May 19, 2025
The International Monetary Fund (IMF) has concluded its Article IV mission to Estonia, highlighting the country's gradual recovery from a prolonged economic downturn. The IMF staff's preliminary findings indicate that Estonia is facing challenges such as high prices and costs due to previous shocks, alongside global policy uncertainty and rising trade barriers.
The statement emphasizes that innovative young firms in Estonia are constrained by a lack of skilled labor and limited access to capital markets. Additionally, increasing defense spending is compounding existing fiscal imbalances. The IMF staff suggests that the 2025 budget strikes an appropriate balance between sustaining spending efforts and containing the deficit but recommends further adjustments starting in 2026 to address growing imbalances.
Estonia's GDP is projected to grow by 1.0 percent in 2025 and accelerate to 1.8 percent in 2026, with moderate growth expected in the euro area and other export markets. However, inflation is set to remain elevated at an average of 5.3 percent in 2025 due to tax increases and domestic cost pressures.
The IMF notes structural challenges within the Estonian economy, including wages growing faster than productivity and permanent increases in input costs hindering price-sensitive activities. Geopolitical developments, rising defense spending needs, and preexisting fiscal imbalances pose significant hurdles.
Fiscal policy recommendations include sustaining spending efforts while addressing medium-term imbalances. The authorities have announced a revised defense spending target of at least 5 percent of GDP from 2026. The IMF staff advises exploring options for revenue mobilization through broad-based growth-friendly measures rather than excessive reliance on higher tax rates.
Financial policies should be carefully calibrated to evolving risks as financial stability risks have increased slightly. The current macroprudential stance remains appropriate given rapid credit growth and real estate risks.
Structural reforms are necessary for building resilience and fostering transformation within the Estonian economy. Decisive action is needed to enhance productivity by easing labor reallocation, reducing regulatory burdens, and deepening capital markets.
Efforts should also focus on addressing skill mismatches through targeted active labor market policies while ensuring energy security remains critical as Estonia transitions away from fossil fuels towards alternative energy sources.
The mission expressed gratitude towards the Estonian authorities for their hospitality and collaboration during discussions.