By David Mardiste
TALLINN, July 13 (Reuters) - Estonia is determined to keep on target for euro adoption in 2011 and will make further budget cuts this year and next to keep its deficit low, even as the economy sinks, the prime minister and the finance minister said.
Estonia does not need International Monetary Fund aid as it has reserves and is not planning any devaluation, they added.
The country, forecast by the central bank to be heading for a gross domestic product (GDP) drop of about 12 percent this year, has already carried out budget cut measures of about 7 percent of GDP this year, or 16 billion kroons ($1.42 billion).
"Our main challenge was the inflation criteria (for euro adoption) and now, according to our prognoses, we will reach the level of the inflation criteria this autumn," Prime Minister Andrus Ansip told Reuters Television in an interview on Friday.
"Now the main challenge is the deficit criteria. We have to keep the deficit below three percent in Estonia," Ansip added.
"We have to do our best. The people here in Estonia can understand why those cuts, painful cuts are needed for our country," he added.
"We don't even think of the IMF...there is no need for additional financing," he added.
Despite Estonia's economic woes, the government has formally set a target date for joining the euro zone at Jan 1, 2011.
A report from Swedbank said further cuts of more than 2 billion kroons could be needed this year alone.
If further cuts are not made, the budget deficit will be 4.5 percent of GDP this year and next, Swedbank added.
Estonia, like Baltic neighbours Latvia and Lithuania, has
hit recession due to the global crisis and sharp cuts in credit
from leading Nordic banks Swedbank
The government currently expects a 2009 budget deficit of 6.7 billion kroons, or 2.9 percent of GDP. It is drawing on budget reserves piled up during the recent years of boom.
However, its deficit forecast was drawn up under a forecast of a GDP drop of 8.5 percent this year.
The turnout is going to be worse than that.
"There is no certain plan over an additional budget. But we will still cut the budget more this year, that is for sure," Finance Minister Jurgen Ligi told Reuters Television.
"But we have not decided if we will go to parliament as the government and prime minister can decrease expenses as well to some extent," Ligi added.
The Finance Ministry will start preparing its budget for 2010 in August and release new 2010 forecasts that month, Ligi said stressing that the government will draw up the budget with a deficit within the Maastricht criteria for 2010.
Entry to the euro zone is Estonia's exit strategy from its currency board regime and both the prime minister and finance minister ruled out a change to the country's exchange rate.
"It is absolutely correct that we won't want to devalue our currency," Ansip said, adding it was impossible to do without three reading of a bill in parliament.
Ligi saw no spillover effect on Estonia from neighbouring Latvia, which last year had to agree a 7.5 billion euro European Union (EU) and International Monetary Fund (IMF) and which suffered devaluation rumours in late May and early June.
"Of course, we have stable policy, a conservative budget policy, a currency board system and there is no political will or economic reasons to think about devaluation," he said.