IMF gives an 'A' for effort

TALLINN - A team from the International Monetary Fund (IMF), led by Christoph Rosenberg, visited Tallinn from March 23 - 29 to review jointly with the authorities the economic situation and assess policies, especially in the fiscal area. The mission met with President Toomas Hendrik Ilves, Prime Minister Andrus Ansip, Finance Minister Jurgen Ligi, Eesti Pank Governor Andres Lipstok, other senior officials and market participants. 

“The Estonian economy is emerging from a severe recession. After a cumulative output decline of almost 20 percent in 2008-09, we project the resumption of modest growth in 2010. Domestic demand will, however, remain weak for some time. Medium-term growth prospects will therefore depend on the economy’s ability to reorient towards exportables and on developments in Estonia’s trading partners. Inflation is expected to remain subdued and the current account in surplus for several years,” said Rosenberg.

“Estonia’s currency board arrangement has withstood the pressures from the global financial crisis remarkably well, due to swift and determined action by both the public and private sector. The economy’s demonstrated flexibility bodes well for its continued ability to adjust to shocks once Estonia has joined the euro zone, which is targeted for 2011,” explained Rosenberg.

According to Rosenberg, thanks to an extraordinary effort at all levels of government, especially in the last months of the year, the 2009 fiscal deficit was contained well below the Maastricht limit. Some of this adjustment was achieved by one-off revenue measures and potentially reversible expenditure cuts. “We nevertheless expect that this year’s budget deficit, while higher than in 2009, can be kept below 3 percent of GDP, provided that strict expenditure restraint is maintained and the economy’s gradual rebound proceeds as expected.”

Rosenberg considers that one important task going forward is to secure fiscal sustainability against the background of an erosion of the tax base and spending pressures arising from structural unemployment and aging. “The planned increase of the retirement age is a welcome step. But additional efforts will likely be required to keep the fiscal deficit below 3 percent of GDP in 2011 and beyond, let alone achieve a balanced budget by 2013, as targeted in the convergence program. Possible measures include a broadening of the tax base, structural reforms in education and health, and restructuring of local governments. Due to implementation lags and risks to the outlook, these reforms should be implemented sooner rather than later.”

He added that good fiscal performance, which in recent years has been supported by the widely shared desire to join the euro, cannot be taken for granted. This suggests a strengthening of fiscal institutions, including a more transparent and binding medium-term budget framework and formalizing appropriate fiscal rules.