Estonia will need to use its budget resources for the extraordinary costs caused by the war in Ukraine as well as target state support primarily toward those who need help the most, the International Monetary Fund (IMF) said at the conclusion of its regular economic policy consultations with Estonia on Wednesday.
The IMF noted in its concluding statement that in the current uncertain circumstances, Estonian policy must be able to react quickly, according to a Bank of Estonia press release.
The first priority should be to target budget funds to the spending demands caused by the war in Ukraine — from taking in refugees to finding ways to ensure national security and energy supply in changed circumstances.
"Carefully designed contingency plans, including in the event of a shut-off of natural gas imports from Russia, could help inform near-term fiscal priority policies," the summary noted.
The changed spending demands on the state must be matched on the revenue side through tax policy, the IMF noted, recommending that Estonia broaden its tax base.
"I also find it worrying how the gap between state expenditures and revenues continues to widen," Bank of Estonia Governor Madis Müller said in response to the report. "This makes it particularly important that decisions on major additional expenses be taken responsibly, with agreement on how additional costs will be financed."
The Washington-headquartered international fund provided a positive assessment of the support measures implemented in Estonia to ease the impact of steep price increases, although it emphasized that such support should increasingly be targeted to low-income households.
Reducing dependence on energy and fuels imported from Russia has now become a clear priority for state spending and investment in the longer term, it added.
The IMF estimates that economic growth in Estonia will slow to 1.25 percent this year, while inflation will on average remain high at 16 percent.
The primary risks come from the possible negative impacts of the war in Ukraine, such as energy prices continuing to rise, the number of refugees arriving being higher than expected, or continuing interruptions to supplies keeping inflation high.
High inflation, which has been boosted further by strong domestic demand in Estonia, could in turn create risks of a wage-price spiral. This poses a danger to the competitiveness of manufacturing exports from Estonia. Close attention must also be paid to developments in the housing market, the fund added.
A delegation from the IMF was in Estonia from May 4-18 to discuss the condition of the Estonian economy, the impact of the war launched by Russia in Ukraine as well as the economic policy steps taken with the public and private sectors in response. This visit was part of the IMF's annual economic policy consultation.
Click here to read the IMF's concluding statement on Estonia in full.
Editor: Aili Vahtla