IMF Executive Board Concludes 2016 Article IV Consultation with the Republic of Estonia
IMF News, January 13, 2017
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- Published: January 13, 2017
Overview and recent performance
- On January 9, 2017, the Executive Board concluded the Article IV consultation with the Republic of Estonia.
- Notwithstanding sound economic and institutional fundamentals, including “one of the strongest public finances in Europe” and a business friendly environment, Estonia’s recent growth has been subdued.
- Growth in 2016 is estimated at only 1.3 percent, driven mainly by private consumption on the back of strong wage growth in a tightening labor market.
- Labor productivity and external competitiveness have weakened.
- Exports are gradually recovering, but investment continues to contract.
- Import growth is low, keeping the current account in small surplus in 2016.
- Inflation rose moderately to around 1 percent in 2016.
Outlook and projections
- The economy is expected to gradually strengthen as the external environment improves and existing pro-growth policies come to fruition.
- Growth projections:
- 2017: 2.3 percent
- 2018: 2.8 percent
- Inflation projection:
- 2017: 2.5 percent (reflecting rising energy prices, sizable contributions from excise tax hikes, and a moderate pickup in underlying price dynamics)
- Current account: expected to swing into mild deficit as investment gathers steam and consumption remains strong.
- Primary downside risks: failure of external demand to pick up and continued rapid wage growth denting competitiveness.
Executive Board assessment and key messages
- Directors commended Estonia for strong institutions and determined reforms that delivered solid growth and substantial gains in living standards over two decades.
- Directors concurred on an outlook for a pick‑up in growth but cautioned that downside risks dominate.
- Rapid wage growth together with stagnant productivity has started to reduce competitiveness.
- Fiscal space from strong public finances provides room to support supply-side strengthening while preserving strong fiscal institutions.
- Financial sector is in a strong position and adequately supports the economy, but Directors cautioned about spillover risks from potential vulnerabilities in Nordic parent banks.
Policy recommendations (three‑pronged approach to enhance productivity and preserve competitiveness)
- (i) Improve effectiveness, scale, and take‑up of existing pro‑growth programs, including by establishing a dedicated productivity unit.
- (ii) Re-anchor wage growth in fundamentals:
- Ensure increases in public wages and minimum wages do not front‑run private‑sector wage growth.
- Promote greater female labor force participation.
- Further streamline government employment to boost labor supply.
- (iii) Enhance competitiveness through tax reforms.
- Support planned further increase in public investment, ensuring high rates of return for both new and existing projects.
- Continue steps to tackle income inequality and consider income tax reform to help achieve distributional objectives.
- Mitigate financial spillover risks from Nordic parent banks by strengthening cooperation with home‑country and European authorities in a revamped Nordic‑Baltic Stability Group.
Selected macroeconomic and social indicators, 2013–18 (highlights)
- GDP (billions of Euro): 2013: 18.9; 2014: 19.8; 2015: 20.3; 2016: 20.8; 2017: 21.8; 2018: 22.9
- Real GDP growth (year-on-year in percent): 2013: 1.4; 2014: 2.8; 2015: 1.3; 2016: 2.3 (table formatting in source indicates 2016 and projection years)
- Private consumption (year-on-year in percent): 2013: 3.7; 2014: 3.2; 2015: 4.6; 2016: 3.8; 2017: 2.6
- Gross fixed capital formation (year-on-year in percent): 2013: -2.9; 2014: -8.1; 2015: -3.4; 2016: -0.9; 2017: 5.3
- Exports of goods and services (year-on-year in percent): 2013: 3.0; 2014: -0.6; 2015: 4.1; 2016: 5.2
- Imports of goods and services (year-on-year in percent): 2013: 3.3; 2014: 2.2; 2015: -1.4; 2016: 5.7; 2017: 5.6
- Average HICP (year-on-year change in percent): 2013: 0.5; 2014: 0.1; 2015: 0.9; 2016: 2.5; 2017: 2.4
- GDP deflator (year-on-year change in percent): 2013: 3.9; 2014: 1.7; 2015: 1.0; 2016: 1.6; 2017: 2.1
- Average monthly wage (year-on-year growth in percent): 2013: 7.8; 2014: 5.9; 2015: 6.5; 2016: 5.5; 2017: 5.0
- Unemployment rate (ILO definition, percent, pa): 2013: 8.6; 2014: 7.4; 2015: 6.1; 2016: 7.6; 2017: 8.3
- Average nominal ULC (year-on-year growth in percent): 2013: 6.8; 2014: 3.6; 2015: 6.7; 2016: 4.8
- General government (ESA10 basis; percent of GDP) — Revenue: 2013: 38.4; 2014: 39.1; 2015: 40.5; 2016: 41.4; 2017: 42.2
- General government (ESA10 basis; percent of GDP) — Expenditure: 2013: 38.5; 2014: 40.3; 2015: 40.7; 2016: 41.9; 2017: 42.5
- Financial surplus (+) / deficit (-): 2013: -0.2; 2014: 0.7; 2015: 0.8; 2016: 0.3
- Structural balance: 2013: 1.1; 2014: 1.5; 2015: 0.0
- Total general government debt: 2013: 10.2; 2014: 10.7; 2015: 10.0; 2016: 9.7; 2017: 9.3; 2018: 9.1
- External sector (percent of GDP) — Trade balance: 2013: -4.8; 2014: -5.1; 2015: -4.3; 2016: -4.6; 2017: -5.4; 2018: -6.3
- Service balance: 2013: 7.0; 2014: 8.5; 2015: 8.4; 2016: 8.2; 2017: 8.0
- Income balance: 2013: -2.4; 2014: -2.5; 2015: -2.1; 2016: -2.6
- Current account: 2013: -0.1; 2014: 1.2; 2015: 0.2; 2016: -0.7
- Gross external debt/GDP (percent) 1/: 2013: 92.4; 2014: 96.7; 2015: 94.8; 2016: 89.5; 2017: 83.1; 2018: 76.8
- Net external debt/GDP (percent) 2/: 2013: -10.2; 2014: -10.3
- General government external debt/GDP (percent) — Including government assets held abroad 3/: 2013: -1.5; 2014: -1.3; 2015: -1.7; 2016: -1.6; 2017: -1.2
- Money and credit (year-on-year growth in percent) — Credit to the economy 4/: 2013: 6.2
- Output gap (in percent of potential output): 2013: -0.8; 2014: -0.3
- Growth rate of potential output (in percent): 2013: 1.8
Social indicators (reference years)
- Population (2014, pa): 1.32 million
- Per capita GDP (2014): $20,126
- Life expectancy at birth (2013): 81.1 (female) and 71.2 (male)
- Poverty rate (share of the population below the established risk-of-poverty line, 2013): 21.7 percent
- Main exports: machinery and appliances
Source: IMF Executive Board summary of the 2016 Article IV consultation with the Republic of Estonia (Press Release No. 17/10).