IMF Executive Board Concludes 2013 Article IV Consultation with the Republic of Estonia

Public Information Notice (PIN) No. 13/47
May 13, 2013

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2013 Article IV Consultation with Estonia is also available.

On May 3, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Estonia.1


In 2012, Estonia’s economic recovery continued with stronger-than-expected growth, lower inflation and a close-to-balance fiscal outcome. Supported by strong macroeconomic policies and Estonia’s Nordic ties, growth has returned to a sustainable pace. Exports have substantially exceeded pre-crisis levels and have been the main driver of the recovery while imports, bolstered by domestic demand, pushed the external current account into a deficit. Tightening capacity constraints have prompted a strong private investment response, and private consumption has been supported by rising consumer confidence and a strengthening labor market. Inflation has declined in line with global fuel and food prices, but it remains among the highest in the European Union (EU). While overall and long-term unemployment rates have declined, these remain above pre-crisis levels.

Growth will likely slow in 2013, in line with less buoyant domestic demand and weaker external demand. With a gradual recovery in the euro area in the second half of 2013, exports will provide a positive, albeit smaller, contribution to growth. Domestic demand is projected to expand in line with continued improvements in the labor market, and will be bolstered by tax cuts. But private investment’s contribution to growth is projected to decline consistent with a slowing from its double-digit pace in 2011–12. Inflation should moderate as declining external price pressures are projected to more than offset the effects of Estonia’s energy market liberalization and excise tax increases. Core inflation is projected to remain unchanged with productivity gains broadly offsetting wage increases.

Risks to the outlook will largely be on the downside in 2013. These stem primarily from a prolonged period of slow growth in the euro area as the EU is the destination of two-thirds of Estonia’s exports. The unwinding of past real and financial sector imbalances will therefore be more protracted and weigh on domestic demand. Financial spillovers could emerge in the event of a sharp resurgence of global financial market volatility. Alternatively, a faster-than-expected euro area recovery or stronger-than-expected exports could boost growth. In this case, continued labor market strength could fuel wage and price pressures in the medium term.

Executive Board Assessment

Executive Directors commended the authorities for implementing strong policies that have contributed to an impressive economic recovery, reduced imbalances, and increased resilience to external shocks. Nevertheless, the economy faces downside risks arising primarily from an uncertain external environment. Directors welcomed the authorities’ commitment to sound macroeconomic policies and structural reforms to address the remaining vulnerabilities, safeguard macroeconomic and financial stability, enhance growth prospects, and tackle the high unemployment.

Directors commended the authorities’ continued commitment to fiscal prudence. They welcomed that the 2013 budget aims at rationalizing government expenditure, while increasing social and investment spending. Going forward, it will be important to withstand spending pressures on wages, adhere to budgetary allocations, and save potential windfall revenues. Directors saw merit in adopting a simple and transparent medium-term budgetary framework as it would provide fiscal credibility. In general, they considered that multi-year expenditure ceilings under this framework would help reduce policy uncertainty and avoid pro-cyclical policies. Setting up a Fiscal Council and a structural budget balance rule would also enhance the framework.

Directors noted that the banking sector is profitable, liquid and well capitalized. They agreed that further strengthening of macroprudential policies will be necessary to limit banks’ exposure to the real estate market and safeguard financial stability. Directors highlighted the importance of continued deepening of the existing cross-border Nordic-Baltic prudential arrangements. Looking ahead, they underscored the need for ensuring coordination between the existing Nordic-Baltic arrangements and a future EU banking union. Directors welcomed the ongoing initiatives to develop a data-exchange cooperation framework among financial groups and to set up a cross-border burden-sharing mechanism.

Directors emphasized that measures to reduce the high level of unemployment, build human capital, improve the business environment, and boost competitiveness are critical to foster long-run growth. Welcoming the recent steps to improve work incentives and education systems, they called for stronger action toward addressing skill mismatches, re-focusing education and training programs, including vocational training, in order to meet the economy’s needs. They also called for improving labor market flexibility.

Estonia: Selected Macroeconomic and Social Indicators, 2010–13
(In units as indicated)
  2010 2011 2012 2013

National income, prices and wages


GDP (euro, billions)

14.3 16.0 17.0 18.2

Real GDP growth (year-on-year in percent)

3.3 8.3 3.2 3.0

Average HICP (year-on-year change in percent)

2.7 5.1 4.2 3.2

GDP deflator (year-on-year change in percent)

0.7 2.9 3.2 3.8

Average monthly wage (year-on-year growth in percent)

0.9 5.4 6.0 4.5

Unemployment rate (ILO definition, percent)

16.9 12.5 10.2 8.3

Average nominal ULC (year-on-year growth in percent)

-6.4 3.8 5.3 2.8

Saving-investment balances (in percent of GDP)


National saving

23.2 26.9 26.4 27.6


23.4 26.4 26.6 25.4


-0.2 0.5 -0.2 2.1

Domestic investment

20.3 24.8 27.6 27.5


17.3 21.8 24.2 22.5


2.9 3.0 3.4 5.1

Foreign saving

-2.9 -2.1 1.2 0.0

General government (ESA95 basis; percent of GDP)


Revenue and grants

40.8 39.4 40.2


Expenditure and net lending

40.7 38.3 40.5


Fiscal balance

0.2 1.2 -0.3 0.3

External sector (in percent of GDP)


Trade balance

-1.9 -1.4 -4.3 -3.2

Service balance

9.4 7.8 7.2 7.2

Income balance

-6.2 -5.8 -5.6 -5.3

Current account

2.9 2.1 -1.2 0.0

Gross international reserves (euro, millions)

2,766 1,935

In months of imports

4.7 2.6

In percent of gross short-term debt (including trade credits)

41.6 32.7

In percent of base money

121.8 82.9

Gross external debt/GDP (in percent) 1/

115.2 97.7 93.0 82.5

Net external debt/GDP (in percent) 2/

23.8 6.6 4.9 -2.3

General government external debt/GDP (in percent)


Excluding government assets held abroad

5.3 3.4 7.4 8.6

Including government assets held abroad 3/

-1.9 -3.0 0.7 3.0

Exchange rate (euro/US$ - period average) 4/

0.72 0.78

Money and credit (year-on-year growth in percent)


Domestic credit to nongovernment

-5.3 -5.0

Base money

-51 39.5

Broad money

0.1 3.0

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

1/ Includes trade credits.

2/ Net of portfolio assets (including money market instruments), financial derivative assets, other investment assets, and reserve assets held by Estonian residents.

3/ Includes the Stabilization Reserve Fund (SRF).

4/ Until 2011, the Estonian kroon was pegged at 15.6466 kroons to the euro. The euro was adopted on January 1, 2011.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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