The agreement was initially slated to last through the end of this year, but was extended because the IMF review of its quotas, which will substantially increase its funding, has not yet come into force, according to a press release.

This means that the IMF needs to extend its loan agreements for now so that the international fund can maintain its financial capacity.

The IMF has similarly extended its loan agreements with other IMF member states that likewise signed deals in 2020.

Bilateral loan agreements are the third line of defense for the IMF, which it can use to lend to countries in difficulty, but only once the resources of its first two lines of defense have already been exhausted. To date, the IMF has not yet needed to utilize its bilateral loans.

"It's in Estonia's interests as a small country with an open economy that the IMF has sufficient financial capacity to hold off any possible crises as well as to support countries facing economic difficulties if needed," said Bank of Estonia Deputy Governor Ülo Kaasik.

"As a country dependent on exports, we could be directly affected by developments in the global economy, and for this reason it's right for the central bank to have this agreement with the [IMF]."

The Bank of Estonia's bilateral loan agreement with the IMF remains the Estonian central bank's liquid foreign reserve asset, and the Bank of Estonia retains the right to recall it if necessary after it has been activated.

If the loan agreement is activated, the Bank of Estonia's income from the loan to the IMF would depend on the difference between the interest rates on the basket of currencies that make up the special drawing rights (SDR) of the IMF and the rates on the European Central Bank's (ECB) monetary policy loans.

Two preceding lines of defense

The IMF's first source of funding, or line of defense, is the quota paid in by the fund's member states, which currently stands at a total of €595.4 billion. When the quota review currently underway enters into force, this amount will be increased to €894.6 billion.

Its second line of defense is multilateral lending agreements, which currently total €455.5 billion. Estonia does not participate in these agreements. Once the quota review enters into force, this amount will be reduced to €378.9 billion.

Bilateral loan agreements between the IMF and its member states make up the IMF's third line of defense. Once the corresponding agreements have been extended, these agreements will total up to €177 billion, but the terms of the agreements state that they will expire automatically once the quota review enters into force.

Should the quota review not come into force during the next few years, the agreement between the Bank of Estonia and the IMF will remain in force through the end of 2027.

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