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Estonia Faces Fiscal and Financial Challenges Amid Recession

Estonia’s Budget Deficit Projected to Reach 3.5% of GDP

TALLINN, Estonia - The International Monetary Fund (IMF) has warned that Estonia is facing a perfect storm of fiscal and financial challenges as it navigates its way out of the current recession.

IMF Report Highlights Fiscal Policy Challenges

According to an IMF report released today, Estonia’s budget deficit is projected to reach 3.5 percent of GDP this year, with risks skewed to the upside due to potential revenue shortfalls. The public debt-to-GDP ratio, while low, is expected to rise over the forecasting horizon, and interest payments are absorbing a growing share of spending.

Recommendations for Prudent Fiscal Policy

The report highlights that Estonia’s fiscal policy must be prudent in order to support competitiveness and preserve buffers. To achieve this, the IMF recommends:

• Adopting the car registration and road tax
• Identifying revenue measures worth one percent of GDP already planned in the budget strategy
• Accelerating the implementation of updated land taxable values and lifting the exemption on primary residence plots

Financial Stability Risks on the Rise

On the financial front, the report notes that while financial stability risks are still contained, they have increased due to the prolonged recession and tighter financial conditions. The IMF urges the authorities to:

• Review bank exposures
• Ensure credit risk is properly reflected in risk weights across the banking system
• Consider introducing a carbon tax and phasing out the domestic oil-shale sector to support Estonia’s green transition

Structural Reforms Key to Boosting Competitiveness

The report also emphasizes the need for structural reforms to boost competitiveness and counter structural headwinds. This includes measures aimed at:

• Increasing corporate investment
• Improving labor reallocation
• Enhancing digital technologies in traditional sectors
• Ensuring real wage growth remains closely aligned with productivity growth

IMF Mission Chief’s Assessment

“Estonia faces significant challenges as it navigates its way out of the recession,” said IMF Mission Chief for Estonia, [Name]. “However, with prudent fiscal policy, financial sector reforms, and structural changes, Estonia can emerge stronger and more resilient.”

Contact Information

Contact: Carlos de Resende IMF Communications Department Phone: +1 202 623-7100 Email: MEDIA@IMF.org @IMFSpokesperson