Press Release: IMF Approves US$39 Million Stand-By Credit for Estonia

IMF News, March 1, 2000

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Canonical URL: Press Release: IMF Approves US$39 Million Stand-By Credit for Estonia

IMF approved an 18-month stand-by credit for Estonia in an amount equivalent to SDR 29.34 million (about US$39 million) to support the government's 2000-2001 economic program.
Estonia will treat the stand-by credit as precautionary and does not intend to draw on it.
Estonia joined the IMF on May 26, 1992, and its quota is SDR 65.2 million (about US$87 million).
Estonia's outstanding use of IMF financing currently totals SDR 17 million (about US$23 million).

Authorities committed to a comprehensive and well-balanced program for maintaining macroeconomic stability and completing structural reforms to support recovery and medium-term sustained growth while safeguarding the external position.
The program is precautionary; Estonia has not used Fund resources under three earlier arrangements.
Key policy components highlighted:
- Phase out discretionary fiscal stimulus provided in 1999.
- Target a fiscal deficit of 1¼ percent for 2000.
- Reduce the size of government expenditures relative to GDP over time; general government expenditures to remain broadly frozen in real terms in 2000, including keeping pensions and public sector wages broadly unchanged after large increases in 1999.
- Strict adherence to the currency board arrangement as the cornerstone of policy.
- Continue sound fiscal policy, safeguard financial sector stability, continue structural reforms, maintain labor market flexibility, and adopt a cautious approach to foreign borrowing.
- Strengthen banking system through consolidation, enhanced supervision, foreign investor participation, and strengthened bank management.
- Complete structural reforms to meet all EU accession requirements by early 2003, focusing on public administration, the pension system, privatization of remaining large infrastructure state enterprises, and addressing oil-shale mining and electricity generation issues.

Context:
- Estonia suffered a steep downturn after the August 1998 Russian crisis; growth resumed in the second half of 1999 and appears to be accelerating.
- The downturn sharply cut the current account deficit by contracting private sector demand.
Growth projections (as stated in the text):
- Real GDP growth is expected to accelerate to about 4% in 2000 and to about 6% in 2001, from negative levels in 1999.
Tabled real GDP growth (year-on-year in percent):
- 1996: 3.9
- 1997: 10.6
- 1998: 4.0
- 1999: -1.3
- 2000: 6.0
Inflation and monetary policy:
- Authorities do not target inflation rates under the currency board arrangement.
- Forecasted moderate increase in both CPI and GDP inflation due to recovery and increases in indirect taxes.
- Bank of Estonia to continue adhering to currency board requirements and abstain from providing credit to government or banking system; Bank of Estonia does not set interest rates nor aim at credit or money supply targets.
- Recent recovery of broad money growth viewed as healthy.

Fiscal targets:
- Reduce budget deficit to 1.25% of GDP in 2000.
- Eliminate the deficit altogether in 2001.
- From a deficit of 4.8% of GDP in 1999.
Key elements of the 2000 budget:
- Hold on pensions and public sector wages.
- Abolition of the corporate profit tax.
- Compensating increases in other taxes.

Estonia remains a leader among transition countries in the pace of structural reforms.
Program's structural reform priorities:
- Privatization and restructuring of the few remaining major infrastructure firms.
- Improved supervision over financial markets through eventual introduction of a unified supervision agency.
- Reform of public administration.
- Reform in pension and health areas.
- Legal and institutional reforms driven by objective of meeting all European Union accession requirements by January 1, 2003.

Banking sector:
- Material strengthening via consolidation, enhanced supervision, foreign investor capital and liquidity support, and strengthened bank management.
External and reserve indicators (selected):
- Gross international reserves (In millions of U.S. dollars):
- 1996: 640
- 1997: 760
- 1998: 815
- 1999: 856
- 2000: 858
- 2001: 918
- Trade balance (in millions of U.S. dollars):
- 1996: -1,021
- 1997: -1,128
- 1998: -1,117
- 1999: -770
- 2000: -803
- 2001: -928
- Exports (in millions of U.S. dollars):
- 1996: 1,814
- 1997: 2,297
- 1998: 2,684
- 1999: 2,467
- 2000: 2,576
- 2001: 2,824
- Imports (in millions of U.S. dollars):
- 1996: -2,834
- 1997: -3,426
- 1998: -3,801
- 1999: -3,237
- 2000: -3,379
- 2001: -3,752
- Current account (in millions of U.S. dollars):
- 1996: -399
- 1997: -563
- 1998: -480
- 1999: -209
- 2000: -285
- 2001: -343
- Gross external debt/GDP (in percent):
- 1996: 25.5
- 1997: 46.8
- 1998: 45.1
- 1999: 39.3
- 2000: 34.6
- Net external debt/GDP (in percent):
- 1996: 33.1
- 1997: 33.3
- 1998: 30.8

Source: Press Release: IMF Approves US$39 Million Stand-By Credit for Estonia (March 1, 2000).