Statement by the IMF Staff Representative

The economic recovery seems to be firmly established, supported by strengthened domestic private demand. The Bank of Estonia (BoE) is committed to maintaining the currency board until the euro becomes Estonia's official currency. The compliance with the Basel Core Principles (BCP) has improved and is now high. Monetary and financial policies are transparent. Financial sector assessment program recommendations have been integrated into the government's work program. Good progress is being made in the implementation of the structural reform agenda, including the privatization of major infrastructure companies.

Abstract

The economic recovery seems to be firmly established, supported by strengthened domestic private demand. The Bank of Estonia (BoE) is committed to maintaining the currency board until the euro becomes Estonia's official currency. The compliance with the Basel Core Principles (BCP) has improved and is now high. Monetary and financial policies are transparent. Financial sector assessment program recommendations have been integrated into the government's work program. Good progress is being made in the implementation of the structural reform agenda, including the privatization of major infrastructure companies.

Since EBS/00/101 was issued, the authorities have confirmed that they have submitted the new Basic Budget Law to parliament, thereby fulfilling the structural performance criterion for June 30, 2000. Also, the Bank of Estonia has issued regulations for the improved loan assessment framework, including a uniform minimum loan loss provisioning system in line with international standards (a structural benchmark).

While the VAT exemption on thermal energy was lifted effective July 1, 2000, parliament decided to apply the VAT only at a reduced rate of 5 percent instead of the full rate of 18 percent. This will imply a loss of revenue of about EEK 94 million for 2000 (about 0.1 percent of GDP). The government is committed to submit, if necessary, to parliament in August 2000 a supplementary budget with sufficient expenditure cuts to ensure that the fiscal program targets will be met. The authorities have reaffirmed their intention to use any windfalls in revenues resulting from faster than expected economic growth to further reduce the fiscal deficit in 2000.

New balance of payments data show a downward revision of the 1999 current account deficit from 6.1 percent of GDP to 5.8 percent of GDP and a preliminary estimate of the current account deficit for the first quarter of 2000 of about 8 percent of GDP. This outturn is consistent with a current account deficit of 6.5 percent for 2000 as projected in EBS/00/101. The current account deficit in the first quarter of 2000 was financed entirely by non–debtcreating flows—overwhelmingly in the form of foreign direct investment (including a significant amount of reinvested earnings).

Republic of Estonia: Staff Report for the 2000 Article IV Consultation and First Review Under the Stand-By Arrangement
Author: International Monetary Fund