Press Release No. 95/1

The International Monetary Fund (IMF) has approved a second drawing, equivalent to SDR 11.625 million (about US$16.9 million), by Estonia under the systemic transformation facility (STF).¹ On October 27, 1993, the IMF approved Estonia's first drawing under the STF, also of SDR 11.625 million, together with an SDR 11.625 million stand-by credit (see Press Release No. 93/48).

Estonia has been highly successful during the past two years in achieving its main targets of macroeconomic stabilization. Inflation has subsided to 1-2 percent a month and output is believed to have grown by roughly 5 percent in 1994. Foreign direct investment is buoyant, reflecting the successful stabilization and the support of a liberal trade and exchange regime. As expected, with the restructuring of the economy, the high level of foreign direct investment, and the recovery of demand, the external current account moved from a small surplus in 1993 to a deficit of around 8 percent in 1994. Exports continued to grow rapidly, particularly to industrial countries, although exports to the former Soviet Union were less buoyant as the kroon stopped depreciating in real terms against the Russian ruble, while imports rose sharply, reflecting the continued recovery of domestic demand.

Despite these many positive developments, Estonia's financial system has remained fragile, but the authorities have developed an action plan for materially strengthening bank supervision during 1995, and the recent enactment of the Credit Institutions Act has enhanced enforcement powers with respect to bank supervision and prudential regulations.

The continued pursuit of tight fiscal policies and the self-correcting mechanism of Estonia's currency board should help keep inflation under control. Continuing structural reforms and policies supporting improved price and wage flexibility in the economy should also assist in containing inflation.

Estonia joined the IMF on May 26, 1992, and its quota² is SDR 46.5 million (about US$68 million). Its outstanding use of IMF financing currently totals SDR 42 million (about US$61 million).

Estonia: Selected Economic Indicators   1992 1993 1994*   (percent change) Real GDP growth –17.0 –2.1 6.0 Consumer price index 1,069.0 89.0 48.0     (percent of GDP) Financial fiscal balance (deficit –) 0.8 2.3 0.9 External current account balance (deficit –) 8.0 0.6 –7.9 Sources: Estonian authorities; and IMF staff estimates. *Program. 1. The STF is a temporary IMF financing facility that provides assistance to member countries facing balance of payments difficulties arising from severe disruptions in their traditional trade and payments arrangements owing to a shift from reliance on trading at nonmarket prices to multilateral market-based trade. 2. 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.