Republic Of Estonia: Republic Of Estonia Second Review Under the Stand-by Arrangement
Author: International Monetary Fund
Publication Date:
11 Jan 2001
eISBN:
9781451812350
Language:
English
Keywords:
ISCR; CR; Estonia review; deficit; privatization program; authority; balance of payments; trade balance; exchange rate; personal income; commercial bank official
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The fast economic recovery despite a strong fiscal correction is a result of the government’s determined macroeconomic and structural policies. Executive Directors commend the government for adhering to its ambitious fiscal targets. The careful crafting of legislation to establish a second pillar of the pension system is appropriate. The high confidence in the currency board and the strengthening of the banking system will stabilize the financial system. Nonbanking supervision has to be strengthened further and the draft securities market law should be implemented.

Abstract

The fast economic recovery despite a strong fiscal correction is a result of the government’s determined macroeconomic and structural policies. Executive Directors commend the government for adhering to its ambitious fiscal targets. The careful crafting of legislation to establish a second pillar of the pension system is appropriate. The high confidence in the currency board and the strengthening of the banking system will stabilize the financial system. Nonbanking supervision has to be strengthened further and the draft securities market law should be implemented.

I. Introduction

1. During the discussions for the first program review and the 2000 Article IV consultations on June 30, 2000, Directors welcomed the further strengthening of Estonia’s economic performance and endorsed the fiscal program targets for 2000 and 2001. Directors noted that further reform of the pension system would be required, including a faster increase in the pension age. They supported the move to unified supervision of the financial sector and stressed that the new agency should have adequate budgetary and operational independence, as well as powers to issue and revoke licenses.

II. Recent Economic Developments And Performance Under the Program

2. Despite a sharp fiscal correction, the economic recovery is gaining momentum (Figure 1). Driven mainly by strong export growth, real GDP growth reached 6.4 percent in the first half of 2000 over a weak first half in 1999; compared to the first half of 1998, real GDP was only 3.3 percent higher. For the year 2000, growth is likely to exceed the program projections to reach 5½-6 percent. As a result of the large increase in oil prices and the weakness of the euro (to which the kroon is pegged), 12-month CPI inflation reached 4.7 percent in September 2000. Unemployment has begun to decline from its peak in the first quarter of 2000 but remains higher than in 1999 as the rapid reorientation of the economy continues and traditional sectors such as agriculture and fisheries continue to decline.

Figure 1.
Figure 1.

Baltic Countries: Selected Economic Indicators, 1995-2000

Citation: IMF Staff Country Reports 2001, 014; 10.5089/9781451812350.002.A001

Source: Country authorities; and Fund staff estimates.

3. The external position has strengthened more than projected. Notwithstanding the economic upturn, the current account deficit narrowed in the first half of 2000 to 5½ percent of GDP from 6.2 percent of GDP in the first half of 1999. Spurred by the recovery in the EU and the competitiveness gains from the peg to the euro, the value of exports of GNFS grew by nearly 40 percent in the first half of 2000 (y-o-y). Subcontracting (mainly of electronics and textiles) nearly doubled (Table 1) and there was strong demand for traditional wood and furniture products. Imports of GNFS, excluding those related to subcontracting activity, recovered by 23 percent after a substantial contraction in the first half of 1999. The confidence in the currency board remains high, as demonstrated by falling interest rate spreads (Figure 2). The strengthened external position resulted in the recent increase in Estonia’s sovereign ratings by a major rating agency (Fitch IBCA) to BBB+, the second highest amongst EU accession candidates.

Figure 2.
Figure 2.

Estonia: External Sector Financial Indicators, 1995-20001/

Citation: IMF Staff Country Reports 2001, 014; 10.5089/9781451812350.002.A001

Sources: National authorities, Bloomberg; and Fund staff estimates and projections.1/ Difference between EEK and Euro money market rates.
Table 1.

Estonia: Annual Growth Rate of Export and Import Values in Deutsche Mark, 1998-2000

(in percent)

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Source: Bank of Estonia

4. Fueled by a strong balance of payments position, monetary aggregates continue to grow at a relatively fast pace(Figure 3). At end-September, broad money was 31 percent higher than a year earlier, reflecting the recovery of the economy and a redirection of funds from the stock market (which had crashed in 1997) to the banking system. An estimated 5 percentage points of broad money growth reflected the impact of the 17 percent increase in the U.S. dollar-euro exchange rate on the kroon value of dollar-denominated bank deposits. Credit to the non-government sector recovered after stagnating in mid-1999, with credit to nonbank financial institutions (mainly leasing companies) gaining in importance.1 The increase in the NFA of the banking system accounted for about one third of the growth of broad money during the first three quarters of 2000. Banks continue to hold very high levels of liquidity. The average capital adequacy ratio was over 14 percent in September 2000, substantially higher than the mandated ratio of 10 percent. With the sale of Optiva Bank completed, about 97 percent of assets of the banking system are now fully or majority owned by Swedish or Finnish banks. The recent buyout of the Estonian minority stake in the second largest bank reflects the increased role assumed by strategic foreign investors in the Estonian banking system (and will register as a large influx of FDI in the second half of 2000).

Figure 3.
Figure 3.

Estonia: Monetary and Financial Indicators, 1995-2000

Citation: IMF Staff Country Reports 2001, 014; 10.5089/9781451812350.002.A001

Sources: Bank of Estonia; Statistical Office of Estonia, IFS, and Fund staff estimates.1/ Tallinn Stock Exchange index.2/ Foreign assets of commercial banks declined at end-1999 as banks shifted resources from deposits abroad to deposits with the Bank of Estonia to enhance domestic liquidity in anticipation of problems related to Y2K.

5. All end-June and end-September performance criteria were met, including the structural performance criterion on the submission of a new basic budget law to parliament. All structural benchmarks were also observed, with the exception of the benchmark on the new securities market law (Annex, Tables 1 and 2). The latter will be submitted to parliament only at end-December 2000 as more time was needed to ensure its consistency with changing EU requirements and the soon to be established unified financial supervision agency (SMEP, paragraph 13). The benchmark on the submission to parliament of a complete pension reform package by December 1, 2000 is expected to be met only with a few weeks’ delay, as forming a broad political consensus within the government coalition and refining the calculations is proving more time consuming than anticipated.

6. The divestiture of the few remaining public enterprises is proceeding. The sale of the Narva power station is being finalized, which should lead to substantial new investments in the electricity generation and a marked reduction in pollution (SMEP, paragraph 16). Several bids have also been received for the sale of a two thirds stake in the main railway company. The sale is expected to be completed by March 2001. Negotiations on EU accession are proceeding well, with 15 of the 31 chapters of the Acquis Communautaire already provisionally closed.

III. Discussions WITH THE Authorities

7. In the attached letter of intent, Prime Minister Laar and Governor Kraft reaffirm the policy commitments expressed in the original memorandum of economic policies (EBS/00/18). The macroeconomic and structural policies specified for the remainder of the program period carry forward the basic thrust of the original program.

8. External and domestic prospects remain broadly unchanged. The authorities have revised upward their growth projections for 2000, but kept unchanged their projections for 2001 and the medium term. The inflation forecasts for 2000 and 2001 have been increased moderately to take account of higher imported inflation on account of energy prices and the weak euro. The medium-term outlook for the trade, current account and the saving-investment balance remain unchanged, as the stronger-than-expected export growth in the first half of the year has been matched by an almost equally large increase in imports. The mission concurred with the authorities that there was no evidence of an overheating economy or balance of payments pressures, and that the budgetary targets for 2000 and 2001 remained appropriate. The authorities stressed that they stand ready to tighten fiscal policy in the event of a substantial weakening of external conditions or an overheating of the domestic economy.

9. Important challenges remain. The authorities acknowledge that high oil prices could negatively affect growth in Estonia’s export markets and that domestic demand and employment have yet to recover fully. Their objective of reducing the size of government over time within the constraint of a budget which is balanced over the business cycle, remains ambitious as the transitional costs of the pension reform, and of NATO and EU accession, may imply sizable fiscal outlays (although these remain for now difficult to quantify). The appropriate structure of the tax system against the prospect of EU accession is also an important issue. In this regard, Prime Minister Laar and Minister Kallas have requested technical assistance from the Fund to assess the present tax system and the advisability of a further shift toward indirect taxation.

A. Fiscal Policy in 2000 and 2001

10. The budget outlook for the remainder of 2000 remains broadly in line with the program(Figure 4). As projected, data for end-September, which only became available after the mission, show a substantial increase in budget revenues in the first nine months of 2000. In nominal terms, revenues increased by 14 percent (y-o-y), while the ratio of revenues to GDP increased to 39.4 percent, despite the phase-out of the corporate profits tax. However, the authorities do not anticipate that the higher-than-expected real growth would lead to a substantial overperformance in tax collections for the year, as the recovery has been mostly driven by the export sector, which is not directly part of the tax base. Stronger than expected revenues from the VAT and corporate income tax for the year2 are expected to be offset to some extent by a shortfall in excise revenues and personal income tax. The former reflects a three- and six-month delay, respectively, in the implementation of excise taxes on fuel components and the introduction of alcohol excise warehouses; both measures were originally scheduled for July 2000. While slow wage growth and high unemployment explain part of the relatively poor performance of personal income tax, revenues from the social security and medical insurance taxes, which have a similar tax base as the personal income tax, are nevertheless growing fast. Higher-than-projected land tax revenue (a local tax) is likely to lead to higher expenditures at the local government level.

Figure 4.
Figure 4.

Estonia: General Government Operations, 1996-2000

(In percent of GDP)

Citation: IMF Staff Country Reports 2001, 014; 10.5089/9781451812350.002.A001

Sources: Estonian Ministry of Finance; and Fund staff calculations.1/ Includes balances of the state and local governments and extrabudgetary funds.2/ Includes balances of the Social Insurance and of the Medical Insurance Funds. Available only from 1997 onwards.3/ Data shown are on a cumulative basis.

11. The authorities have been successful in restraining expenditures. In the first nine months of 2000, expenditures grew only by 2 percent (y-o-y) in nominal terms, while declining by 2.3 percentage points of GDP. The authorities expect transfers and subsidies, and capital expenditures to remain in line with the program. In particular, the Social Insurance Fund is projected to move toward balance this year after a deficit of close to 1 percent of GDP in 1999. The government also expects to recover EEK 200 million (0.25 percent of GDP) in deposits and guarantees it had lost in a bank failure in 1998.3

12. Meeting the budget deficit target of 1¼ percent of GDP for 2000 will imply a fiscal adjustment by over 3½ percent of GDP. While the budget deficit in the first half of 2000 was only slightly less than targeted, the budget was in a substantial surplus in the third quarter. For the first nine months, the budget deficit amounted to about ½ percent of period GDP. The authorities are concerned about the seasonal expenditure pressures in the fourth quarter of 2000, when ministries spend their budget allocations and many workers receive an extra month’s pay as a year-end bonus. In addition, expenditure pressures from local governments may emerge.4 The authorities are, nevertheless, confident that the end-year target will be met, and they stand ready to cut central government expenditures if necessary. The mission recommended meeting the fiscal target for the year without counting the expected recovery of bank deposits and guarantees, given the one-off nature of this transaction. Prime Minister Laar stated that he was committed to fiscal overperformance by the amount of the recovered deposits (SMEP, paragraph 8). This would imply aiming at a budget deficit of only 1 percent of GDP for 2000.

13. Consistent with program commitments, the government presented a balanced budget for 2001 to parliament in October (SMEP, paragraph 9). On the revenue side, the budget anticipates a significant reduction in the ratio of direct taxes to GDP on account of the completed phase-out of the corporate tax on retained profits and a 25 percent increase in the income threshold for the personal income tax. This is in line with the government’s long-term objective of lowering overall taxation, while reducing its reliance on direct taxes. Tax revenues will, however, benefit from the full-year impact of the introduction of the excise measures mentioned above and the VAT on heating fuel. The mission concurred that the revenue projections were appropriately cautious. It was agreed that any overperformance in revenue collection should lead to a budget surplus so as to strengthen the balance of payments position.

14. The restraint on nominal wages and the freeze on pensions have been maintained to complete the correction for the excessive increases awarded in 1999 (SMEP, paragraphs 9 and 10). Teachers’ salaries, however, will be increased by 15 percent and a bonus fund has been created within the envelope of the wage bill to reward government employees on the basis of performance. Overall, the wage bill is projected to increase by 4 percent in nominal terms. Starting in 2001, local governments will assume the responsibility for education expenditures; accordingly, the share of the personal income tax transferred to local governments will be increased by 10 percentage points to 66 percent. Notwithstanding the preparation for NATO accession, military expenditures will be contained to 1.8 percent of GDP in 2001, compared with 1.6 percent of GDP in 1999. Capital outlays on transportation and agriculture will increase in line with a near doubling of EU disbursements to ½ percent of GDP. The pension and medical insurance funds are both expected to produce a surplus in 2001. Overall, total government expenditures will remain broadly constant in real terms, while declining sharply relative to GDP.

15. The organic budget law was submitted to parliament in June 2000 and is expected to be approved by year-end (SMEP, paragraph 10). The law will increase the transparency of the fiscal accounts by consolidating extra-budgetary funds and foreign-financed capital expenditures in the budgetary process. It will also strengthen the control of the central government on all government entities, including local governments. The structure of local governments is also being reviewed with a view to reducing the number of administrative units and improving control over public expenditure. The current structure, with 247 municipalities, leads to excessive administrative costs and unnecessary replications of services. The government expects to complete the review early next year and develop an approach for restructuring by June 2001.

B. Financial and External Sector Issues

16. The relatively fast growth of the monetary aggregates is being closely scrutinized (SMEP, paragraph 11). The BoE stated that it had already taken recourse to moral suasion with key commercial banks and was carefully monitoring banks’ lending policies and risk management. However, the BoE also pointed out that the relatively high rates of growth in credit and broad money followed on a sharp slowdown in the growth of these aggregates during the recession in 1999, and that the financial deepening was linked to the stabilization gains made. Over the medium term, the growth of broad money was expected to become more closely aligned with the growth of nominal GDP. In this regard, the recent slowdown in the growth of base money was a welcome sign. The authorities indicated that they stand ready to act decisively should excessive credit growth threaten a weakening of the external accounts. As discussed in EBS/00/101, page 21, the decision to allow commercial banks to meet a portion of the reserve requirements with foreign assets as of January 1, 2001, is not expected to lead to a significant easing of monetary conditions.

17. The mission sought an explanation as to why banks have strived to remain highly liquid. The BoE and commercial bank officials suggested that this may to some extent reflect the preparation for expansion into neighboring countries, as part of the Baltic strategy of the banks’ corporate parents. Banks also take account of the fact that the BoE is not willing to act as lender of last resort (and could in any case do so only to a limited extent) and that banks’ access to capital markets can dry up, as was the case during the Asia crisis in 1997 and the. Russia crisis in late 1998. Banks also seek to avoid any need for recourse to their foreign owners in the event of a liquidity squeeze (although banks and rating agencies expect that such liquidity support would be forthcoming in the event of a crisis). Finally, an additional explanatory factor for the rapid growth of both banks’ foreign assets and liabilities is the fact that banks hedge their maturity and currency risks by redepositing non-kroon deposits (mainly U.S. dollar-denominated) received with highly rated banking institutions abroad, while borrowing longer term in euros to fund their lending in Estonia.

18. The authorities continue to remain vigilant against fragility in the financial system (SMEP, paragraph 14). Specifically, the authorities have already queried whether the high rate of growth of leasing transactions (which has recently played an important role in the expansion of the monetary aggregates) had been associated with a weakening of risk assessment and management by the (bank-owned) leasing companies. Supervisors underscored the need to enforce the same high risk monitoring standards for leasing as for lending operations.

19. The authorities judge that the external outlook remains favorable. Prime Minister Laar stressed that the structure of the Estonian economy has changed. Estonia now produces a wide range of goods and has, therefore, become less dependent on imports. Moreover, the fiscal adjustment had made an important contribution to the strengthening of the saving-investment balance. The economic upturn has, therefore, not led to a widening of the current account deficit. The authorities recognized the potential risk to the external balance from a possible slowdown in Estonia’s export markets at a time when domestic demand was recovering.

20. The authorities do not intend to raise tariffs or introduce new ones until Estonia is on the verge of EU accession. Estonia introduced in January 2000 import tariffs on agricultural products,5 primarily to demonstrate the administrative capacity for handling the EU’s tariff and trade system. The rest of the trade system continues to be free of any restrictions. On balance, Estonia’s trade system remains one of the most liberal.

C. Structural Reforms

21. Legislation to establish a second pillar of the pension system as of January 2002 will be submitted to parliament in December (SMEP, paragraph 15). The government’s draft proposal calls for the participation to be voluntary for current members of the workforce. However, the mandatory participation for new entrants in the workforce is still under debate. For participants, 4 percentage points of the 20 percent social security tax will go toward the fully funded second pillar, together with an additional contribution of 2 percentage points of their wage income. The latter is likely to increase national savings, but it would make participation in the second pillar somewhat less attractive. This would reduce the deficit in the first pillar and the transitional costs to the government budget.6 The mission urged the further reform of the first pillar, most notably by increasing the retirement age, in order to maintain the pension system financially viable.7

22. The government and the central bank have reached agreement to create a unified financial supervision agency. The agency is expected to become operational at end-2001. Consistent with earlier recommendations of the staff, it will have full operational and licensing independence and its work will reflect international best practices in financial supervision. In the meantime, a new securities market law will be submitted to parliament in December to strengthen the supervision of the stock market.

23. The privatization of the few remaining public enterprises continues as planned (SMEP, paragraph 17). The majority stake in the main railway company is expected to be sold before March 2001, and the government is currently considering the privatization of a portion of Eesti Energia. Linked to the completion of negotiations for the sale of the Narva power plants to a U.S. company in June 2000, the government has completed the upgrading of the energy inspectorate. The government plans to strengthen the agency further in the coming months by increasing staffing and seeking EU and World Bank technical assistance.

24. The government is completing an overhaul of labor market legislation. The new legislation will include measures to target training programs to the needs of local labor markets, increase regional mobility, and improve the effectiveness of employment offices. A labor force development plan has also been drawn up to tackle the problem of long-term unemployment by providing incentives for retraining or early retirement. There was concern that the EU accession process may lead to a reduction of the flexibility of the labor market, and the mission agreed that labor market issues should figure prominently in the next Article IV discussions.

D. Program Monitoring

25. The remainder of the program period will be monitored through quarterly performance criteria for end-March and end-June 2001, as specified in the attached SMEP (Paragraph 18 andTable 1). The limit on the cumulative government deficit has been set in line with the target of a balanced budget for the year, but takes account of the fact that the first half of the year is normally characterized by weaker revenue performance. The floor on NIR and the debt ceilings will remain unchanged compared to the end-2000 targets, except for the ceiling on the contracting of long-term debt, which has been raised by US$50 million in order to accommodate possible new project loans from multilateral institutions. The high quality and timeliness of data permits effective program monitoring.8

IV. Staff Appraisal

26. The fast economic recovery despite a strong fiscal correction testifies to the success of the authorities’ determined macroeconomic and structural policies. Confidence in the currency board remains high, external debt, debt service and the current account deficit remain moderate, the banking system has strengthened, and unemployment has started to decline. Preparation for EU accession is well advanced.

27. The authorities are to be commended for adhering to their ambitious fiscal targets for 2000 and 2001. The commitment to overperform vis-à-vis the budgetary targets at end-December 2000 to the extent of recovered deposits from an earlier bank failure is laudable, as is the intention to compensate for any overspending by local authorities. This will ensure the withdrawal of fiscal stimulus at a time when export growth and private sector demand are leading the recovery. The revenue estimates for 2001 are appropriately cautious, and the continuation of the wage and pension freeze is necessary in order to complete the correction of the excessive increases granted in 1999. The budget for 2001 will decisively reduce the share of government in the economy. The authorities are rightly committed to achieving a fiscal surplus next year should revenue growth exceed expectations, so as to protect the balance of payments. The authorities are encouraged to implement the new organic budget law as early as practical.

28. The careful crafting of legislation to establish a second pillar of the pension system is appropriate and the brief delay in submitting this legislation inconsequential. The higher contribution rate required for participants in the second pillar would alleviate a portion of the transitional costs to the budget and could increase national savings. The authorities need now to strengthen the first pillar, including by raising the retirement age, in order to maintain the financial viability of the pension system. The review of the structure of local administration is a welcome step, as it is likely to lead to a more effective control of public expenditures.

29. The continued high confidence in the currency board and the strengthening of the banking system bode well for the stability of the financial system. The authorities need to remain vigilant against a recurrence of excessive credit growth and, if necessary, act decisively. The authorities are to be commended for reaching an agreement on creating a unified financial supervision agency. Non-banking supervision will need to be strengthened further and the authorities will need to ensure that adequate resources are made available to the relevant institutions. In this context, the draft securities market law should be implemented as soon as feasible.

30. Reducing unemployment remains appropriately one of key priorities for the government. The overhaul of the labor market legislation is a welcome step, which aims at reducing both frictional and structural unemployment. However, the authorities need to guard against reforms that may reduce the flexibility of the labor market or increase the non-wage costs to employers.

31. The authorities’ intention to publish this staff report together with the SMEP is commendable. Estonia is a subscriber to the SDDS and the quality and frequency of data provided, including on websites, is high and fully meets the requirements for surveillance and program monitoring.

32. Staff recommends completion of the second review.

V. Proposed Decision

The following draft decision is proposed for adoption by the Executive Board:

1. The Government of the Republic of Estonia has consulted with the Fund in accordance with paragraph 3(d) of the Stand-By Arrangement for the Republic of Estonia (EBS/00/18, Sup. 2, 6/2/00) and the second paragraph of the letter dated February 11, 2000 from the Prime Minister and the Governor of the Bank of Estonia.

2. The letter dated November 24, 2000 from the Prime Minister and the Acting Governor of the Bank of Estonia shall be attached to the Stand-By Arrangement for the Republic of Estonia, and the letter dated February 11, 2000, as supplemented, from the Prime Minister and the Governor of the Bank of Estonia shall be read as supplemented by the letter dated November 24, 2000 from the Prime Minister and the Acting Governor of the Bank of Estonia.

3. Accordingly, the performance criteria for March 31, 2001 and June 30, 2001 as set forth in paragraph 3(a) of the Stand-By Arrangement for the Republic of Estonia shall be provided in Table 1 to the letter dated November 24, 2000.

4. The Fund decides that the second review contemplated in paragraph 3(d) of the Stand-By Arrangement for the Republic of Estonia is completed.

Table 2.

Estonia: Selected Macroeconomic Indicators, 1997-20011/

(In units as indicated)

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Sources: Estonian authorities, and Fund staff estimates and projections.

Projections exclude the impact of the Narva power plant investment program which could start in late 2001.

Effective 1998, a new CPI index is used that is based on 1997 weights.

Excludes any impact of the planned pension system reform, which is unlikely to come into effect before 2002.

Includes net lending.

Gross international reserves (and thus base money) at end-1999 were inflated by banks shifting resources from accounts abroad to the Bank of Estonia to enhance domestic liquidity in anticipation of Y2K.-related problems. These positions were largely reversed in early 2000.

Includes use of Fund credit and trade credits.

Net of deposits held abroad by the general government and commercial banks.

Includes government-guaranteed debt and Fund credit under the Systemic Transformation Facility (which was on-lent by the Government to commercial banks).

Government assets held abroad include the Stabilization Reserve Fund (SRF).

The Estonian kroon has been pegged to the deutsche mark at EEK 8=DM 1 since June 20, 1992.

The exchange rate in the 2000 column reflects the rate at end-September 2000.

Table 3.

Estonia Summary of General Government Operations, 1997-2001

(In millions of EEK)

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Sources: Data provided by the Estonian authorities, and Fund staff estimates and projections.

Starting from 2000, includes revenue from the taxation of dividends and fringe benefits (the latter was introduced as of January 1, 2000). Prior to 2000, revenue from the taxation of dividends was shown under the corporate profits tax.

For 2000, includes spending agencies own revenue.

For 2000, includes outlays financed from spending agencies own resources.

Wages and salaries of a number of budgetary institutions are included under “other goods and services”.

For 2000, excludes the recovery of expected deposits from a bank failure in 1998.

Used for financing the general government deficit.

Table 4.

Estonia: Summary of General Government Operations, 1997-2001

(In percent of GDP)

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Sources: Data provided by the Estonian authorities, and Fund staff estimates and projections.

Starting from 2000, includes revenue from the taxation of dividends and fringe benefits (the latter was introduced as of January 1, 2000). Prior to 2000, revenue from the taxation of dividends was shown under the corporate profits tax.

For 2000, includes spending agencies own revenue.

For 2000, includes outlays financed from spending agencies own resources.

Wages and salaries of a number of budgetary institutions are included under “other goods and services”.

For 2000, excludes the recovery of expected deposits from a bank failure in 1998.

Used for financing the general government deficit.

Table 5.

Estonia: Banking Survey and Monetary Authorities: 1997-2000

(In millions of EEK)

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Sources: Data provided by the Estonian authorities, and Fund staff estimates and projections.

The authorities revised the data on deposit money banks’ foreign liabilities in December 1998 by including substantial amounts of bonds issued in foreign liabilities that had hitherto been included in other items (net).

Excludes foreign assets of the Stabilization Reserve Fund

The Bank of Estonia’s foreign assets rose sharply in December 1999 as commercial banks shifted funds into their accounts with the Bank of Estonia to enhance domestic liquidity in anticipation of Y2K problems. This was reversed in the first quarter of 2000.

Excludes foreign assets of the central government’s Stabilization Reserve Fund.

Currency board cover is equivalent to base money (e.g., the sum of currency issue plus the kroon liabilities of the Bank of Estonia in its correspondent accounts).

Requirement to be met on the basis of daily average of deposits over month. Up to June 2000, it includes a liquidity requirement equivalent to 3 percent of the reserve requirement base (imposed since December 1997). After June 2000, the liquidity requirement was incorporated into the reserve requirement

Net of currency board cover (program definition).

Including balances in the Stabilization Reserve Fund (SRF).

Table 6.

Estonia: Summary Balance of Payments 1997-2001

(In millions of DM)

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Sources: Bank of Estonia, and Fund staff estimates and projections.

The revised projections for 2001 and beyond do not include imports of capital equipment and FDI inflows associated with the privatization of the electricity comp and the railroads. Preliminary estimates suggest that if these projects proceed on a relatively ambitious timetable, the current account deficit could widen by as mu as 1 percent and 2 percent of GDP in 2001 and 2002, respectively. Outer years would be less affected.

Projections for 2001 do not take into account the impact on capital flows of the pension reform now under discussion.

The large flows in 1998 were associated with the purchase by Swedish banks of substantial interests in the two largest Estonian banks (Hansapank and Uhispank).

Includes operations in debt securities.

Excludes Government deposits held abroad (including in the SRF).

Changes in gross international reserves may differ from flows implied by overall balance of payments due to valuation changes, etc.

Gross international reserves at end-1999 were inflated by banks shifting resources from accounts abroad to the Bank of Estonia to enhance domestic liquidity in anticipation of Y2K-related problems.

Includes trade credits.

Short term debt is defined on the basis of original maturity.

Net of Government deposits held abroad and foreign assets of commercial banks.

Includes government guaranteed debt.

ANNEX I

Table 1.

Estonia: Quantitative Performance Criteria under the Program, September 30, 20001/

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Definitions of the concepts were set out in the Annex to the Memorandum of Economic Policies (EBS/00/18).

The targets for net international reserves at end-September 2000 was adjusted for the net proceeds of the sale of Optivabank, as specified in EBS/00/18.

ANNEX II

Table 2.

Estonia: Structural Performance Criterion and Benchmarks, September 30, 2000

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