This 2008 Article IV Consultation highlights that the economy of Estonia is now experiencing its most severe recession since the early 1990s. The financial sector has withstood the global financial turbulence well so far, but risks remain significant. Executive Directors have commended the Estonian authorities for the progress made in recent years in achieving economic convergence and deepening real and financial ties with the European Union. Directors have also commended the authorities for their planned substantial fiscal restraint in 2009.

Abstract

This 2008 Article IV Consultation highlights that the economy of Estonia is now experiencing its most severe recession since the early 1990s. The financial sector has withstood the global financial turbulence well so far, but risks remain significant. Executive Directors have commended the Estonian authorities for the progress made in recent years in achieving economic convergence and deepening real and financial ties with the European Union. Directors have also commended the authorities for their planned substantial fiscal restraint in 2009.

March 2, 2009

1. This statement reports on data releases and policy measures since the staff report was issued. The additional information does not change the thrust of the staff appraisal.

2. Preliminary data suggest that GDP fell sharply in the last quarter of 2008. Industrial production plummeted, and the decline in retail sales accelerated. A flash estimate puts real GDP growth at -9.4 percent year-on-year for the 4th quarter (-4.2 percent quarter-on-quarter, seasonally adjusted). These figures would imply that the economy contracted by 3.6 percent in 2008 instead of the 2.4 percent reported in the staff report). Carry-over effects would bring GDP growth to -6.2 percent in 2009 instead of the -4 percent in the staff report. This would produce a larger reduction in inflation and external current account deficit than in the staff report’s baseline scenario, but it would also bring a greater deterioration in the performance of bank loans.

3. The parliament has approved a supplementary budget for 2009 which further tightens the fiscal stance. The main measures are cuts in operational expenses (including the wage bill) in all ministries and a slowing of the pace of pension increases. The authorities estimate that these and other measures will reduce expenditure by about 3¼ percent of GDP which, under a 6.2 percent economic contraction, would reduce the general government deficit to about 1 percent of GDP. Their objective is to ensure the deficit would not exceed the Maastricht limit even if GDP falls as much as 8 percent in 2009.

Republic of Estonia: Selected Economic Indicators

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Sources: Estonian authorities, and Fund staff estimates.
Republic of Estonia: 2008 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Estonia
Author: International Monetary Fund