OREANDA-NEWS. On June 11, 2009 Governor of Eesti Pank ANDRES LIPSTOK presented the central bank's 2008 Annual Report to the Riigikogu. He said in his speech that structural reforms and maintaining confidence in fiscal and monetary policy in the medium and longer-term are the tools that help the economy out of the crisis, reported the press-centre of Eesti Pank.

According to Lipstok, 2008 was an extraordinary year in the global economy. "It is clear the events that took place at the end of the last and at the beginning of this year were real challenges for the Estonian monetary and financial system, testing their resilience and ability to adjust to the changing external environment. Today I dear to look at the situation with moderate optimism and repeat what has already been said in March: Estonia has all the possibilities to successfully overcome the crisis," Lipstok said.

Mr Lipstok also repeated that Eesti Pank forecasts a slight decline in the price level for this and the next year. "It is clear no changes will be made and must not be made in Estonia's monetary policy and the monetary policy framework. The exchange rate of the Estonian kroon will remain unchanged and we will accede to the euro area with the current exchange rate. I would also like to stress that price stability is one of the most important factors supporting economic growth," Lipstok noted.

When speaking about the credibility of the banking system, Governor of Eesti Pank said that banks have coped well with the crisis. "The average capital adequacy ratio of the Estonian banking system is above 22%. The capitalisation of the subsidiaries of the banks operating here is absolutely sufficient to cope with even larger loan losses than the current estimated 2% without having to include additional capital."

Lipstok also spoke about the integration of our banking system with Scandinavian and European markets, which is one of the most significant factors contributing to stability and which is supported by cooperation between Nordic and Baltic region countries. "I am convinced the daily information exchange and cooperation agreements of our region set an example of ensuring financial stability for the entire European Union," he said.

The central bank governor stressed that Estonia's enterprises and households have thoroughly changed their behaviour and expectations over the past half a year. "Therefore, the private sector has already largely adjusted to the changed economic environment and the main threats to the Estonian economy have markedly abated. The current account, i.e., the difference between investment and savings, has practically balanced and the financing of the economy's current expenditure is ensured by current income. In addition, Estonia has no problems with financing its external debt," he stressed.

Lipstok also said that joining the euro area is Estonia's main and the most immediate economic policy goal. "It must be made sure that the current account deficit, which cannot be avoided in the prevailing economic environment, remains below 3% of GDP both this year and in 2010. In order to achieve this, Eesti Pank is of the opinion that in addition to the steps taken in February and April, this year's fiscal deficit has to be reduced by a further 6.5 billion kroons.

In addition to fiscal consolidation, it is also necessary to ensure long-term fiscal sustainability," Lipstok stressed. "When the most severe part of the crisis is over, the first thing to be done is to achieve budget balance and then the extensive fiscal reserves of the public sector must be restored. The National Budget Strategy recently approved by the government aims at achieving consolidated budget balance in 2012.

In Eesti Pank's estimate, this is a grounded and ambitious goal. Considering the hike in state expenditure as a ratio to GDP, the adjustment of the budget must mainly take place on the expenditure side. If only tax advances were used to finance costs at the current level, it would imperil Estonia's long-term economic growth," Lipstok said.

At the end of his speech the Governor noted that the measures taken over the past half a year in both the public and the private sector have improved the country's chances to overcome the crisis. This is confirmed by the fact that most of the rating agencies as well as the IMF's recent mission to Estonia have expressed positive assessments of Estonia's economic outlooks.