Data reported by the Bank of Estonia show that inflation over the year continued to slow in April, and it stood at 13.5%. However, the price level was 2% higher than in the previous month. The largest part of this came from higher prices for two groups of goods, which were electricity and heat energy. Prices for natural gas and motor fuels fell at the same time though. Price pressures could be seen to be weaker for food commodities and producer prices, but not for consumer prices for food. The price for meat products and bakery products continued to rise fast.
Prices were higher for electricity and heat in April because energy subsidies ended in April, adding 1.5 percentage points to the increase in those prices over the month. The price of electricity was 29% higher in April than it was in March.
In this context, the IMF delegation visited Estonia at the beginning of May to discuss the state of Estonia’s economy and economic policy steps with representatives of the public and private sectors. The visit took place within the framework of the IMF’s annual economic policy consultations.
The IMF’s conclusion is that Estonia has made remarkable progress over the past two decades, but signs of pressure 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.
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 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 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 capitalized, 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 labor shortage in sectors, increasing productivity, and promoting green and digital transition.
The IMF’s concluding statement is also available on the web page of the Bank of Estonia.