OREANDA-NEWS  On 18 December was announced, that an International Monetary Fund (IMF) mission visited Tallinn during December 9-15, 2008 for discussions on Estonia's current economic situation, as part of the IMF's annual consultation.

The mission issued the following statement at the conclusion of the visit today:

"The global financial crisis is exacerbating Estonia's slowdown, which began in early 2007. With worldwide confidence low, and global demand likely to remain weak, we do not expect the economy to recover until 2010.

"To cope with the current global and domestic stresses, Estonia can look to strengths in its policy and structural frameworks. First among these is the fixed exchange rate, underpinned by the robust currency board arrangement. This should anchor price expectations, leading to a sharp decline in inflation. Second, the banking sector is well capitalized and almost entirely owned by Nordic groups that benefit from supportive stabilization programs in their home countries. Finally, labor and product markets are flexible, which should help smooth the transition to recovery.

"The major policy challenge is the budget. The 2009 budget incorporates a welcome adjustment that required difficult decisions. However, given the deteriorating global outlook, our assessment is that the deficit will likely exceed 3 percent of GDP in 2009 and beyond. This does not present a near-term financing risk given the prudent accumulation of fiscal reserves via surpluses in recent years. But the current fiscal posture is not sustainable going forward. Moreover, it risks breaching the Maastricht fiscal threshold just when inflation is receding. This could delay euro entry, which the authorities rightly consider to be their highest priority. What is needed now is early action to achieve fiscal consolidation.

"This visit completes the mission's 2008 Article IV discussions with Estonia."