OREANDA-NEWS. December 15, 2010. The head of the mission of the International Monetary Fund (IMF) to Estonia, Alexander Hoffmaister, said at a news conference summing up the mission's one-and-a-half week visit to Estonia that the Estonian economy has been doing better than expected of late and the IMF has raised the economic growth forecast for the country for 2011 to 3.5-4 percent.

In the press conference at the Bank of Estonia, the head of the IMF Article IV mission to Estonia stressed on repeated occasions the need to keep the state's spending under control and to stick to the state budget adopted for next year, warning Estonia against upward revisions of the budget.

Hoffmaister observed that even though Estonia's outlooks are good, risk factors nevertheless exist. These include developments on the financial and bond markets and a possible second period of worldwide economic decline. He said that in the event if these risks should materialize Estonia will be supported by its low fiscal deficit and low level of government debt.

While spending pressures will continue, under current policies a balanced budget can be broadly achieved, the IMF delegation said in its conclusions. This will require holding expenditures unchanged after discounting inflation. Demands to boost spending are bound to emerge nevertheless, given the large expenditure cuts in 2009, limited social benefits, and an improving economy. If necessary, offseting measures should focus largely on the revenues side. Consideration should be given to increasing VAT and environment and property taxes. Hoffmaister said that potential tax changes should be as broad-based as possible.

The head of the IMF mission said that neither the topic of graduated rate income tax nor of corporate income tax were discussed during the mission.

The IMF recommends Estonia to set out a full-fledged medium term fiscal framework, including binding multi-year expenditure ceilings, and pursue a counter-cyclical fiscal policy.

Speaking about the situation of banking, Hoffmaister said that while banks have coped relatively well, one needs to keep an eye on it that banks remain as well capitalized as they are now also in the future. He also stressed the importance of continued cross-border cooperation in financial sector supervision.

Another key point made by the IMF mission is the need to fully deploy potential resources and restore competitiveness. It said that from a cyclical perspective, the previous boom-induced gap between real wages and productivity seems to be narrowing, with Estonia's active labor market policies, geared to ensure that workers acquire the skills required by the economy, seen as key to address the skill mismatch legacy of the construction boom.

Estonia's Finance Minister Jurgen Ligi named as keywords the quality of the state's expenditures, the need to achieve a fiscal surplus and the importance of restoring and accumulating reserves. He emphasized that one needs to address structural problems in the budget, which won't be solved by the resumption of economic growth.

According to Ligi, a ban has to be put on the drawing up of supplementary budgets with the aim of spending potential surplus revenue.

The need to continue pursuing a conservative fiscal policy was stressed also by Bank of Estonia governor Andres Lipstok, who underscored that next year's state budget must be fulfilled in the adopted form.

International cooperation in financial sector supervision needs to continue. Lipstok said that while cooperation to this effect works well now, one mustn't become lazy or leave untapped the big opportunities there are to develop this cooperation further.

Lipstok, just like Hoffmaister and Ligi, pointed at inflation, which at this point is significantly driven by food and fuel, or prices that Estonia cannot control. Price increase is set to remain high on the agenda in the future too, the central bank governor said.