Back Matter


  • Banerjee, Biswajit; and other, 1995, Road Maps of the Transition: The Baltics, the Czech Republic, Hungary, and Russia, IMF Occasional Paper No. 127 (Washington: International Monetary Fund).

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  • Bennett, Adam G.G., 1992, “The Operation of the Estonian Currency Board,” IMF Paper on Policy Analysis and Assessment No 92/3. (Washington: International Monetary Fund)

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  • Bennett, Adam G.G., 1994, “Currency Boards: Issues and Experiences,” IMF Paper on Policy Analysis and Assessment 94/18 (Washington: International Monetary Fund).

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  • Economist Intelligence Unit, March 1990, The Baltic States: The Economic and Political Implications of the Secession of Estonia, Latvia, and Lithuania from the USSR (London: Economist Group).

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  • Eesti Pank, 1992, The Monetary Reform in Estonia (Tallinn: Bank of Estonia).

  • Gulde, Anne-Marie, and Peter Keller, 2002, “Another Look at Currency Board Arrangements and Hard Currency Rate Pegs for EU Accession Countries,The Choice of Exchange Rate Regime and Monetary Policy Rule in Accession to EU and Entry to EMU (Tallinn: Bank of Estonia; forthcoming).

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  • International Monetary Fund, 1993, Estonia, Economic Review Series (Washington: International Monetary Fund).

  • Kallas, Siim, and Mart Sorg, 1994, Currency Reform in Estonia, Reform Round Table Working Paper No. 9 (Tallinn: Estonian Academy of Sciences)

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  • Richards, Anthony, and Gunnar Tersman, 1995, Growth, Nontradables, and Price Convergence in the Baltics, IMF Working Paper 95/45 (Washington: International Monetary Fund).

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  • Van Arkadie, Brian, and Mats Karlsson, 1992, Economic Survey of the Baltic States (New York: New York University Press)

  • Zavoico, Basil, 1995, “A Brief Note on the Inflationary Process in Transition Economies” (unpublished; Washington: International Monetary Fund).

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Messrs. Knöbl and Zavoico are Senior Resident Representative and Senior Economist in the European II Department, respectively. Mr. Sutt is a Deputy Governor at the Bank of Estonia. Mr. Knöbl was the mission chief on Estonia immediately following its independence, during the period of currency reform, and for two years thereafter. Mr. Zavoico was the lead desk economist on Estonia from November 1991 through October 1993. Mr. Sutt was an economist in the central bank policy unit at the Bank of Estonia in the run-up to the currency reform. The authors wish to thank Siim Kallas, Ardo Hansson, and Rein Voog who took the time to discuss the early history of the reform process and John Odling-Smee (EU2), Adam Bennett (MED), Peter Keller (EU2), Tapio Saavalainen (EU2), Richard Haas (EU2), and Andrus Alber (OED) for their comments. The views expressed are those of the authors and do not necessarily represent those of the IMF or the Bank of Estonia.


For an assessment of post-independence growth in the Baltics, see Gulde and Keller (2002).


This framework was called IME, which is the Estonian acronym for “self-managed Estonia” and is also the Estonian word for miracle. Among the original authors of IME were Siim Kallas and Edgar Savisaar. For more background, see van Arkadie and Karlsson (1992), Kallas and Sorg (1994), and Economist Intelligence Unit (1990).


An important product of this period was the establishment in Estonia of the first commercial bank in the Soviet Union that operated as a joint stock company—Tartu Commercial Bank—in December 1988. This bank later also had the distinction of being the first bank in the CIS and Baltic region to be declared insolvent and then liquidated (December 1992).


The Bank of Estonia was originally founded in February 1919 upon Estonia first gaining independence, but was closed in June 1940 following Estonia’s annexation by the Soviet Union. For a more detailed history of the Bank of Estonia, see its website at “’’.


Shortly after its reestablishment, the Bank of Estonia also took over the Tallinn branch of the Foreign Trade Bank of the Soviet Union (Vneshekonombank). Although this bank’s responsibilities were largely commercial, they provided Bank staff with important experience in managing foreign assets.


Indeed, the first tender for the design of kroon banknotes was announced in December 1989.


By law the MRC had three members: the Prime Minister, the Governor of the Bank of Estonia, and one expert appointed by the legislative body. The founding members of the MRC were Edgar Savisaar, Rein Otsason, and Siim Kallas. In February 1992 the MRC was reconstituted to include Tiit Vähi (then Prime Minister), Siim Kallas (then Governor of the Bank of Estonia), and R. Jalakas (a Swedish banker of Estonian origin). Ardo Hansson was appointed as a substitute member in June 1992 (shortly before the currency reform). To ensure that it could complete its work, its term of office was set to end only in June 1995.


Indeed, from the outset the Bank of Estonia adopted an explicit policy of only hiring staff with “modern” views, i.e., market- and Western-oriented technicians.


Kallas was regarded as having useful experience in banking through his work at the Savings Bank (Hoiupank) and was already a member of the Bank of Estonia’s Board.


In August 1991 the Bank of Estonia had only about 25 staff.


Indeed, in a meeting with the IMF’s Managing Director (Michel Camdessus) on October 31, Prime Minister Savisaar formally asked the IMF for a stabilization fund to support Estonia’s currency reform. The Managing Director expressed sympathy for Estonia’s predicament but said that membership in the IMF would need to be secured and credible macroeconomic policies implemented before financial support from the IMF could be mobilized.


In the event, and to supplement the Bank of Estonia’s meager foreign reserves, the Estonian legislature in January 1992 committed to the balance sheet of the Bank of Estonia 150 thousand cubic meters of forests ready for felling, which it was estimated had a market value of about US$150 million. Thus came about the myth—prevalent in the years immediately following the reform—that the kroon was backed by Estonia’s forests. These forest assets were formally removed from the Bank of Estonia’s balance sheet only in June 1997.


See Box 1 for details of the evolution of Estonia’s relationship with the IMF.


Two IMF staff, including Mr. Knöbl, were invited to participate in this meeting. In addition to the three members of the MRC, several other high officials, including the ministers of finance and trade, also joined in the discussions.


On assuming the premiership, Vähi also replaced Savisaar on the MRC


This committee came to be known as the “Forest Committee” as it was sequestered in a forest guest house about 25 kilometers west of Tallinn. Although Vähi was formally the chairman, Enn Roose (Deputy Minister of Finance) was the effective head.


Because only Russia could issue ruble notes, a cash ruble shortage developed throughout the ruble zone at that time. This was a major motivating factor in many early currency reforms.


The most striking manifestation of the cash ruble shortage was the emergence of a spread between cash and “account” rubles (rubles held in accounts at commercial banks), which emerged in late 1991 and grew rapidly, especially after the inflation that accompanied price liberalization in early 1992. The premium on cash peaked at almost 100 percent in the first quarter of 1992.


The ruble shortage led to interesting innovations in the service sector. For example, hotels (which had no natural access to cash rubles as they tended to be paid in foreign currency or account rubles) established pizza kiosks where fast food was sold for cash. Cash rubles so collected were used to pay wages and meet other cash expenses.


The Forest Committee engaged in a Purchasing Power Parity exercise that suggested a wholesale shift to world prices for all goods and services on the first day following the reform with no compensating adjustments to either demand or supply. Since the minimum consumption basket thus valued was around US$ 240/month and since the average wage was US$30/month, this suggested that the exchange rate would need to be set at least eight times the prevailing market rate to meet minimum social requirements.


Jeffrey Sachs was Professor of Economics at Harvard University, Ardo Hansson was advisor to Prime Minister Vähi, and Boris Pleskovic was economic advisor to the Prime Minister of Slovenia with experience of the Slovenian currency reform.


At the time, it was believed that the introduction of a currency board in Argentina in March 1991 contributed importantly to monetary stability by imposing strict fiscal discipline on a government that had in the past found it impossible to resist major spending initiatives financed largely by borrowing from the central bank.


The Sachs team also met with the IMF mission to discuss its proposal for a CBA.


The draft MFEP foresaw two alternatives as regards timing. The first alternative involved a reform in May-early June, but without the initial financial support from the IMF (as there was insufficient time to bring the associated financial program to the IMF’s Executive Board). The second alternative involved a brief delay in the currency reform to allow time to complete negotiation of the MFEP and prepare the necessary paperwork.


The mission also left behind a short note outlining the main operational features of a currency board, in which it was proposed that the currency board back only the money base, for which existing and prospective foreign reserves were just about adequate.


That is, the monetary liabilities of both the Bank of Estonia and the commercial banks. Thereafter, the issue of new money by the Bank of Estonia would occur only through the purchase of foreign exchange reserves, i.e., the system would revert to a base money rule. It was estimated at the time that foreign exchange reserves amounting to US$200-300 million would be needed to meet this initial requirement.


There was also the problem of the Hoiupank, or Savings Bank, which was the main depository of individual savings accounts in Estonia. Its assets were held exclusively in the Gosbank, Moscow. Access to these assets—which represented about 1/3 of the amount that the Bank of Estonia was considering covering under its currency board - was denied by Moscow which effectively blocked these accounts. In the interests of ensuring broad support for its reform, the Bank of Estonia decided to fully recapitalize the Hoiupank. To ensure maximum security of these deposits, it also imposed a 100 percent reserve requirement on the Hoiupank’s liabilities.


In fact, there was a deliberate rounding up to the nearest whole DM multiple from the prevailing market rate to build-in a modest cushion of competitiveness (to eight kroon to one deutsche mark).


This represented gold held as foreign reserves by the Republic of Estonia prior to Estonia’s annexation by the Soviet Union in June 1940. After Estonia regained its independence, selected depositories recognized these claims and returned the gold. However, at the time of the currency reform, only the gold restituted from the Bank of England was available to the Bank of Estonia (about US$52 million). A further US$45 million was restituted from Sweden and the BIS in July. The total required to cover the Bank of Estonia’s liabilities (including those of the Hoiupank) at the time of the currency reform was about US$63 million.


The power given the MRC to promulgate decrees with the full force of law proved crucial in the last weeks prior to the reform as legislation could be drafted, amended, and given effect in a very short time.


For more details on the economic implications and mechanics of currency boards, see Bennett (1992 and 1994).


In the event, these clearing arrangements broke down shortly thereafter. However, this did not have a major impact on economic activity and inadvertently supported the government’s policy of a rapid reorientation of trade and finance to the West.


Key structural measures included early price and trade liberalization, the early adoption of effective bankruptcy legislation (September 1992) and a privatization program that provided for the sale of 100 percent stakes in larger enterprises and that did not discriminate against foreign investors. Legal reforms and a court system that supported the enforcement of contracts were also crucial in creating an environment in which private enterprise could prosper.


At this stage of development, the primary function of banks was to facilitate payments through the clearing mechanism. This role was quickly taken over by surviving banks.Moreover, since part of the deposits held in these banks had not been freely usable for some time before the collapse of the banks, the economic impact of their closure, at least in part, already been absorbed.


As noted, monetary policy was tightened in Lithuania only in the spring of 1993; until then inflation had remained high.

The Estonian Currency Board: Its Introduction and Role in the Early Success of Estonia's Transition to a Market Economy
Author: Mr. Andres Sutt, Mr. Basil B. Zavoiceo, and Mr. Adalbert Knöbl