TALLINN - The governor of the central bank was quick to put a positive spin on the latest report by the International Monetary Fund despite criticism of the bloated current account deficit and surge in consumer-based lending.
"The IMF's assessment of the Estonian economy is favorable, stressing at the same time the need to carry on the previous economic policy," Bank of Estonia President Vahur Kraft said on Nov. 11.
"It is obvious that the state's economic policy must keep in mind Estonia's membership in ERM II and the eventual transition to the euro, for which the country must, according to the position of the Bank of Estonia and the government, be technically ready by mid-2006," Kraft stressed.
The IMF's report on economic policy consultations with Estonia noted the high current account deficit, called on authorities to maintain a fiscal surplus and urged to curb lending growth. The Washington-based fund also noted that the widening of the external current account deficit to 13.2 percent of gross domestic product in 2003 was partly due to one-off investments related to energy and transportation and did not worsen the country's competitiveness as Estonian exports increased. Furthermore, a large part of the deficit has been financed by foreign direct investment inflows, the fund noted.
IMF also stated in its report that Estonia has been among the fastest growing of the EU's accession countries. Per capita GDP has almost doubled since 1993 and reached around 45 percent of the EU average in 2003 in purchasing power parity terms, the bank wrote.
Nevertheless, most IMF directors agreed with the opinion that the continuing high current account deficits are a potential cause of concern and may not be sustainable over the medium term. The fund underlined the importance of maintaining a prudent fiscal policy stance in order to avoid exacerbating the current account imbalance and to minimize the risks under ERM II, which Estonia must join for two years before adopting the euro.
"The state budget plays an important role in securing economic equilibrium, which helps maintain Estonia's reliability," the president of the central bank said.
Fiscal policy plays the dominant role in restraining domestic demand and curbing inflationary pressures, and Estonia's currency board arrangement, which has served the country well, is a viable strategy in the run-up to euro adoption, the IMF said.
The report was drawn up on the basis of consultations that an IMF mission held in Estonia this past summer. The board of directors discussed the report on Nov. 8.