Press Release: IMF Approves Stand-By Credit for Estonia

December 17, 1997

The International Monetary Fund (IMF) today approved a 15-month stand-by credit for Estonia equivalent to SDR 16.1 million (about US$22 million) to support the government’s 1998 economic program. The authorities have indicated their intention not to draw on the credit, as was the case under the stand-by that expired in August 1997.


Economic developments in Estonia have been favorable, and the objectives of the 1996/97 program were broadly met. The remarkable performance in several respects during the past few years has been largely due to Estonia’s early decision to establish an open economy based on a liberal market-oriented trading and financial system accompanied by the discipline of a currency board arrangement. A relatively conservative fiscal stance and a strong commitment to structural reforms, aimed at minimizing direct participation of the state in the economy, have aided the rapid development of a vibrant private sector. By mid-1997, about 75 percent of the economy—in terms of output—was under private ownership, including the banking system, services, trade, and most industry. Real GDP increased by 4 percent in both 1995 and 1996, and at an annual rate of almost 12 percent during the first half of 1997. Inflation continued to decline in 1996 to about 15 percent, and fell further to an annual rate of about 12 percent in November 1997. The external current account deficit widened from 5 percent of GDP in 1995 to about 10 percent of GDP in 1996, and has remained high in 1997, but net capital inflows, including direct and portfolio investment, continued to rise and were sufficiently large to cover this deficit and allow for an increase in the gross foreign assets of the monetary authorities.

The 1997/98 Program

The macroeconomic program for 1998 seeks to ensure that the gains made so far are not reversed, and envisages an annual growth rate of real GDP of over 5 percent, with inflation declining further to about 8 percent. To reduce demand pressures on the economy, the general government surplus is expected to increase to 1.8 percent of GDP, and the current account deficit is projected to decline by more than 2 percentage points.

The program follows a three-pronged approach: tighter fiscal policies to restrain domestic demand; monetary measures (within the limited policy options available under the currency board) to reduce the rate of credit expansion and to raise banking system prudential standards, plus anintensification of financial system surveillance; and accelerated structural reforms to improve productivity and raise private savings.

On the fiscal side, tax revenues are expected to continue to improve through further economic expansion, some new tax measures, and stronger tax administration. At the same time, the ratio of general government expenditures to GDP will decline. To demonstrate its commitment to strengthening the fiscal stance and to help provide a prudent margin for contingencies, the government will continue to place some of its accumulated financial savings into the newly created Stabilization Reserve Fund.

On the monetary front, the currency board arrangement and the peg to the deutsche mark continue to serve Estonia well by providing a transparent and credible framework for economic expectations. To safeguard its viability, the banking sector will remain subject to prudential norms that either match or exceed the levels recommended by the Basle Committee on Banking Supervision or European Union directives. Measures to address the growth in domestic credit and improve the soundness of the financial system, such as raising capital adequacy ratios and the level of required bank reserves, will be further reinforced. Banks’ minimum capital requirements will be raised, and prudential regulations will be imposed on a consolidated basis for banks and their nonbank financial subsidiaries.

Structural Reforms

Important financial sector reforms will supplement fiscal and financial policy actions. In particular, there will be more aggressive approach to financial sector surveillance to reduce systemic risks and improve supervision of bank and nonbank financial institutions. Measures to strengthen securities and capital markets will also be implemented under the program.

Other structural reforms focus on faster implementation of enterprise privatization and land reform, thus improving the scope for noninflationary growth by minimizing distortions and reducing constraints on potential output. Reforms will also include asset sales, monopoly regulation, and promotion of competition. Negotiations with the World Trade Organization are proceeding, and the authorities intend to adhere to their market-oriented policies on international trade, which have marked Estonia so far as a rare economy with no customs tariffs.

Addressing Social Costs

Estonia’s social safety net includes a state pension scheme, medical insurance coverage, unemployment compensation, and a targeted income maintenance scheme. A thorough reform of the pension scheme aims to establish a more direct link between contributions and benefits, moving in stages from the current pay-as-you-go system to a three-tier, partially funded system, beginning in early 1998 and becoming fully operational in 2001.

The Challenge Ahead

The sound economic performance of recent years has also created new challenges for macroeconomic stability. The authorities must guard against aggregate demand pressures that could cause the banking system to overextend itself in an environment of rising capital inflows and against demand-driven real wage increases that outstrip productivity gains. Growth prospects will depend on a balanced combination of increased public savings through fiscal adjustment, monetary measures to restrain credit growth and financial risks, and accelerated structural reforms to improve productivity.

Estonia joined the IMF on May 26, 1992, and its quota 1 is SDR 46.5 million (about US$63 million). Its outstanding use of IMF financing currently totals SDR 40 million (about US$54 million).

Estonia: Selected Economic Indicators






(Percent change)

Real GDP






Consumer prices






(Percent of GDP)

Fiscal balance,
including net
lending (deficit -)






External current account balance (deficit-)***






(Months of imports)

Gross international reserves






Sources: Estonian authorities; and IMF staff estimates and projections.



***The Bank of Estonia has recently revised the balance of payments statistics so that the 1996 current account deficit is now 9.6 percent of GDP. Data for 1997 are also being revised, but such revisions are not reflected in the staff estimates for 1997 and 1998.

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


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