There are plans to borrow €1.36 billion this year to cover the budget deficit, the Ministry of Finance's economic forecast shows. It has not yet been decided in what form but a 3-4 percent interest rate is expected.
The state has already borrowed money in the form of bonds and loans and will need to do so again in the future. But the situation has become more complicated as borrowing money has become more expensive.
The ministry's spring forecast shows the deficit will be covered by short- and long-term bond issues and new loans until 2027.
New short-term bonds were issued in March but the average yield for six-month bonds was 3.259 percent and 3.324 percent for 12-month bonds. The year before, the figures were -0.44 percent and 0.9 percent, respectively.
The Ministry of Finance told ERR there are plans to borrow €1.36 billion this year and loans, short- and long-term bonds will be used in the coming years to patch the hole.
"The exact timing and amounts will depend on financial market conditions and current public finance needs. The interest rate environment has been very volatile at the beginning of this year and it is difficult to predict what it will be," said Ministry of Finance spokesperson Siiri Suutre.
She said rising interest rates "in the order of 3 to 4 percent" also need to be taken into account. Rates are expected to rise until 2027.
In the past Estonia's debt burden was low which kept the interest rates expense down to below 0.1 percent of GDP, but by 2027 this will have risen to 1 percent of GDP.
This year interest rate related-expenses will cost the state €174.8 million, by 2027 this will rise to €471.6 million.
New loans will be taken out
The ministry said loans will also be taken out this year. In the past, money has been borrowed from the Nordic Investment Bank.
At the end of March, Estonia's debt obligations totaled €4.5 billion euros. Of this, €2.85 billion (63 percent) were short- and long-term issued bonds and the remaining €1.65 billion (37 percent) were taken out in loans.
The deepening deficit will increase the government sector's debt burden to 20.2 percent of GDP this year and 33 percent by 2027, the Ministry of Finance wrote.
The ministry estimated this year's budget deficit will reach €1.7 billion or 4.3 percent of GDP.
The new government is also planning to raise taxes.
Editor: Helen Wright