Governor of Eesti Pank Madis Müller told the Riigikogu in his speech on Thursday that the economy has come through the pandemic crisis better than feared and that it is already recovering to its path of growth of before the crisis. Mr Müller said that it was quite justified to support the economy during the crisis, but in the exit from the crisis it is not wise to delay the return of the state finances to a sustainable path, as the revenues and expenses of the state remain at present out of balance looking forward.

“State support for people and businesses who would otherwise have lost their incomes has clearly been very important during the crisis. Under the circumstances it was reasonable for the government to take a loan to support the economy”, he said. “The Estonian economy is already recovering this year though, and so it is the right time to start to think about how state spending can be brought back more in line with revenues. To sustain the country as the economy recovers without increasing the debt constantly could be the goal that frames the other choices in Estonian state finances”.

Mr Müller noted that the gap remains large between the state’s revenues and expenses in the state budget strategy even after the crisis, and achieving balance has not been set as a goal even for 2025. This is not sustainable. “Living beyond our means is unfortunately not possible for a long time”, he warned, and especially as this will not be the last crisis. “We will need buffers again for the next crisis”.

He noted that a possible point of danger for the Estonian economy is the reviving real estate market. It is the job of the central bank to guard against events in the market that could lead debt burdens to grow too fast. This means that the active use of state support for house purchases should be reviewed so that it helps people who really need help. “It is certainly worth helping young families to buy their first house, and guarantees may be needed for loans taken to buy a house in rural areas”, said Mr Müller. “The question is primarily about adjusting the criteria for the guarantees”.

In his comments on the risks to the financial sector, Mr Müller pointed to the companies that are still not properly regulated or under state supervision, such as those dealing in virtual currencies, and savings and loan associations. He expressed the hope that draft laws setting a clearer framework for both of these areas would soon reach the floor of the Riigikogu.

He noted that the data for the first quarter indicate a strong improvement in the outlook for the Estonian economy. GDP is already larger than it was in the fourth quarter of 2019 before the crisis and is also larger than was forecast before the crisis. In March the central bank forecast economic growth of 2.7% in the Estonian economy this year. “Eesti Pank will publish a new forecast later this month, and it will be more optimistic than before”, said Mr Müller. Inflation will be relatively moderate in Estonia this year and will fall again once the economy has recovered.

Speech in English to be published in due course

For further information:
Viljar Rääsk
Head of Communications
Eesti Pank