On January 17, 2020, the Executive Board of the
International Monetary Fund (IMF) concluded the 2019 Article IV
with the Republic of Estonia.
Estonia’s economic performance remains solid, supported by strong
institutions and effective structural reforms. Real GDP growth remains
high and above potential for an estimated third year in a row,
supported by domestic private consumption. However, slower construction
activity and the energy sector’s disruptive transition to carbon
neutrality are set to weigh in on economic activity. Inflation is above
the EU average, and consistent with Estonia’s convergence process. The
labor market remains tight with wages picking up alongside increasing
labor force participation. Unemployment has declined to a record low.
The fiscal position has been accommodative, but public debt is very
low. The external position remains substantially stronger than implied
by medium-term fundamentals and desirable policies. Banks are
profitable, liquid, and solvent and housing price levels are in line
The outlook is favorable for the near term, but for slower economic
activity for the medium term. Supported by still-strong private
consumption, real GDP is projected to grow above trend in the near
term, reaching 4.0 percent and 3.2 percent in 2019 and 2020,
respectively. Over the medium term, growth is set to converge to its
potential at around 2.8 percent, constrained largely by the level of
productivity and weak foreign demand. Reflecting these developments,
the current account is projected to decline toward its norm turning
negative by 2024 owing to strong import growth. Inflation is expected
to continue its downward path in line with low energy prices, but
remain above the EU average. Externally, international trade risks
could weaken growth and slow export in Nordic countries with spillovers
on Estonia’s banking system. Domestically, labor shortages in the
highly-skilled segment and continued wage pressures could affect
medium-term competitiveness. Ongoing anti-money laundering and
counter-terrorism financing (AML/CFT) concerns could be source of
further reputational risks.
Executive Board Assessment
Executive Directors commended the authorities for their economic
management and structural reforms that have delivered solid economic
performance in recent years. Noting the risks arising from the global
trade and financial outlook, as well as demographic developments within
Estonia, Directors emphasized that policies and reforms should focus on
raising productivity, boosting sustainable growth and reducing
Directors generally called for unwinding of the expansionary fiscal
policies in the short term. A few Directors, however, advocated greater
emphasis on efficient spending. Over the long term, Directors supported
using the substantial fiscal space for more growth-friendly reforms, in
particular, to promote productivity growth and enhance labor supply.
Noting that monetary policy is likely to remain expansionary, Directors
underscored that macroprudential policies should contain financial
sector risks that could arise from the low interest rate environment.
They encouraged the authorities to continue to monitor broader
macro-financial developments, especially real estate and housing
related risks, while enhancing the macroprudential toolkit and standing
ready to act, should risks materialize.
Directors emphasized that accelerating ongoing reforms aimed at
increasing productivity growth and boosting labor supply are important
to raise long-term output. They highlighted that expanding firms’
innovation capacity through more investment in research and development
would broaden the economy’s innovation base and enhance productivity.
Directors also called for active labor market policies to support labor
supply, particularly among low-income households. To further address
inequality, they called for preserving the gains in labor force
participation and employment over the last few years. Directors
commended the reforms undertaken to increase female labor force
participation and agreed that continued efforts to reduce the gender
pay gap and further support childcare arrangements would be helpful.
Directors noted that Estonia’s pension system plays a critical role in
reducing relative poverty and, therefore, encouraged the authorities to
preserve its viability and sustainability. They advised caution with
regard to the changes being planned to Pillar II of the system as these
could complicate macroeconomic management and further slow capital
market development, as well as entail longer-term fiscal costs.
Directors welcomed the enhancements to the AML/CFT framework. They
agreed that increasing the number of on-site AML/CFT inspections,
raising the penalties for AML/CFT violations, and consolidation of
supervision at the regional level would contribute to strengthening the
It is expected that the next Article IV Consultation with the Republic
of Estonia will be held on the standard 12-month cycle.