IMF: Estonia should curb wage hike to keep its competitive edge (5)
IMF analysts made their annual visit to Estonia last week and gave a press conference with preliminary findings on Monday. A more comprehensive report will be published in mid-December. Overall, Estonia's position is strong, although there is some concern over competitiveness.
IMF first highlighted the fact that Estonian economy has very strong fundamentals – macro-economic balance is in place, current account is balanced, unemployment has come down, inflation is very low, public finances are strong, government services are effective, and public investment is quite high. Economic growth is also likely to pick up the pace over the next years and reach 2.9 percent in 2016.
However, Estonia will face some challenges. "The demographic outlook is particularly challenging and also productivity growth has the tendency of slowing down once a certain income level is reached," said Christoph Klingen, head of the delegation. In terms of numbers, the growth rate is estimated to stay at around 3 percent over the next five years.
Klingen acknowledged that the Estonian Government is already doing a lot to boost productivity. Yet, some of the programs pertaining to active labor market policies, lifelong learning, vocational training, and other areas, could be stepped up, and traditional industries upgraded when possible.
In addition, Estonia must also reduce its reliance on EU funds, which are bound to come down. It might be necessary to further increase the retirement age and reliance on foreign labor.
IMF also warned that wages have been growing at a higher rate than productivity in recent years. This will be hard to sustain and could impair competitiveness. The fast increase of minimum wage should not set the pace for wage increases in general, Klingen said.