Abstract
Estonia’s commitment to free markets and prudent financial policies has paid off handsomely. Demand pressures and rapid productivity growth have produced strong wage increases and large employment gains. Inflation, while moderate for a fast-converging economy, remains above the Maastricht threshold, and has been pushed up in recent months by rises in nontraded goods prices. Estonia’s economic growth has supported—and been supported by—rapid credit growth, financed increasingly by resource transfers from Nordic banking groups to Estonian affiliates. The macroeconomic impact of EU funds is needed.
This statement reports on data and official projections released subsequent to the finalization of the Staff Report. These developments underscore but do not change the thrust of the staff appraisal.
1. On November 8, the Bank of Estonia (BOE) published a revised economic forecast for 2006–08. The BOE’s growth forecast for 2006 has been revised up to 11.8 percent, well above the staff’s projection of 10 percent. The revision reflects more recent data on production and a more optimistic view of prospects for employment growth. For the following two years, BOE’s growth projections are similar to staff’s. BOE’s new inflation projection is somewhat lower than staff’s projection for 2006 because it incorporates the recent decline in fuel prices, but slightly higher than staff’s projection in the outer years.
2. A flash estimate of third quarter balance of payments, released on November 13, shows a weakening of the current account relative to the previous two quarters and to staff projections. The third quarter current account deficit is estimated at 16 percent of projected third quarter GDP, bringing the current account ratio for the first three quarters to 14 percent. The deterioration appears to reflect mainly a sharp drop in export growth, only partly offset by a decline in import growth. While an explanation must await more detailed data, it is likely that the deficit for the year will be wider than the 12.5 percent of GDP projected by the staff and the central bank.