The International Monetary Fund (IMF) warned in its concluding statement of its economic policy discussions in Estonia that Estonia’s public debt will be on an unsustainable trajectory under current policies. Eesti Pank agrees with the assessment of the IMF and considers that the solution would be a cross-party agreement in Estonia like those in Sweden and Finland to keep the public finances on a sustainable track.

Governor of Eesti Pank Ülo Kaasik said the assessment of the IMF largely agrees with the position of the central bank. “The state of the public finances unfortunately means that Estonia needs to take a longer view and find solutions that last longer than one electoral cycle. Having a large debt is not an abstract problem because it makes future borrowing more expensive for the state and for the private sector. The debt growing rapidly means that interest payments get bigger and bigger each year, which makes the state less able to provide public services”, he said.

Eesti Pank proposed to the Riigikogu in May that it should consider introducing a debt brake, and underlined that the state spent 28 million euros on interest payments in 2022 but that amount could increase to around 650 million a year by 2030. That money would be enough to finance three larger universities, or the whole domestic security and emergency apparatus from the Rescue Services Agency to the Police and Border Guard Board.

Ülo Kaasik also noted that having a large debt leaves Estonia more exposed. “As a small and open country we must be aware that the next crisis could arrive very quickly from an unexpected direction. If public finances are in order and our debt is not too large, the state will have more room for manoeuvre to support households and businesses in Estonia and carry out its main tasks. Keeping the debt small is an issue of national security”, he said.

The IMF finds that the Estonian economy is recovering after a challenging recession, but that an economic recovery will not on its own solve Estonia’s long-term problems. The Estonian economy has lower growth potential than before, and achieving more sustainable growth will require increased productivity, improved access for businesses to capital and qualified labour, support for a stable energy policy, and encouragement for investment, innovation and export diversification.

The IMF considers that Estonia faces difficult choices in its public finances. Increasing spending on defence is an understandable and necessary move in the current security climate, but does not alter the fact that revenues and expenditures should be better aligned over the longer term. Estonian public debt remains moderate in international comparison, but its rapid growth is a cause for concern. The state debt was around 2.5 billion euros in 2019 but had grown to 10 billion by 2025 and could exceed 20 billion by 2030.

Inflation has fallen in Estonia, but still remains above the average in the euro area, having been affected by earlier tax rises and the fluctuations in the price of energy. The purchasing power of households is better this year than it was last year, but sustained growth in it requires the economy to be more productive and more competitive.

The IMF observed that the banking sector as a whole in Estonia is strong and that the risks to the financial sector are limited. Households and companies have generally coped well with higher interest rates and the share of problem loans has remained small. This has been helped by the relatively good position of the labour market, the financial buffers built up earlier, and the strong capitalisation of the banks.

The IMF delegation was in Estonia from 27 May to 9 June for the annual economic policy consultation. The mission discussed the condition of the Estonian economy and economic policy measures with the public and private sectors.

Eesti Pank proposed to the Riigikogu in May that the political parties should reach a consensus on keeping the public finances on a sustainable track. Such an agreement should not describe the tax policies or spending priorities of one or another political party, but it could express the shared understanding of all the parties in the parliament that the Estonian public debt must be kept at a reasonable level. The proposal is explained in more detail in Estonian on the Eesti Pank website.

The concluding statement of the IMF visit

Additional information:
Viljar Rääsk
Head of Communications
Eesti Pank
6680 745, 5275 055
Email: [email protected]
Press enquiries: [email protected]