IMF Executive Board Concludes 2025 Article IV Consultation with Estonia

IMF News, July 14, 2025

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Bibliographic details

• Published: July 14, 2025

Overview and context

• The Executive Board concluded the Article IV Consultation with the Republic of Estonia on a lapse of time basis on July 9, 2025.
• The authorities consented to the publication of the Staff Report prepared for this consultation.
• After a long downturn, the Estonian economy is experiencing a gradual recovery, but higher input costs, a legacy of earlier shocks, global policy uncertainty, and trade barriers are preventing a more vigorous rebound.
• In response to fast-rising defense spending needs, a further fiscal adjustment is needed to stabilize the debt ratio and preserve critical buffers against future shocks.

Economic outlook and projections

• GDP is projected to expand by 0.5 percent in 2025 and accelerate to 1.5 percent in 2026.
• Inflation projections:
  • HICP headline period average: 3.7 (2024), 5.1 (2025), 4.4 (2026)
  • HICP headline end-period: 3.9 (2024), 5.3 (2025)
  • HICP core: 5.2 (2024), 6.8 (2025), 5.9 (2026)
  • Alternate core row: 5.7 (2024), 8.0 (2025), 4.1 (2026)
• Growth drivers and constraints:
  • Exports of goods expanded in 2024, led by stronger demand from main trading partners.
  • Investment rebounded in 2024.
  • A short-lived surge in consumption occurred as car sales jumped in anticipation of a new motor vehicle tax and then dropped sharply once the tax came into effect in January.
  • Higher taxes and services prices are keeping inflation elevated; staff estimates the new motor vehicle tax added 1.2 percentage points to annual inflation.
  • Global policy uncertainty and trade barriers are expected to hinder a stronger recovery.
• Selected indicators (annual percent change, unless otherwise indicated; values shown by year):
  • Real GDP growth: -0.3 (2024), 0.5 (2025), 1.5 (2026)
  • Private consumption: -0.2 (2024), 1.8 (2025)
  • Gross fixed capital formation: -6.9 (2024), 2.6 (2025), 2.2 (2026)
  • Exports of goods and services: -1.2 (2024), 4.6 (2025), 1.2 (2026)
  • Imports of goods and services: 0.4 (2024), 4.3 (2025), 1.0 (2026)
  • GDP (nominal; billions of Euros): 39.5 (2024), 41.5 (2025), 43.9 (2026)
  • Average monthly wage (year-on-year growth in percent): 8.1 (2024), 8.4 (2025)
  • Unemployment rate (ILO definition, percent, pa): 7.5 (2024), 7.9 (2025)

Fiscal assessment and recommendations

• Executive Board view: Fiscal policy is appropriately calibrated in 2025, but further growth-friendly consolidation is needed starting from 2026.
• Recommended adjustment:
  • Staff recommends an adjustment of 0.5 percentage point of GDP per year relative to baseline during 2026-30.
  • Objective: secure convergence towards a sustained structural deficit of less than 1 percent of GDP by 2032 and stabilize the debt ratio at around 32 percent.
• In adverse growth scenarios:
  • Automatic stabilizers should be allowed to provide economic support, with the debt ratio stabilizing a bit later and at a slightly higher level.
• Composition of adjustment:
  • Rely predominantly on revenue-based mobilization but also identify specific spending measures.
  • Staff sees merits in a comprehensive review of Estonia’s tax system considering alternative options and potential implications for revenue mobilization and long-run growth.
  • On the spending side: commitment to contain growth of the public sector wage bill is welcome; staff recommends limiting the discretion of line ministries and other agencies in setting up wages.
  • Additional spending containment options: introducing means-testing of existing social benefits and reviewing current indexation mechanisms for pensions.

• General government finances (Percent of GDP):
  • Revenue: 42.5 (2024), 43.1 (2025), 42.9 (2026)
  • Expenditure: 44.0 (2024), 45.7 (2025), 46.6 (2026)
  • Fiscal balance: -1.5 (2024), -2.6 (2025), -3.7 (2026)
  • Structural balance: -0.9 (2024), -1.9 (2025), -3.2 (2026)
  • General government gross debt: 23.6 (2024), 25.4 (2025), 28.1 (2026)

Financial stability and macroprudential policy

• Risks and vulnerabilities:
  • Financial stability risks warrant vigilance, especially developments in commercial and residential real estate given high bank exposures to this loan segment.
  • Bank capital remains adequate, but new large dividend payouts should be discouraged as they divert potential sources of equity and reduce banks’ ability to absorb future shocks.
  • Cyber risk should be monitored closely and reflected in supervisory assessments.
  • Risk-based supervision of virtual asset service providers should be further enhanced.
• Macroprudential stance:
  • Current macroprudential stance remains appropriate.
  • Decision to maintain the CCyB at 1.5 percent is welcome given rapid credit growth and real estate risks; caution is advised in considering a return to the 1 percent positive neutral rate.
  • Staff recommends continued review of bank exposures and ensuring credit risk is properly reflected in risk weights across the banking system, especially for IRB banks.
• Balance of payment and external indicators:
  • Current account: -1.1 (2024), -2.3 (2025), -2.1 (2026)
  • Trade balance: 0.6 (2024), 0.2 (2025), -0.1 (2026)
  • Net FDI: 3.3 (2024), 3.2 (2025)
  • NIIP: -9.5 (2024), -9.6 (2025)
  • REER (percent change): 1.4 (2024)

Structural reforms and productivity enhancements

• Areas needing decisive action:
  • Address skill shortages.
  • Deepen capital markets.
  • Reduce regulatory burden.
  • Foster innovation.
• Positive ongoing initiatives:
  • Efforts to ease quotas for immigrants, cut red tape, and incentivize R&D spending.
  • Commitment to facilitate development of renewables and ensure energy security.
• Additional recommendations:
  • Improve targeting of active labor market policies.
  • Further progress towards a EU single market combined with domestic policies facilitating investments by second-pillar pension funds would promote capital market deepening and enable young, innovative Estonian firms to access finance and grow.

Executive Board assessment — summary

• Estonia is recovering from a prolonged recession but faces challenges; a mild recovery is expected to continue, supported by a more expansionary policy mix.
• The external position is broadly in line with fundamentals and desirable policies.
• Inflation is projected to remain elevated before resuming a downward trend; near-term risks to growth remain skewed to the downside and could be exacerbated by higher-than-euro area inflation.
• It is recommended that the next Article IV consultation be completed on the standard 12-month cycle.

IMF Executive Board Concludes 2025 Article IV Consultation with Estonia — Press Release No. 25/245, July 14, 2025. Sources: Estonian authorities; and IMF staff estimates and projections.

References

• Republic of Estonia and the IMF
• IMF Policy Advice -- A Factsheet
• Press Releases
• PRESS CENTER
• [www.imf.org/[country]](http://www.imf.org/%5bcountry)
• http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
• https://www.imf.org/en/home