IMF Emphasises Importance of Conservative Fiscal Policy in Estonia Report
2 February (BNS)
This week the executive directors of the International Monetary Fund approved the 2010 report on Estonia's economic situation and outlook recommending continued fiscal prudence. The IMF commended Estonia's economic and budget policies that enabled the Baltic nation to join the euro zone.
The directors noted the challenges ahead in maintaining growth while reducing high unemployment. The IMF advised Estonia to closely monitor price developments, improve the resilience of the financial system, and enhance productivity and external competitiveness, taking full advantage of euro zone membership.
The IMF welcomed Estonia's goal of returning to budget surpluses in the coming years but noted that achieving this target will require substantial expenditure compression. It will be important in this situation to protect education and investment spending, and at the same time continue to improve expenditure efficiency.
Directors encouraged the authorities to do their utmost to ensure that the implementation of the new household debt restructuring law does not undermine confidence in the rule of law or financial intermediation.
"The IMF rightly names ensuring sustainable economic growth as Estonia's biggest challenge, underlining the importance of sticking to conservative fiscal policy. The IMF says in the report that keeping budgetary spending under continued tight control is extremely important regardless of the forthcoming election. This concerns first and foremost budget balance and the restoration of buffers, which will enhance Estonia's credibility. The Bank of Estonia shares this view," central bank governor Andres Lipstok said.
"The IMF predicts that economic growth in the first year of Estonia's euro zone membership will with the support of strong exports reach 3.6% while the high level of unemployment will be hard to lower and calls for active labour market measures. Although rising world market prices may according to the IMF speed up inflation, a positive thing is that base inflation is kept in check," Lipstok said.
The IMF estimates that prices will rise an average 4% in Estonia this year.
According to the central bank governor, the IMF's opinion that Estonia's membership of the euro zone will reduce risks to the financial sector deserves to be mentioned. Nonetheless, continued vigilance regarding both tensions on global financial markets and legislative changes affecting the sector is necessary. At the same time, banks' liquidity and capitalisation are sufficient thanks to their full integration into strong Nordic banking groups.
The report approved by IMF directors is based on the findings of the annual consultations with representatives of the Estonian public and private sectors held in December 2010.
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