Press Release: IMF Approves Stand-By Credit for Estonia

July 29, 1996

The International Monetary Fund (IMF) today approved a 13-month stand-by credit for Estonia for an amount equivalent to SDR 13.95 million (about US$20 million) in support of the Government's 1996-97 economic program. The Estonian authorities do not intend to use the credit except in the unlikely event that an unexpected balance of payments need were to emerge.


During 1995 and 1996 Estonia has made further progress toward becoming a modern market economy. After stagnating in 1994, the economy expanded in 1995, with real GDP growth of 3.2 percent; inflation declined to 28.9 percent in 1995 from 47.7 percent in 1994; and the external current account deficit narrowed to 5.3 percent of GDP in 1995 from 7.5 percent in 1994 and was financed mainly by direct foreign investment. This performance meant that Estonia broadly met the objectives of the 15-month IMF stand-by credit approved on April 12, 1995, under which no drawings were made (see Press Release No. 95/23).

Structural reforms broadened in 1995, particularly in the privatization of medium and large-scale enterprises and housing, and in the development of a sound financial system equipped to address the needs of an emerging market economy. The regulatory environment for domestic financial institutions improved further and the Government maintained a highly open trade regime.

Despite these accomplishments, the economic recovery and progress toward price stability are likely to remain fragile for some time. Furthermore, financial imbalances appeared in late 1995 as a decline in public savings led to a general government deficit and to increased reliance on foreign borrowing for public investment.

The 1996-97 Program

The economic and financial program for 1996-97, which is supported by the new stand-by credit, seeks to strengthen the economic recovery while preserving macroeconomic stabilization. The program aims at real GDP growth of 3.1 percent in 1996 and 4.4 percent in 1997; reducing inflation to 27.1 percent in 1996 and 21 percent in 1997; and containing the external current account at 6.9 percent of GDP in 1996 and 5.8 percent in 1997.

To these ends, fiscal policy aims to ensure that government operations do not generate excessive pressures on prices and wages, and do not crowd out private sector access to domestic and external financing. Accordingly, the overall deficit of the general government will be limited to 1.4 percent of GDP in 1996 and 0.5 percent of GDP in 1997. Total revenues will be maintained at 38.7 percent of GDP and 38.2 percent of GDP in 1996 and 1997, respectively. Expenditure and net lending are projected to decline to 40.1 percent of GDP in 1996 and 38.7 percent of GDP in 1997. Current and capital expenditure and net lending will contribute about half of the decline in the expenditure ratio in 1996, while the fiscal adjustment is expected to fall entirely on current expenditures on goods and services in 1997. In the exchange area, Estonia will continue with its strict currency board arrangement, with the result that there is essentially no room for an active monetary policy.

Structural Policies

Under the program, a number of structural changes in the fiscal management system will be implemented, including steps to improve the control and monitoring of borrowing by local governments, as well as the efficiency of government expenditure. Both bank restructuring and strengthening of bank supervision are expected to continue under the program. Residual privatization in the program period and beyond will focus on industrial monopolies, in particular the electricity company, as well as on the oil shale sector, and on land privatization.

Social Safety Net

Estonia's social safety net includes unemployment compensation and a targeted income maintenance scheme. New pension and social tax laws aimed at establishing a more direct link between contributions and benefits, and a sharing of contributions between employers and employees, will be submitted to Parliament by November 1996.

The Challenge Ahead

Adherence to its coherent economic strategy is essential to preempt the emergence of macroeconomic imbalances in Estonia, and to attain the growth and disinflation objectives in 1996, 1997, and the medium term.

Estonia joined the IMF on May 26, 1992, and its quota1 is SDR 46.5 million (about US$68 million). Its outstanding use of IMF financing currently totals SDR 59 million (about US$86 million).

Estonia: Selected Economic Indicators

  1994 1995* 1996** 1997**

(percent change)
Real GDP -0.1 3.2 3.1 4.4
Consumer prices
47.7 28.9 27.1 21.1
(percent of GDP)
General government balance
     (deficit –)
1.3 -0.8 -1.4 -0.5
External current account balance
     (deficit –)
-7.5 -5.3 -6.9 -5.8

Sources: Estonian authorities and IMF staff estimates.


1. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.


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