV 5. Macroeconomic Convergence
• V 6. EU Pre- and Postaccession Financial Instruments
  • 7. Preaccession Fiscal Surveillance
• Tables
• III 1. Public Debt Sustainability Under Alternative Assumptions
  • 2. External Debt Sustainability Under Alternative Assumptions
• IV 3. Earlier Accession Countries (EACs) and the Baltic Countries: Key Macroeconomic Indicators
  • 4. EACs: Phillips-Perron Unit-Root Tests
  • 5. EACs: Ordinary Least-Squares (OLS) Regression Results
• V 6. Estonia: Summary Medium-Term Fiscal Scenarios
  • 7. Latvia: Summary Medium-Term Fiscal Scenarios
  • 8. Lithuania: Summary Medium-Term Fiscal Scenarios
• Figures
• I 1. The Baltic Countries: Selected Economic Indicators
• II 2. The Baltic Countries and Selected Other Countries: General Government Expenditure and Tax Structure, 2000
• IV 3. Earlier Accession Countries (EACs) and the Baltic Countries: Real Convergence
  • 4. EACs and the EU-6: Fiscal Developments
  • 5. EACs: Macroeconomic Stability
  • 6. EACs: Annual FDI Inflows
  • 7. EACs: Speed of Real Convergence
• V 8. The Baltic Countries: Real Growth in Discretionary Spending Relative to 2001 Under Various Scenarios
  • 9. The Baltic Countries: Reduction in Discretionary Spending Relative to 2001 Under Various Scenarios

Preface

This Occasional Paper is based on a staff background paper prepared for the 2001 and 2002 Article IV consultations between the International Monetary Fund and the Republic of Estonia, the Republic of Latvia, and the Republic of Lithuania. The paper describes the fiscal challenges of the three Baltic countries in their run-up to EU and NATO accession.

The paper is the product of a team effort of the Baltic Division of the European II Department. The project was initiated by Peter M. Keller, who also provided valuable guidance to the authors. The paper was prepared by a staff team led by Johannes Mueller and composed of Christian Beddies, Robert Burgess. Vitali Kramarenko, and Joannes Mongardini. The paper benefited from comments from Patricia Alonso-Gamo, Costas Christou, Christina Daseking, Robert A. Feldman, George Kopits, Bradley McDonald. Roger Nord, John Odling-Smee, Jerald Schiff, Axel Schimmelpfennig, Günther Taube, Nancy Wagner: and from the European Commission, Directorate-General for Economic and Financial Affairs (DG ECFIN). The authors would like to thank Alexandra Merlino for excellent research assistance; Jean Boyd and Julie Burton for superb secretarial assistance; and James McEuen of the External Relations Department, who edited the paper and coordinated its production for publication.

The views expressed in the paper are those of the authors and do not necessarily reflect the views of the national authorities, the IMF, or the IMF’s Executive Directors.

List of Abbreviations