OREANDA-NEWS. May 21, 2008. Comments by the Minister of Finance and Governor of Eesti Pank to the conclusions of the International Monetary Fund (IMF) mission to Estonia.
IVARI PADAR, Minister of Finance of the Republic of Estonia

I would like to thank the IMF delegation for useful discussions and interesting analyses.

Estonia has always deemed important the opinion of the IMF experts on our economy. Considering both the global and our own domestic economic situation we appreciate the analysis of international experts even more.

Over the last years the economic growth in Estonia has exceeded its potential level bringing along economic imbalances (inflation, rapid wage growth, current account deficit). The process of adjustment to the changed conditions has begun; this has been accelerated by global developments.

Fiscal policy

Considering the current developments the government has taken measures to adjust to the changed conditions. The supplementary budget approved last Thursday is a first step in the right direction.

Since changes in economy have been faster than projected, cutting expenditure is unavoidable and the public sector has to make its contribution.

The draft supplementary budget will decrease revenues by 6,1 bln kroons and expenditure by 3,2 bln kroons. I believe that the supplementary budget demonstrates responsibility and the decision is essential to maintain a correct fiscal and economic policy stance.

Against the background of the most recent growth figures, many have expressed the opinion that further expenditure cuts should be done. I believe that today there is no analyst who would take the risk to project precisely the recovery of the Estonian economy and thereby also how taxes will be collected in two or six months.

At the moment we should focus in particular to establishing a budgetary framework for the following years. It is important that the government fiscal strategy that is being negotiated would start to take into consideration the actual situation and the opportunities of today and tomorrow.

Economic growth
In the light of 0,4 per cent growth both the government but also individuals have to make the right conclusions and to review their expenditure.

I would like to recall that the first quarter of 2008 is being compared to the first quarter of 2007 which was a time of extremely fast growth. Moreover, it is important to notice that the given GDP figure of 0,4 per cent already includes the high rate of inflation in the first quarter.

Along with the slowdown in price increase some increase in real GDP growth compared to the first quarter can be expected.

In the coming months no significant improvement in economic situation is expected. This is indicated by entrepreneurs’ weakened assessment of business conjuncture and pessimistic forecasts.

Slowdown in economic growth provides preconditions for a more balanced future development; however, it might not be an easy process.

We agree with the Fund that in tighter economic conditions we have to be even more flexible and respond quickly to all changes. The supplementary budget is a first step in this direction; however, there is still a long way to go.

ANDRES LIPSTOK, Governor of Eesti Pank
1. The talks between Estonia and the IMF mission have always been thorough and deep. Therefore, let me thank the Head of the Mission and the delegation for the long and useful cooperation.

2. The Head of the Mission and the Minister of Finance gave a complete overview of the progress of the mission. Therefore I would like to focus briefly on the three following issues only: the current situation of the Estonian economy, the key issues for monetary and economic policy and the banking sector.

An overall assessment of the Estonian economy

3. First of all, let us turn to the economy. This year the Estonian economy is going through the necessary adjustment and thereafter will resume the sustainable level. In this respect, the IMF assessment is broadly in line with the forecast of Eesti Pank. Now, let me add a few comments on the flash estimate of first quarter 2008 GDP.

4. The preliminary growth figure of the first quarter is slightly smaller than expected, however, it still remains in the range of our projection and is in line with the overall economic adjustment scenario. The flash estimate is a preliminary assessment which can change. Therefore we can only speculate on what has caused the difference, but it is likely that the private consumption growth in particular has undergone a faster slowdown. The rate of expansion of goods and services has remained on the level observed last year. This means that the share of external-demand-orientated branches has increased.

5. It is important to emphasise that in the changed economic conditions the risks that the Estonian economy has been subject to will recede. All signs suggest that saving by private persons is increasing and debt growth is slowing down. Therefore, the current account deficit is also decreasing. At the same time, the level of direct investments into Estonia continues to be high.

The main challenges for the Estonian economy – price and wage growth and fiscal position

6. A few words on the economic policy. We agree with the Fund that the two key issues for the Estonian economy are inflation and fiscal policy.

7. First, on price growth. According to the forecast of Eesti Pank the inflation will decrease in the second half of the year and in the coming years. The beginning of this year was influenced mainly by food and energy price increases in global markets and by tax changes. At the same time, together with the slowdown in domestic demand growth there are signs of decreasing price growth in the services sector.

8. Nevertheless, it is evident that a smooth decrease in inflation is directly dependent on the recovery of the consistency between productivity and wages. Although there are some signs of slowdown, the wage growth has still been considerably higher than productivity growth over the last year. This trend cannot last if we want to guarantee a continued growth in competitiveness and income. Wages will continue to increase but in line with the particular economic environment and the situation of firms.

9. The Minister of Finance already covered thoroughly the fiscal policy issue. I would like to confirm that we support a policy that would (a) maintain for the current year a balanced budget at the least; and (b) guarantee a considerable surplus over the medium and long term. It is clear that the key issue for the public finances in the short term is fiscal adjustment to the changed conditions, while at the same time maintaining an environment conducive to growth. These are the main factors contributing to Estonia’s economic reliability and supporting new productive investments.

Financial sector

10. Estonia’s financial sector continues to be strong. Decreasing credit growth is in line with what has been expected and the banks’ readiness to finance worthy projects is sufficient. Banks’ capital and liquidity buffers are adequate enabling them to cope with smaller profits and with some credit loss increase.


11. To sum up, we agree with the Fund that the changed economic conditions are testing the public finances and economic flexibility. The fundamentals of the Estonian economy are strong for further developments and new growth. The current year will show whether we are ready to use these opportunities and to maintain the strengths of the Estonian economy. As a separate issue I would like to emphasise that the new labour contract will support job creation, increase labour market flexibility and thereby enhance forward-looking changes in the economy.

The Concluding Statement of the IMF Mission is available on Eesti Pank’s website