TALLINN - The International Monetary Fund has said that Estonia should consider "all options" to continue slashing its budget in order to reduce the country's deficit.
A team from the IMF led by Christoph Rosenberg, Senior Regional Representative for Central Europe and the Baltics, spent a week in the country assessing the current economic situation and reviewing the economic policies of the ruling coalition government.
Rosenberg said Estonia had been "severely affected" by the crisis, but that the country should still make every effort to bring its budget deficit below the 3 percent mark outlined by the Maastricht criteria 's the requirements needed for a country to adopt the euro.
"The authorities' deficit target of below 3 percent of GDP appears appropriate. This reflects both the size of remaining fiscal buffers and uncertainty about future financing possibilities given present financial market conditions. It will also help Estonia to qualify for speedy euro adoption'sa goal to which the authorities rightly attach high priority," the IMF representative said.
He went on to say that though the goal was important, it would be difficult to achieve and the country would need to consider "all options" to make it work.
"Reducing the deficit to such a level already in 2009-10, however, will be very challenging against the backdrop of the unprecedented economic downturn. Given the uncertain outlook, all options'son both the revenue and the expenditure side'sshould be considered," he said.
Rosenberg highlighted the depth of the crisis facing Estonia.
"Like other countries in the region, Estonia has been severely affected by the world financial crisis. We presently project output to contract by 13 percent this year and that the recovery will not start until late 2010 at the earliest, depending in part on global developments," he said.
The IMF representative added that it was likely growth rates in the country would never reach those seen in the years following accession into the EU, and that the Estonian government would thus need to undergo "a fundamental rebalancing of fiscal expenditures and revenues."
Compared with Latvia and Lithuania, whose economies are in worse shape, Estonia compiled budgets with surplus revenues during the recent years of stellar growth. These built up reserves mean it would be unlikely that the country would have to turn to the IMF for a loan.
"It is hard to conceive that (Estonia) would need to turn to the IMF," Rosenberg said. "Estonia has built up buffers that are quite substantial. There are many safeguards."
POSITIVE NOTE
Despite the difficult forecasts and the need for further drastic cuts to the budget, Rosenberg said there were a number of positive aspects about the Estonian economy.
"Imbalances built up in the boom years are corrected quickly, with the external current account deficit expected to largely close and inflation to move below the Maastricht level already this year. The drop in nominal wages after the very strong growth over the past years, while painful, will bolster Estonia's competitiveness and is a testament to the economy's flexibility and commitment to its currency peg."
"The financial system, operating in the environment of Estonia's successful currency board arrangement, has proven resilient to the deterioration of global funding conditions. Banks can look to large liquidity buffers, recently enhanced by the precautionary swap arrangement between Eesti Pank and the Swedish Riksbank.
"The close integration with Nordic parents, which have maintained their exposure throughout the crisis, proves to be a strength for both the financial and corporate sector. Nevertheless, in this uncertain environment financial flows and capital adequacy need to be monitored closely," Rosenberg said.
