## 1. Risk Assessment Matrix

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### Context and pre-COVID baseline
- Growth averaged 5 percent in 2017–19.
- Core inflation averaged around 2 percent.
- Unemployment dipped below 5 percent in 2019.
- Gross public debt ratio: 8.4 percent of GDP in 2019.
- Capital adequacy ratio: 25½ percent in 2019.
- Net public debt was negative until 2019.
- Structural constraints: productivity growth generally below wage growth; small firm size; aging population; low energy efficiency; reversal of net out-migration since 2015; persistent relative poverty, inequality, gender pay disparities.

### COVID-19 developments and public health response
- Initial infection rate: below most European countries until early-2021.
- Second wave: resurgence since fall 2020; strict quarantine from March 11, 2021 until April 25, 2021.
- Vaccinations: over 50 doses administered per 100 of the population by end-May (2021); authorities targeted vaccinating 70 percent of the adult population by the fall of 2021.
- Health system strengths: relatively high ICU capacity; proactive vaccination strategy with preorders from multiple suppliers and phased priority groups.

### Macroeconomic impact of COVID-19
- Full-year 2020 output fell by around 3 percent.
- Output gap became negative in 2020.
- Unemployment increased from 5 percent in March 2020 to 7.5 percent in December 2020.
- Employment losses concentrated in contact-intensive sectors (hospitality, food, recreation, trade, transportation).
- Sectoral performance: information and communications and financial services performed relatively well in 2020; hospitality, food, recreation, trade, and transportation suffered deep contractions and negative productivity shocks.
- Inflation: turned into deflation in 2020 due to slack, weaker global energy prices, and excise tax cuts.
- Current account: consistently in surplus through 2019, supported by strong services exports.
- Public finances: fiscal deficit widened to 4.8 percent of GDP in 2020.
- Public debt ratio jumped to 18.2 percent of GDP in 2020 (reflecting pre-financing from the 2020 EUR 1.5 billion Eurobond whose proceeds were not fully used by year end).
- 2020 revenue changes (y/y): total revenues declined by 1.4 percent with components:
  - Social contributions: 7.1 percent (contribution to revenue growth).
  - PIT receipts: 7.9 percent.
  - CIT: -11.7 percent.
  - Excise tax: -20.5 percent.
  - Nontax: -8.8 percent.
- Spending increases concentrated in transfers and subsidies.

### Policy response and stabilization measures
- Fiscal package: budget support package of 8½ percent of GDP in response to the pandemic.
- Execution: high execution of spending measures; wage support scheme large in size and take-up in 2020.
- Fiscal rules: Estonia triggered national escape clauses for 2020–21 in line with EU guidelines.
- Financial measures: bank moratoria participation under EBA guidance; loan coverage peaked around 10 percent concentrated among corporates; moratoria coverage negligible by late-2020.
- Macroprudential: systemic risk buffer relaxed from 1 to 0 percent; countercyclical buffer at zero.
- Supranational support: coordination with EU institutions and ECB large asset purchase programs eased financial conditions.
- Health measures: preordering of vaccines and phased vaccination plan; aim to vaccinate 70 percent of adults by fall 2021.

### Financial sector and real estate
- Bank solvency/liquidity: no indication of deterioration through 2021:Q1.
- NPL ratios: continued to decline through 2021:Q1.
- Lending interest rates: broadly stable despite ECB accommodative policy.
- Moratoria: corporate loan moratoria concentrated in real estate, accommodation/catering/entertainment, and manufacturing; household moratoria tracked separately.
- Real estate: significant hit in 2020:Q2 followed by rapid recovery and further acceleration in early-2021; Residential Property Price Index series tracked 2008–2020 (2015=100).

### Distributional and labor market effects
- Employment losses concentrated among lower-wage earners; wage subsidies mitigated some effects.
- Overall wage growth in 2020 remained positive due to the wage support scheme.
- Construction: employment increase of 39 percent y/y in 2020 while wages declined by 2 percent y/y in Dec 2020 (construction excluded in one chart note).

### Key takeaways: strengths and vulnerabilities
- Strengths reducing downside risk:
  - Low pre-crisis public debt and strong fiscal policy framework.
  - High bank capital adequacy and low NPLs.
  - Rapid and sizable fiscal support (8½ percent of GDP) and effective vaccine procurement.
- Vulnerabilities increasing risk:
  - Second wave and new virus strains triggered strict quarantine and renewed restrictions in early-2021.
  - Sectoral concentration of losses in contact-intensive sectors dominated by SMEs with smaller buffers.
  - Structural constraints (productivity, firm size, energy efficiency, demographic challenges) limit recovery potential.
- Policy priorities implied:
  - Maintain targeted fiscal support while preserving long-run fiscal discipline.
  - Continue monitoring bank asset quality as moratoria phase out.
  - Advance policies to address structural constraints to lift productivity and potential growth.

### External sector assessment (2020) and CA diagnostics
- Despite headline current account swinging into deficit, external sector assessed as substantially stronger than justified by medium-term fundamentals and desirable policies in 2020.
- Deterioration driven by temporary factors: large FDI-financed exceptional increase in computer services imports.
- Adjusted current account balance: 5.8 percent of GDP.
- CA norm (from model): -1.8 percent of GDP.
- Implied CA gap: 7.6 (presented as CA Gap) and an alternative CA Gap table entry of -1.3.
- REER gap (in percent): -14.6 (presented as -14.6) and elsewhere summarized as 14½ percent in the preferred CA model.
- Cyclical contributions (from model): (-)-2.2.
- COVID-19 adjustor: 1/0.3 (table entry preserved).
- Additional temporary/statistical factors: (+)4.2.
- Natural disasters and conflicts: (-)-0.1.
- Relative policy gap (o/w): 4.0.
- Elasticity: -0.52.
- Note: estimated decline in labor productivity (-0.8 percent) and rising unit labor costs (3.1 percent) in 2020 could reduce the large undervaluation margin over time.

### Outlook and projections (Staff baseline)
- Output recovery assumptions:
  - Robust recovery in 2021:H2–2  2, driven by vaccinations, policy support, withdrawal of pension system savings from September 2021, and EU fund-backed public investment.
  - Growth gradually easing toward a potential of a little above 3 percent.
  - Sectoral unevenness and permanent re-balancing expected; moderate bank credit growth supportive.
- Inflation:
  - Projected to increase but remain anchored.
  - After upticks in 2021 and excise tax cuts expiry in 2022, inflation to settle at around 2 percent over the medium term.
- Current account outlook:
  - Expected to move toward small deficits due to import-intensive EU funds and drawdown of domestic savings, partially offset by a reversal of temporary services deterioration.
- Risks: unusually large two-way uncertainty.
  - Key downside risks: (i) unexpected mutation of the virus; (ii) long-term economic scarring; (iii) cybersecurity or AML/CFT setbacks.
  - Key upside possibilities: (i) accelerated recovery from successful vaccinations; (ii) higher potential growth from digital and green technologies.
- Authorities expected slightly slower 2021 momentum than staff but faster acceleration in 2022 (to around 5 percent) due to pension system and precautionary deposit drawdowns.
- Authorities concerned about overheating risks from pension withdrawals and housing spillovers but deemed manageable.

### Key medium-term macroframework (selected exact figures)
- Real GDP growth (percent):
  - 2020: -2.9
  - 2021: 3.4
  - 2022: 4.5
  - 2023: 3.7
  - 2024: 3.4
  - 2025: 3.2
  - 2026: 3.2
- Output gap (percent):
  - 2020: -2.1
  - 2021: -1.7
  - 2022: -0.6
  - 2023: -0.3
  - 2024: -0.1
  - 2025: -0.1
  - 2026: 0.0
- Inflation (percent):
  - 2020: -0.6
  - 2021: 1.7
  - 2022: 2.5
  - 2023–2026: 2.1 each year
- Unemployment rate (percent):
  - 2020: 6.8
  - 2021: 6.9
  - 2022: 6.5
  - 2023: 5.5
  - 2024: 5.0
  - 2025: 4.8
  - 2026: 4.8
- CAB (percent of GDP):
  - 2020: -1.0
  - 2021: 0.7
  - 2022: 0.2
  - 2023: 0.2
  - 2024: -0.2
  - 2025: -0.6
  - 2026: -0.8
- Fiscal balance (percent of GDP):
  - 2020: -4.8
  - 2021: -6.3
  - 2022: -4.2
  - 2023: -3.7
  - 2024: -3.1
  - 2025: -2.5
  - 2026: -2.0
- General government debt (percent of GDP):
  - 2020: 18.2
  - 2021: 24.0
  - 2022: 27.1
  - 2023: 29.8
  - 2024: 31.7
  - 2025: 33.0
  - 2026: 33.6

### Risk Assessment Matrix — Selected risks, likelihood, impact, and policy responses
- Unexpected shifts in the COVID-19 pandemic (Likelihood: High; Time horizon: short to medium)
  - Impact: prolonged pandemic → prolonged support and exacerbated vulnerabilities; faster containment → boost confidence and activity.
  - Recommended response: participate in global and European responses; ramp up vaccination implementation; provide economic support consistent with fiscal space and avoid premature withdrawal; mitigate social scarring via targeted steps to reduce inequality and gender gaps.
- Accelerating de-globalization (Likelihood: Medium; Time horizon: medium)
  - Impact: through trade, confidence, FDI channels; growth and employment would suffer.
  - Recommended response: participate in global and European responses; provide fiscal support; manage risk via export diversification.
- Sharp rise in risk premia (Likelihood: Medium; Time horizon: short term)
  - Impact: weaken spending and confidence, especially via Nordic parent bank exposures and bank funding links.
  - Recommended response: enhance macroprudential toolkit; rely on banks’ high capitalization and liquidity.
- Overheating in the housing market (Likelihood: Medium)
  - Impact: multi-year price growth and easy financing risk asset price bubbles.
  - Recommended response: vigilant macroprudential policies and supervision; tighten enforcement of housing-related tools such as LTV ratios; review eligibility of government mortgage support programs.
- Cyber-attacks on critical infrastructure and financial systems (Likelihood: Medium; Time horizon: short to medium)
  - Impact: Estonia susceptible due to history of cyber-attacks and ICT reliance.
  - Recommended response: participate in global and European defenses; allocate sufficient fiscal resources and maintain vigilant regulation to improve national cyber-security.
- Risks to cross-border banking including AML/CFT (Likelihood: Medium; Time horizon: short to medium)
  - Impact: curtailed credit supply, confidence loss, pressures on correspondent banking relationships, AML/CFT setbacks.
  - Recommended response: strengthen AML/CFT framework; preserve capitalization and liquidity; step up cross-border supervision and cooperation with home-country authorities.

### Fiscal policy strategy and recommendations
- Overall focus:
  - (i) support the recovery through growth-friendly fiscal policy;
  - (ii) address scarring while re-balancing toward dynamic, inclusive, digital, and climate-friendly growth;
  - (iii) enhance AML/CFT frameworks while bolstering sound credit provision.
- Short-to-medium term: Right-size fiscal policy
  - 2021 support package totals 6½ percent of GDP, comprising business support (KredEx, Enterprise Estonia), support to employees and households, tax measures, and a supplementary 2021 budget enhancing support by 2.2 percent of GDP targeted to healthcare and support for employees and households.
  - Staff projects 2021 fiscal deficit of 6.3 percent of GDP.
  - Revenues expected to be lower by 0.2 percent of GDP than in the 2021 amended budget; expenditures forecast higher by 0.1 percent of GDP.
- Medium-term priorities:
  - Use fiscal space to boost capital spending, support recovery, and increase potential growth.
  - Public wage bill in 2022–23 projected to grow by 5 percent annually in nominal terms.
  - Investments projected to reach 8 percent of GDP in 2025–26, assuming absorptive capacity increases.
- Next Generation EU Funds and RRP:
  - RRP envelope: EUR 982.5 million (about 3.4 percent of GDP) allocated over 2021–2026 (0.5 percent of GDP annually).
  - RRP: 80 percent capital expenditure, aimed at health resilience and digital/green transition.
  - About 75 percent of EU Fund inflows over 2021–26 (EUR 5.3 billion) expected to finance investment.
- Public investment management:
  - Public investment multipliers sizable (0.9–1.2); dynamic cumulative multipliers around 1.2 over three years and up to 2 during recessions.
  - Speed implementation of PIMA recommendations; improve institutional capacities for timely EU fund use.
- Fiscal transparency and risk management:
  - Advanced fiscal transparency but scope to improve forecasting and fiscal risk analysis.
  - Recommend an integrated Fiscal Risk Statement and quantification of guarantees, environmental risks, and quasi-fiscal activities.
- Rebuilding fiscal buffers:
  - Need robust plan to gradually rebuild buffers as recovery reduces support needs; balance fiscal discipline and high-multiplier spending; upgrade asset and liability management.

### Public debt dynamics and DSA (selected exact figures)
- Nominal gross public debt (percent of GDP): 2019: 8.8; 2020: 8.4; 2021: 18.2; 2022: 24.0; 2023: 27.1; 2024: 29.8; 2025: 31.7; 2026: 33.0; 203?: 33.6.
- Public gross financing needs (percent of GDP): 2019: 2.0; 2020: 1.2; 2021: 9.4; 2022: 8.0; 2023: 5.8; 2024: 3.9; 2025: 3.5; 2026: 2.9; 2.3.
- Primary deficit (percent of GDP): 2019: 0.0; 2020: -0.5; 2021: 4.8; 2022: 6.3; 2023: 4.2; 2024: 3.7; 2025: 3.1; 2026: 2.5; 2.0.
- Primary (noninterest) revenue (percent of GDP): 2019: 38.6; 2020: 39.4; 2021: 40.2; 2022: 40.7; 2023: 39.8; 2024: 39.8; 2025: 40.5; 2026: 40.7.
- Primary (noninterest) expenditure (percent of GDP): 2019: 38.6; 2020: 38.9; 2021: 45.0; 2022: 47.0; 2023: 44.0; 2024: 43.5; 2025: 43.6; 2026: 43.2.
- Sovereign spreads and ratings: EMBIG (bp): 3/42; 5Y CDS (bp): 62; Ratings: Moody's A1/A1; S&Ps AA-/AA-; Fitch AA-/AA-.

### Public investment multipliers and spillovers to corporate investment (key exact estimates)
- Static public investment multipliers estimated around 0.94 during 2021–22, declining to about 0.87 in 2024–26.
- Dynamic multipliers: around 1.2 cumulatively over three years; around 2 when the public investment shock occurs during recessions.
- Impact of 1 percentage point public investment increase on corporate investment:
  - On impact: 0.35 percentage point.
  - Cumulative after five years: 1.5 percentage points.
- Firm-level sample: 36,415 firms covering 2002–19.
- Firm-size and ownership heterogeneity (selected exact values):
  - Horizon=T+0: Small = 0.31, Large = 0.30, Very Small = 0.25, Medium = 0.24.
  - Horizon=T+5: Very Small = 2.10, Small = 1.38, Medium = 0.64, Large = -0.04.
  - Ownership Horizon=T+5: Foreign = 1.68, Domestic = 0.90.
- Sectoral spillovers (Horizon=T+5, exact values):
  - Arts and entertainment (R) = 3.03; Construction (F) = 2.80; Education (P) = 2.52; Information and communication (J) = 2.07; Transport (H) = 1.55; Health (Q) = 1.45; Manufacturing (C) = 1.17; Financial and insurance (K) = -0.29; Mining (B) = -1.34; Electricity (D) = -1.91.

### Next Generation EU, RRF, REACT-EU, and JTF — allocations and projected uses
- RRP envelope: EUR 982.5 million (about 3.4 percent of GDP) over 2021–2026 fully in grants.
- RRP composition: 80 percent capital expenditure.
- REACT-EU 2021 allocation: EUR 173.2 million.
- JTF total envelope: EUR 354 millio n (1.2 percent of GDP) to be implemented starting 2022.
  - JTF aim: 80 percent for restructuring and diversifying Ida-Viru economy/workforce; 20 percent for social, environmental, community aspects.
- 2021 budget envisages EUR 1.1 billion in EU grants.
- RRF pre-financing expected about 13 percent; REACT-EU initial deployment about EUR 40 million.
- RRP planned investments (selected):
  - Tallinn Hospital construction: EUR 380 million (largest in draft RRP).
  - Direct support for enterprises: EUR 70 million digitalization; EUR 100 million greening private sector; EUR 50 million hydrogen solutions.
  - EUR 150+ million public sector digital infrastructure and fast internet connection.
  - Rail and local investments: Rohuküla railway EUR 5 million; Tallinn hospital building EUR 30 million (RRF-related expenditure plan component).

### Execution of 2020 fiscal measures and 2021 budget specifics (selected exact figures)
- Total 2020 support package: 2323.3 Euro Million; 8.6 percent of 2020 GDP.
- Business support: 1531.7 Euro Million; 5.6 percent of 2020 GDP.
- Financing support: 1377.0 Euro Million; 5.1 percent of 2020 GDP.
- Guarantees: 350.0 Euro Million; 1.3 percent of 2020 GDP.
- Loan for liquidity support: 500.0 Euro Million; 1.8 percent of 2020 GDP.
- Strategic capital injection: 300.0 Euro Million; 1.1 percent of 2020 GDP.
- Employment and households support: 504.4 Euro Million; 1.9 percent of 2020 GDP.
- Wage support measure: 250.0 Euro Million; 0.9 percent of 2020 GDP.
- Health-related expenditure: 223.9 Euro Million; 0.8 percent of 2020 GDP.
- Tax measures: 378.7 Euro Million; 1.4 percent of 2020 GDP.
- Excise: 269.2 Euro Million; 1.0 percent of 2020 GDP.
- Suspension of pillar II contributions: -262.5 Euro Million; -1.0 percent of 2020 GDP.
- Execution as of end-December 2020: 38 percent of the financial envelope paid out; applications reached 99.7 percent.
  - Individuals support uptake: 99 percent; operating support measures uptake: 92 percent.
  - Financial instruments payment rate: 18 percent; investment measures payment rate: 46 percent.
- 2021 supplementary budget: strengthens healthcare capacity; work support about EUR 140 million extended until May; targeted relief about EUR 152 million for most affected sectors.

### Financial management, ALM, and liquidity (selected exact facts)
- 2020 gross public debt increased by about 10 percentage points from 8.2 percent of GDP in 2019.
- Net debt: 2.5 percent of GDP in 2020.
- Notable long-term issuances in 2020:
  - EUR 1.5 billion 10-year Eurobond (5.5 percent of GDP); interest rate on the Eurobond 0.235 percent.
  - 15-year loan from Nordic Investment Bank (2.8 percent of GDP).
  - EUR 575 million T-bills issued in 2020.
- 2021 borrowing plans: government envisages borrowing up to EUR 4.3 billion through T-bills, IFI loans and Eurobond issuances.
- For 2021: average interest cost expected to reach 0.2 percent per annum; average maturity projected to increase to 11 years.
- As of January 31, 2021: weighted average interest re-fixing period of total debt portfolio was 4.60 years.
- Liquidity reserves: outstanding debt obligations were 2.7 times the liquidity reserves as of end-April 2021.
- ALM changes in June 2020: prior limits on financial assets’ duration (0.45 years) and outstanding debt duration (0.5 years) became obsolete as Treasury debt portfolio exceeded liquidity reserves.

### Supervisory, insolvency, and AML/CFT recommendations
- Supervisory vigilance: maintain provisioning rules; continue portfolio reviews and enhanced reporting; maintain transparent public disclosures.
- Housing market: maintain debt-to-income, loan-to-value, and loan maturity cap requirements and 15 percent risk weight for mortgage loans; be ready to recalibrate tools if pension withdrawals cause overheating.
- Insolvency: January 2021 amendments to the bankruptcy act introduce a bankruptcy ombudsman, streamline claim procedures, increase court specialization.
- AML/CFT: AMLTFP act amended to incorporate EU fifth AML directive entered into force July 2020; tighten licensing/practices of virtual currency service providers; forthcoming Moneyval evaluation in 2022 an opportunity to assess progress; streamline process for imposing fines for AML/CFT violations.

### Social, labor, and structural policy recommendations
- Labor market:
  - Ramp up active labor market policies and retraining to address low-skilled and youth employment losses.
  - Expand means to the Unemployment Insurance Fund as part of workability reform.
- Inequality and social protection:
  - Address pockets of relative poverty, particularly among the elderly.
  - Review of the pension system planned to be completed by 2022.
  - Improve access to health services and implement long-term care program.
- Gender and family care:
  - Continue Gender Equality Program, nudging programs, enhanced paternity leave of mid-2020, and steps for safe child-care and long-term care services.
  - Proposal for Welfare Development Plan 2023–30 being elaborated.
- Immigration:
  - Facilitate immigration and entrench positive net immigration to help address aging, productivity, and skilled labor shortages.
- Digital and green transition:
  - 2030 digigov strategy to boost data governance, core IT services, last mile connectivity.
  - Incentivize digitalization of private businesses via grants and training.
  - Comprehensive predictable carbon pricing strategy recommended to achieve emissions targets.
  - Authorities committed to carbon neutrality by 2050 with sub-targets: discontinue electricity production from oil shale by 2035; discontinue use of oil shale for the energy industry by 2040.

### Staff appraisal (summary)
- Estonia broadly successful in managing COVID-19: lockdowns mitigated health outcomes but caused economic downturn.
- Rapid, broad-based, and sizable policy responses contained economic damage; fall in output among the mildest in the EU.
- Vaccination rollout expanding and restrictions easing, paving way for rebound.
- Estonia’s external sector assessed as substantially stronger than justified by medium-term fundamentals and desirable policies in 2020.

_Italic: Source — IMF staff content from the provided Estonia chapter excerpts and tables (1estea2021001)._

### 1. Risk Assessment Matrix ________________________________________________________________________ 15

### 1. Risk Assessment Matrix

### Context and pre-COVID baseline
- Estonia entered the COVID-19 crisis with strong macroeconomic fundamentals:
  - Growth averaged 5 percent in 2017–19.
  - Core inflation averaged around 2 percent.
  - Unemployment dipped below 5 percent in 2019.
  - Gross public debt ratio: 8.4 percent of GDP in 2019.
  - Capital adequacy ratio: 25½ percent in 2019.
  - Net public debt was negative until 2019.
- Structural constraints noted:
  - Productivity growth generally below wage growth.
  - Small firm size, aging population, and low energy efficiency weighing on potential.
  - Reversal of net out-migration since 2015 mitigated population aging relative to peers.
  - Persistent challenges: relative poverty, inequality, gender pay disparities.

### COVID-19 developments and public health response
- Pandemic trajectory:
  - Initial period: rate of infections below most European countries until early-2021.
  - Second wave: resurgence since fall 2020; strict quarantine from March 11, 2021 until April 25, 2021.
  - Vaccinations progressed in line with the euro-area average; over 50 doses administered per 100 of the population by end-May (2021).
  - Authorities targeted vaccinating 70 percent of the adult population by the fall of 2021.
- Health system strengths:
  - Relatively high ICU capacity contributed to initial successful management.
  - Proactive vaccination strategy with preorders from multiple suppliers and phased priority groups (e.g., elderly and frontline workers).

### Macroeconomic impact of COVID-19
- Output and labor market:
  - Full-year 2020 output fell by around 3 percent.
  - Output gap became negative in 2020.
  - Unemployment increased from 5 percent in March 2020 to 7.5 percent in December 2020.
  - Employment losses concentrated in contact-intensive sectors (hospitality, food, recreation, trade, transportation).
- Sectoral outcomes:
  - Information and communications and financial services performed relatively well in 2020.
  - Hospitality, food, recreation, trade, and transportation services suffered deep contractions and negative productivity shocks.
- Prices and inflation:
  - Inflation turned into deflation in 2020 due to economic slack, weaker global energy prices, and excise tax cuts.
- External sector:
  - Current account was consistently in surplus through 2019, supported by strong services exports.
- Public finances and fiscal impact:
  - Fiscal deficit widened to 4.8 percent of GDP in 2020.
  - Public debt ratio jumped to 18.2 percent of GDP in 2020, reflecting pre-financing from the 2020 EUR 1.5 billion Eurobond whose proceeds were not fully used by year end.
  - Total revenues declined by 1.4 percent y/y in 2020 with notable components:
    - Social contributions: 7.1 percent (contribution to revenue growth).
    - PIT receipts: 7.9 percent (benefitted from wage support).
    - CIT: -11.7 percent.
    - Excise tax: -20.5 percent.
    - Nontax: -8.8 percent.
  - Spending increases concentrated in transfers and subsidies.

### Policy response and stabilization measures
- Fiscal measures:
  - Estonia enacted a budget support package of 8½ percent of GDP in response to the pandemic.
  - Execution of spending measures was comparatively high; wage support scheme had large size and take-up in 2020.
  - Estonia triggered national escape clauses from fiscal rules for 2020–21 in line with EU guidelines.
- Financial sector measures:
  - Bank moratoria participated by most banks under EBA guidance; loan coverage peaked at around 10 percent and concentrated among corporates.
  - Moratoria coverage became negligible by late-2020 as exposures were limited.
  - Macroprudential adjustments: systemic risk buffer relaxed from 1 to 0 percent; countercyclical buffer already at zero.
- Supranational and monetary support:
  - Coordination with EU institutions and ECB support (including large asset purchase programs) eased financial conditions.
- Health measures:
  - Preordering of vaccines and phased vaccination plan targeting priority groups; aim to vaccinate 70 percent of adults by fall 2021.

### Financial sector and real estate
- Resilience:
  - No indication of deteriorating bank solvency or liquidity through 2021:Q1.
  - NPL ratios continued to decline through 2021:Q1.
  - Lending interest rates broadly stable despite ECB accommodative policy.
- Credit and moratoria:
  - Corporate loans with active moratoria tracked through March 2020–21 with sectoral concentration in real estate, accommodation/catering/entertainment, and manufacturing.
  - Household loans with active moratoria tracked separately (mortgage and non-mortgage).
- Real estate market:
  - Significant hit in 2020:Q2 followed by rapid recovery and further acceleration in early-2021.
  - Residential Property Price Index series tracked 2008–2020 (2015=100).

### Distributional and labor market effects
- Labor market scarring risks:
  - Employment losses concentrated among lower-wage earners; wage subsidies mitigated some effects.
  - Overall wage growth in 2020 remained positive due to the wage support scheme.
  - Sectoral wage and employment changes in 2020: construction noted an employment increase of 39 percent y/y in 2020 while wages declined by 2 percent y/y in Dec 2020 (construction excluded in one chart note).

### Key takeaways (risk assessment highlights)
- Strengths reducing downside risk:
  - Low pre-crisis public debt and strong fiscal policy framework.
  - High bank capital adequacy and low NPLs.
  - Rapid and sizable fiscal support (8½ percent of GDP) and effective vaccine procurement.
- Vulnerabilities increasing risk:
  - Second wave and new virus strains triggered strict quarantine and renewed restrictions in early-2021.
  - Sectoral concentration of losses in contact-intensive sectors dominated by SMEs with smaller buffers.
  - Structural constraints (productivity, firm size, energy efficiency, demographic challenges) limit recovery potential.
- Policy implementation priorities implied by assessment:
  - Maintain targeted fiscal support while preserving long-run fiscal discipline.
  - Continue monitoring bank asset quality as moratoria phase out.
  - Advance policies to address structural constraints to lift productivity and potential growth.

*Source: Republic of Estonia — IMF staff report (1. Risk Assessment Matrix).*

### 20.       Despite the swing of the headline current account into deficit, the external sector is still

### 1estea2021001 - 20.       Despite the swing of the headline current account into deficit, the external sector is still

### External sector assessment (2020)
- Despite the headline current account swinging into deficit, the external sector is assessed as having been substantially stronger than justified by medium-term fundamentals and desirable policies in 2020.
- The deterioration of the current account reflects temporary factors, notably a large FDI-financed exceptional increase in computer services imports.
- Adjusted current account balance: 5.8 percent of GDP.
- CA norm (from model): -1.8 percent of GDP.
- Implied CA gap: 7.6 (presented as CA Gap) and an alternative CA Gap entry of -1.3 in the table (table labels retained as in source).
- REER gap (in percent): -14.6 (presented as -14.6) and elsewhere summarized as 14½ percent in the preferred Current Account (CA) model (see Annex II).
- Cyclical contributions (from model): (-)-2.2.
- COVID-19 adjustor: 1/0.3 (table entry preserved).
- Additional temporary/statistical factors: (+)4.2.
- Natural disasters and conflicts: (-)-0.1.
- Relative policy gap (o/w): 4.0.
- Elasticity: -0.52.
- Note: The estimated decline in labor productivity (-0.8 percent) and rising unit labor costs (3.1 percent) in 2020 could reduce the large undervaluation margin over time.

### Outlook and projections
- Output recovery assumptions:
  - A robust recovery taking place in 2021:H2–2  2, driven by progress in vaccinations, ongoing policy support, a boost to domestic demand from the expected withdrawal of pension system savings starting from September 2021, and EU fund-backed public investment.
  - Going forward, growth would gradually ease toward a potential of a little above 3 percent.
  - Growth would be uneven across sectors with some permanent re-balancing prompted by changed behavioral patterns and assumed macro-level scarring.
  - Continued moderate bank credit growth will support activity.
- Inflation:
  - Projected to increase but remain anchored.
  - After upticks due to the rise in global commodity prices in 2021 and the expiration of the excise tax cuts in 2022, inflation will settle at around 2 percent over the medium term.
- External current account outlook:
  - Expected to move toward small deficits under two countervailing forces:
    - Reversal of temporary deterioration in the services balance would push the current account toward a surplus in 2021.
    - Expected inflows of EU funds and the broader economic recovery based on drawing down domestic savings will be import-intensive, pushing the current account towards a deficit.
- Staff baseline risks: risks are balanced with unusually large two-way uncertainty.
  - Key downside risks: (i) unexpected mutation of the virus derailing the global/regional recovery; (ii) emergence of long-term economic scarring; (iii) setbacks on cybersecurity or AML/CFT.
  - Key upside possibilities: (i) accelerated recovery due to successful vaccinations; (ii) higher potential growth from digital and green technologies.
  - Recovery in EU trading partners has significant potential for regional spillovers, especially in tourism and manufacturing.

### Authorities’ views
- Authorities broadly agreed with staff’s outlook and risk assessment.
- At the time of consultation, authorities expected slightly slower economic momentum in 2021 compared to staff, but faster growth acceleration in 2022 (to around 5 percent) due to expected drawdown of pension system and precautionary deposit balances.
- Authorities noted concern over possible overheating risks from sizable withdrawals from pension savings and spillovers to the housing market, but deemed those risks manageable.

### Key medium-term macroframework (Estonia: Summary Medium-Term Macroframework)
- Real GDP growth (percent) by year:
  - 2020: -2.9
  - 2021: 3.4
  - 2022: 4.5
  - 2023: 3.7
  - 2024: 3.4
  - 2025: 3.2
  - 2026: 3.2
- Output gap (percent) by year:
  - 2020: -2.1
  - 2021: -1.7
  - 2022: -0.6
  - 2023: -0.3
  - 2024: -0.1
  - 2025: -0.1
  - 2026: 0.0
- Inflation (percent) by year:
  - 2020: -0.6
  - 2021: 1.7
  - 2022: 2.5
  - 2023: 2.1
  - 2024: 2.1
  - 2025: 2.1
  - 2026: 2.1
- Unemployment rate (percent) by year:
  - 2020: 6.8
  - 2021: 6.9
  - 2022: 6.5
  - 2023: 5.5
  - 2024: 5.0
  - 2025: 4.8
  - 2026: 4.8
- CAB (percent of GDP) by year:
  - 2020: -1.0
  - 2021: 0.7
  - 2022: 0.2
  - 2023: 0.2
  - 2024: -0.2
  - 2025: -0.6
  - 2026: -0.8
- Fiscal balance by year:
  - 2020: -4.8
  - 2021: -6.3
  - 2022: -4.2
  - 2023: -3.7
  - 2024: -3.1
  - 2025: -2.5
  - 2026: -2.0
- Structural balance (percent of GDP) by year:
  - 2020: -4.6
  - 2021: -6.5
  - 2022: -4.2
  - 2023: -3.6
  - 2024: -3.1
  - 2025: -2.5
  - 2026: -2.0
- General government debt (percent of GDP) by year:
  - 2020: 18.2
  - 2021: 24.0
  - 2022: 27.1
  - 2023: 29.8
  - 2024: 31.7
  - 2025: 33.0
  - 2026: 33.6

### Risk Assessment Matrix — Selected risks, likelihood, impact, and policy responses
- Unexpected shifts in the COVID-19 pandemic (Likelihood: High; Time horizon: short to medium term)
  - Impact: Prolonged pandemic could require prolonged support and exacerbate vulnerabilities; faster containment would boost confidence and activity.
  - Recommended policy response: Participate in global and European policy responses; ramp up implementation of the vaccination strategy; provide economic support in line with Estonia’s significant fiscal and other policy space and do not withdraw the support prematurely; mitigate “social scarring” through targeted steps to reduce inequality and gender gaps.
- Accelerating de-globalization (Likelihood: Medium; Time horizon: medium)
  - Impact: As an open economy, Estonia would be affected through trade, confidence, and FDI channels; growth and employment would suffer.
  - Recommended policy response: Participate in global and European policy responses; provide fiscal support; manage risk through export diversification.
- Sharp rise in risk premia (Likelihood: Medium; Time horizon: short term)
  - Impact: Could weaken spending and confidence, especially via Nordic parent bank exposures and bank funding links to global conditions.
  - Recommended policy response: Continue to enhance the macroprudential toolkit and rely on ample buffers, including banks’ high capitalization and liquidity.
- Overheating in the housing market (Likelihood: Medium)
  - Impact: Multi-year price growth and easy financing conditions create risks for asset price bubbles.
  - Recommended policy response: Pursue vigilant macroprudential policies and financial supervision; tighten enforcement of housing-related macroprudential tools such as LTV ratios; review eligibility of government mortgage support programs and their role in circumventing the LTV ratios.
- Cyber-attacks on critical infrastructure and financial systems (Likelihood: Medium; Time horizon: short to medium term)
  - Impact: Estonia’s history of cyber-attacks and reliance on ICT processes make it susceptible.
  - Recommended policy response: Participate in global and European defenses; continue strong efforts to improve national cyber-security by allocating sufficient fiscal resources and through vigilant regulation.
- Risks to cross-border banking including AML/CFT (Likelihood: Medium; Time horizon: short to medium term)
  - Impact: Curtailed credit supply, confidence loss, pressures on correspondent banking relationships, and AML/CFT setbacks could weigh on the financial sector.
  - Recommended policy response: Further strengthen the AML/CFT framework; preserve high capitalization and liquidity; step up cross-border supervision, including cooperation with home-country authorities.

### Policy discussions and recommendations
- Overall policy focus:
  - (i) Support the recovery through a growth-friendly fiscal policy.
  - (ii) Address potential scarring while re-balancing the economy toward dynamic, inclusive, digital, and climate-friendly growth.
  - (iii) Enhance AML/CFT frameworks while bolstering sound credit provision.
- Fiscal policy space and strategy:
  - Substantial policy space allows supporting the recovery and addressing medium-term structural challenges.
  - Tension exists between (i) need for expansionary fiscal stance for recovery and investment, and (ii) Estonia’s traditional preference for conservative fiscal stance.
  - Key effective constraint to size of fiscal support is government capacity to spend effectively and efficiently.
- Right-sizing fiscal policy — Short-to-Medium Term:
  - 2021 support package totals 6½ percent of GDP, comprising:
    - Support to businesses through KredEx Foundation and Enterprise Estonia.
    - Support to employees and households, including unemployment benefits with skill-enhancing training and help with health sector contributions.
    - Tax measures: extended excise cuts on several fuels, tax incentives up to 2022, and deferred tax debt interest payments for 18 months.
    - Additional support: supplementary 2021 budget enhancing support by 2.2 percent of GDP targeted to healthcare expenditure and support for employees and households.
  - Staff projects 2021 fiscal deficit of 6.3 percent of GDP, incorporating authorities’ support measures and need for additional support.
  - Revenues expected to be lower by 0.2 percent of GDP than in the 2021 amended budget; expenditures forecast higher by 0.1 percent of GDP.
- Medium-term priorities:
  - Use ample fiscal space to boost capital spending, support recovery, and increase potential growth.
  - Current expenditures projected to decline gradually as a share of GDP; public wage bill in 2022–23 would grow by 5 percent annually in nominal terms.
  - Investments projected to grow steadily and reach 8 percent of GDP in 2025–26, assuming absorptive capacity increases.
- Next Generation EU Funds and RRP:
  - RRP envelope: EUR 982.5 million (about 3.4 percent of GDP) allocated over 2021–2026 (0.5 percent of GDP annually).
  - RRP: 80 percent capital expenditure, aimed at health sector resilience and digital/green transition.
  - About 75 percent of EU Fund inflows over 2021–26 (EUR 5.3 billion) is expected to finance investment (footnote preserved).
- Public investment and spending management:
  - Improving management of public spending and investment is critical to realize payoffs and multiplier effects.
  - Staff analysis suggests public investment multipliers are sizable (0.9–1.2) and higher public investment has substantial positive spillovers to corporate private investment.
  - Speeding implementation of PIMA recommendations on long-term strategic planning and project implementation would be helpful.
  - Efficient and timely use of available EU funds, including 2014–20 Cohesion Funds and Just Transition Fund, requires continued improvements in institutional capacities, including in local governments.
- Fiscal transparency and risk management:
  - Fiscal transparency is advanced but with scope for improvement.
  - More holistic management of fiscal risks is needed, including quantification of risks from guarantees, environmental risks, and quasi-fiscal activities.
  - An integrated Fiscal Risk Statement is recommended.
- Rebuilding fiscal buffers:
  - A robust plan for gradually rebuilding fiscal buffers and managing debt is needed as recovery reduces the need for continued support.
  - Targets should balance maintaining fiscal discipline and maximizing high-multiplier spending.
  - Quality measures and upgrading asset and liability management should underpin targets.

*Source: Estonian authorities; and IMF staff estimates and projections.*

### 33.      The authorities concurred with the need to support the economy while the pandemic

### 33. The authorities concurred with the need to support the economy while the pandemic lingers but underscored the case for a balanced approach

### Fiscal support and near-term stance
- Authorities view the incipient recovery as justifying discontinuing the wage support scheme around mid-2021.
- Upcoming deficit-neutral EU fund inflows and withdrawals of the pension savings would continue to stimulate the economy.
- Fiscal reserves allocated in the 2021 budget—and Estonia’s flexible budget management practices—would backstop deployment of further support, should it be needed.
- A composite indicator of health and vaccine metrics is being used to guide integrated decision making on re-opening and continued support programs.

### Medium-term fiscal framework (2022–25) and public investment
- The authorities’ new medium-term fiscal framework for 2022–25 aims at a gradual reduction of the fiscal deficit by at least 0.5 percent of GDP per year, in line with the national fiscal rule.
- The framework envisions generating expenditure savings while expanding elements of the social safety net and productive investment.
- Ongoing elaboration of RRF will help re-ignite the twin green-digital transition.
- The REACT Fund will support the labor market and health system.
- The Just Transition Fund will help restructure the oil-shale sector.
- Authorities concurred with recommendations of the recent fiscal transparency TA and the 2019 PIMA and are working on their implementation, as well as further upgrading debt management.

### Minimizing scarring and re-tooling growth engines
- As pandemic effects subside, resources should be reallocated to address COVID-19’s multifaceted and potentially lasting economic damage.
- Estonia’s strengths: ample fiscal buffers, labor market flexibility, and strong institutions.
- Risks: greater susceptibility to “social scarring” affecting skill accumulation, net migration, and sectoral mismatches—amplifying Estonia’s productivity challenge (SIP on Labor Market scarring).
- Effective and holistic structural reforms should complement fiscal support to labor and the social safety net.

### Sectoral support and program monitoring
- Sectoral support programs should be maintained until the recovery is entrenched.
- Staff urged prompt re-deployment of wage support should the recovery falter.
- Other forms of support, including loan guarantees, should be continued as needed.
- Program design and targeting will need refinement over time.
- Comprehensive monitoring of all types of support based on a battery of economic indicators and big data should guide decisions on costs, benefits, and pace of withdrawal.

### Labor market policies and skills
- The fall in Estonia’s 2020 employment was particularly concentrated among the low-skilled and the young.
- Need for enhanced education and training to relieve long-standing shortage of skilled labor and prevent atrophy of skills.
- Implementation of plans to expand retraining is ongoing.
- Strengthening ALMP and enhancing the workability reform would require expanding the means provided to the Unemployment Insurance Fund.

### Inequality, poverty, and social protection
- Estonia’s Gini coefficient moved close to the euro-area average in 2019.
- Data on at-risk poverty suggest substantial pockets of relative inequality, particularly among the elderly.
- Disproportionate pandemic impact on the youth, people with low education, and the elderly—who could be additionally impacted by the change in the second pillar system.
- Recent increase in pension entitlements is welcomed; a review of the pension system planned to be completed by 2022 will help map out objectives.
- Improved access to health services and implementing a long-term care program are important.

### Gender gap and family care policies
- Estonia’s pay gap has narrowed but remains among the highest in the EU.
- Government’s Gender Equality Program envisions enhanced gender gap monitoring and evaluation and public awareness through digital tools.
- Ongoing activities include nudging programs (e.g., to remove gender glass ceilings in the ICT sector) and further measures for a more equitable work-life balance, including an enhanced paternity leave program of mid-2020.
- Further steps could bolster safe child-care and long-term care services.
- A proposal for a Welfare Development Plan 2023–30 is being elaborated.

### Immigration and population trends
- Entrenching positive net immigration could help address population aging, low productivity, and lack of skilled labor.
- COVID-19 shock and tight immigration quota have blunted recent progress in attracting immigrants.
- Government should continue to expand business and labor regulations that helped catalyze net immigration, including training and education programs for immigrants, the e-residency program, improved business climate, lower restrictions for impacted businesses, and further reduction of constraints to migration.

### Digitalization and green transition
- The 2030 digigov strategy aims to lock-in Estonia’s global leadership in digital public services by boosting data governance and open data, core IT services, and last mile connectivity.
- Stepped-up digitalization of private businesses should be incentivized through grants, investment support, and digital skills training.
- Other reforms: (i) digitalization to speed up legal processes; (ii) support for broadband infrastructure (5G corridors); and (iii) further strengthening cybersecurity.
- Digitalization agenda will be supported with financial resources of the NGEU.

### Climate policy and oil-shale sector restructuring
- Estonia aligned with the European Green Deal, including the goal of climate neutrality by 2050.
- The likelihood of reaching the emissions reductions target of 70 percent between 1990 and 2030 has improved as electricity production rebalances away from oil-shale.
- Progress hinges on: (i) credibly addressing social and labor aspects of the oil shale industry’s restructuring (including pathways to alternative “green jobs”), supported by the EU’s Just Transition Fund; and (ii) implementing transport electrification and renewable energy agendas.
- A comprehensive and predictable carbon pricing strategy, covering also transportation sector and buildings, should help achieve the emissions targets.
- Authorities committed to achieving carbon neutrality by 2050, with intermediate sub-targets of discontinuing electricity production from oil shale by 2035 and the use of oil shale for the energy industry by 2040.
- Note: The EU Emissions Trading System for now excludes transport and buildings; key EU-wide decisions on amending the coverage of the ETS framework were pending during the consultation.

### Financial stability and productive credit
- Financial sector has weathered the pandemic well; scope exists for bank credit to more fully support Estonia’s productive transformation.
- Despite solid capital and liquidity buffers, Estonian banks’ credit to corporates has been relatively weak compared to some other euro area countries.
- Enterprise surveys show availability of credit improving, but Estonian SMEs remain somewhat finance constrained.
- Bank profitability declined in 2020.

### Withdrawal of moratoria, provisioning, and targeted support
- With bank moratoria and forbearance measures now being largely withdrawn, targeted support to borrowers needs to be retained.
- Central bank stress tests show strong balance sheets and low bank exposures to pandemic-hit sectors; even in an adverse scenario, NPLs would rise significantly less than during the global financial crisis.
- As moratoria are discontinued, banks can re-assess borrowers, recognize losses, and step up credit to more viable sectors.
- Targeted financial support tailored to clients’ conditions should be considered by policymakers as needed given remaining uncertainties and uneven pandemic impact.

### Supervisory vigilance and macroprudential stance
- Supervisory framework is strong but requires continued actions:
  - Provisioning: targeted and temporary interventions could be considered in problematic cases, but classification and provisioning rules should continue to fully apply.
  - Reporting: banks need to continue portfolio reviews and risk assessments regularly; enhanced reporting should be carefully applied industry-wide and public disclosures remain fully transparent.
  - Housing market and macroprudential policy: maintain standard macroprudential instruments (debt to income, loan-to-value, and loan maturity cap requirements and the 15 percent risk weight for mortgage loans).
- Authorities should be ready to re-calibrate tools in light of housing market overheating risks posed by pension system withdrawals.
- As the economy recovers, systemic risk and countercyclical capital buffers (both currently at zero) could be re-assessed and macroprudential tools may need more active use if significant divergences with the euro-area’s cyclical conditions emerge.

### Insolvency and AML/CFT reforms
- Remaining bottlenecks to resolving insolvencies should be forcefully addressed.
- January 2021 amendments to the bankruptcy act introduce a bankruptcy ombudsman, streamline procedures for accepting and defending claims, and increase specialization of courts.
- Consultations underway for legislative changes to align domestic framework with EU guidelines.
- AML-CFT reform agenda: AMLTFP act amended to incorporate provisions of the EU fifth AML directive and entered into force in July 2020.
- Authorities tightening licensing and practices of virtual currency service providers.
- Forthcoming evaluation by Moneyval in 2022 is an opportunity to assess progress; authorities should mobilize the AML/CFT regime in preparation.
- The process of imposing fines for AML/CFT violations should be streamlined; upcoming regional TA recommendations on AML/CFT should inform reform agenda.

### Authorities’ views (summarized)
- Pro-active structural and social reform agendas emphasized.
- 2021 budget allocation allows for full-year implementation of the wage support scheme should this be needed.
- Some support measures will remain, increasingly as financing or contingent assistance targeted to vulnerable sectors; support to tourism sector to continue beyond 2021.
- Ongoing revamping of training curricula to help job reallocation.
- Support to health system and the elderly will continue; both the pension increase and the minimum tax-exempt income threshold for pensioners planned for 2023.
- Extensive reforms to reduce the gender gap and new programs to incentivize immigration and skilled labor.
- Public R&D spending increased in the 2021 budget to 1 percent of GDP and planned to be maintained.
- Authorities expect to use RRF projects to spur digitalization and green growth.
- Committed to ambitious climate mitigation objectives achieved through price and nonprice measures in coordination with EU regulations, including the carbon neutrality and oil-shale sub-targets noted above.
- Broad agreement that weak credit growth to corporates is primarily demand-driven; commitment to maintain supervisory vigilance and advance AML/CFT and insolvency-related reforms.

### Staff appraisal (summary)
- Estonia broadly successful in managing the COVID-19 pandemic: lockdowns mitigated health outcomes but caused an economic downturn.
- Rapid, broad-based, and sizable policy responses helped contain economic damage; the fall in output has been among the mildest in the EU.
- Vaccination rollout is being expanded and restrictions are being eased, paving the way for an economic rebound.
- Estonia’s external sector is assessed as having been substantially stronger than justified by medium-term fundamentals and desirable policies in 2020.

*Source: 1estea2021001 - Chapter excerpt (PDF).*

### 52.      Output is set to recover, but the outlook is subject to large two-way risks. A robust

### Output is set to recover, but the outlook is subject to large two-way risks

### Near-term outlook and risks
- A robust recovery is expected in the near term on the back of progress with vaccinations, continued policy support, a boost to domestic demand from the expected withdrawal of pension system savings, and EU fund-backed public investment.
- There are however large two-way risks, including from virus mutations and economic scarring on the downside, and on the upside from increased confidence due to successful vaccinations and enhanced opportunities for digital and green transition.

### Fiscal policy guidance
- Fiscal support should continue to be provided until the recovery is firmly entrenched.
- Estonia has ample policy space, reflecting prudent macroeconomic management and low debt.
- The fiscal support has been sizable, broad-based, and well-coordinated.
- While the current fiscal stance is appropriate, as health conditions improve and the economy recovers, the support should be gradually withdrawn.
- While some support measures have already expired as the economy has shown signs of recovery, they need to be promptly re-deployed should any signs of weakness emerge.
- In parallel, a plan to return to the medium-term objective should be part of a well-sequenced strategy to rebuild policy buffers and rebalance support toward productive investment.
- Further improving fiscal transparency and project implementation and maximizing the impact of NGEU grant funding should complement the envisioned scaling up of public investment.

### Structural policies to protect and revitalize productive and social fabric
- Comprehensive monitoring of policy support and evaluation of experience should guide decisions on the costs and benefits of continuing with labor market programs to minimize labor market scarring.
- Active labor market policies should be ramped up to enhance training, match workers to good jobs, reduce skill shortages, and incentivize hiring.
- To manage potential social scarring risks, policies should continue to reduce inequality and gender gaps and further protect the elderly.
- The recent and planned increases in pension entitlements are welcome, and so is the planned review of the pension system.
- Further facilitating immigration could help address population aging, low productivity, and scarcity of skilled labor.

### Accelerating green and digital transition
- NGEU funds open up opportunities for further progress in the greening and digitalization agenda, where Estonia should supplement its commendable progress in digital public services with improved efficiency in R&D spending to enhance digitalization of private businesses.
- Drawing on the government’s strong commitment to more ambitious climate targets, the authorities should continue their efforts to implement all aspects of their reform agenda.
- In particular, comprehensive and predictable carbon pricing could be considered to achieve the emissions targets.
- Further steps should be taken to accelerate the restructuring of the oil-shale sector while managing its social impact.

### Financial supervision and macroprudential policy
- Financial supervisors and macroprudential policymakers should remain vigilant.
- Estonia’s strong financial sector has weathered the pandemic well and helped support the economy.
- Financial supervision policies are appropriate, but continued careful monitoring is warranted.
- Banks’ exposures to pandemic-hit sectors seem to be contained, and banks can now more soundly re-assess their borrowers and fully use the potential for credit provision while continuing to provide targeted support to vulnerable segments of the economy.
- The macroprudential stance is appropriate, though there is a need for a continued reassessment of the policy tools in light of developments in the real estate market.
- Staff welcomes the authorities’ continued progress with legislative and institutional reforms of the AML-CFT framework, which should be further advanced.

*Republic of Estonia — IMF staff assessment (excerpt).*

### 57.      It is recommended that the next Article IV consultation be completed on the standard

### 1estea2021001 - 57.      It is recommended that the next Article IV consultation be completed on the standard 

### Recommendation
- It is recommended that the next Article IV consultation be completed on the standard 12-month cycle.

### COVID-19 Developments (2020–21)
- Daily Covid-19 Hospitalizations (Patients per 1 million people; weighted by population): charted for Estonia, Latvia, Lithuania, Europe (Feb-20 to May-21).
- New Weekly Covid-19 Deaths (7-day moving average cases per 100k people): charted (Feb-20 to May-21).
- Positive Tests Rate (7-day average positive tests rates; simple average): charted (Feb-20 to May-21).
- Weekly Covid-19 Tests (7-day average tests, in thousands per 1 million people): charted (Feb-20 to May-21).
- Sources: Bloomberg Finance L.P.; Our World In Data; IMF, WEO; and IMF staff calculations.

### Real Sector Developments (2010–20)
- GDP Growth and Contributions (YoY, percent): consumption, GCF, net exports, GDP contributions plotted (Dec-10 to Dec-20).
- Industrial Production (YoY, percent): series (Jan-10 to Jan-21).
- Retail Sales (YoY, percent): series (Jan-10 to Jan-21).
- Confidence Indicators (Percent balance): consumer confidence and business confidence (Dec-09 to Jan-21).
- Real GDP Growth, SA (Percent): QoQ and YoY series (Jan-10 to Jan-20).
- Employment Growth and Unemployment Rate (Percent): unemployment rate and employment growth series (Jan-10 to Jan-20).
- Sources: Haver; and national authorities.

### External Developments (2004–20)
- Current Account (Percent of GDP): components include net income payments, net current transfers, imports and exports of goods and services (2004–2020).
- External Position (Percent of GDP): gross debt (external), net debt, NIIP (RHS) (2004–2020).
- Saving and Investment (Percent of GDP): national saving and investment, current account (RHS) (2004–2020).
- Capital and Financial Accounts (Percent of GDP): capital transfers, FDI, portfolio investments, other (2004–2020).
- Sources: Haver; Statistics Estonia; and IMF staff calculations.

### External Competitiveness (2008–20)
- REER vs EU28 Index (2008Q1=100): REER-CPI and REER-ULC series (Jun-08 to Dec-20).
- Estonia's Market Share in Selected Countries (Percent): Finland, Sweden, Russia, World (2013–2019).
- Export Composition (Billions of Euros): by product categories and total export (2008–2020).
- Unit Labor Cost (2008Q1=100, SA) and Real Wages (2008Q1=100, SA): series (Jun-08 to Dec-20).
- Productivity (Output per working person, 2008Q1=100): total economy and manufacturing (Jun-08 to Dec-20).
- Sources: DOTS; Haver; WEO; and EU Commission.

### Fiscal Developments and Structure (2004–20)
- General Government, 2004-20 (Percent of GDP): Revenue, Expenditure, Overall balance (RHS).
- General Government Debt, 2020 (Percent of GDP): cross-country comparison with Estonia among peers.
- Public Social Expenditures, 2019 (Percent of GDP): breakdown by Other, Unemployment, Family and children, Old age, Sickness and disability.
- General Government Capital Expenditures, 2019 (Percent of GDP): cross-country comparison.
- Tax Wedge, 2019 (Single person at 100% of average earnings, no child): cross-country comparison.
- GINI Coefficient, 2019 (Gini index of 0 to 100): cross-country comparison.
- Sources: WEO; Eurostat; and OECD.

### Financial Sector Developments (2008–20)
- Non-performing Loans (NPLs) definitions: Lithuania includes impaired loans and loans past due by 60 days but not impaired; Latvia loans overdue by more than 90 days; Estonia loans overdue by more than 60 days.
- Non-performing Loans (Percent of outstanding loans): Estonia, Latvia, Lithuania series (Mar-11 to Jul-20).
- Regulatory Tier 1 Capital to Risk-weighted Assets (Percent): Estonia, Latvia, Lithuania (2008–2020Q3).
- Loan-to-Deposit Ratio (Percent): Estonia, Latvia, Lithuania (2010–2020).
- Households' Balance Sheets (Billions of Euros): total assets and liabilities series (2010–2020).
- Sources: Haver; national authorities; and IMF staff calculations.

### Public Sector Debt Sustainability Analysis (DSA) — Baseline Scenario (As of May 25, 2021)
Key projected indicators (in percent of GDP unless otherwise indicated):
- Nominal gross public debt: 2019: 8.8; 2020: 8.4; 2021: 18.2; 2022: 24.0; 2023: 27.1; 2024: 29.8; 2025: 31.7; 2026: 33.0; 203?: 33.6.
- Public gross financing needs: 2019: 2.0; 2020: 1.2; 2021: 9.4; 2022: 8.0; 2023: 5.8; 2024: 3.9; 2025: 3.5; 2026: 2.9; 2.3.
- Real GDP growth (in percent): 2019: 3.6; 2020: 5.0; 2021: -2.9; projection 2022–2026: 3.4, 4.5, 3.7, 3.4, 3.2, 3.2.
- Inflation (GDP deflator, in percent): 2019: 3.2; 2020: 3.2; 2021: -0.4; projection 2022–2026: 3.3, 2.7, 2.4, 2.8, 2.6, 2.7.
- Nominal GDP growth (in percent): 2019: 7.0; 2020: 8.4; 2021: -3.4; projection 2022–2026: 6.8, 7.3, 6.2, 6.3, 5.9, 5.9.
- Effective interest rate (in percent): 2019: 0.9; 2020: 0.4; 2021: 0.4; projection 2022–2026: 0.2, 0.2, 0.2, 0.2, 0.2, 0.2.
- Change in gross public sector debt (cumulative): 2019–2026 cumulative: 15.4.
- Identified debt-creating flows (cumulative): 15.6.
- Primary deficit (percent of GDP): 2019: 0.0; 2020: -0.5; 2021: 4.8; 2022: 6.3; 2023: 4.2; 2024: 3.7; 2025: 3.1; 2026: 2.5; 2.0.
- Primary (noninterest) revenue and grant (percent of GDP): 2019: 38.6; 2020: 39.4; 2021: 40.2; 2022: 40.7; 2023: 39.8; 2024: 39.8; 2025: 40.5; 2026: 40.7; 40.9; 42.5 (later-year figure).
- Primary (noninterest) expenditure (percent of GDP): 2019: 38.6; 2020: 38.9; 2021: 45.0; 2022: 47.0; 2023: 44.0; 2024: 43.5; 2025: 43.6; 2026: 43.2; 42.9; 264.2 (note: table displays cumulative value labeled 264.2).
- Automatic debt dynamics: cumulative contribution -9.4 (interest rate/growth differential and components reported).
- Other identified debt-creating flows (cumulative): 3.3.
- Residual, including asset changes: various year-by-year values including 0.5, -0.6, 0.5, -0.1, 0.0, 0.0, 0.0, 0.0, -0.2.
- Sovereign Spreads: EMBIG (bp): 3/42; 5Y CDS (bp): 62.
- Ratings: Moody's A1/A1; S&Ps AA-/AA-; Fitch AA-/AA-.
- Assumptions and formulas for automatic debt dynamics and interest-growth differential provided in footnotes.
- Source: IMF staff.

### Public DSA — Alternative Scenarios and Composition (2021–26)
Underlying assumptions (in percent):
- Baseline scenario assumptions (2021–2026): Real GDP growth: 3.4, 4.5, 3.7, 3.4, 3.2, 3.2; Inflation: 3.3, 2.7, 2.4, 2.8, 2.6, 2.7; Primary Balance: -6.3, -4.2, -3.7, -3.1, -2.5, -2.0; Effective interest rate: 0.2, 0.2, 0.2, 0.2, 0.2, 0.2.
- Historical scenario assumptions (2021–2026): Real GDP growth: 3.4, 3.2, 3.2, 3.2, 3.2, 3.2; Inflation: same as baseline; Primary Balance: -6.3, -0.5, -0.5, -0.5, -0.5, -0.5; Effective interest rate: 0.2, 0.3, 0.4, 0.4, 0.5, 0.5.
- Constant Primary Balance scenario: Primary Balance constant at -6.3 across 2021–2026; Effective interest rate: 0.2, 0.3, 0.4, 0.4, 0.3, 0.3.
Composition and projections:
- Gross Nominal Public Debt (in percent of GDP) projected 2019–2026 for Baseline, Historical, Constant Primary Balance scenarios.
- Public Gross Financing Needs (in percent of GDP) projected 2019–2026.
- Debt by maturity (Medium and long-term; Short-term) projected 2010–2026.
- Debt by currency (Local currency-denominated; Foreign currency-denominated) projected 2010–2026.
- Source: IMF staff Calculations.

### Selected Macroeconomic and Social Indicators, Key Projections (2018–26)
- GDP (nominal; billions of Euro): 2018: 25.9; 2019: 28.1; 2020: 27.2; 2021: 29.0; 2022: 31.1; 2023: 33.1; 2024: 35.1; 2025: 37.2; 2026: 39.4.
- Annual change (in percent): 2018: 8.7; 2019: 8.4; 2020: -3.4; 2021: 6.8; 2022: 7.3; 2023: 6.2; 2024: 6.3; 2025: 5.9; 2026: 5.9.
- Real GDP growth (year-on-year in percent) 1/: 2018: 4.4; 2019: 5.0; 2020: -2.9; 2021: 3.4; 2022: 4.5; 2023: 3.7; 2024: 3.4; 2025: 3.2; 2026: 3.2.
- Private consumption, Gross fixed capital formation, Exports, Imports: time series with specific values spanning 2018–2026 (see Table 1).
- Average HICP (year-on-year change in percent): 2018: 3.4; 2019: 2.3; 2020: -0.6; 2021: 1.7; 2022: 2.5; 2023: 2.1; 2024: 2.1; 2025: 2.1; 2026: 2.1.
- Unemployment rate (ILO definition, percent, pa): 2018: 5.4; 2019: 4.4; 2020: 6.8; 2021: 6.9; 2022: 6.5; 2023: 5.5; 2024: 5.0; 2025: 4.8; 2026: 4.8.
- Average nominal ULC (year-on-year growth in percent): 2018: 5.0; 2019: 5.4; 2020: 3.1; 2021: 1.7; 2022: 1.6; 2023: 2.1; 2024: 1.8; 2025: 1.2; 2026: 1.1.
- General government (ESA10 basis; percent of GDP): Revenue, Expenditure, Financial surplus (+)/deficit (-), Structural balance, Total general government debt (specific series):
  - Revenue: 2018: 38.7; 2019: 39.4; 2020: 40.2; 2021: 40.8; 2022: 39.8; 2023: 39.8; 2024: 40.6; 2025: 40.8; 2026: 40.9.
  - Expenditure: 2018: 39.2; 2019: 38.9; 2020: 45.0; 2021: 47.0; 2022: 44.1; 2023: 43.5; 2024: 43.7; 2025: 43.3; 2026: 42.9.
  - Financial surplus (+) / deficit (-): 2018: -0.5; 2019: 0.5; 2020: -4.8; 2021: -6.3; 2022: -4.2; 2023: -3.7; 2024: -3.1; 2025: -2.5; 2026: -2.0.
  - Structural balance: 2018: -1.2; 2019: -0.5; 2020: -4.6; 2021: -6.5; 2022: -4.2; 2023: -3.6; 2024: -3.1; 2025: -2.5; 2026: -2.0.
  - Total general government debt: 2018: 8.2; 2019: 8.4; 2020: 18.2; 2021: 24.0; 2022: 27.1; 2023: 29.8; 2024: 31.7; 2025: 33.0; 2026: 33.6.
- Social indicators: Population (2019, pa): 1.32 million; Per capita GDP (2017): $32,998; Life expectancy at birth: 82.2 (female) and 73.3 (male).
- Poverty rate (share of the population below the established risk-of-poverty line): 22.2 percent; Main exports: machinery and appliances.
- Sources: Estonian authorities; Eurostat; and IMF staff estimates and projections.
- Footnotes: 1/ Statistics Estonia revised National Accounts series in August 2019 inter alia shifting reference year to 2015 and improving the methodology. 2/ Includes the Stabilization Reserve Fund (SRF). 3/ Includes trade credits.

### Summary of General Government Operations (2018–26) — Key Lines (In percent of GDP)
- Revenue and Grants: 2018: 38.7; 2019: 39.4; 2020: 40.2; 2021: 40.8; 2022: 39.8; 2023: 39.9; 2024: 40.6; 2025: 40.8; 2026: 40.9.
- Revenue: 2018: 36.5; 2019: 36.9; 2020: 37.8; 2021: 38.0; 2022: 37.1; 2023: 37.0; 2024: 37.7; 2025: 37.9; 2026: 38.1.
- Tax revenue: 2018: 21.2; 2019: 21.3; 2020: 21.2; 2021: 21.3; 2022: 21.3; 2023: 21.6; 2024: 21.6; 2025: 21.6; 2026: 21.7.
  - Direct taxes: 2018: 7.4; 2019: 7.3; 2020: 7.7; 2021: 8.1; 2022: 7.6; 2023: 7.4; 2024: 7.6; 2025: 7.6; 2026: 7.6.
  - Indirect taxes: 2018: 13.8; 2019: 14.0; 2020: 13.4; 2021: 13.3; 2022: 13.6; 2023: 13.8; 2024: 14.0; 2025: 14.0; 2026: 14.1.
- Social contributions: 2018: 11.7; 2019: 11.8; 2020: 13.1; 2021: 13.1; 2022: 12.2; 2023: 12.1; 2024: 12.3; 2025: 12.4; 2026: 12.5.
- Expenditure: 2018: 39.2; 2019: 38.9; 2020: 45.0; 2021: 47.0; 2022: 44.1; 2023: 43.5; 2024: 43.7; 2025: 43.3; 2026: 42.9.
- Expense (current expenditure): 2018: 34.0; 2019: 34.1; 2020: 39.3; 2021: 40.5; 2022: 37.5; 2023: 36.1; 2024: 35.8; 2025: 35.3; 2026: 35.1.
- Transfers and subsidies: 2018: 16.2; 2019: 16.1; 2020: 20.2; 2021: 20.9; 2022: 18.5; 2023: 17.8; 2024: 17.4; 2025: 17.0; 2026: 16.9.
- Net acquisition of NFA (capital expenditure): 2018: 5.3; 2019: 4.9; 2020: 5.7; 2021: 6.5; 2022: 6.6; 2023: 7.4; 2024: 7.9; 2025: 8.0; 2026: 7.9.
- Financing (accrual basis) and structural balance series provided (see Table 2).
- Sources: Eurostat; Statistics Estonia; and IMF staff calculations.

### Selected External and Balance of Payments Indicators (2018–26)
- Current Account (Millions of Euros): 2018: 238; 2019: 553; 2020: -283; 2021: 202; 2022: 648; 2023: 1; 2024: -85; 2025: -218; 2026: -320.
- Primary Current Account 1/: 2018: 2,190; 2019: 2,684; 2020: 1,433; 2021: 2,167; 2022: 2,128; 2023: 2,248; 2024: 2,191; 2025: 2,171; 2026: 2,188.
- Trade Balance (Millions of Euros): 2018: 669; 2019: 1,128; 2020: 367; 2021: 156; 2022: 0; 2023: 565; 2024: 505; 2025: 144; 2026: 133; 44.
- Exports of goods (Millions of Euros): 2018: 12,592; 2019: 13,316; 2020: 13,307; 2021: 14,098; 2022: 15,007; 2023: 15,595; 2024: 16,116; 2025: 16,602; 2026: 17,043.
- Imports of goods (Millions of Euros): 2018: 13,816; 2019: 14,207; 2020: 13,482; 2021: 14,474; 2022: 15,694; 2023: 16,327; 2024: 16,919; 2025: 17,492; 2026: 18,027.
- Services Balance (Millions of Euros): 2018: 1,894; 2019: 2,019; 2020: 211; 2021: 1,091; 2022: 1,292; 2023: 1,381; 2024: 1,317; 2025: 1,303; 2026: 1,327.
- Primary Income (Millions of Euros): 2018: -499; 2019: -627; 2020: -335; 2021: -565; 2022: -594; 2023: -623; 2024: -654; 2025: -687; 2026: -722.
- Capital Account (Millions of Euros): 2018: 345; 2019: 342; 2020: 395; 2021: 422; 2022: 453; 2023: 481; 2024: 511; 2025: 541; 2026: 574.
- Financial Account (Millions of Euros): 2018: 679; 2019: 1,006; 2020: 906; 2021: 245; 2022: 175; 2023: 624; 2024: 263; 2025: 242; 2026: 253.
- Total external debt (Gross, percent of GDP): 2018: 77.4; 2019: 73.8; 2020: 88.7; 2021: 86.9; 2022: 83.3; 2023: 80.7; 2024: 78.0; 2025: 75.8; 2026: 73.6.
- Current Account (percent of GDP): 2018: 0.9; 2019: 2.0; 2020: -1.0; 2021: 0.7; 2022: 0.2; 2023: 0.2; 2024: -0.2; 2025: -0.6; 2026: -0.8.
- Sources: Bank of Estonia; and IMF staff estimates and projections.
- Footnotes: 1/ Excluding interest payments and reinvested earnings. 2/ Includes operations in debt securities. 3/ Starting in 2000, the definition of external debt was widened to include money market instruments and financial derivatives.

### Macroeconomic Framework (2018–26) — Selected Aggregates
- Real GDP growth (percent): 2018: 4.4; 2019: 5.0; 2020: -2.9; 2021: 3.4; 2022: 4.5; 2023: 3.7; 2024: 3.4; 2025: 3.2; 2026: 3.2.
- Domestic demand real growth (percent): 2018: 4.1; 2019: 4.5; 2020: 2.4; 2021: 1.3; 2022: 5.4; 2023: 4.1; 2024: 4.4; 2025: 4.1; 2026: 4.0.
- Gross saving (percent of GDP): 2018: 27.7; 2019: 29.7; 2020: 29.6; 2021: 28.6; 2022: 28.3; 2023: 29.0; 2024: 29.4; 2025: 29.6; 2026: 29.9.
- Investment (percent of GDP): 2018: 26.7; 2019: 27.7; 2020: 30.7; 2021: 27.9; 2022: 28.1; 2023: 28.8; 2024: 29.6; 2025: 30.2; 2026: 30.7.
- Current account: 0.9, 2.0, -1.0, 0.7, 0.2, 0.2, -0.2, -0.6, -0.8 (2018–2026).
- Memorandum items include fiscal balance, revenues, expenditures, structural balance, total general government debt, and net non-debt creating capital inflows (specific series provided).
- Sources: Estonian authorities; and IMF staff estimates and projections.

### External Vulnerability Indicators (2015–20)
- Exports of goods and services (year-on-year, percent): 2015: -2.7; 2016: 4.8; 2017: 7.8; 2018: 6.5; 2019: 6.6; 2020: -7.5.
- Imports of goods and services (year-on-year, percent): 2015: -3.5; 2016: 5.3; 2017: 7.1; 2018: 8.5; 2019: 4.4; 2020: -2.3.
- Current account balance (percent of GDP): 2015: 1.8; 2016: 1.2; 2017: 2.3; 2018: 0.9; 2019: 2.0; 2020: -1.0.
- Total external debt (percent of GDP): 2015: 92.2; 2016: 88.0; 2017: 83.4; 2018: 77.4; 2019: 73.8; 2020: 88.7.
- Debt service to exports of GNFS: 2015: 70.7; 2016: 69.5; 2017: 61.3; 2018: 51.1; 2019: 45.4; 2020: 56.7.
- Financial market indicators: Tallinn stock exchange index (OMX Tallinn) end of period and S&P foreign currency debt rating (AA- across reported years).
- Sources: Estonian authorities; Bloomberg; and Standard & Poor's.

### Households, Financial Assets and Liabilities (2015–20)
- Total Assets (millions of euros): 2015: 22,702; 2016: 24,646; 2017: 28,587; 2018: 31,816; 2019: 33,506; 2020: 37,674.
- Total Liabilities (millions of euros): 2015: 8,485; 2016: 8,994; 2017: 9,630; 2018: 10,310; 2019: 10,906; 2020: 11,504.
- Net Financial Assets (millions of euros): 2015: 14,217; 2016: 15,652; 2017: 18,957; 2018: 21,506; 2019: 22,600; 2020: 26,170.
- Memorandum: Liabilities to gross wages and salaries ratio: 2015: 116.2; 2016: 115.9; 2017: 114.0; 2018: 111.7; 2019: 107.1; 2020: 112.8.
- Sources: Eesti Pank; and Statistics Estonia.

### Financial Soundness Indicators (2015–2020:Q3)
- Regulatory capital to risk-weighted assets: 2015: 28.0; 2016: 31.8; 2017: 29.2; 2018: 28.5; 2019: 25.4; 2020Q3: 25.8.
- Regulatory Tier I capital to risk-weighted assets: 2015: 27.7; 2016: 31.4; 2017: 28.8; 2018: 28.1; 2019: 25.0; 2020Q3: 25.3.
- NPLs to gross loans (non-financial sector): 2015: 1.0; 2016: 0.9; 2017: 0.7; 2018: 0.5; 2019: 0.4; 2020Q3: 0.4.
- Loans to households (sectoral distribution, percent): 2015: 44.3; 2016: 42.5; 2017: 44.4; 2018: 44.9; 2019: 46.2; 2020Q3: 46.5.
- Loans to non-financial corporations (percent): 2015: 41.4; 2016: 40.8; 2017: 37.7; 2018: 37.5; 2019: 35.9; 2020Q3: 35.9.
- Return on assets: 2015: 3.7; 2016: 1.9; 2017: 1.7; 2018: 1.8; 2019: 1.2; 2020Q3: 1.3.
- Return on equity: 2015: 29.9; 2016: 15.6; 2017: 13.0; 2018: 14.0; 2019: 8.0; 2020Q3: 5.4.
- Loans to deposits: 2015: 105.4; 2016: 109.9; 2017: 107.6; 2018: 109.1; 2019: 100.8; 2020Q3: 91.8.
- Sources: IFS database, Eesti Pank, and Financial Supervisory Authority.

_Italic: Source — IMF staff content from the provided Estonia chapter excerpts and tables._

### Annex I. Debt Sustainability Analysis

### Annex I. Debt Sustainability Analysis

### Overview
- The COVID-19 shock led to a significant and sudden rise in Estonia’s gross public debt by about 10 percentage points, from 8.2 percent of GDP in 2019.
- Estonia’s public debt remains sustainable and among the lowest among European peers.
- Net debt remained relatively small at 2.5 percent of GDP in 2020, reflecting the government’s prudent approach to building reserve buffers.
- Changes in the State Treasury’s asset-liability management (ALM) approach in June 2020 were tailored to increased borrowing needs while maintaining high standards of risk management.

### Debt dynamics in 2020
- Fiscal deficit widened to 4.8 percent in 2020 from a balanced position in 2019.
- Public debt increased by 9.8 percentage points of GDP in 2020.
  - Nominal debt growth contributed 9.2 percentage points.
  - GDP contraction contributed 0.6 percentage points.
- Long-term instruments contributed notably to the debt increase:
  - EUR 1.5 billion 10-year Eurobond issuance (5.5 percent of GDP); interest rate on the Eurobond is 0.235 percent.
  - 15-year loan from Nordic Investment Bank (2.8 percent of GDP).
- The government also issued EUR 575 million worth of T-bills in 2020.
  - EUR 150 million worth of 2020 T-bill issuances was amortized in 2020; the outstanding amount of T-bill will be amortized in 2021.
- Fiscal reserves increased substantially in 2020, leaving net government debt at 2.5 percent of GDP (increasing from negative levels in 2019).
- Estonia is classified as a low-scrutiny case under the DSA framework.

### 2021 budget and borrowing plans
- The 2021 budget, augmented by the March 2021 supplementary budget, envisages a further widening of the deficit to 6.0 percent of GDP, financed by additional borrowing.
- As of end-April 2021, Estonia’s outstanding debt obligations (two European Investment Bank loans, one loan from Nordic Investment Bank, two Treasury bills, and one Eurobond) were 2.7 times the liquidity reserves.
- The government borrowing strategy envisions borrowing up to EUR 4.3 billion through T-bills, IFI loans and Eurobond issuances.
- For 2021:
  - The average interest cost is expected to reach 0.2 percent per annum.
  - The average maturity of government debt is projected to further increase to 11 years.
- The State Treasury has several committed credit lines with banks representing 21 percent of the government liquidity position in March 2021 that can be quickly drawn upon.

### Medium-term outlook (2021–2026)
- Fiscal deficit is expected to gradually narrow to 2.0 percent of GDP in 2026, after expanding to accommodate essential spending rebalanced toward investment.
- Gross financing needs are expected to narrow to 2.3 percent of GDP in 2026, from 8.0 percent of GDP in 2021.
- Estonia’s debt-to-GDP ratio is expected to increase from 24.0 percent of GDP in 2021 to 33.6 percent of GDP in 2026.
- There is a risk of a lower debt trajectory if a more robust post-COVID macroeconomy requires less fiscal policy support, entailing a faster narrowing of deficits.

### Risk management, ALM, and liquidity
- The Treasury’s primary financial management objective is to meet the State’s financial obligations in full and at all times by maintaining liquidity and preserving the value of financial reserves.
- Debt management aims at keeping the cost of servicing debt as low as possible while maintaining interest rate and refinancing risks manageable.
- ALM jointly considers the State’s assets and liabilities to improve overall financial risk management and minimize costs.
- The ALM principles were modified in June 2020 to fit increased borrowing needs:
  - Interest rate risk management for financial assets (the Liquidity Reserve and the on-lending portfolio) remains unchanged with a 0.45 years duration limit.
  - Risk management principles for liabilities are now based on the average interest rate re-fixing period method.
  - As of January 31, 2021, the weighted average interest re-fixing period of the total debt portfolio was 4.60 years.
- Prior ALM limits (2014 to May 2020) required financial assets’ duration not to exceed 0.45 years and outstanding debt duration not to exceed 0.5 years; these became obsolete as the Treasury debt portfolio exceeded liquidity reserves after COVID-19.

### Liquidity, refinancing, and other financial risks
- Government liquidity is well above the minimum requirements for liquidity management.
  - The minimum required liquidity equals the State’s six-month negative net cash flow (transactional and precautionary requirements).
- Foreign currency exposures are limited and cannot exceed 1 percent of the Liquidity Reserve Fund.
- The Stabilization Reserve Fund is fully hedged against exchange rate risks by design; Stabilization Reserves are excluded from the ALM approach.
- Refinancing risks are minimized through high duration and a requirement to spread long-term obligation repayments to keep annual repayments within 5 percent of projected GDP each year.
- Credit risk is mitigated by a requirement to invest financial reserves in only highly rated assets.
- Liquidity and refinancing risks are further minimized by ALM requirements on the duration and average interest re-fixing period of financial assets and liabilities.

*Prepared by Neree Noumon.*

### 4.      The use of financing measures in 2020 was relatively lower compared to other support

### 4.      The use of financing measures in 2020 was relatively lower compared to other support measures

### Execution and uptake of 2020 COVID-19 fiscal measures
- As of end-December 2020, 38 percent of the financial envelope of the measures was paid out; applications reached 99.7 percent.
- Measures to support individuals and operating support measures had the highest uptake, at 99 percent and 92 percent, respectively.
- Financial instruments and investment measures had lower payment rates: 18 percent (financial instruments) and 46 percent (investment measures), in part due to:
  - (i) the large projects involved and complications in the approval process;
  - (ii) initial requirements that were assessed as too strict and subsequently relaxed;
  - (iii) a greater use of banks’ repayment moratoria, which lowered demand for guarantees.
- Strategic capital injections had 80 percent execution.
- The wage compensation scheme’s uptake exceeded the budgeted amount.
- Table key aggregates (2020 Supplementary Budget; End-2020 execution; Package 2021–22, From 2020 Suppl. Budget — Euro Million and Percent of GDP):
  - Total support package: 2323.3 Euro Million; 8.6 percent of 2020 GDP.
  - Business support: 1531.7 Euro Million; 5.6 percent of 2020 GDP.
  - Financing support: 1377.0 Euro Million; 5.1 percent of 2020 GDP.
  - Guarantees: 350.0 Euro Million; 1.3 percent of 2020 GDP.
  - Loan for liquidity support: 500.0 Euro Million; 1.8 percent of 2020 GDP.
  - Loan for investment: 177.0 Euro Million; 0.7 percent of 2020 GDP.
  - Strategic capital injection: 300.0 Euro Million; 1.1 percent of 2020 GDP.
  - Employment and households support: 504.4 Euro Million; 1.9 percent of 2020 GDP.
  - Wage support and transfers: 280.5 Euro Million; 1.0 percent of 2020 GDP.
  - Wage support measure: 250.0 Euro Million; 0.9 percent of 2020 GDP.
  - Health-related expenditure: 223.9 Euro Million; 0.8 percent of 2020 GDP.
  - Heath expenditure 2/: 206.1 Euro Million; 0.8 percent of 2020 GDP.
  - Other targeted supports: 171.0 Euro Million; 0.6 percent of 2020 GDP.
  - Tax measures: 378.7 Euro Million; 1.4 percent of 2020 GDP.
  - Excise: 269.2 Euro Million; 1.0 percent of 2020 GDP.
  - Tax arrears rescheduling: 67.0 Euro Million; 0.2 percent of 2020 GDP.
  - Suspension of pillar II contributions: -262.5 Euro Million; -1.0 percent of 2020 GDP.

### Monetary policy, regulatory forbearance, and other national measures
- Eesti Pank reduced the systemic risk buffer for commercial banks from 1 percent to 0 percent on March 25, 2020 to free up resources for loan losses or new loans. The measure was expected to free up about €110 million for the banks.
- Eesti Pank announced it would allocate ¾ of its 2019 profits equivalent to €18.9 million, the maximum amount legally allowed, to support the state budget.

### Additional fiscal measures and 2021 supplementary budget actions
- After the wage support scheme expired in June 2020, it was discontinued to make room for other social insurance measures. The government approved €28 million in additional measures (in December 2020), mostly for wage support. These measures primarily targeted Ida-Viru and Harju Counties.
- The 2021 supplementary budget aims to strengthen healthcare capacity and mitigate social and economic lockdown impacts in 2021, responding to increased cases and hospitalizations during March–April 2021.
- The 2021 supplementary budget provides resources for:
  - (i) extraordinary additional COVID-19-related costs of hospitals, emergency medical care departments, and other medical institutions;
  - (ii) coronavirus testing;
  - (iii) the purchase of COVID-19 vaccines and the organization of vaccinations.
- Resources were allocated to mitigate social and economic impacts: the work support (about EUR 140 million) scheme was extended until May, and targeted relief measures (about EUR 152 million) for the most affected sectors (transport, tourism, culture and sports, education, and research).

### 2021 Budget, carryover of unused support, and recovery orientation
- The balance (4.2 percent of GDP) of unused fiscal support from the 2020 supplementary budget (mostly financing support) was carried over to the 2021 budget to help support businesses during recovery.
- Scaling up of public investments, including using EU Next Generation Funds, is expected to help create new jobs and promote a green and digital recovery.
- Health expenditures related to vaccine deployment are expected to be sustained, including using EU-REACT funds.

### Next Generation EU Funds, RRF, REACT-EU, and Just Transition Fund (JTF)
- As of May 2021, Estonia’s Resilience and Recovery Plan (RRP) reached the final stages of consultation; the final RRP envelope submitted to the European Commission in June stood at EUR 982.5 million (3.4 percent of GDP), allocated over 2021–2026 fully in terms of grants.
- Estonia’s 2021 allocation under the REACT-EU instrument: EUR 173.2 million.
- The JTF’s final plan and allocation (EUR 354 millio n) are expected to be approved by the government in early fall of 2021 and launched in 2022.
- The Next Generation EU (NGEU) components noted: (i) Recovery and Resilience Facility (RRF); (ii) Recovery Assistance for Cohesion and the Territories of Europe (REACT-EU); (iii) the Just Transition Fund (JTF); and (iv) the Agricultural Fund for Rural Development.
- Estonia does not currently plan to borrow through the RRF borrowing facility (EUR 1.9 billion is available), given the current low interest rate environment.
- The 2021 budget envisages EUR 1.1 billion in EU grants.
- Expected 2021 RRF and REACT-EU initial deployment: RRF pre-financing about 13 percent and REACT-EU about EUR 40 million.
- RRP priorities and specific planned investments:
  - Tallinn Hospital construction: EUR 380 million (largest investment in draft RRP).
  - Direct support measures for enterprises: EUR 70 million for digitalization; EUR 100 million for greening in private sector; EUR 50 million for hydrogen solutions.
  - Over EUR 150 million in investments for public sector digital infrastructure and services and fast internet connection.
  - Investments in regional railway network and Tallinn’s tramway.
  - Capital transfers to improve internet connectivity in remote and sparsely populated areas: EUR 10 million.
  - Government sector IT gross fixed capital formation (about EUR 40 million).
  - Local government investments in foot- and cycle traffic: about EUR 5 million.
  - Rohuküla railway: EUR 5 million.
  - Tallinn hospital building: EUR 30 million (RRF-related expenditure plan component).

### Just Transition Fund (JTF) focus and allocation
- Total JTF envelope to be implemented starting from 2022: EUR 354 millio n (1.2 percent of GDP).
- JTF allocation aims:
  - (i) restructuring and diversifying the Ida-Viru region’s economy and workforce: 80 percent of the envelope;
  - (ii) tackling the social, environmental, and community aspects of the transition: 20 percent of the envelope.
- The JTF’s first programming strand: investment grants, labor mobility allowances, re-profiling services for oil-shale sector employees, and promotion of knowledge intensity entrepreneurship.
- The JTF’s second programming strand: decoupling district heating from oil shale, alleviating environmental and health impacts of oil shale mining and processing, and supporting related local government and regional initiatives.
- Context: As of 2019, the oil-shale industry—highly concentrated in the Ida-Virumaa—accounted for over 50 percent of Estonia’s total GHG emissions.

*Source: 1estea2021001 - 4.      The use of financing measures in 2020 was relatively lower compared to other support*

### 5.      The unused portion of the EU MFF 2014-2020 Fund will complement the new 2021–2027

### 5.      The unused portion of the EU MFF 2014-2020 Fund will complement the new 2021–2027 EU MFF Funds

### Cohesion Fund: size, allocations, and absorption
- Cohesion Fund size over 2021–2027: about EUR 3 billion.
- Allocation breakdown of the Cohesion Fund:
  - about 25 percent to “Smart Estonia” priorities
  - 25 percent to green priorities
  - 17 percent to transport
  - 23 percent to skills and social infrastructure
- Disbursement timing and absorption:
  - The Cohesion Fund is less likely to be disbursed in 2021 or would have a very low disbursement rate that is typical in the first years of the EU budget period.
  - 39 percent of 2014–2020 Cohesion Funds were not absorbed as of end-March 2021 and are required to be used within 2.5 years.
  - Lowest absorption rates observed in:
    - education, social and employment funds (49 percent still to be paid out)
    - urban and public services funds (43 percent to be paid out)
  - Higher absorption (more than 2/3) was seen in the rural development and transport, and ICT-related Funds.
- Government action: The government is taking measures to accelerate the absorption of the Cohesion Fund by its various agencies.

### Medium-term EU funding, RRF, and Rail Baltica
- EU funds to be used for next four years (State Budget Strategy 2022–25): about Euro 7.4 billion.
- Expected uses of cohesion policy funds: supporting employment, social inclusion, education and research and development, innovation, and enterprise facilitation.
- Average composition of EU funds:
  - 60 percent of EU funds are expected to be used for investments
  - of which 35 percent as public investments
- RRF planned share of investment: 80 percent.
- Rail Baltica financing and scale:
  - Rail Baltica is a major investment expected to be actively continued and financed from the EU budget (Connecting Europe Facility).
  - EUR 938 million expected to be invested over 2021–25, according to the State Budget Strategy.
- The decline of EU structural funds in the medium term will be partly offset by scaling up of NGEU and Rail Baltica projects.

### Fiscal multipliers in Estonia (overview)
- Static public investment multipliers:
  - estimated at around 0.94 during 2021–22
  - expected to gradually decrease to about 0.87 in 2024–26
- Dynamic multipliers:
  - estimated at around 1.2 cumulatively over three years
  - around 2 when the public investment shock occurs during recessions
- Drivers of higher near-term multipliers:
  - higher propensity to consume (expected to remain elevated around 0.7)
  - lower import leakages during periods of economic slack (as illustrated by import intensities observed during the GFC period)
  - higher propensity to consume in the near-term driven by: withdrawal of the pension system savings, use of involuntary savings, and higher public transfers and subsidies which are expected to increase faster than tax revenues.

### Estimated impact of front-loading RRF investments
- RRF totals referenced:
  - EUR 982 million total amount
  - EUR 786 million investment (80 percent of total amount)
- Cumulative output gains (static multipliers):
  - Frontloaded: 2.2 pp. of GDP
  - Equal or backloaded (authorities’ planned path): around 2–2.1 pp. of GDP
- Cumulative output gains (dynamic multipliers):
  - Frontloaded: 3.5 pp. of GDP
  - Equal or backloaded (authorities’ planned path): 2.8–3 pp. of GDP
- Conclusion: Front-loading well-designed public investments produces larger cumulative output gains versus equally disbursed or backloaded profiles.

### Policy implications and recommendations
- Timing: Front-load well-designed public investments to maximize near-term multipliers given current low interest rates and economic slack.
- Fiscal strategy:
  - Prioritize investments that have high spillovers to corporate investment and support the digital and green transition.
  - Accelerate absorption of unused 2014–2020 Cohesion Funds within the 2.5-year requirement to avoid loss and to complement 2021–2027 funds.
- Rationale:
  - Delaying investments makes them less expansionary and risks crowding out future private investment as recovery advances and interest rates rise.
  - Public investment can crowd in corporate investments, especially when firms have strong balance sheets and favorable financing conditions.

### Public investment spillovers to corporate investments
- Corporate investment behavior:
  - Estonian corporates tend to invest more during expansions and when Zero Lower Bound interest rate level (ZLB) is hit.
  - Low-leverage and less financially constrained firms have a higher propensity to invest across sectors.
- Sectoral patterns:
  - Most leveraged firms on average are in accommodation and catering, trade, and transport—sectors most affected by COVID-19.
  - Sectors that thrived during the crisis (e.g., ICT, financial, professional) entered the pandemic with relatively stronger balance sheets.

*Source: 1estea2021001 - 5.      The unused portion of the EU MFF 2014-2020 Fund will complement the new 2021–2027*

### 4.      Capital expenditure is also found to have significant spillovers to corporate

### 1estea2021001 - 4.      Capital expenditure is also found to have significant spillovers to corporate investment

### Key findings on public investment spillovers
- A one percentage point increase of public investment induces an increase of corporate investment by around 0.35 percentage point on impact and 1.5 percentage points cumulatively after five years.
- Spillovers are larger during recessions.
- Capital expenditure in education and health exhibits high spillover effects, reinforcing their role to boost productivity, facilitate resource allocation, and help limit scarring.
- Higher multipliers are found for firms in the transport sector; greening is an important component of Estonia’s strategy to reduce GHG emissions.
- Capital expenditure has higher spillovers to small firms’ investment and could complement programs to boost small firms’ access to digital technologies (OECD, 2019, 2021, EIB Firm Survey).
- Spillovers are similar and positive irrespective of firms’ leverage or cash constraints, highlighting the critical role of capital expenditure in supporting firms during the recovery.
- Spillovers are larger around the ZLB (zero lower bound), highlighting the importance of accommodative monetary policy at the EU level to support the recovery and the twin transition.

### Quantitative results and heterogeneity (selected exact estimates)
- Impact and cumulative corporate investment response to a 1 percentage point public investment shock:
  - On impact: 0.35 percentage point
  - Cumulative after five years: 1.5 percentage points
- Firm-level data: 36,415 firms covering 2002–19 were used to estimate spillovers.
- Firm-size spillovers (selected horizons, exact values):
  - Horizon=T+0: Small = 0.31, Large = 0.30, Very Small = 0.25, Medium = 0.24
  - Horizon=T+2: Very Small = 1.00, Small = 0.96, Medium = 0.57, Large = 0.43
  - Horizon=T+5: Very Small = 2.10, Small = 1.38, Medium = 0.64, Large = -0.04
- Ownership spillovers (exact values):
  - Horizon=T+0: Foreign = 0.29, Domestic = 0.25
  - Horizon=T+2: Foreign = 1.04, Domestic = 0.63
  - Horizon=T+5: Foreign = 1.68, Domestic = 0.90
- Sectoral spillovers (Horizon=T+5, exact values and sector mapping):
  - R: Arts and entertainment = 3.03
  - F: Construction = 2.80
  - P: Education = 2.52
  - J: Information and communication = 2.07
  - M: Professional = 1.56
  - H: Transport = 1.55
  - Q: Health = 1.45
  - E: Water = 1.43
  - G: Trade = 1.17
  - C: Manufacturing = 1.17
  - S: Other services = 0.99
  - N: Administrative and support services = 0.88
  - I: Accommodation and Food Service = 0.88
  - L: Real estate = 0.75
  - A: Agriculture = 0.71
  - K: Financial and insurance = -0.29
  - B: Mining = -1.34
  - D: Electricity = -1.91

### Implications for policy and recovery
- Targeted public capital expenditure (notably in education, health, and transport) can generate significant crowding-in of corporate investment and accelerate digital and green transitions.
- Higher spillovers to small and very small firms suggest public capital spending can complement policies to improve small firms’ access to digital technologies.
- Because spillovers remain positive regardless of firm leverage or cash constraints, capital expenditure is effective in supporting firms broadly during recovery phases.
- Larger spillovers around the ZLB underscore the need for accommodative monetary policy at the EU level to magnify the recovery and support the twin (digital and green) transition.

### Methodology and data summary (exact methods and inputs)
- Data sources:
  - Annual National Input-Output Tables (NIOT) from Timmer and others (2015), available until 2014.
  - Macroeconomic and conditioning variables from World Economic Outlook (WEO).
  - EU RRF Fund data from the Estonian authorities.
  - Public capital expenditure data by function from Eurostat.
  - Firm-level data (36,415 firms) from the Orbis database covering 2002–19.
- Static multipliers:
  - Derived from the demand equation of GDP as functions of the propensity to consume (dependent on saving rate and net tax rate), the import intensity of private consumption (CP), and import intensities of public consumption (CG), investments (I), and exports (X).
  - Formula preserved exactly: ∆Y/∆A_i = (1−m_{A_i})/(1−ccc (1−m_{CCC})), where A_i = CG, IG, IP or X; m_{A_i} is the import intensity of autonomous expenditure A_i; m_{CCC} is the import intensity of private consumption CCC; cccc = 1−tttt−sstt with tttt, sstt net tax rate and saving rate, respectively.
  - Import intensities computed using NIOT following Bussière and others (2013).
- Dynamic multipliers:
  - Estimation follows Ramey and Zubairy (2018) and uses Blanchard and Perotti (2002) structural VAR identification to derive fiscal shocks.
  - Cumulative and dynamic multipliers measure cumulative real GDP gain relative to cumulative public spending/investment exogenous shock over a three-year period.
  - Local projections (Jordà, 2005) are estimated with state-dependent dummies (expansion vs recession) to obtain conditional cumulative multipliers m_{E,h} and m_{R,h}.
  - Lag polynomial chosen: L = 4.
- Estimating public investment spillovers to corporate investment:
  - Jorda (2005) local projections used to estimate cumulative effects at horizon h:
    - (y_{j,t+h} − y_{j,t−1})_{h,j=0} = α_{j,h} + δ_h ∆I_t + β_1 ∆y_{j,t−1} + β_2 ∆y_{j,t−2} + θ_h X_{j,t−1} + ε_{j,t+h}
  - y_{j,t+h} − y_{j,t−1} is percentage change of net corporate investment rate; net corporate investment rate computed as annual change of real fixed tangible assets over lagged tangible assets.
  - ∆I_t is growth of total public investment or growth by function.
  - Controls include one-year lag growth of sales, growth of EBIDTA, and real GDP growth.
  - Estimation by sector (NACE), firm size categories (Very Small <4 employees; Small 4–50; Medium 51–250; Large >250), and ownership (domestic vs foreign).
  - State-conditioned regressions include dummies for expansion/recession, ZLB hit, high leverage, and high financial constraint.
  - Leverage defined by median debt-to-equity or debt-to-capitalization ratio; financial constraint defined by median of a composite index from principal components on total assets, return on assets, current assets/current liabilities, and cash flows/liabilities.

*Source: 1estea2021001 - 4.      Capital expenditure is also found to have significant spillovers to corporate investment*

### References

### 1estea2021001 - References

### Bibliographic References
- Blanchard, O., & Perotti, R. (2002). An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output. the Quarterly Journal of economics, 117(4), 1329–1368.
- Bussière, M., Callegari, G., Ghironi, F., Sestieri, G., & Yamano, N. (2013). Estimating Trade Elasticities: Demand Composition and the Trade Collapse of 2008–2009. American Economic Journal: Macroeconomics, 5(3), 118–51.
- Jordà, Ò. (2005). Estimation and Inference of Impulse Responses by Local Projections. American Economic Review, 95(1), 161–182.
- OECD (2019), OECD Economic Surveys: Estonia 2019, OECD Publishing, Paris, https://doi.org/10.1787/f221b253-en.
- OECD (2021), The Digital Transformation of SMEs, OECD Studies on SMEs and Entrepreneurship, OECD Publishing, Paris, https://doi.org/10.1787/bdb9256a-en.
- Ramey, V. A., & Zubairy, S. (2018). Government Spending Multipliers in Good Times and in Bad: Evidence from U.S. Historical Data. Journal of Political Economy, 126(2), 850–901.
- Timmer, M. P., Dietzenbacher, E., Los, B., Stehrer, R., & De Vries, G. J. (2015). An Illustrated User Guide to the World Input–Output Database: The Case of Global Automotive Production. Review of International Economics, 23(3), 575–605.

### Annex VI — Estonia’s Fiscal Transparency Evaluation: Key Findings
- Overall assessment:
  - Estonia has very strong fiscal transparency institutions and practices based on the IMF’s Fiscal Transparency Code (FTC).
  - Strongest performance on Fiscal Reporting (Pillar I).
  - Scope for improvement in Fiscal Forecasting and Budgeting (Pillar II) and Fiscal Risk Analysis and Management (Pillar III).
  - Most underlying systems, knowledge, and capacity for improving Pillars II and III already exist.
- Scores and gaps:
  - Against the 36 principles of the FTC, Estonia scores:
    - good or advanced practices for 27 principles;
    - basic practices on six principles;
    - does not meet three principles: (i) public participation in the budget; (ii) assessing specific fiscal risks; and (iii) Public-Private Partnerships.
- Fiscal risks and disclosures:
  - A comprehensive overview of fiscal risks in Estonia is missing.
  - Holistic risk reporting should include the quantification of likelihoods and potential costs (e.g., likelihood that guarantees will be called, potential cost of environmental and natural resources risks).
  - PPP oversight framework has limited disclosure of total obligations and fiscal risk.
  - Costs of SOEs’ quasi-fiscal activities are not quantified and reported.

### FTE Recommendations (selected)
- Improve integrated fiscal reporting in consolidated public sector financial statements and fiscal statistics by:
  - including stocks of mineral resources;
  - using market/fair valuations of assets;
  - reporting on other economic flows.
- Consolidate fragmented internal information into more user-friendly disseminated reports, in particular:
  - disseminate detailed monthly and quarterly budget comparable execution reports that allow for clear assessment of all fiscal aggregates against budgeted amounts.
- Improve budget unity by including extrabudgetary funds and social security funds’ financial plans in budget annexes.
- Improve fiscal forecasting by:
  - presenting previous two years’ outturns and current year estimated outturn and four-year budget strategy projections together with forecast reconciliation and improved sensitivity analysis.
- Improve transparency and effectiveness of investment decisions by implementing PIMA report recommendations.
- Facilitate improved citizen understanding of, and involvement in, the budget process.
- Coordinate publication of an annual Fiscal Risk Statement that discusses the size and nature of the full range of specific fiscal risks and their costs.
- Improve transparency and effectiveness of investment decisions by implementing the recommendations of the PIMA report.

### Table 1 / Table 2 — Summary Assessment and Fiscal Risks (high-level points)
- Table 1 indicates a structured assessment across:
  - I. Fiscal Reporting;
  - II. Fiscal Forecasting & Budgeting;
  - III. Fiscal Risk Analysis & Management;
  - and sub-dimensions such as Coverage of Institutions, Budget Unity, Coverage of Stocks, Coverage of Flows, Frequency of In-Year Reporting, Timeliness of Annual Accounts, Timeliness of Budget Documentation, Classification, Internal Consistency, Historical Revisions, Statistical Integrity, External Audit, Subnational Governments, Comparability of Fiscal Data, Forecast Reconciliation, Public Corporations, etc.
- Table 2 (Summary Evaluation: Fiscal Risks) key-rated items and importance:
  - Macroeconomic Risks: Good. Importance: High. Commentary: Twice-yearly forecasts contain detailed discussion and a basic alternative risk scenario. Macroeconomic volatility is relatively high and the impact of COVID-19 has brought additional uncertainty.
  - Specific Fiscal Risks: Not met. Importance: Medium. Commentary: No single summary report setting out all major risks; relevant information exists in various forms.
  - Long-term Fiscal Sustainability: Good. Importance: Medium. Commentary: Long-term fiscal and age-related forecasts published; pensions sustainability analysis periodic; health sustainability analysis not published.
  - Budgetary Contingencies: Good. Importance: Low. Commentary: Budget includes contingencies with access criteria; no comprehensive report produced. At 0.5 percent of total expenditure in 2017, the size is in the mid-range compared to selected EU countries.
  - Asset and Liability Management: Good. Importance: Medium. Commentary: Authorized by law and government’s financial position analyzed and disclosed; no comprehensive asset management strategy.
  - Guarantees: Good. Importance: Low. Commentary: All government guarantees published quarterly; probability of guarantees being called is not published. Stock of guarantees is low; last time a guarantee was called was over 10 years ago.
  - Public-Private Partnerships: Not met. Importance: Medium. Commentary: Obligations under PPPs are not regularly disclosed; stock small but plans to increase use.
  - Financial Sector Exposure: Advanced. Importance: Low. Commentary: Government support to financial sector quantified and managed; financial sector stability regularly assessed.
  - Natural Resources: Basic. Importance: Medium. Commentary: Annual estimates of volumes published; value of shale oil stocks not comprehensively estimated.
  - Environmental Risks: Basic. Importance: Low. Commentary: Main natural disaster risks identified qualitatively; little quantification of potential fiscal impacts.
  - Sub-national Governments: Advanced. Importance: Low. Commentary: Financial reports consolidated monthly and monitored; strict legal borrowing limit; consolidated sector financially sound though a few have high debt and significant deficit.
  - Public Corporations: Good. Importance: Low. Commentary: Transfers disclosed and based on published ownership policy; annual report on overall financial performance; quasi-fiscal activities not quantified. Assets cover liabilities of SOEs; sector broadly profitable.

### Fund Relations — Key Data (as of April 30, 2021)
- Membership Status: Joined: May 26, 1992; Article VIII.
- Quota and SDRs:
  - Quota: 243.6 SDR Million, 100.00 percent Quota.
  - Fund holdings of currency: 188.89 SDR Million, 77.54 percent.
  - Reserve Tranche Position: 54.73 SDR Million, 22.47 percent.
  - Net cumulative allocation (SDR Department): 61.97 SDR Million, 100.00 percent allocation.
  - Holdings (SDR Department): 24.63 SDR Million, 39.74 percent.
- Outstanding Purchases and Loans: None.
- Latest Financial Arrangements (in millions of SDR):
  - Stand-by 03/01/2000–08/31/2001 Amount Approved 29.34 Amount Drawn 0.00.
  - Stand-By 12/17/1997–03/16/1999 Amount Approved 16.10 Amount Drawn 0.00.
  - EFF 07/29/1996–08/28/1997 Amount Approved 13.95 Amount Drawn 0.00.
- Projected Payments to Fund: None.
- Exchange Arrangements: As of January 1, 2011, Estonia’s currency is the euro, which floats freely and independently against other currencies.
- Article IV Consultation: On the 12-month consultation cycle. Last consultation concluded on January 22, 2020.

### Technical Assistance and TA Chronology (selected items)
- Fiscal and governance TA highlights (2000–21):
  - FAD Pension reform Mission: April 2000 — Ministries of Finance and Social Affairs.
  - MAE Banking Supervision Staff Visit: December 2000 — Bank of Estonia.
  - FAD Tax Policy Mission: March 2001 — Ministry of Finance.
  - FAD Medium-term Budget Technical Assistance: December 2003 — Ministry of Finance.
  - FAD Tax Reform Technical Assistance: February 2005 — Ministry of Finance.
  - FAD Revenue Administration Technical Assistance: December 2013 — Ministry of Finance.
  - FAD Public Investment Management Technical Assistance: December 2018 — Ministry of Finance.
  - FAD Fiscal Transparency Evaluation Technical Assistance: December 2020 — Ministry of Finance.
  - LEG Corporate Insolvency Law Technical Assistance: May 2018–April 2021 — Ministry of Justice.
  - STA BOP and Prices statistics Regional training: May 2017–April 2023 — Bank of Estonia.
  - LEG AML/CFT Regional TA: November 2022–September 2021 — Bank of Estonia.

### Statistical Issues — Data Adequacy and Standards (as of May 6, 2021)
- General: Estonia’s data provision to the Fund is adequate for surveillance purposes.
- National Accounts Statistics:
  - Compiled by Statistics Estonia (SE) in accordance with ESA 2010.
  - Quarterly GDP estimates at current and constant prices compiled using production, income and expenditure approaches.
  - Annual and quarterly national accounts compiled at previous year prices and chain-linked to 2010, using double deflation.
  - As of September 2011, data compiled on EMTAK 2008.
  - Authorities revised national accounts time series from 1995 in August 2019; reference year for chain-linked series shifted from 2010 to 2015.
- Government Finance Statistics:
  - Fiscal data published by the Ministry of Finance (MoF); historical data on SE’s website.
  - Monthly central government data disseminated with a lag of up to 25 days after the end of the month; detailed revenue breakdown available; expenditure breakdown not available.
  - Ministry uses SDDS flexibility options on timeliness of monthly central government operations data and central government debt data.
  - Comprehensive annual central and general government operations data compiled according to ESA2010; reported in IMF’s GFS database.
  - Quarterly general government data included in International Financial Statistics; quarterly debt data reported to World Bank/IMF Public Sector Debt Statistics database.
- Monetary and Financial Statistics:
  - Bank of Estonia compiles and reports monetary and financial statistics consistent with the IMF’s Monetary and Financial Statistics Manual.
  - Majority of statistics disseminated on the Bank of Estonia’s webpage on the 17th banking day after the end of the reporting period.
  - Data for individual banks available quarterly since 2008Q1 on the Financial Supervision Authority’s webpage.
- Financial Soundness Indicators (FSIs):
  - BoE reports quarterly data for 11 of the 12 core FSIs and 9 of the 13 encouraged FSIs for deposit-takers.
- External Sector Statistics:
  - Quarterly balance of payments, external debt, and IIP data compiled consistent with BPM6.
  - Daily exchange rate data available with a one working day lag.
  - Monthly import/export data available with a two-month lag.
  - Data Template on International Reserves and Foreign Currency Liquidity is disseminated monthly and hyperlinked to the Fund’s DSBB.
- Data Standards and Quality:
  - Estonia subscribed to the SDDS on September 30, 1998, metadata published January 27, 1999.
  - Estonia met SDDS specifications on March 30, 2000.
  - Estonia is in process to adhere to SDDS Plus.
  - Data ROSC report published November 2001 and updated June 2002.
  - 2009 fiscal transparency ROSC indicated Estonia meets nearly all transparency code requirements and approached best international practice in some areas.

### Table of Common Indicators Required for Surveillance (as of May 6, 2021) — Selected entries
- Exchange Rates: Date of latest observation May 6, 2021; Date received May 6, 2021; Frequency D; Frequency of Reporting D; Frequency of publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation March 2021; Date received April 7, 2021; Frequency M; Frequency of Reporting M; Frequency of publication M.
- Reserve/Base Money: Date of latest observation March 2021; Date received April 14, 2021; Frequency M; Frequency of Reporting M; Frequency of publication M.
- Broad Money: Date of latest observation March 2021; Date received April 29, 2021; Frequency M; Frequency of Reporting M; Frequency of publication M.
- Consumer Price Index: Date of latest observation March 2021; Date received April 9, 2021; Frequency M; Frequency of Reporting M; Frequency of publication M.
- Revenue, Expenditure, Balance and Composition of Financing—General Government: Date of latest observation Q1/2021; Date received May 3, 2021; Frequency Q; Frequency of Reporting Q; Frequency of publication Q.
- Revenue, Expenditure, Balance and Composition of Financing—Central Government: Date of latest observation Q1/2021; Date received May 3, 2021; Frequency M; Frequency of Reporting M; Frequency of publication M.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation Q4/2020; Date received March 25, 2021; Frequency Q; Frequency of Reporting Q; Frequency of publication Q.
- External Current Account Balance: Date of latest observation Q4/2020; Date received March 10, 2021; Frequency Q; Frequency of Reporting Q; Frequency of publication Q.
- GDP/GNP: Date of latest observation Q4/2020; Date received March 1, 2021; Frequency Q; Frequency of Reporting Q; Frequency of publication Q.
- Gross External Debt: Date of latest observation Q4/2020; Date received March 10, 2021; Frequency Q; Frequency of Reporting Q; Frequency of publication Q.
- International Investment Position: Date of latest observation Q4/2020; Date received March 10, 2021; Frequency Q; Frequency of Reporting Q; Frequency of publication Q.

*Prepared by European Department; content extracted from the referenced IMF staff report materials.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1estea2021001.pdf_