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IMF Country Report No. 17/9
REPUBLIC OF ESTONIA
2016 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE REPUBLIC OF ESTONIA
January 2017
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the [Consultation Year] Article IV consultation with the Republic of Estonia, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its January 9, 2017 consideration of the staff report that concluded the Article IV consultation with the Republic of Estonia.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on January 9, 2017, following discussions that ended on December 5, 2016, with the officials of the Republic of Estonia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on December 21, 2016.
An Informational Annex prepared by the IMF staff.
A Statement by the Executive Director for the Republic of Estonia.
The documents listed below have been or will be separately released.
Selected Issues
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2017 International Monetary Fund
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REPUBLIC OF ESTONIA
STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION
December 21, 2016
Despite solid fundamentals, strong institutions, and a history of impressive output growth, Estonia’s more recent growth and productivity performance has disappointed, and wage rises are putting competitiveness at risk. Growth is projected at 1.3 and 2.3 percent for this year and next. If competitiveness is maintained and policies to boost innovation and labor supply bear fruit, it could reach some 3 percent in the medium term.
Key Issues
Effectively addressing low productivity growth and risks to competitiveness requires a three-pronged approach: (i) making growth promotion more effective through oversight of programs by a dedicated productivity unit in the Prime Ministry, better calibrating programs to company’s needs, incentivizing take-up, and scaling-up selected programs; (ii) re-anchoring wage developments in fundamentals by moderating government and minimum wage policies and mobilizing additional labor resources for the private sector, including through faster reduction of government employment; and (iii) social security contribution cuts to provide relief from pressures on profitability.
Fiscal policy has primarily been stability oriented, but should do more to strengthen the economy’s supply side while preserving Estonia’s strong fiscal institutions. Demand stimulus is not necessary, but Estonia’s extraordinarily strong public finances should be utilized to finance the three-pronged approach to boosting productivity detailed above.
Estonia’s financial sector is sound, though subject to spillover risks from Nordic parent banks. High capitalization and ample liquidity are formidable lines of defense. Cross-border crisis preparedness and management should be further strengthened in a revamped Nordic-Baltic Stability Group.
Approved By
P. Gerson and V. Kramarenko
Discussions on the 2016 Article IV consultation mission were held in Tallinn during October 13–24 and were followed up with video conferences after the change of government in late November. The Estonia team conferred with the team of Prime Minister Ratas, former Prime Minister Rõivas, Finance Minister Sester, Bank of Estonia Governor Hansson, and other senior officials, as well as the Parliamentary Finance Committee, labor and employer organizations, private sector representatives, and non-governmental think tanks. A conference call was held with banking supervisors at the ECB on October 17. The team comprised Mr. Klingen (head), Messrs. Abdoun, Tudyka (both EUR), and Mr. Stanger (STA). Ms. Anni (OED) participated in the meetings.
Contents
CONTEXT AND OUTLOOK
A. Context and Recent Developments
B. Outlook and Risks
POLICY DISCUSSIONS
A. Securing Sustainable Income Convergence and Safeguarding Competitiveness
B. Putting Fiscal Policy at Fuller Service to the Economy
C. Further Bolstering Financial Sector Resilience
STAFF APPRAISAL
BOXES
1. External Stability Assessment
2. Characteristics of Productivity Growth at the Firm Level
3. Developments of Unit Labor Costs and Implications for Competitivenes
FIGURES
1. Real Sector Developments, 2009–16
2. External Developments, 2004–15
3. External Competitiveness, 2008–16
4. Fiscal Developments and Structure, 2003–15
5. Financial Sector Developments
6. Public Sector Debt Sustainability Analysis (DSA)–Baseline Scenario
7. Public Sector DSA–Composition of Public Debt and Alternative Scenarios
TABLES
1. Selected Macroeconomic and Social Indicators, 2013–18
2. Summary of General Government Operations, 2012–18
3. General Government Financial Assets and Liabilities, 2010–2016:Q2
4. Summary Balance of Payments, 2010–18
5. Macroeconomic Framework, 2010–21
6. Indicators of External Vulnerability, 2010–5
7. Households, Financial Assets and Liabilities, 2010–15
8. Financial Soundness Indicators, 2009–2016Q2
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REPUBLIC OF ESTONIA
STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX
December 21, 2016
Prepared By
European Department
Contents
FUND RELATIONS
STATISTICAL ISSUES
Front Matter Page
Press Release No. 17/10
FOR IMMEDIATE RELEASE
January 13, 2017
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