Copyright Page
IMF Country Report No. 24/178
REPUBLIC OF ESTONIA
SELECTED ISSUES
June 2024
This paper on the Republic of Estonia was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the Republic of Estonia. It is based on the information available at the time it was completed on May 23, 2024.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
PO Box 92780 • Washington, D.C. 20090
Telephone: (202) 623–7430 • Fax: (202) 623–7201
E-mail: publications(g>imf.org Web: http://www.imf.org
International Monetary Fund
Washington, D.C.
© 2024 International Monetary Fund
Title page
REPUBLIC OF ESTONIA
SELECTED ISSUES
May 23, 2024
Approved By
European Department
Prepared By Carlos de Resende, Gianluigi Ferrucci, Bingjie Hu, Sadhna Naik, and Can Ugur
Contents
WHAT EXPLAINS ESTONIA’S RECENT LOSSES OF EXPORT MARKET SHARES
A. Introduction
B. The Decline in Estonia’s Export Market Share
C. Methodology
D. CSA Decomposition: Estonia
E. CSA Decomposition: Comparison Across the Baltics
F. Sector Contributions to Export Performance
G. The Services Export Share
H. Conclusions
FIGURES
1. Export Market Share and Growth of Estonia’s Top Export Markets
2. ULC and HICP-based Real Effective Exchange Rate
3. Country Contribution to Export Share Decline and Main Export Destinations
4. CSA Decomposition
5. Contribution to Estonia’s Export Share Decline
6. CSA: Baltics Comparison
7. CSA: Decomposition of Change in Export Market Shares in the Baltics
8. CSA: By Products
9. Current Account Balance and Economic Structure
10. Export Performance in Services
ANNEX
I. Additional Results
References
TFP GROWTH, THE BALASSA-SAMUELSON HYPOTHESIS, AND COMPETITIVENESS IN THE BALTICS
A. Introduction
B. Methodology
C. Results
D. Conclusions
FIGURES
1. Estimates of TFP
2. Estimates of Structural TFP
3. GDP
4. Decomposition of Actual and Potential GDP Growth
5. REER and TFP-Based REER
6. Contributions to GDP Growth in the Baltics
7. Contribution to GDP Growth in the Baltics, 1995–2023
8. Actual and TFP-Based REER in the Baltics, 1995–2023
9. REER Gaps in the Baltics
TABLES
1. Johansen Cointegration Tests
2. Cointegration Between REER and TFP
3. Changes in GDP Growth Rates Between 1995–2008 and 2020–2023Q2
4. Decomposition of GDP Growth
References
THE ROLE OF ALLOCATIVE EFFICIENCY IN PRODUCTIVITY GROWTH
A. Introduction
B. Methodology: How We Derive Allocative Efficiency
C. Decomposition of TFP Growth
C. Allocative Efficiency in Estonia
D. Allocative Efficiency and Structural Policies
FIGURES
1. Allocative Efficiency Has Worsened in the Baltics in General
2. Allocative Inefficiency Has Dragged TFP Growth in the Baltics
3. Allocative Efficiency Improved After the GFC with Limited Recovery
4. Within-Sector Allocative Efficiency Is More Important than the Shift Across Sectors
5. Productivity Loss Due to Allocative Inefficiency Is Worse for Services than Goods
6. Variance of Marginal Revenue Product of Capital Has Increased in Recent Years
7. Dispersion in Productivity Increased Over Time
8. Dispersion of Productivity Increased in Mining and Real Estate in Estonia
9. Less Regulation in the Product Market Is Related to Better Allocative Efficiency
10. Financial Market Liberalization Is Associated with Better Allocative Efficiency
11. Labor Market Liberalization Is Related to Better Allocative Efficiency
References
BENCHMARKING ESTONIA’S PUBLIC FINANCES -A PRIMER
A. Introduction
B. Expenditures
C. Revenues
D. Conclusions
FIGURES
1. Government Expenditures, 1995–2023
2. Government Expenditures, 2001–2023
3. Government Expenditures, 2015–2023
4. Government Expenditures by Economic Transaction, 2001–2023
5. Government Expenditures by Economic Transaction, 1995–2023
6. Change in Government Spending Over 2011–2023
7. Government Expenditure Differential with Nordics and Euro Area
8. Government Expenditure by Function, 2001–2022
9. Government Expenditures by Economic Transaction, 1995–2022
10. General Government Revenues, 2001–2023
11. Government Revenues, 1995–2023
12. Actual and Counterfactual Total Revenues, 2000–2022
13. Tax Revenues, 1995–2022
14. Tax Revenues, 2022
15. Revenues from CIT and Property Taxes, 2001–2022
References
ESTONIAN BANKS: CAPITALIZATION, PROFITABILITY, AND REGULATORY IMPLICATIONS
A. Background
B. Recent Developments
C. Capital Adequacy
D. Heterogeneity of Capital Levels Across Banks
E. Risk Weights on Mortgage and Corporate Lending at IRB Banks: A Counterfactual Analysis
F. Taxation of Extra Profits
G. Conclusions and Recommendations
FIGURES
1. Bank Assets to GDP Ratio and Market Share by Assets
2. Balance Sheet Structure and Macroprudential Measures Currently in Effect
3. Key Performance Indicators of Estonian Banks
4. Bank Lending Developments
5. Asset Quality and Return on Equity
6. Bank Capital Adequacy
7. Estimated Share of Banking Book under Standardized and IRB Approach
8. Counterfactual CAR
References
POLICIES TO TACKLE CLIMATE CHANGE IN ESTONIA
A. Background
B. Mitigation Policies
C. Sectoral Policies
D. Physical Risk and Adaptation Policies
E. Conclusions
FIGURES
1. Reported Emissions and Kaya Decomposition
2. Total Energy Supply and Emission Intensities
3. Emissions Forecast
4. Carbon Pricing Coverage of EU ETS and Effective Carbon Price
5. Fossil Fuel Subsidies
6. Renewable Energy
7. Environmental Taxes
8. Sectoral Policies
9. Temperature Anomalies and Damages from Extreme Weather Events
10. IMF-Adapted ND-GAIN
References