Estonia will need to use its budget resources for the extraordinary costs caused by the war in Ukraine and to target state support primarily towards those who need help the most, said the International Monetary Fund (IMF) at the end of its regular economic policy consultations with Estonia.

The IMF noted in its concluding statement of the visit that policy must be able to react quickly in the current uncertain circumstances. The first priority should be to target budget funds to the spending demands caused by the war in Ukraine from taking in refugees and finding ways to ensure national security and energy supplies in the changed circumstances. “Carefully designed contingency plans, including in the event of a shut-off of natural gas imports from Russia, could help inform near-term fiscal policy priorities”, noted the summary.

The changed spending demands on the state must be matched on the revenue side through tax policy said the IMF, recommending that Estonia should broaden its tax base.

“I also find it worrying how the gap between state expenditures and revenues keeps widening continuously. This makes it particularly important that decisions on major additional expenses be taken responsibly with agreement about how the additional costs will be financed”, said Governor of Eesti Pank Madis Müller in response to the IMF report.

The IMF gave a positive assessment of the support measures taken in Estonia to ease the impact of steep price rises, though it emphasised that such support should increasingly be targeted to low-income households. Reducing dependence on energy and fuels imported from Russia has now become a clear priority for state spending and investment in the longer term.

The IMF estimates that growth in the Estonian economy will slow to 1.25% this year, while inflation will on average be high at 16%. The main risks come from the possible negative impacts of the war, such as energy prices continuing to rise, the number of refugees arriving being higher than expected, or continuing interruptions to supplies keeping inflation high. High inflation, which has been boosted further by strong domestic demand in Estonia, could create risks of a wage-price spiral. This poses a danger to the competitiveness of manufacturing exports from Estonia. Close attention must also be paid to developments in the housing market.

The concluding statement of the IMF visit can be found on the Eesti Pank website.

The IMF delegation was in Estonia from 4 May to discuss the condition of the Estonian economy, the impact of the war launched by Russia in Ukraine, and the economic policy steps taken in response with the public and private sectors. The visit was part of the IMF's annual economic policy consultation.

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