The IMF recommends that Estonia start reducing its budget deficit already this year



Estonia should start reducing the state budget deficit already this year in order to slow down inflation and maintain long-term competitiveness, stated the IMF in its staff concluding statement of the 2023 article IV mission.

The IMF’s conclusion is that Estonia has made remarkable progress over the past two decades, but signs of potential pressures on competitiveness have emerged. An overly lenient fiscal policy may step up price pressures and further undermine Estonia’s competitive position. Thus, the IMF recommends considering a much less stimulative fiscal policy that would narrow the gap between budget revenues and expenditures.

According to the IMF, various options should be explored to reduce the budget deficit in 2023, including curbing public sector wage growth and moving forward with some planned tax increases. A neutral fiscal stance would contribute to reducing the risk of inflation being entrenched and the resulting threat to long-term competitiveness.

„Similarly to the IMF, Eesti Pank is also concerned that the government expenditures significantly exceed revenues. I agree with the view that a large fiscal deficit will add momentum to the already rapid rise in prices. This, in turn, may lead to wage pressures and erode our economy’s competitiveness. Therefore, it is important that Estonia’s fiscal policy be geared towards restraining inflation,“ said Governor of Eesti Pank Madis Müller after discussions with the IMF’s mission.  

The IMF estimates that Estonia’s economy will decline by 1.2% this year, with inflation slowing to 9.7%. However, core inflation is expected to remain stubbornly high reflecting second round effects and the stimulative fiscal policy. While the Estonian economy managed to recover swiftly from the pandemic, the impact of the Russia’s war in Ukraine is expected to leave a more permanent scar. Unless the country increases productivity-enhancing capital spending the economy may not grow as fast as it was expected before the crises. Alongside fiscal policy measures, targeted financial policies to underpin financial stability are also needed to achieve longer-term sustainable growth. The banking sector in Estonia is well capitalised, but looking ahead, it is important to carry out rigorous stress tests to assess whether banks would manage in tougher economic conditions. In the field of preventing money laundering, risk-based supervision of banks is in place, but it needs to be enhanced and also extended to virtual asset service providers. The IMF also considers it important to carry out structural reforms addressing skill-based labour shortage in sectors, increasing productivity, and promoting green and digital transition.

The IMF’s concluding statement is also available on the web page of Eesti Pank.

The IMF delegation has been in Estonia since May 9 to discuss the state of Estonia’s economy and economic policy steps with representatives of the public and private sector. The visit took place within the framework of the IMF’s annual economic policy consultations.

Additional information:
Hanna Jürgenson
Communications Specialist
Eesti Pank
Tel: 56920 930
Press enquiries: [email protected]