Estonia needs to take measures to boost productivity, said the International Monetary Fund (IMF) mission manager to the country, Cheikh Anta Gueye, on Monday. This should be carried out through structural reform and changes to fiscal policy. While the country as made progress in anti-money laundering areas, more can be done here, the IMF finds. Gueye also repeated the IMF's skepticism of the second-pillar pension reform, championed by the Isamaa party and being moved forward by the coalition government.
Gueye appeared at a press conference with Bank of Estonia Governor Madis Müller and Minister of Finance Martin Helme (EKRE).
The three met for a meeting before the press conference, with Gueye announcing that a detailed report will be submitted to the IMF board in Washington in early 2020, and the recommendations posted on the IMF website soon.
While Estonia had seen growth in real GDP, Gueye said, this showed signs of slowing, to a projected 3.2 percent in 2019, compared with 4.8 percent last year. A slowdown in the construction sector was noteworthy, as was a record low in unemployment, and an increase labor force participation.
The IMF has made three recommendations:
1) Structural reform to enhance productivity, particularly since an aging population could cut long-term growth in half by 2050. This reform should include raised output by the labor force.
2) Changes to fiscal policy to unwind the fiscal impulse in the short term, and again to raise productivity in the medium term.
Measures to carry this out should include further research and development (R&D) investment, an insolvency framework to release capital for productive purposes, improving labor supply and liberalizing the economic migration framework.
The measures should start to correct the fiscal situation, which has built up an impluse since 2017, next year, Gueye said.
Public spending should be made more efficient, and the public sector wage growth should be aligned more with productivity growth.
3) Reforms to the financial sector, including continued Anti-Money Laundering/Counter-Financing of Terrorism (AML/CFT) framework and monitoring of the latter was also needed, according to Gueye.
There is room for enhancement here, Gueye said – while he did not mention it, this comes in the wake of the Dankse and Swedbank large-scale money laundering scandals – even though the banks are generally strong, with sufficient capitalization, profits, and liquidity.
Gueye also noted that the maximum penalty for money laundering infringements should be raise.
Second pillar pension reform
Gueye also touched on the much-vaunted second pillar pension reform, likely to become fact at the bginning of 2020, saying that the IMF had mixed views on making it voluntary, noting that while there were flexibility issues in the system as it exists, these could be addressed while retaining the mandatory nature of the scheme, Gueye said.
The continued building up of a savings culture in Estonia was necessary, Gueye went on, while saying that the sudden release of second pillar savings and subsequent consumption could have a destabilizing effect on the macro economy.
In the Q&A session which followed the press conference, Guyeye noted that enhancing the productivity of the Estonian economy was achievable with the right investment, use of the existing fiscal space, and better public-private partnership negotiations, in order to make the public sector perform better. The sector has a strong degress of investment, but low productivity, Gueye said.
The full video of the press conference, mostly in English, is below.
Editor: Andrew Whyte